Hysan Development Co Ltd
Annual Report 2008

Plain-text annual report

Building for Quality 2008 ANNUAL REPORT Stock Code: 00014 2008 was a most eventful year for the wider economy, while Hysan returned another year of good performance amidst the changing conditions. To provide a clear picture of Hysan in 2008, this Annual Report is divided into four sections: an overview of our Company and business, how we put our strategy into action, how we further strengthened our governance, and our financial results. We believe this arrangement will help the reader to better understand Hysan as a whole and our efforts during the year to develop further as a successful and responsible business. Cover: While the designs of our building features evolve over time, their underlying quality remains unchanged. This commitment to provide the best of products and services guides our way forward. Contents 1. Overview 2. Our Strategy in Action 14 Market Overview 16 Investment Properties Portfolio 18 Management’s Discussion and Analysis 18 Operations Review 20 Financial Review 30 Financial Policy 34 Internal Controls and Risk Management 37 Human Resources 4. Financial Statements and Valuation 76 Directors’ Responsibilities for the Financial Statements 77 Independent Auditor’s Report 78 Financial Statements 133 Five-Year Financial Summary 135 Report of the Valuer 136 Schedule of Principal Properties 04 Hysan Today 07 Year 2008 in Review 10 Chairman’s Statement 3. Our Governance 40 Board of Directors and Senior Management 44 Corporate Governance Report 59 Directors’ Report 66 Directors’ Remuneration and Interests Report 73 Audit Committee Report 137 Shareholding Analysis 02 Hysan Annual Report 2008 1. Overview 04 Hysan Today 07 Year 2008 in Review 10 Chairman’s Statement O v e r v i e w This section focuses on Hysan’s mission, competitive advantages, corporate values and other background information about who we are and what we do. It also highlights our performance in 2008, as well as provides our Chairman’s statement on how Hysan is building for the future. Hysan Annual Report 2008 03 Hysan Annual Report 2008 03 Overview Hysan Today 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 our 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 2008 Responsible Business as the Guiding Principle Hysan aims to be a successful as well as responsible business. We pay attention not only to the results achieved, but also to how we deliver the same. The principle of being a responsible business is at the heart of our Company. Our Corporate Values I Take Pride I Forge Ahead We foster the highest business ethics and accountability. At Hysan, we take pride in our work, acknowledge responsibility for our actions and endeavour to complete our tasks in the right way. Our thought leadership applies to all strategic and operational issues in the quest to create innovative solutions through collective insight. We aim to take a market leadership position in whatever we do. Hysan maintains long-term and mutually benefi cial partnerships with our shareholders, clients, business partners, employees and the community. We take responsibility by giving back to the community. This is achieved through everyday business operations as well as active participation in community activities. I Share and Support I Care O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 05 Overview Hysan Today Overview Value Creation Recurring Underlying Profit HK$ million Underlying Profit HK$ million 6 6 0 , 0 1 5 9 5 5 7 1 4 6 6 8 5 1,200 960 720 480 240 0 1 0 2 , 1 8 5 1 , 1 5 0 0 , 1 2 1 0 , 1 1,300 1,040 780 520 260 0 9 0 6 04 05 06 07 08 04 05 06 07 08 Adjusted Shareholders’ Funds HK$ million Recurring Underlying Earnings per Share HK cents Dividends per Share HK cents , 4 3 1 7 9 2 9 3 2 2 , 40,000 32,000 24,000 16,000 8,000 0 , 2 7 0 5 9 3 2 7 0 3 , 0 6 6 4 3 , 120 96 72 48 24 0 0 0 6 5 . . 0 6 1 4 7 9 0 6 . . 0 0 8 0 6 0 0 6 . . 7 5 2 0 1 2 3 0 9 . 80 64 48 32 16 0 0 0 0 5 . 0 0 5 4 . 0 0 0 4 . 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 06 Hysan Annual Report 2008 Year 2008 in Review Highlights • Group turnover up 19.7% • Recurring Underlying Profi t up 12.2% • Full-year dividends up 13.3% • Balanced tenant base supports resilience amidst a challenging 2009 • Strong balance sheet underlying our building for the future O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 07 Overview Year 2008 in Review Overview of the Group’s Financial Performance TURNOVER Offi ce Retail Residential Others 2008 HK$ million 2007 HK$ million CHANGE HK$ million 703 608 292 35 567 505 262 34 1,638 1,368 136 103 30 1 270 • Group turnover rose by 19.7% • Office sector revenue saw healthy growth, due mainly to positive rental reversion on renewals • Sales growth helped retail rental rate increases and contributed to turnover rent PROFIT INDICATORS Recurring Underlying Profi t Underlying Profi t Statutory Profi t 2008 HK$ million 2007 HK$ million CHANGE HK$ million 1,066 1,201 1,594 950 1,158 3,949 116 43 (2,355) CHANGE % +24.0% +20.4% +11.5% +2.9% +19.7% CHANGE % +12.2% +3.7% -59.6% • Recurring Underlying Profit increased due to higher rental rate and good occupancy, also reflected more prudent financial investment strategy • Underlying Profit change reflected smaller gains from disposal of long-term equity investments during the year • Statutory Profit change reflected the impact of property revaluation Recurring Underlying Profi t Underlying Profi t 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). 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, 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. Statutory Profi t 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. ASSET VALUE INDICATORS Total assets Shareholders’ funds Adjusted Shareholders’ Funds 2008 HK$ million 2007 HK$ million CHANGE HK$ million 41,536 31,469 34,660 40,890 31,652 35,072 646 (183) (412) CHANGE % +1.6% -0.6% -1.2% • Shareholders’ funds reflected contribution from operating results as well as decrease in fair value associated with listed securities portfolio 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. 08 Hysan Annual Report 2008 Key Financial Data 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$) 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 Non-financial Performance ACCOMPLISHMENTS AREAS 2008 2007 102.57 102.56 115.56 115.55 153.37 153.36 68.00 (9.11) 0.10 30.23 33.29 1.96 90.32 90.27 110.09 110.04 375.46 375.25 60.00 2.42 5.21 30.51 33.81 2.29 CHANGE % +13.6% +13.6% +5.0% +5.0% -59.2% -59.1% +13.3% N/A -98.1% -0.9% -1.5% -14.4% 2008 2007 CHANGE 4.4% 5.9% 10.2X 59.5% 3.9 years 5.6% 6.8% 7.8X 60.1% 4.0 years 24.9% : 75.1% 24.7% : 75.3% -1.2pp -0.9pp +2.4X -0.6pp N/A N/A Corporate Governance Continued to be recognised by industry for excellence in corporate governance, including the Diamond Award (Non-Hang Seng Index Category) in the Hong Kong Institute of Certifi ed Public Accountant’s Best Corporate Governance Disclosure Awards 2008, and also the Best Corporate Governance Practices in China Award for 2008, as presented by IR Global Rankings. Corporate Responsibility Became a constituent member of the FTSE4Good Global Index, one of the best known indices to track responsible business practices around the world. Hysan Annual Report 2008 09 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Overview Chairman’s Statement Overview Hong Kong maintained steady growth during the first half of 2008 despite growing concerns about the global economy. The second half of the year saw a marked worsening of the global environment, with the international financial system experiencing severe strain in the fourth quarter. Hong Kong’s financial markets were adversely affected, with the impact being felt in the real local economy. Good Operating Performance and Strong Balance Sheet Against this background, Hysan achieved another year of good operating performance in our core leasing business. The Group’s 2008 turnover was HK$1,638 million, an increase of 19.7% from 2007. Office sector turnover growth was 24.0%, while Retail followed closely at 20.4% and Residential at 11.5%. Recurring Underlying Profit, the key measurement of our core business performance, was HK$1,066 million, up 12.2% from HK$950 million in 2007. This reflected our more prudent financial investment strategy in light of market conditions. Earnings per share based on Recurring Underlying Profit correspondingly rose to HK102.57 cents (2007: HK90.32 cents). Underlying Profit, which excludes unrealised changes in fair value of investment properties and related deferred tax, was HK$1,201 million (2007: HK$1,158 million). Year 2007 recorded substantial gains derived from the disposal of long-term securities. Statutory Profit was HK$1,594 million (2007: HK$3,949 million). This reflected the impact of property revaluation. We maintained a strong balance sheet, with improved net interest coverage (2008: 10.2 times; 2007: 7.8 times) and net debt to equity ratios (2008: 5.9%; 2007: 6.8%) signifying the Group’s financial strength. The external valuation of the Group’s investment property portfolio was HK$35,850 million, a slight rise from HK$35,711 million in 2007. Adjusted shareholders’ funds were HK$34,660 million (2007: HK$35,072 million). The Board of Directors recommends the payment of a final dividend of HK54.0 cents per share (2007: HK48.0 cents). Together with the interim dividend of HK14.0 cents per share (2007: HK12.0 cents), there is an aggregate distribution of HK68.0 cents per share, representing a year- on-year increase of 13.3%. Subject to shareholder approval, the final dividend will be payable in cash with a scrip dividend alternative. “Hysan achieved another year of good operating performance in our core leasing business.” 10 Hysan Annual Report 2008 Building for the Future These are challenging times. However, with a strong balance sheet as our platform, we aim to maintain our focus on building the future of our property investment business. Our strengthened management team will enable us to continue to provide high quality products and services to tenants and visitors alike. We also took further steps to strengthen our internal controls and risk management. These measures are further described elsewhere in this year’s Annual Report. The development of 500 Hennessy Road, the future northern gateway of our community in Causeway Bay, is in good progress. We believe this building will remain competitive for a long time to come. Environmental sustainability, in particular, has been a key focus of our design and planning considerations. Directors and Staff I would like to take this opportunity to express my sincere thanks to Pauline Wong, who retired from the Company during the year, having served the Board since 1991. I would also like to thank all our staff members for their dedication and hard work during the year. Outlook The global economic outlook will remain negative in 2009, and Hong Kong’s real economy is to be further impacted. Hysan will inevitably be affected by the overall environment. However, the longer-term contractual nature of our core leasing business, and our balanced tenant base with no undue dependence on any particular business sector, mean that we should be more resilient during these challenging times. Peter T.C. LEE Chairman Hong Kong, 10 March 2009 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 11 12 Hysan Annual Report 2008 2. Our Strategy in Action 14 Market Overview 16 Investment Properties Portfolio 18 Management’s Discussion and Analysis 18 Operations Review 20 Financial Review 30 Financial Policy 34 Internal Controls and Risk Management 37 Human Resources This section begins with an overview of Hong Kong’s leasing market, leading to a comprehensive look at how we operated in 2008. It provides information on the drivers behind our financial performance, in terms of how we manage our operations, finances, risks, as well as human talent. It also showcases our portfolio, which is instrumental in shaping a unique community in Causeway Bay. Hysan Annual Report 2008 13 Hysan Annual Report 2008 13 Hysan Annual Report 2008 13 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Market Overview This market report intends to give general background rather than Group-specific information. Views expressed shall not be regarded as providing any advice or recommendation for whatever purpose. For the Group’s performance – see “Management’s Discussion and Analysis” section. Hong Kong Economy In the first half of 2008, the major statistics indicated strong economic growth in Hong Kong. The overall economy, as measured by Gross Domestic Product (“GDP”), increased by 5.8% year- on-year in the first half. During that six-month period, the unemployment rate reached a 10-year low of 3.3% which supported the increasing trend on private consumption. However, the impact of the global financial crisis started to emerge in the second half of 2008 and became more widespread and apparent in the fourth quarter. In the second quarter of 2008, the growth of GDP began to slow down. The unemployment rate was 4.1% at the end of the year. Even the concern on inflation has subsided as the inflation rate, which once reached 6.3% in July 2008, dropped to 2.1% in December 2008. Due to the reversal in the second half, economic growth for the whole year of 2008 has slowed to 2.5%, compared with 6.4% in 2007. Gross Domestic Product Year-on-Year Growth (%) . 0 2 1 7 7 . 9 7 . 6 6 . . 7 8 4 3 . 14 12 10 8 6 4 2 0 -2 -4 1 4 . 9 0 . - 1 1 8 . . 2 7 6 . 0 9 . 9 6 . 1 6 . 4 6 . 7 6 . 6 5 . 7 1 6 6 . . 9 6 . 3 7 . 3 4 . 7 1 . 5 2 . - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 03 04 05 06 07 08 Source: Census and Statistics Department Office Office take-up amounted to 2.0 million square feet net in the first half of 2008. As the adverse impact of the global financial crisis filtered into Hong Kong, the office market recorded marginally negative take-up (-19,141 square feet) in the second half of 2008. Hence, the full-year net take-up remained at about 2.0 million square feet net, compared with 3.4 million square feet net in 2007. The total new supply of Grade A offices in core districts remained limited, which, to some extent, negated some of the negative impact of the reduced demand. During 2008, there was only less than 0.2 million square feet net of new Grade A office projects completed in core districts, compared with over 3.5 million square feet in decentralised areas which include Island East, Kowloon West and Kowloon East. 14 Hysan Annual Report 2008 The overall vacancy rate rose to 6.9% in 2008. On the rental of Grade A office, a rise of 20.7% was seen in the first three quarters of 2008, followed by a drop of 11% in the fourth quarter. As a result, the overall average rental rose by 7.4% in the full year of 2008, with Causeway Bay/Wanchai increasing by 13.5%. 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 overall Grade A Offi ce rents Change in Causeway Bay/Wanchai Grade A Offi ce rents (*) square feet net Source: Jones Lang LaSalle 2008 2007 3,680,432 3.8% 2.9% 6.9% +7.4% +13.5% 3,302,070 1.6% 2.1% 5.1% +21.6% +12.4% Retail During the first half of 2008, the growth in domestic consumption and tourist arrivals continued the upward trend of the previous year. Retail sales improved by 16% year-on-year in value during the six-month period. The growth of retail sales slowed to 0.8% year-on-year in the fourth quarter of 2008, giving rise to an overall increase of 10.6% throughout the year. In the tourism market, non-Mainland arrivals registered a drop of 5.9% year-on-year in the second half of 2008. Mainland visitors have become a strong support to the retail sector as they still recorded consecutive increases in arrival numbers throughout the second half of the year. This group of visitors accounted for 57% of the total arrivals in 2008. For the year, rentals for prime street shops recorded a mild increase of 4.1%, while premium prime shopping centres saw a slight decline of 0.3% in rentals. Retail sales by value Total visitor arrivals Mainland visitor arrivals Change in prime street shop rents Change in premium prime shopping centre rents 2008 +10.6% +4.7% +8.9% +4.1% -0.3% 2007 +12.8% +11.6% +13.9% +17.9% +15.3% Source: Jones Lang LaSalle, Census and Statistics Department and Hong Kong Tourism Board Luxury Residential Similar to the office and retail sectors, the Hong Kong residential leasing market performed satisfactorily in the early part of 2008. After increasing by 10.4% during the first half, overall luxury rents fell 18.7% in the second half of the year. One of the major reasons of the decline was attributable to the reduced demand from expatriates. Overall, luxury rentals decreased by 10.2% in 2008. The potential supply for luxury units in traditional high-end districts on Hong Kong Island and Kowloon during 2009 is still on the low side, which helps to alleviate some pressure from the reduced demand. Change in luxury residential rents Source: Jones Lang LaSalle 2008 -10.2% 2007 +17.6% Hysan Annual Report 2008 15 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Investment Properties Portfolio 3 SUNNING PLAZA Mid-Levels CROSS HARBOUR TUNNEL N SOGO 10 HENNESSY ROAD 9 L E E G A R D E N R O A D 8 NORTH POINT JARDINE’S BAZAAR 2 4 1 YUN PING ROAD E N U E H Y S A N A V 3 LEIGHTON ROAD 5 11 LEIG H T O N R O A D CENTRAL TIMES SQUARE P E R C I V A L S T R E E T 6 7 D A O N R O T H E I G L Not to scale ABERDEEN TUNNEL Th rough decades of development, Hysan has created one of Hong Kong’s best known commercial districts in Causeway Bay, home to the effi cient offi ces of multinational corporations, celebrated retail shops, and an eclectic collection of food, beverage and entertainment outlets. Our buildings and our tenants have fashioned a community that is like no other. 1 THE LEE GARDENS Total Gross Floor Area 902,797 ft2 Number of Floors 53 Parking Spaces 200 Completed 1997 2 LEE GARDENS TWO Total Gross Floor Area 626,996 ft2 Number of Floors 34 Parking Spaces 176 Completed 1992 Renovation of retail podium 2003 Total Gross Floor Area 279,717 ft2 Number of Floors 30 Parking Spaces 150 (jointly owned with Sunning Court) Completed 1982 4 AIA PLAZA Total Gross Floor Area 139,119 ft2 Number of Floors 25 Completed 1989 5 111 LEIGHTON ROAD Total Gross Floor Area 79,905 ft2 Number of Floors 24 Completed 1988/Renovated 2004 6 LEE THEATRE PLAZA Total Gross Floor Area 317,160 ft2 Number of Floors 26 Completed 1994 7 LEIGHTON CENTRE Total Gross Floor Area 435,008 ft2 Number of Floors 28 Parking Spaces 264 Completed 1977/Renovated 2004 8 ONE HYSAN AVENUE Total Gross Floor Area 169,019 ft2 Number of Floors 26 Completed 1976/Renovated 2002 9 500 HENNESSY ROAD Estimated Total Gross Floor Area Approx. 710,000 ft2 Projected Year of Completion 2011 10 BAMBOO GROVE Total Gross Floor Area 691,546 ft2 Number of Units 345 Parking Spaces 436 Completed 1985/Renovated 2002 11 SUNNING COURT Total Gross Floor Area 97,516 ft2 Number of Units 59 Parking Spaces 150 (jointly owned with Sunning Plaza) Completed 1982/Renovated 2003 16 Hysan Annual Report 2008 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. 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. 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 some trend-setting stores. 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. 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. 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. 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. 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. 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. 500 HENNESSY ROAD 500 Hennessy Road, Causeway Bay 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. Hysan Annual Report 2008 17 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 500 Hennessy Road Hysan’s future northern gateway is now undergoing construction. Our Strategy in Action Management’s Discussion and Analysis Operations Review Turnover The Group’s turnover continued to grow and reached HK$1,638 million in 2008 despite the challenging economic environment. Compared to HK$1,368 million last year, this represented an increase of 19.7%. There were good performances across the Group’s property portfolio. Profitability Recurring Underlying Profit (the key measurement of the Group’s core leasing business), arrived at by excluding from Statutory Profit asset value changes, gains from disposal of long-term assets and prior years’ tax provision, was HK$1,066 million, up 12.2% from HK$950 million in 2007. The increase was attributable to higher rental rate achieved and good occupancy rate maintained by all leasing sectors during the year. It also reflects our more prudent financial investment strategy in light of the market conditions. Underlying Profit, arrived at by excluding from Statutory Profit the change in fair value of investment properties and the related deferred tax, was HK$1,201 million, increased by 3.7% from HK$1,158 million in 2007. This reflected smaller gains from disposal of long-term equity investments during the year. Statutory Profit, prepared in accordance with Hong Kong Financial Reporting Standards, was HK$1,594 million, decreased by 59.6% from HK$3,949 million in 2007. In year 2007, substantial fair value gain of HK$3,131 million was recorded. While the external valuation of the Group’s investment property portfolio actually increased to HK$35,850 million as at year- end 2008 (2007: HK$35,711 million), the Group incurred capital expenditures for investment properties during the year. This results in a slight decrease in fair value of HK$212 million recognised in the consolidated income statement. Key Performance Indicators While many factors contributed to the Group’s business results, turnover growth, occupancy rate and property expenses trend are the key drivers used by the Group’s management for assessment of the performance of our core leasing business. The nature of these performance indicators, the way they are measured and their significance to the Group are set out below. Key Performance Indicators PERFORMANCE INDICATOR HOW IT IS MEASURED SIGNIFICANCE TO THE GROUP Turnover Growth – Rental revenue in 2008 compared to that in 2007 – Refl ects the combined effect of changes in rental rate and occupancy rate 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 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 – Calculated by dividing property expenses by turnover – An indication of the gross margin of our business 18 Hysan Annual Report 2008 Business Units Review For management purposes, the leasing activity of the Group is organised into three sectors – office, retail and residential. Each sector has a different tenant base and requires different marketing strategies. The following discusses our portfolio, strategies and performance of each sector. Office Sector Description: Hysan owns and manages 2.1 million gross square feet of high quality offi ce buildings in the core commercial district of Causeway Bay. We offer a range of fi rst class premises with different occupier characteristics, attracting a balanced, broad-based portfolio of tenants. The diversity means no one industry takes up more than 25% of the overall fl oor area. Hysan’s offi ce lease terms are typically for three years, but in some cases up to six to nine years in duration. 2008 Highlights: – Offi ce sector revenue saw healthy growth of 24.0% to HK$703 million (2007: HK$567 million) – This was attributable mainly to positive rental reversion on renewals throughout the year. Other contributors included new tenants, as well as the expansion of existing tenants requiring more space – The portfolio had 97.5% (2007: 96.6%) occupancy at the end of the year Retail Sector Description: Hysan’s retail portfolio, approximately 0.9 million gross square feet in size, takes full advantage of its position in Causeway Bay, one of Hong Kong’s prime retail areas. The tenants include a variety of retail and leisure outlets, housed in buildings like The Lee Gardens and Lee Gardens Two, with a concentration of high end brands, or Lee Theatre Plaza area, home to lifestyle shops and renowned restaurants. Retail leases normally run for three years, but longer leases may be signed on a case-by-case basis. These leases provide for a fi xed monthly rent, with turnover rent in most cases. 2008 Highlights: – Retail sector revenue grew 20.4% over last year to HK$608 million (2007: HK$505 million) – Good local consumption growth throughout 2008, even though the growth slowed down somewhat in the second half of the year – Tourists visiting Hong Kong, especially from Mainland China continued to increase in 2008 which supported the local retail market – Sales growth in turn helped the rental rate increases and contributed to turnover rent – Occupancy remained at 97.4% (2007: 97.8%) at the end of the year Residential Sector Description: Our residential portfolio principally comprises of the Bamboo Grove residential development located in Mid-Levels. We offer top quality facilities and personalised services. Residential leases are typically for two years. 2008 Highlights: – Residential sector revenue increased 11.5% to HK$292 million (2007: HK$262 million) – Demand for luxury residential properties from expatriates, especially from the fi nancial sector, weakened during the last quarter of the year – Our residential portfolio recorded a 89.6% (2007: 90.2%) occupancy at the end of the year amid such a challenging environment Turnover by Sector 2% 18% 37% 43% Gross Floor Area by Sector Excluding Property Under Redevelopment 21% 24% 55% Capital Value by Sector 1% 15% 19% 37% 28% Office Retail Residential Property under Redevelopment Others Hysan Annual Report 2008 19 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Management’s Discussion and Analysis Financial Review Understanding Financial Statements To evaluate our ability to generate shareholder returns, we have provided information that focuses on the Group’s fi nancial position, performance and changes in fi nancial position through three indispensable components of fi nancial statements. Th ey are: • Income Statement – provides information about the Group’s performance; • Balance Sheet – provides information about the Group’s fi nancial position; and • Cash Flow Statement – provides information about the Group’s change in fi nancial position. The balance sheet summarises the Group’s fi nancial position at every year end. Our financial position is affected by the economic resources we control, our fi nancial structure (debts and equity), our liquidity and solvency, and our capacity to adapt to changes in the environment in which we operate. Broad analysis is set out on pages 26 and 27. The income statement summarises the Group’s performance every financial year. Information about our performance is essential, in particular our profi tability and trends, in order to assess potential changes in the economic resources that we are likely to control in the future. It is also useful in forming judgments about the effectiveness with which the Group might employ additional resources. Detailed analysis is set out on pages 22 to 25. The cash flow statement summarises the Group’s change in fi nancial position every fi nancial year. This information is useful in reviewing our operating, investing and financing activities during the reporting year and in providing a basis to assess our ability to generate cash and cash equivalents and our needs to utilise those cash fl ows. Further analysis is set out on page 28. INCOME STATEMENT BALANCE SHEET CASH FLOW STATEMENT 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 Minority interests Statutory Profit attributable to Equity Holders Assets Investment properties Available-for-sale investments Interests in associates Accounts receivables Cash and bank balances Other assets Liabilities Accounts payable Borrowings Taxation Other liabilities Equity Share capital Reserves Minority interests Operating Activities Rental received from tenants Payment to suppliers Net tax paid Investing Activities Payments in respect of investment properties Interest and dividends received Receipts from (payment to) overseas projects Financing Activities Payment of finance costs Dividends paid Additions (repayment) of borrowings Consideration paid for repurchase of shares Proceeds on exercise of share options These three components of the financial statements are interrelated because they reflect different aspects of the same transactions or events. Although each statement provides information that is different from the others, none is likely to serve only a single purpose or provide all the information necessary for particular needs of users. The illustration above shows examples of relationships between the income statement, balance sheet and cash fl ow statement. 20 Hysan Annual Report 2008 Key Accounting Policies Th e turnover and results of the Group are principally derived from leasing of investment properties located in Hong Kong and the aggregate carrying amount of the Group’s investment properties accounts for over 85% of the Group’s total assets. We believe that the explanation of our accounting treatment for investment properties is valuable to the users to understand our fi nancial statements. Why the Group’s investment properties are measured at fair value? For the measurement of investment properties, Hong Kong Accounting Standard 40 “Investment Property” permits an entity to choose either the fair value model or the cost model. The chosen measurement model must be applied to all of the entity’s investment properties. • Fair value model – Investment property is measured at fair value, and changes in fair value are recognised in the income statement. • Cost model – Investment proper ty is measured at depreciated cost less any accumulated impairment losses. The fair value of the investment property must still be disclosed. Measurement of Investment Properties Fair Value Model Change in fair value recognised in income statement Cost Model Depreciated cost less any accumulated impairment losses The Group has selected the fair value model to measure its investment properties as the fair value model provides useful information about property held for rental, even if there is no immediate intention to sell the property. The economic performance of a property can be regarded as being made up of both rental income earned during the period (net of expenses) and changes in the value of future net rental income. Furthermore, with the passage of time, cost-based measurements become increasingly irrelevant. An aggregation of costs incurred over a long period ago is of questionable relevance. O u r S t r a t e g y i n A c t i o n Any disadvantages in using fair value to measure the Group’s investment properties? Being a property investor, the Group’s results are mainly derived from the rental revenues on its investment properties. As the change in fair value on investment properties does not generate cash and is inherently volatile, the inclusion of the unrealised fair value change in the consolidated income statement causes an increase in fluctuation 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, 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 upon disposal of the Group’s investment properties. Accordingly, the change in fair value on investment properties and the related deferred tax are both excluded from Statutory Profit in arriving at other profit indicators given by management, being Underlying Profi t and Recurring Underlying Profi t. Why the for mer Hennessy Centre (cur rently under redevelopment) has not been transferred out of investment property into property under development for the duration of the redevelopment? In the past, the Group held the former Hennessy Centre as an investment property to earn rental income. In order to maximise our shareholders’ wealth, the former Hennessy Centre is now being redeveloped for continued future use as investment property. The temporary transfer out of investment property into property under development, which will be measured at cost less any impairment losses, for the duration of the redevelopment, would be of little or no benefi t to users of the fi nancial statements and potentially confusing the user of our financial statements. Therefore, the former Hennessy Centre remains as in the Group’s investment property in the fi nancial statements. This treatment also complied with Hong Kong Accounting Standard 40 “Investment Property”. O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 21 Our Strategy in Action Management’s Discussion and Analysis Condensed Consolidated Income Statement For The Year Ended 31 December 2008 Condensed Consolidated Balance Sheet Condensed Consolidated Cash Flow Statement 2008 HK$ million 2007 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 Recurring Underlying Profi t 1,638 (217) 63 146 (134) (155) (212) 590 (264) 263 (124) 1,594 1,201 1,066 1,368 (208) 98 302 (106) (175) 3,131 452 (185) (560) (168) 270 (9) (35) (156) (28) 20 (3,343) 138 (79) 823 44 3,949 (2,355) 1,158 950 43 116 +19.7 +4.3 - 35.7 - 51.7 +26.4 - 11.4 N/A +30.5 +42.7 N/A - 26.2 - 59.6 +3.7 +12.2 Turnover Turnover comprises principally rental income derived from the Group’s investment properties portfolio in Hong Kong and is analysed by sectors as follows: Offi ce sector Retail sector Residential sector Others 2008 HK$ million 2007 HK$ million CHANGE HK$ million CHANGE % 703 608 292 35 567 505 262 34 1,638 1,368 136 103 30 1 270 +24.0 +20.4 +11.5 +2.9 +19.7 The Group continued to have good performance across all leasing sectors in which it operated. Detailed analysis of each segment is covered in “Business Units Review” set out on page 19. 22 Hysan Annual Report 2008 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. While the total property expenses increased slightly by HK$9 million or 4.3% to HK$217 million (2007: HK$208 million), such increase is significantly less than the relevant increase in turnover. Property expenses to turnover ratio thus improved from 15.2% to 13.2% against 2007. Our energy efficiency enhancement programme led to continued savings in energy costs. Investment Income Investment income of HK$63 million (2007: HK$98 million) mainly comprised dividend and interest income. The decrease reflected a lower interest environment in 2008 and lower dividend income derived from the Group’s equity investments. Other Gains and Losses Other gains and losses dropped to HK$146 million from HK$302 million in 2007. Hysan creates a unique business community with its fi rst-class premises, which satisfy a variety of different tenants’ needs. The Group manages financial assets held as long-term investments with the aim of balancing their anticipated liquidity position, funding needs, capital gains as well as industry diversification. For these reasons, certain available-for-sale equity investments were disposed of during the year resulting in a realised gain of HK$186 million recognised in the consolidated income statement. The remaining available-for-sale investments portfolio will continue to be held as the Group’s long-term investments. In light of the extreme volatility and uncertainty of the financial markets since September 2008, the Group has adopted a more prudent strategy in its financial investment activities. As at the end of 2008, the Group had no outstanding position on held-for-trading investments. Instead, the Group made investments in short-term government bills and notes, which are the most liquid and secure types of investment to maintain the Group’s liquid assets. The Group has made use of derivatives to manage the volatilities or adjust the appropriate risk profile of our treasury assets and liabilities. As at year-end 2008, all of the outstanding derivatives were related to the hedging of, and are commensurate with, our interest rate and foreign exchange exposures. Administrative Expenses Administrative expenses increased to HK$134 million from HK$106 million in 2007, which was principally due to higher staff costs as a result of the Group’s efforts to strengthen our management team. Hysan Annual Report 2008 23 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Management’s Discussion and Analysis Finance Costs In a lower interest rate environment, the Group’s finance costs dropped by 11.4% to HK$155 million (2007: HK$175 million). In the current year, the Group’s average finance costs dropped to 4.4% from 5.6% in 2007. Further discussion of the Group’s financial policy, including debt and interest rate management, are set out in the “Financial Policy” section. Change in Fair Value of Investment Properties The global financial crisis hit Hong Kong’s property market hard, especially in the last quarter of 2008, which led to an adverse movement in fair value of the Group’s investment properties. Excluding other movements in investment properties (such as additions and transfer to property, plant and equipment), fair value loss of HK$212 million (2007: fair value gain of HK$3,131 million) on revaluation of the Group’s investment properties was recognised in the consolidated income statement during the year. Share of Results of Associates The Group’s share of results of associates improved by 30.5% to HK$590 million (2007: HK$452 million). The increase in the share of results of associates was mainly attributable to the positive rental growth and the favourable movement in fair value of the Shanghai Grand Gateway project, of which the Group owns 24.7%. The 2007 comparative figure also included contribution from Singapore Amaryllis Ville project, of which the Group owns 25.0%. All units in this Singapore residential project were sold as at year-end 2007. Shanghai Grand Gateway Excluding the change in fair value of investment properties and the gain on disposal of certain carparks held by the associate, the Group’s share of operating results in Shanghai Grand Gateway project increased by 24.5% to HK$137 million (2007: HK$110 million). All the residential units as well as retail and office properties are virtually fully let at year-end 2008. Under Hong Kong Accounting Standards 40 “Investment Property”, properties at Shanghai Grand Gateway have been revalued at fair value by an independent professional valuer. The Group’s share of the revaluation gain, net of the corresponding deferred tax thereon, of the associate amounted to HK$412 million (2007: HK$311 million). 24 Hysan Annual Report 2008 Busy Causeway Bay is recognised as one of Hong Kong’s prime retail and entertainment areas. Taxation Taxation for the year dropped significantly by HK$744 million to HK$1 million (2007: HK$745 million) principally due to the reduction in deferred tax provision arising from the revaluation on investment properties. In addition, the tax effect of a change in the Hong Kong profits tax rate from 17.5% to 16.5% also made the Group’s taxation for the year decrease. As disclosed in the annual and interim reports published in previous years, the Group has over the past few years been in dispute with the Hong Kong Inland Revenue Department (“IRD”) on interest deductions made in years of assessment dated back to 1995/96. Taking into consideration professional advice and recent development, the Group has been in discussions with IRD to settle the claims. A formal proposal was submitted to IRD at the end of December 2008 to settle the claims at HK$450 million, inclusive of tax principal, interest and all amount payable. Full provision for such estimated exposure has been made at the balance sheet date, of which HK$31 million and HK$41 million were provided in the first and second half of the year, respectively. Total cash exposure (net of tax reserve certificates already purchased) amounted to HK$268 million will be satisfied out of cash deposits and credit facilities. The Group expects to settle the claims in the region of such amount within the next few months. No other Hong Kong destination offers the round-the-clock world of work, shopping and leisure activities in a single thriving district. Hysan Annual Report 2008 25 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Management’s Discussion and Analysis Condensed Consolidated Income Statement Condensed Consolidated Balance Sheet As At 31 December 2008 Condensed Consolidated Cash Flow Statement 2008 HK$ million 2007 HK$ million CHANGE HK$ million Investment properties Available-for-sale investments Interests in associates Time deposits, cash and bank balances Held-to-maturity debt securities Other assets Total assets Borrowings Taxation – current – deferred Other liabilities Total liabilities Net Assets Shareholders’ funds Minority interests Total Equity 35,850 1,022 2,340 1,015 700 609 35,711 2,479 1,601 484 – 615 41,536 40,890 3,751 2,861 351 3,648 1,076 8,826 270 3,910 1,001 8,042 32,710 32,848 31,469 1,241 31,652 1,196 32,710 32,848 Adjusted Shareholders’ Funds 34,660 35,072 139 (1,457) 739 531 700 (6) 646 890 81 (262) 75 784 (138) (183) 45 (138) (412) CHANGE % +0.4 - 58.8 +46.2 +109.7 N/A - 1.0 +1.6 +31.1 +30.0 - 6.7 +7.5 +9.7 - 0.4 - 0.6 +3.8 - 0.4 - 1.2 Investment Properties Under the Hong Kong real estate price adjustment cycle, the Group’s investment properties were revalued at HK$35,850 million (2007: HK$35,711 million). Available-for-Sale Investments Available-for-sale investments comprised principally equity securities listed in Hong Kong. In 2008, the Hong Kong stock market experienced significant turmoil, especially in the last quarter of the year, and the Hang Seng Index dropped by 48% during the year. Consistent with the overall Hong Kong stock market trend and as a result of the disposal of certain equity securities, total fair value of the Group’s listed securities portfolio, classified as available-for-sale investments, has also been reduced to HK$982 million as at year-end 2008 (2007: HK$2,439 million). 26 Hysan Annual Report 2008 Interests in Associates Interests in associates had increased by HK$739 million to HK$2,340 million. This mainly represented the Group’s share of operating results, change in fair values of investment properties as well as exchange gain on translation in the Shanghai Grand Gateway projects during the year. Our well-planned community of offi ce buildings creates a green and spacious ambience for multinational and local companies alike. Time Deposits, Cash and Bank Balances Time deposits, cash and bank balances amounted to HK$1,015 million as at year-end 2008 (2007: HK$484 million). The increase is principally attributable to funds from new bank loan and issuance of fixed rate notes before the credit market deteriorated in the last quarter of 2008. These new funds prepared the Group to better deal with the possible tightened credit situation in 2009. Held-to-Maturity Debt Securities Approximately HK$700 million funds were maintained at government bills and notes at year-end 2008 to preserve the Group’s liquidity in this most liquid and secure form of investment. Borrowings The carrying amount of the Group’s borrowings stood at HK$3,751 million at year-end 2008, an increase from HK$2,861 million as at year-end 2007. The increase is mainly due to US$25.6 million (equivalent to HK$200 million) new bank loan and issuance of HK$565 million fixed rate notes during the year. Taxation Provision for taxation (aggregation of current tax and deferred tax) decreased to HK$3,999 million in 2008 (2007: HK$4,180 million), which was principally due to a HK$223 million taxation credit on deferred tax resulting from the change in tax rate. Such decrease was offset by a net increase in current tax of HK$81 million, which was made up of a HK$192 million charge for the year, a prior year tax provision of HK$72 million and a tax payment less refunds of HK$183 million. Shareholders’ Funds The contribution to shareholders’ funds from operating results was largely offset by the decrease in fair value associated with the listed securities portfolio, resulting in a slight decrease in shareholders’ funds from HK$31,652 million in 2007 to HK$31,469 million in 2008. Adjusted shareholders’ funds were also reduced slightly from HK$35,072 million in 2007 to HK$34,660 million in 2008. Minority Interests The rise of HK$45 million in minority interests to HK$1,241 million (2007: HK$1,196 million) was attributable to profit contribution as well as revaluation surplus from Lee Gardens Two. Hysan Annual Report 2008 27 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Management’s Discussion and Analysis Condensed Consolidated Income Statement Condensed Consolidated Balance Sheet Condensed Consolidated Cash Flow Statement For The Year Ended 31 December 2008 Operating activities Cash generated from operations Net tax paid Investing activities Payments in respect of investment properties Disposals of available-for-sale investments Proceeds upon maturity (placement) of principal-protected deposits Interest and dividends received Receipts from overseas projects Purchase of property, plant and equipment Financing activities Dividends paid Finance costs Increase in borrowings Proceeds on exercise of share options Share repurchase 2008 HK$ million 2007 HK$ million CHANGE HK$ million CHANGE % 1,362 (183) 1,179 1,100 (140) 960 262 (43) 219 +23.8 +30.7 +22.8 (345) (125) (220) +176.0 272 394 (122) - 31.0 78 60 6 (5) 66 (641) (140) 765 2 – (197) 87 140 (3) 296 (497) (162) – 15 (513) 275 (27) (134) N/A - 31.0 - 95.7 (2) +66.7 (230) - 77.7 (144) 22 765 (13) 513 +29.0 - 13.6 N/A - 86.7 - 100.0 (14) (1,157) 1,143 - 98.8 Net increase in cash and cash equivalents 1,231 99 1,132 +1,143.4 Operating Activities There was an increase of HK$219 million net cash from operations over the previous year which was in line with the growth in the Group’s core business operating results. Tax payments less refund of HK$183 million was also made during the year. Investing Activities There was a decrease in net cash from investing activities to HK$66 million (2007: HK$296 million). This principally reflects increased capital expenditure, including the re-development of Hennessy Centre, during the year. Year 2007 also recorded substantial proceeds from disposal, firstly, of available-for-sales investments; and, secondly, of all the remaining units in the Group’s Singapore joint-venture residential project. Financing Activities Net cash used in financing activities was HK$14 million, a decrease of HK$1,143 million from last year. This was mainly due to new borrowings of HK$765 million, comprising bank loan of HK$200 million and fixed rate notes of HK$565 million issued under the Medium Term Notes Programme. No share repurchase was undertaken during the year. 28 Hysan Annual Report 2008 Beyond Financial Statements Contingent Liabilities The Group has underwritten its associates on cash calls to finance working capital requirements. Based on currently available information, management does not anticipate any major call for cash contributions in the foreseeable future. Capital Expenditure and Management The Group is committed to enhancing the asset value of our 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$345 million. The graph on the right illustrates capital expenditure patterns during the last five years. Capital Expenditure HK$ million 400 320 240 160 80 0 0 7 3 5 4 3 4 0 1 5 2 1 1 8 The Group has an internal control system for scrutinising capital expenditures. Detailed analysis of expected risks and returns is submitted to unit heads, Executive Directors or the Board for consideration and approval, depending on strategic importance, cost/benefit and the size of the projects. The criteria for assessment of financial feasibility are generally based on net present value, pay back period and internal rate of return from projected cash flow. 04 05 06 07 08 At year-end, the Group had HK$3,550 million undrawn committed bank facilities. These facilities, together with the Medium Term Notes Programme, available-for-sale investments and positive cash flows from local and overseas operations, provide adequate financial resources to fund the level of planned capital expenditure, including the Hennessy Centre redevelopment project. Hennessy Centre Redevelopment The former Hennessy Centre (at 500 Hennessy Road) redevelopment project will be completed at the end of 2011. Sub-structure works are in progress and the Group has proceeded to awarding the main construction contract. The 36-storey mixed–use office and retail building, with four additional levels of basement, will have a gross floor area of approximately 710,000 square feet. 500 Hennessy Road will be the future northern gateway to Hysan’s community in Causeway Bay. It aims to attain the highest international standards in architectural design, including environmental sustainability. O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 29 Our Strategy in Action Management’s Discussion and Analysis Financial Policy The global financial markets experienced unprecedented turmoil in 2008. In addition to the volatility in most markets around the world, the supply of credit contracted markedly, which translated into wider credit spreads even to borrowers with good credit ratings. Despite the extensive measures rolled out by governments of major countries, the global financial system remains under stress. Therefore, maintaining sufficient liquidity is the key to ensure financial strength. In the wake of the collapse of some major financial institutions, counterparty risk has also become a highly important issue that requires constant monitoring. Hysan adheres to a policy of financial prudence. Our objectives are to: – maintain a strong balance sheet by actively managing debt level and cash flow – secure diversified funding sources from both banks and capital markets – minimise refinancing and liquidity risks by attaining healthy debt repayment capacity, maturity profile, 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 counterparty risks by imposing proper counterparty limits and reduce financial investment risks by holding quality marketable securities Key Performance Indicators PERFORMANCE INDICATOR HOW IT IS MEASURED SIGNIFICANCE TO THE GROUP Average Finance Costs – Interest expenses divided by average – Our treasury aims to manage and optimise borrowing for the year fi nance costs – 2008: 4.4% (2007: 5.6%) – HIBOR was generally lower in 2008 as compared Bank Facilities: Capital Market Issuance – The proportion of the borrowings from banks and from capital market relative to the total borrowings to 2007 – As a measure of diversifi cation of funding sources – No signifi cant change – 2008: 24.9% : 75.1% (2007: 24.7% : 75.3%) Average Debt Maturity – The weighted average of remaining maturity – An indicator of the pressure for refi nancing or period of the Group’s borrowings repaying the existing borrowings in the near term Floating Rate Debt (% on Total Debt) – 2008: 3.9 years (2007: 4.0 years) – The average maturity remains broadly the same – Debt effectively in fl oating interest rate – A measure to calculate the percentage of divided by total debt – 2008: 59.5% (2007: 60.1%) borrowings subject to fl uctuation in market interest rates – No signifi cant change Net Interest Coverage – Gross profi t less administrative expenses before depreciation divided by net interest expenses – It represents the Group’s fi nancial strength from operating activities to meet its interest payment obligations – 2008: 10.2 times (2007: 7.8 times) – Improved ratio refl ects higher gross profi t and Net Debt to Equity – Borrowings less cash and cash equivalents divided by adjusted shareholders’ funds – 2008: 5.9% (2007: 6.8%) lower 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 – Improvement principally due to lower net debt level 30 Hysan Annual Report 2008 Credit Ratings Moody’s – 2008: Baa1 (2007: Baa1) – Investment-grade ratings Standard and Poor’s – 2008: BBB (2007: BBB) unchanged 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 financial prudence. Treasury has an overall objective of optimisation of borrowing costs and management of the associated risks: that is, to minimise finance costs subject to the constraints of the operational parameters. The cost of financing was 4.4% for 2008. Debt Management During 2008, the credit market in Hong Kong tightened significantly due to the deleveraging activities and shrunken balance sheets of many financial institutions. Therefore, a prudent approach to managing our debt portfolio is particularly crucial. While the Group always strives to lower the borrowing margin, the more important consideration in the current environment is to ensure sufficient available facilities, to diversify the funding sources and to maintain a suitable maturity profile relative to the overall duration of the use of such funds. The Group managed to secure a total of HK$765 million of new borrowings, comprising a US$25.6 million bank loan and HK$565 million of notes issued from the Medium Term Notes Programme, before the credit market nearly dried up in the fourth quarter of 2008. This new financing is a precautionary measure taken by the Group in case the credit market remains tight or deteriorates further in 2009. The new financing raised will be sufficient to refinance the maturing debts in 2009 amounting to HK$550 million. As at 31 December 2008, the outstanding gross debt of the Group was about HK$3,698 million (2007: HK$2,921 million). All the outstanding borrowings are on an unsecured and committed basis. In order to diversify our funding sources, the Group has established long-term relationships with a number of local and overseas banks. At present, 10 local and overseas banks have provided bilateral banking facilities to the Group and such bank borrowings accounted for about 24.9% of the Group’s outstanding gross debt. Notes issued from the Medium Term Notes Programme serve as an important source of funding for the Group. The Programme allows the Group to access a broad investor base in the local and international debt capital markets. These markets are more flexible with respect to the longer-tenor debts. For instance, the three notes that the Group issued in 2008 have maturities ranging from 7 to 12 years. As at the end of 2008, about 75.1% of the Group’s outstanding gross debts were sourced from the debt capital markets. The graph on the right shows the percentages of total outstanding gross debts sourced from banks and the debt capital markets in the past five years. Sources of Financing at Year-end HK$ million % 6 7 3 . % 4 . 2 6 % 0 3 5 . % 0 . 7 4 6,000 4,800 3,600 2,400 1,200 0 % 1 . 5 7 % 9 . 4 2 % 3 . 5 7 % 7 . 4 2 % 3 . 5 7 % 7 . 4 2 04 05 06 07 08 Capital Market Issuances Bilateral Bank Loans O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 31 Our Strategy in Action Management’s Discussion and Analysis The Group also strives to maintain an appropriate maturity profile and reduce the concentration of debts maturing in the near term. The average maturity of the debt portfolio was about 3.9 years. As at 31 December 2008, only about HK$620 million or 16.8% of the outstanding debts will be due in less than two years. Therefore, there will not be significant refinancing pressure on the Group in the near term, especially when the level of cash and the undrawn committed facilities available to the Group are taken into account. The debt maturity profile of the Group is as follows: Maturing in not exceeding one year Maturing in more than one year but not exceeding two years Maturing in more than two years but not exceeding fi ve years Maturing in more than fi ve years Total Gross Debt 2008 HK$ million 2007 HK$ million 550 70 2,270 808 3,698 – 550 2,140 231 2,921 Total gross debt at the end of 2008 was HK$3,698 million, increased by around HK$777 million as compared to 2007. Liquidity Management To cope with the tightening credit market, the maintenance of sufficient liquidity is of utmost importance to all businesses. The Group always places great emphasis on liquidity management. Benefited from the strong recurring cash flows from its business, the Group stands in a favourable position to withstand the liquidity crunch. As at 31 December 2008, the Group had cash and bank deposits totalling about HK$1,015 million (2007: HK$484 million). All the deposits are diversified with banks of strong credit ratings and the counterparty risk is monitored on a regular basis. Apart from bank deposits, the Group also invested in short-term government bills and notes issued by the Hong Kong Monetary Authority and US Treasury, thereby preserving the Group’s liquidity in the most liquid and secure form of investment. As at 31 December 2008, the outstanding balance of funds invested in these government bills and notes amounted to about HK$700 million. Additional liquidity reserve is maintained in the form of highly liquid securities listed on The Stock Exchange of Hong Kong. The market value of these securities amounted to HK$982 million as at the end of 2008. Further liquidity, if needed, is available from the undrawn committed facilities offered by the Group’s relationship banks. These facilities, which amounted to HK$3,550 million as at 31 December 2008, essentially allow the Group to obtain the same level of liquidity as holding the equivalent amount of cash. Interest Rate Management Interest expenses account for a significant proportion of the Group’s total expenses. Therefore, the Group closely monitors its interest rate exposures. Depending on our medium- term projections of interest rates, an appropriate hedging strategy is adopted to manage the exposure. 32 Hysan Annual Report 2008 Since the second half of 2008, when the economic outlook worsened and inflation pressure subsided, most of the central banks in the advanced economies have introduced strong measures to cut policy rates. In tandem with the slash of the Fed Fund target rate, the 3-month Hong Kong Inter-bank Offered Rate (“HIBOR”) has dropped from its yearly peak of 4.44% in October 2008 to 0.95% at the end of 2008. However, the benefit of the rate reduction was partially offset by the widened credit spreads on the new borrowings. As at 31 December 2008, about 59.5% of the Group’s debts were at floating rates that can reap the full benefit of the lower interest rate environment. As a result, the Group’s average cost of financing lowered from 5.6% in 2007 to 4.4% in 2008. The diagram on the right shows the Group’s debt levels and average finance costs in the past five years. Debt Levels and Average Finance Costs HK$ million 6,000 4,800 3,600 2,400 1,200 0 2 1 6 , 5 0 9 5 , 5 2.5% 5.6% 4.9% 5 7 3 , 4 3.6% 3 7 9 , 2 9 0 9 , 2 1 2 9 , 2 7 3 4 , 2 4 2 5 , 2 4.4% 8 9 6 , 3 3 8 9 , 1 04 05 06 07 08 Year-end Gross Debt Year-end Net Debt (Gross debt less cash and cash equivalents) Average Finance Costs Foreign Exchange Management 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 and the US$25.6 million bank loan, which have been hedged by appropriate hedging instruments, all of the Group’s other borrowings were denominated in Hong Kong dollars. On the investment side, US$27 million of held-to-maturity debt securities were denominated in US dollars and the investments have also been fully hedged against foreign exchange exposure. Other foreign exchange exposure relates to our investments in overseas project in Shanghai. These foreign exchange exposures amounted to the equivalent of HK$2,340 million or 5.6% of our total assets. Use of Derivatives As at 31 December 2008, all of the outstanding derivatives were related to, and commensurate with, the hedging of interest rate and foreign exchange exposures. The Group has made use of derivatives to manage the volatilities or adjust the appropriate risk profile of our treasury assets and liabilities. To prevent the Group from being exposed to undue risks arising from the use of derivatives, all such transactions have to strictly follow our internal guidelines. 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. Hysan Annual Report 2008 33 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action 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. Board of Directors – Independent Risk Control Board of Directors Audit Committee Internal Audit Management – Risk Management Chairman Chief Executive Officer Business/Unit Heads – business management – operations Executive Director, Finance – treasury, tax, controlling and accounting Executive Director and Company Secretary – compliance – human resources 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 5 components, namely Control Environment; Risk Assessment; Control Activities; Information and Communication; and 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 have in place a formal Code of Ethics which is communicated to all staff (including new recruits). Our “whistle-blowing” system is monitored by an independent third party service provider with direct reporting to Audit Committee Chairman. We aim to build risk awareness and control responsibility into our culture and regard this as the foundation of our internal controls system. 34 Hysan Annual Report 2008 • 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 beneficial 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. In this light, we conducted an entity-wide exercise to map all key control processes to appropriate objectives. Process owners in business and support units were identified to document the relevant policies and are responsible to ensure controls exist and are in operation. We shall continually review and refine these policies. Identify and analyse risks to achieve- ment of corporate objectives Determine impact of such identified risks on the achievement of corporate objectives Determine how each of the other internal controls components, both separately and together, mitigate such risks Specify Corporate Objectives Refine corporate objectives based on changes potentially impacting the business Hysan’s internal controls system: • is designed to ensure corporate objectives are achieved • has five components that work together Monitoring • Independent review by Independent Advisor in 2006 • Internal audit function Information and Communication Implement and operate information and communication to support internal controls Control Environment • Strong tradition of emphasising good corporate governance • Human resources policies Determine Effectiveness Control Activities • Documented key control policies and processes Summary of Key Developments in 2008 Important developments, from risk management perspective, that took place in 2008 and steps taken by management include: • In the fourth quarter of the year, the global financial markets experienced unprecedented turmoil. It led to volatility in most markets in the world, as well as contraction in supply of credit. We adhered to the principle of financial prudence: – We accelerated our financing plans and pre-arranged funding in advance of re-financing due in 2009. – We further strengthened our regular review system of counterparty risks as regards banking and investment activities. – We adopted prudent financial investment activities and orderly disposed of listed securities held for trading purposes. The proceeds were invested in short-term government bills and bonds, a secure and liquid form of investment. (Further details are described in the sections “Management’s Discussion and Analysis – Financial Policy” and “Corporate Governance Report – Focus in 2008”) Hysan Annual Report 2008 35 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Strategy in Action Internal Controls and Risk Management • Worsened economic conditions led to reduced demand in the Hong Kong leasing markets in general, and intensified competition among landlords. – We refined our “scenario planning” approach in preparing budget and forecasts, in anticipation of a more challenging economic environment. This will enable us to take appropriate cost management measures in a timely manner in response to any significant changes in budgeted revenue. – We started a phased project to review our procurement system to further enhance cost efficiency as well as control effectiveness. Steps have been taken to enhance procurement processes, including contractor selection, contract terms and conditions, appropriate in- sourcing, as well as having in place additional checks-and-balances. – In general, we further strengthened our management team, with the view to better understanding and providing solutions to changing tenant needs. Skills in customer relationships management, sales and marketing, as well as property services were further strengthened. Levels of authority were also reviewed following the arrival of new senior staff, balancing effective delegation and control. • Hennessy Centre re-development – Management proceeded to fully develop the design and tendering of the main construction contract. The demolition of the existing structure was completed during the year. – Our internal project management team, complemented by specialist advisers, reviewed the tendering process from the risk perspective. Various aspects, including tender award criteria and process; terms and conditions, were covered in this review. – The Finance Division is also involved in the tendering process to ensure appropriate checks- and-balances and input from the finance perspective. There is periodic reporting to senior management and the Board. 2008 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 findings 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 2008, the Board considered the internal controls system effective and adequate. No significant areas of concern which might affect the operational, financial reporting, and compliance functions of the Company were identified. Way Forward We recognise that the strengthening of internal controls is a continuing process. We shall continually review our business processes and control activities. Most importantly, 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. 36 Hysan Annual Report 2008 Human Resources Key among our growth priorities is the development of a strong base of leadership. Building a talented organisation is the cornerstone of our human resources strategy to support the ongoing success of our business. As at 31 December 2008, we employed a total of 488 staff, including the head office asset management team and front-line building management team. Staff briefi ng session for our results announcement – an example of communication and team work. To succeed in a very competitive business environment, we truly believe that “people” are our most valuable asset and that they drive our success. We focus on building a talented organisation by attracting, retaining and developing our high-performing employees. Considerable efforts have been made to achieve our people-related objectives. Attract – Building our talent pool We have a high commitment to developing our employees to their fullest potential. At the same time, we aim to attract the best talents to work with our team in order to generate innovative insights and to fully capitalise on business opportunities. We attract talents by providing them with a motivating working environment that fosters open communication, teamwork and creativity. The Hysan values are highly appreciated by employees since they promote the Company’s “gold standard” in business ethics and deep respect for each individual. Due to our unceasing efforts, we have successfully attracted talents from different industries to fill key positions. The wealth of business experience and entrepreneurship of these individuals add new perspectives to our strategies for attaining sustainable growth. Retain – Aiming for a high performance team We adopt the principle of “reward for performance” to motivate our employees and recognise their contribution. To cater for the changing needs of our business, we have refined our performance management system to ensure that employee performance is objectively assessed and rewarded. We offer our compensation and benefits at a competitive level to guarantee fairness. Balancing past year’s operating results and the anticipated challenging business environment ahead, our 2009 salary review provided salary increments to all staff. Executive Directors, however, will take a salary freeze. By conducting regular market analysis, we implemented upgrades to our benefits during the year and revamped the compensation system to reinforce our performance-driven culture. Develop – Maximising our employees’ potential We are committed to developing our employees and to maximising their potential, helping them to pursue career paths that match their aspirations. We offer various development opportunities, including classroom training, field visits, challenging projects, on-the-job training and training sponsorship, in order to cater for different development needs of each individual. We will continue to explore different development opportunities and career management processes to encourage our employees to grow with us. The Way Ahead Hysan is well equipped to execute our priorities for the future. People development together with collaborative teamwork continue to be our major focus and platform for supporting our growth plan. To achieve our vision of building a talented organisation that is second to none, we will devote all our efforts to developing and retaining the next generation of leadership at Hysan. Hysan Annual Report 2008 37 O u r S t r a t e g y i n A c t i o n O v e r v i e w O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 38 Hysan Annual Report 2008 Hysan is committed to maintaining the highest standards of corporate governance. Detailed information on our corporate governance structure and practices is set out in four separate reports within this section. 40 Board of Directors and Senior Management 44 Corporate Governance Report 59 Directors’ Report 66 Directors’ Remuneration and Interests Report 73 Audit Committee Report 3. Our Governance Hysan Annual Report 2008 39 Our Governance Board of Directors and Senior Management Structure The Board Chairman Chief Executive Officer Audit Committee Emoluments Review Committee Nomination Committee Investment Committee Finance Corporate Services Property Investment Property Services Property Development Chairman Peter Ting Chang LEE J.P. (I, chairing N) Independent non-executive Directors Tom BEHRENS-SORENSEN (A) Non-executive Directors Hans Michael JEBSEN B.B.S. (I) Executive Directors Ricky Tin For TSANG Executive Director, Finance (currently acting as Chief Executive Offi cer) Fa-kuang HU G.B.S., C.B.E., J.P. (E) Independent non-executive Deputy Chairman Sir David AKERS-JONES G.B.M., K.B.E., C.M.G., J.P. (N, chairing A, E) Dr. Geoffrey Meou-tsen YEH S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst.D. (E, N) Anthony Hsien Pin LEE (chairing I) Chien LEE (A) Dr. Deanna Ruth Tak Yung RUDGARD Wendy Wen Yee YUNG Executive Director and Company Secretary (A) Audit Committee (E) Emoluments Review Committee (N) Nomination Committee (I) Investment Committee 40 Hysan Annual Report 2008 Board of Directors Peter Ting Chang LEE J.P. 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 55. Sir David AKERS-JONES G.B.M., K.B.E., C.M.G., J.P. Sir David is Chairman of GAM Hong Kong Limited, Deputy Chairman of CNT Group Limited and a non-executive director of China Everbright International Limited and K. Wah International Holdings Limited. 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 81. Tom BEHRENS-SORENSEN Mr. Behrens-Sorensen is the Executive Vice President of A.P. Moller-Maersk Group as well as Chairman of Maersk China Limited. He is also the Vice President for the European Chamber of Commerce in China. He has over 20 years of experience with the A.P. Moller-Maersk Group in Asia and Australia. He was appointed as Independent non-executive Director in 2007 and is aged 50. Fa-kuang HU G.B.S., C.B.E., J.P. Mr. Hu is Honorary Chairman of Ryoden Development Limited. He was an independent non-executive director of i-CABLE Communications Limited and retired effective from the conclusion of its annual general meeting held on 17 May 2007. He holds a Bachelor of Science Degree from Shanghai Jiao Tong University. He was appointed a Non-executive Director in 1979 and re-designated as Independent non-executive Director in 2008. He is aged 85. Hans Michael JEBSEN B.B.S. 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 52. Anthony Hsien Pin LEE 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 is also an alternate director of Television Broadcasts Limited. 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 51. Hysan Annual Report 2008 41 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Our Governance Board of Directors and Senior Management Board of Directors Chien LEE Mr. Lee is a private investor and a non-executive director of Swire Pacifi c Limited and Television Broadcasts Limited and a number of private companies. 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 55. Dr. Deanna Ruth Tak Yung RUDGARD 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 69. Dr. Geoffrey Meou-tsen YEH S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst.D. Dr. Yeh is former Chairman of Hsin Chong Construction Group Ltd. He was an independent non-executive director of China Travel International Investment Hong Kong Limited until 14 July 2007. 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 77. Ricky Tin For TSANG Mr. Tsang joined the Group in 2004 and was appointed an Executive Director in 2008. He 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 Master’s Degree in Engineering from Oxford University, United Kingdom. He is 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 47. Wendy Wen Yee YUNG Ms. Yung joined the Group in 1999 and was appointed an Executive Director in 2008. She is responsible for the Group’s corporate services including legal and secretarial, human resources and administration, as well as corporate communications. Ms. Yung holds a Master of Arts Degree from Oxford University, United Kingdom and is qualifi ed as a solicitor of the Supreme Court of England and Wales as well as Supreme Court of Hong Kong. She was a partner of an international law fi rm prior to joining the Group. Ms. Yung is also qualifi ed as a Certifi ed Public Accountant 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 panels of the Hong Kong Institute of Certifi ed Public Accountants and the Hong Kong Institute of Chartered Secretaries respectively. She is aged 47. 42 Hysan Annual Report 2008 Senior Management From left to right Jimmy Yiu Cho MAK Lai Kiu CHAN Cissy Ching Sze CHAN Ricky Tin For TSANG Peter Ting Chang LEE Wendy Wen Yee YUNG Clara WONG Roger Shu Yan HAO Cissy Ching Sze CHAN Director, Retail Portfolio and Marketing Ms. Chan is responsible for the Group’s retail portfolio and related marketing activities. She joined the Group in 2008. Ms. Chan received a Master of Business Administration Degree from the Chinese University of Hong Kong and a Bachelor of Social Science Degree from the University of Hong Kong. She gained substantial general management experience in multinational companies while holding senior positions, with particular expertise in sales and marketing. She is aged 43. Lai Kiu CHAN Director, Design and Project Ms. Chan oversees the Group’s design and project affairs. She joined the Group in 2008. Ms. Chan holds a Doctor of Philosophy Degree in Architecture from the University of Hong Kong. She qualifi ed as a PRC Class 1 Registered Architect, is a Registered Architect of Architects Registration Board of Hong Kong, and is also an Authorised Person (Architect) in Hong Kong. Ms. Chan has received various international and local awards for architectural designs. She is aged 46. Roger Shu Yan HAO Group Financial Controller Mr. Hao is responsible for the Group’s fi nancial and control functions. He joined the Group in 2008. Mr. Hao received a Bachelor’s Degree in Business Administration from the Chinese University of Hong Kong, and is a Chartered Accountant with the Institute of Chartered Accountants in England and Wales, a Fellow of the Association of Chartered Certifi ed Accountants and an Associate of the Hong Kong Institute of Certifi ed Public Accountants. Mr. Hao accumulated extensive experience in auditing, fi nancial management and control, while holding senior positions in multinational corporations. He is aged 43. Jimmy Yiu Cho MAK General Manager, Property Services Mr. Mak, who joined the Group in 2009, oversees the Group’s property management services. He holds a Master of Business Administration Degree from The Open University of Hong Kong. He is a Fellow of Chartered Institute of Housing and Hong Kong Institute of Housing. Having been in senior management positions in a number of property companies, Mr. Mak brings to the Group extensive experience in enhancement of property management services in commercial as well as luxury residential properties. He is aged 50. Clara WONG Director, Offi ce Portfolio Ms. Wong is responsible for the Group’s offi ce portfolio. She holds a Master of Science Degree in Finance from National University of Ireland, and a Bachelor of Arts Degree majoring in Economics and Mathematics from Smith College in the United States. Prior to joining the Group in 2008, Ms. Wong gained extensive experience in customer relationship management and business portfolio management through holding a number of senior positions within the banking industry. She is aged 43. Hysan Annual Report 2008 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Our Governance Corporate Governance Report Responsible Business as the Guiding Priniciple Hysan aims to be a financially 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 Practices Hysan meets the requirements of the Code Provisions contained in the Code on Corporate Governance Practices (the “Corporate Governance Code”) 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”), except that its Emoluments Review Committee (established since 1987) has the responsibility for determining executive Director compensation. The Board is of the view that, in light of the current organisational structure and the relatively simple nature of Hysan’s business activities, the current arrangements for the Emoluments Review Committee to determine executive Director compensation is 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 Chief Executive Officer. Peter Ting Chang LEE serves as the Chairman. An open search is currently underway for a new Chief Executive Officer. 44 Hysan Annual Report 2008 Exceeded Code Provisions Best Practices in Corporate Governance in Place at Hysan The Board fi rst established a formal Corporate Governance Policy* in 2004. The Board has a designated Senior Independent non-executive Director, Sir David AKERS-JONES (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. Over one-third of the Board is represented by Independent non-executive Directors. All Corporate Governance Committees (Audit, Emoluments Review and Nomination) have at least a majority of Independent non-executive Directors. There is a 100% Independent non-executive Director membership for the Emoluments Review Committee. Terms of Reference* of such Committees 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. Such service provider has direct reporting access to the Audit Committee. 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 and determination of price sensitive information in order to ensure consistent and timely disclosure and fulfi llment of the Group’s continuous disclosure obligations. The Group has established an Auditor 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 a formal 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 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. * Detailed policies/terms of reference are available on the Company’s website: www.hysan.com.hk. The Group has early adopted certain changes in requirements of the Listing Rules effective for financial year 2009 and proposed changes set out in recent Stock Exchange consultation conclusions, in pursuant of good governance. Early Adoption Best Practices in Corporate Governance in Place at Hysan The Company has conducted all voting at AGMs by poll since 2004. The Group published its annual results within 73 days for 2008, well within the proposed change (being 3 months of the end of accounting period). The Group has a “Qualifi ed Accountant” (as defi ned under the Listing Rules) throughout 2008. The Audit Committee also reviewed the adequacy of resources, qualifi cation/experience of staff of the Group’s accounting and fi nancial reporting function and their training/budget. Hysan Annual Report 2008 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Our Governance Corporate Governance Report Focus in 2008 Further strengthening of our internal controls system was a key focus area in 2008. This was particularly important in light of the global financial markets turmoil during the fourth quarter and the generally worsened local economic conditions. We adhered to the principle of financial prudence and further strengthened our financial and treasury management, budgetary planning and costs control. In particular, we further enhanced our regular review system of the Group’s counterparty risks in banking and investment activities. Our management team was further strengthened generally. Further details are set out in the separate “Internal Controls and Risk Management Report”. The Board noted recent incidents in Hong Kong and elsewhere associated with the lack of transparency in the management of business activities, including where some companies had taken steps that stray from their core competencies. There were Board discussions on the general principles. The Board and management unanimously agreed as to the significance of providing timely and accurate information to the full Board. They fully supported the monitoring function of Independent non-executive Directors. These are further described under “The Board” in this report. In general, we further improved the quality of corporate governance reporting and disclosure generally. In this Annual Report, we aim to provide comprehensive yet user-friendly information on all material matters regarding performance of the Group. We seek to explain the drivers, risks, and strategy behind our financial performance: • Operations Review (Page 18) • Financial Policy (Page 30) • Human Resources (Page 37) As regards governance-related aspects, enhanced disclosure in internal controls and risk management; executive compensation was made in particular. The relevant reports are: • Internal Controls and Risk Management (Page 34) • Directors’ Remuneration and Interests Report (Page 66) We recognise the significance of electronic communications. Detailed information on our governance framework is set out in our corporate website (www.hysan.com.hk). – New approach to AGMs (2004) – Self-funded programme to facilitate transmission of corporate communication materials to ultimate shareholders (2005) – Corporate Governance Report (2001) – Audit Committee Report (2003) – Directors’ Remuneration and Interests Report (2004) – Internal Controls and Risk Management Report (2006) – Corporate Responsibility Report (2007) Board Committees: – Emoluments Review Committee (1987) – Audit Committee (1999) – Nomination Committee (2005) – Formalised role of Senior Independent non-executive Director (Deputy Chairman) (2007) – Key Corporate Governance Documents – Corporate Governance Guidelines (2004) – Code of Ethics (2005) – Board of Directors Mandate (2007) – Role Requirements of Non-executive Directors (2007) – Formal Corporate Responsibility Policy (2007) ESTABLISH THE INFRASTRUCTURE DISCLOSURE SHAREHOLDER RIGHTS Evolution of Hysan’s Corporate Governance Framework 46 Hysan Annual Report 2008 -- Continual corporate social responsibility efforts as an integral part of good corporate governance (admission to FTSE4Good Index, 2008) -- Company-wide briefing of Code of Ethics and outsourcing of “whistle- blowing” to independent third party (2008) – Continual Group-wide reinforcement of corporate values and culture WAY FORWARD: MORE THAN A BOARD PROCESS 1. Our Corporate Governance Practices – Governance Model and Framework 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. Authority Delegation through: • clear policies and procedures • monitoring Shareholders Board Management Accountability Assurance through checks-and-balances: • monitoring • reporting Governance Framework 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 the Company’s website: www.hysan.com.hk: • 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. O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Hysan Annual Report 2008 47 Our Governance Corporate Governance Report 2. Our Corporate Governance Practices – The Board Focus in 2008 In addition to extensive discussions on Group leasing strategy, projects, and performance, the Board also focused on the following areas. Group human talent was an area of attention. There was a general review and refinement 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. The Chairman ensures that the Directors receive accurate, timely and clear information. This was particularly important in light of global financial markets turmoil during the last quarter of the year. Updated information on the Group’s counterparty risks in banking/investment activities, and steps taken to manage such risks, was supplied to non-executive Directors in a timely manner. Moving forward, management will further strengthen the provision of regular updates to the Board of our business performance in addition to detailed reports presented in quarterly Board meetings. (Please refer to the separate Internal Controls and Risk Management Report for more details.) The Board noted recent incidents in Hong Kong and elsewhere associated with the lack of transparency in the management of business activities, including where some companies had at times taken steps that stray from their core competencies. There were Board discussions on the general principles. The Board and management unanimously agreed on the significance of: firstly, the provision of timely and accurate information to the full Board; and secondly, the monitoring function of Independent non-executive Directors to ensure compliance with the disclosure and other legal requirements. Objectivity of Independent non-executive Directors was further stressed in this light. They have a special contribution as Board members as they offer critical insight into operations. The Board carried out a detailed review of the “independence” of non-executive Directors during the year. The Board and Management The roles of the Board and of the management are separate and distinct. The Board’s responsibility is, firstly to formulate strategy and, secondly, to monitor and control operating and financial performance in pursuit of 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. 48 Hysan Annual Report 2008 These are governed by a formal Board of Directors Mandate (Details are available on the Company’s website: www.hysan.com.hk) which sets out the key responsibilities of the Board in fulfilling its stewardship roles. 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 extension of Group activities into new business areas; annual budgets; preliminary announcements of interim and final results; dividends; material banking facilities; material acquisitions and disposals; and connected transactions. 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 2009. “Hysan has always believed in the need to have outside directors... A majority of the public company’s first board of directors were from outside the Lee family.” “There has been significant evolution in the role of the outside directors as well. Now, they still 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 and are more alert to our responsibilities.” Four Board meetings were held in 2008 and the meetings were structured to allow open discussion. Details of Directors’ Board attendance records are as follow: — Peter T.C. LEE Chairman DIRECTORS ATTENDANCE/ TOTAL BOARD MEETINGS Executive Peter Ting Chang LEE Pauline Wah Ling YU WONG (Stepped down on the conclusion of AGM held in May 2008) Ricky Tin For TSANG (Appointed on 1 April 2008) Wendy Wen Yee YUNG (Appointed on 1 April 2008) Independent Non-executive Sir David AKERS-JONES Tom BEHRENS-SORENSEN Fa-kuang HU Dr. Geoffrey Meou-tsen YEH Non-executive Hans Michael JEBSEN Anthony Hsien Pin LEE Chien LEE Dr. Deanna Ruth Tak Yung RUDGARD 4/4 2/2 3/3 3/3 4/4 3/4 3/4 3/4 4/4 (50% by alternate) 4/4 4/4 4/4 Hysan Annual Report 2008 49 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Our Governance Corporate Governance Report Division of Responsibilities The Group’s corporate governance model aims to effectively combine family control and professional management. In this light, the Board has established a clear specification of duties under our Board structure to ensure a proper division of responsibilities and balance of power. The Group’s Corporate Governance Guidelines provide for separate roles of Chairman and Chief Executive Officer. Peter Ting Chang LEE serves as the Chairman. An open search is currently underway for a Chief Executive Officer. 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. 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. The Non-executive Directors play a key role in protecting shareholders’ interests. They bring an external dimension to the Board, whilst complementing the skills and experience of the executive Directors through their range of knowledge, experience and insight from other sectors. The principal roles of the Senior Independent non-executive Director and Non-executive Directors are set out below: SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR • To be 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 Officer has failed to resolve, or for which such contact is inappropriate. • Our Senior Independent non-executive Director currently chairs two of Hysan’s corporate governance-related committees, namely the Audit Committee and the Emoluments Review Committee. For details, please refer to the Company’s Corporate Governance Guidelines at the Company’s website: www.hysan.com.hk. NON-EXECUTIVE DIRECTORS They have four key roles in addition to those 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 financial 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 For details, please refer to the Company’s Corporate Governance Compliance Report at the Company’s website: www.hysan.com.hk. 50 Hysan Annual Report 2008 Balance and Independence The Board currently comprises of 3 executive and 8 non- executive Directors (including 4 independent non-executive Directors). The Board continually reviews its composition and is actively engaged in succession planning issues for both executive and non-executive roles. Directors’ biographies are set out on pages 41 and 42 and are also available on the Company’s website: www.hysan.com.hk. 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 4 Independent non-executive Directors who are identified in our Annual and Interim Reports and other communications with shareholders. “The ‘independent’ and ‘non-executive’ parts of the title describe my role very well. I am a full member of the Board, but I am not a member of the executive staff of the Company.” “The independent directors look at the company from the outside. We try and see it from the viewpoint of the general shareholding public. We take an independent view of the business operations using our own experience as the basis. The independent directors of Hysan, for example, have a world of experience and are from different walks of life. We can bring much to the Company. We are certainly not cyphers.” — Sir David AKERS-JONES Independent non-executive Deputy Chairman The Board last carried out a detailed review of director independence in March 2009. It concluded that each of the 4 Independent non-executive Directors is independent and will keep under review whether there are relationships or circumstances which are likely to affect (or could appear to affect) independence. Dr. Geoffrey Meou-tsen YEH and Mr. Fa-kuang HU will stand for re-election at this year’s AGM. While they have served the Board for more than 9 years, they have clearly demonstrated their respective 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 their independence. The Board therefore considers that they remain independent, notwithstanding the length of their respective tenure (Please refer to the accompanying Circular to Shareholders for more details on their respective independence considerations). Hysan Annual Report 2008 51 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Our Governance Corporate Governance Report INDEPENDENCE STATUS Name Management Independent Not Independent March 2009 Review- Reason for Independence Status Peter Ting Chang LEE Sir David AKERS-JONES Tom BEHRENS-SORENSEN Fa-kuang HU Hans Michael JEBSEN Anthony Hsien Pin LEE Chien LEE Dr. Deanna Ruth Tak Yung RUDGARD Ricky Tin For TSANG Pauline Wah Ling YU WONG (up to May 2008) Dr. Geoffrey Meou-tsen YEH Wendy Wen Yee YUNG No business or other relationships with the Group or management No business or other relationships with the Group or management No business or other relationships with the Group or management No business or other relationships with the Group or management Director Appointments and Re-Election 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. The Committee met in March 2008 to consider the appointment of 2 new Executive Directors, Ricky Tin For TSANG and Wendy Wen Yee YUNG. Their remuneration where determined by the Emoluments Review Committee (please refer to the separate Directors’ Remuneration and Interests Report on pages 66 to 72). There are formalised role requirements for Non-executive Directors who have 4 additional key roles as well as those requirements applicable to all Directors (Details are available on the Company’s website: www.hysan.com.hk). 52 Hysan Annual Report 2008 Term Non-executive Directors are appointed for a term of 3 years. New Directors are required to submit themselves for re-election at the first AGM following their appointment. The Group’s Articles of Association contains provisions regarding rotation of Directors so that every Director will be subject to retirement by rotation at least once every 3 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. Details of the Directors standing for re-election in the forthcoming AGM are set out in the accompanying Circular to Shareholders. 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. 3 meetings were held in 2008. Supply of Information Supply and access to 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 significance or on new opportunities for the Group. Directors are also kept updated of any material developments from time to time through notifications and circulars giving them the relevant background and explanatory information. Directors also have access to non-Director management staff where appropriate. These ensure that the Board will be given the answers it needs. ance Best Corporate Governance Disclosure Awards 2008: 8: Non-Hang Seng Index Category – Diamond Award ward (top award) Organised by The Hong Kong Institute of Certified Public Accountants Hysan’s 2007 annual report “achieved a good balance between the depth and range of information and readability, and it reflected, overall, a high standard of corporate governance, combining family ownership and professional management.” lity and it reflected — Judges’ Report O u r G o v e r n a n c e 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 financial 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. Hysan Annual Report 2008 53 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Our Governance Corporate Governance Report 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 are also updated on any developments or changes affecting through notifications circulated to them from time to time where appropriate. 3. Our Corporate Governance Practices – Board Committees Focus in 2008 The workings of these governance-related Board Committees were further strengthened during the year. The Emoluments Review Committee now has 100% Independent non-executive Director membership. There is a majority of Independent non-executive Directors for the Audit and Nomination Committees. Terms of reference of these Committees were revised to provide for in-camera meetings of Independent non-executive Directors only to further encourage objective and independent discussions and assessment. In order to provide effective oversight and leadership and pursuant to its Corporate Governance Guidelines, the Board has established 3 governance-related Board Committees. In common with the Board, each Committee has access to independent advice and counsel as required and each is supported by Executive Director and Company Secretary. The terms of reference of these Committees are available on the Company’s website. 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, with an overall majority of Independent non-executive Directors. All members have experience in reviewing or analysing audited financial statements of public companies or major organisations. The Audit Committee meets no less than twice a year. Meetings are also attended by management by invitation including Executive Director, Finance. 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 the preparation of the financial statements. The external auditors are responsible for auditing and attesting to the Group’s financial 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. 54 Hysan Annual Report 2008 The Audit Committee also has the responsibility to review the Group’s “whistle-blowing” procedures for its employees to raise concerns, in confidence 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 2008 Full details are set out in the “Audit Committee Report” on pages 73 and 74. 3 meetings were held in 2008 with full attendance for the 2 meetings for considering the Group’s annual and interim results. 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, Independent non-executive Directors. There is a 100% Independent non-executive Director membership. 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. Activities and Report in 2008 Full details are set out in the “Directors’ Remuneration and Interests Report” on pages 66 to 72. One meeting was held in March 2008 with full attendance to consider Executive Director compensation. Nomination Committee Composition and Meetings Schedule 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 has a majority of Independent non-executive Directors. The Committee meets when it is considered necessary. Roles and Authority The Committee has the responsibility of nominating for Board approval candidates to fill 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 2008 The Committee met in March 2008 with full attendance to consider the appointment of Ricky Tin For TSANG and Wendy Wen Yee YUNG as new Executive Directors as from 1 April 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Hysan Annual Report 2008 55 Our Governance Corporate Governance Report 4. Our Corporate Governance Practices – Shareholders Focus in 2008 We are committed to continually enhancing our communication with shareholders. There is currently no requirement in Hong Kong providing for mandatory forwarding of shareholder communication materials by nominee companies to beneficial shareholders. We operate a self-funded programme to proactively forward shareholder communication materials via nominee companies and continue to expand coverage of the same during the year. We noted recent Listing Rules changes, which (subject to legal requirements of the issuer’s place of incorporation) provide for deemed shareholder consent to receive shareholder communications via electronic means. While we support the wider use of electronic communications in today’s environment, we aim to strike a balance to ensure effective communications with all shareholder segments as far as practicable. We therefore plan to continue our self-funded communication programme for important areas, including Notice of AGM and key information to enable shareholders to vote. In general, we enhanced the quality of disclosure in our corporate communication materials, including this Annual Report. The Board and management fully recognise the significance 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. 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 financial and non-financial 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. Hysan has its company website which provides an additional channel for shareholders and other interested parties to access the Group’s information. The Group’s key corporate governance policies and supporting documents including terms of reference of the various Board Committees as well as the Group’s financial reports, press releases and announcements 56 Hysan Annual Report 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e The AGM provides a useful opportunity for the Board to maintain a constructive dialogue with private shareholders. are available on the website. Since 2006, shareholders are given the option to elect to receive corporate communications by electronic means with their express consent. We continue to review how to better utilise the website for timely disclosure and to enhance transparency. Constructive Use of AGM The Board recognises the significance 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 2007 business environment; business activities review and outlook. The Company values the contributions from shareholders in the questions and answers session after the statutory part of the meeting. 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. Executive Director, Finance participates in regular one-on-one meetings and roadshows. Corporate Disclosure Policy We recognise the significance of consistent disclosure practices aimed at accurate, timely and broadly disseminated disclosure of material information about Hysan. The Group’s Corporate Disclosure Policy 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 identifies who may speak on Hysan’s behalf, and outlines the responsibility for communications with various stakeholders groups. (Details of the Corporate Disclosure Policy is available at the Company’s website: www.hysan.com.hk). Hysan Annual Report 2008 57 Our Governance Corporate Governance Report Shareholder Rights Self-funded Programme to Proactively Forward Shareholder Communication Materials via Nominee Companies Shareholders must be furnished with sufficient 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 beneficial 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 significance of providing information to shareholders to enable them to make an informed assessment in voting. Copies of the Annual Report and financial statements and related papers were dispatched to shareholders at over 30 days prior to the AGM (statutory requirement: 21 days). Comprehensive information on each resolution to be proposed is also provided. Voting We recognise shareholders’ right in exercising their control proportionate to their equity ownership and support the principle of voting by poll. The Company has conducted all voting at general meetings by poll since 2004. The poll is conducted by the Company’s Registrars and scrutinised by the Group’s auditors. Procedures for conducting a poll are included in the Circular to Shareholders accompanying the Notice of AGM and again explained to the general meeting prior to the taking of the poll. 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 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 depositing the signed requisition at the Company’s registered office. 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. 58 Hysan Annual Report 2008 Directors’ Report The Directors submit their report together with the audited financial statements for the year ended 31 December 2008, which were approved by the Board of Directors (the “Board”) on 10 March 2009. Principal Activities The principal activities of the Group continued throughout 2008 to be property investment, management and development. Details of the Group’s principal subsidiaries and associates as at 31 December 2008 are set out in notes 17 and 18 respectively to the financial statements. The turnover and results of the Group are principally derived from leasing of investment properties located in Hong Kong; accordingly, no segment financial 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 this Annual Report. Results and Appropriations The results of the Group for the year ended 31 December 2008 are set out in the consolidated income statement on page 78. An interim dividend of HK14 cents per share, amounting to HK$146 million, was paid to shareholders during the year. The Board recommends the payment of a final dividend of HK54 cents per share with a scrip alternative to the shareholders on the register of members on 18 May 2009, absorbing HK$562 million. The ordinary dividends proposed and paid in respect of the full year 2008 will absorb HK$708 million, the balance of the profit 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 82 and 83 and note 32 to the financial statements respectively. Investment Properties All of the Group’s investment properties were revalued by an independent professional valuer as at 31 December 2008 using the fair value model. Details of movements during the year in the investment properties of the Group are set out in note 14 to the financial statements. Details of the major investment properties of the Group as at 31 December 2008 are set out in the section under Schedule of Principal Properties of this 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 15 to the financial statements. O u r G o v e r n a n c e Share Capital Details of movements in the share capital of the Company during the year are set out in note 31 to the financial 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 59 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 “Corporate Governance 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 44 to 58) – it gives detailed information on the Company’s compliance with the Corporate Governance Code, and adoption of local and international best practices; (b) “Directors’ Remuneration and Interests Report” (pages 66 to 72) – 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 73 and 74) – it sets out the terms of reference, work performed and findings of the Audit Committee for the year; (d) “Internal Controls and Risk Management” (pages 34 to 36) – it sets out the Company’s framework on internal controls and risks assessment including control environment, control activities, work done during the year and further steps to be done; and (e) “Corporate Responsibility Report” – it sets out the Company’s Corporate Responsibility Policies and Practices reflecting its commitment to maintaining, a high standard of corporate governance. The Board The Board currently comprises Peter Ting Chang LEE (Chairman), Ricky Tin For TSANG (Executive Director, Finance) and Wendy Wen Yee YUNG (Executive Director and Company Secretary) and eight other Non-executive Directors. Sir David AKERS-JONES acts as the Independent non-executive Deputy Chairman, also chairing two corporate governance-related committees, namely, the Audit Committee and the Emoluments Review Committee. Ricky Tin For TSANG and Wendy Wen Yee YUNG were appointed as Executive Directors effective 1 April 2008. Pursuant to the Company’s Articles of Association, Pauline Wah Ling YU WONG retired from the Board by rotation as from the conclusion of the annual general meeting held on 14 May 2008. She remained as Senior Advisor to the Company until 31 December 2008 when she retired from the Company. Save otherwise mentioned, the Directors whose names and biographies appear on pages 41 and 42 have been Directors of the Company during the year. Raymond Liang-ming HU, Kam Wing LI, Timothy John SMITH and V-nee YEH (resigned on 20 January 2009) also served as alternate Directors throughout the year. 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 office shall retire from office by rotation. A retiring Director is eligible for re-election. Particulars of Directors seeking for re-election at the forthcoming annual general meeting (“2009 AGM”) are set out in the accompanying circular to shareholders. The Company has received from each Independent non-executive Director an annual confirmation of his independence as regard each of the factors referred to in Rule 3.13 (1) to (8) 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 Directors 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 66 to 72. 60 Hysan Annual Report 2008 Substantial Shareholders’ and Other Persons’ Interests in Shares As at 31 December 2008, 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 notified to the Company, were as follows: Aggregate long positions in shares and underlying shares of the Company Name Capacity Lee Hysan Estate Company, Limited Lee Hysan Company Limited Beneficial owner and interests of controlled corporations Interests of controlled corporations Number of ordinary shares held 433,130,735 (Note b) 433,130,735 (Note b) % of the issued share capital (Note a) 41.60 41.60 Silchester International Investors Limited Investment manager 83,513,000 8.02 Notes: (a) The percentage has been compiled based on the total number of shares of the Company in issue as at 31 December 2008 (i.e. 1,041,114,578 ordinary shares). (b) 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 2008. 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 37 to the financial statements. Some of these transactions also constitute “Continuing Connected Transactions” under the Listing Rules, as identified below. Continuing Connected Transactions Certain transactions entered into by the Group constituted continuing connected transactions (the “Transactions”) under Rule 14A.34 of the Listing Rules during the year. Details of the Transactions required to be disclosed are set out as follows: Lease granted by the Group I. (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 (“Oxer”) (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: O u r G o v e r n a n c e Connected person Date of agreement Terms Premises Oxer Limited (Note b) 30 August 2007 (Lease and Supplemental Lease) 3 years commencing from 1 July 2007 (for Room 3703) and 35 months commencing from 1 August 2007 (for Room 3704) Rooms 3703 and 3704 and 1 carparking space Annual consideration (Note a) 2008: HK$ 1,458,060 2009: HK$ 1,464,144 732,072 2010: HK$ (on pro-rata basis) (Note c) 6 July 2007 (Carpark Licence Agreement) 34 months commencing from 1 September 2007 (for a carparking space) Hysan Annual Report 2008 61 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 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 (i) Jebsen and Company Limited (Note d) 29 June 2007 3 years commencing from 1 September 2007 (ii) Hang Seng Bank Limited (Note d) 7 June 2006 (Note e) 3 years commencing from 1 October 2006 (iii) Hang Seng Bank Limited 15 October 2007 (Note f) 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) (Note g) Office units on the 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 the Lower Ground Floor (iv) Pearl Investments 23 May 2008 (HK) Limited (Note i) (Lease) 18 May 2007 (Carpark Licence Agreement and a supplemental letter dated 5 June 2007) 3 years commencing from 15 May 2008 Room 1401C on the 14th Floor 3 years commencing from 1 June 2007 1 carparking space Annual consideration (Note a) 2008: HK$ 20,582,424 2009: HK$ 20,692,488 2010: HK$ 13,794,992 (on pro-rata basis) (Note c) 2008: HK$ 1,643,808 (on pro-rata basis) 2008: HK$ 10,578,491 2009: HK$ 12,526,488 2010: HK$ 9,866,293 (on pro-rata basis upto 14 October 2010) (Notes c and h) 2008: HK$ 1,307,578 (on pro-rata basis for the Lease) 2009: HK$ 2,049,156 2010: HK$ 2,011,356 (on pro-rata basis for the Carpark Licence Agreement) 736,132 (on pro-rata basis for the Lease) (Note c) 2011: HK$ 62 Hysan Annual Report 2008 Continuing Connected Transactions continued I. Lease granted by the Group continued (c) Bamboo Grove, 74-86 Kennedy Road, Hong Kong (“Bamboo Grove”) The following lease arrangement was entered into by Kwong Wan Realty Limited, a wholly-owned subsidiary of the Company and property owner of Bamboo Grove, as landlord, with Atlas Corporate Management Limited (“Atlas”), a wholly-owned subsidiary of Lee Hysan Estate Company, Limited, a substantial shareholder of the Company (holding 41.60% interest). Details of the leases are set out below: Connected person Date of agreement Terms Premises Atlas Corporate Management Limited 5 January 2006 (Note j) 2 years commencing from 16 January 2006 Penthouse 01 on the 29th and 30th Floors and 2 carparking spaces Annual consideration (Note a) 2008: HK$ 72,494 (on pro-rata basis) (d) One Hysan Avenue, Causeway Bay, Hong Kong (“One Hysan Avenue”) The following lease arrangements were 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 leases are set out below: Connected person Date of agreement Terms Premises (i) Atlas Corporate Management Limited (ii) Atlas Corporate Management Limited 9 November 2005 3 years commencing from 1 November 2005 Whole of 21st Floor 14 November 2008 (Note k) 3 years commencing from 1 November 2008 Whole of 21st Floor Annual consideration (Note a) 2008: HK$ 1,169,800 (on pro-rata basis) 2008: HK$ 416,598 (on pro-rata basis) 2009: HK$ 2,505,684 2010: HK$ 2,505,684 2011: HK$ 2,088,070 (on pro-rata basis) (Note c) 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 Annual consideration Barrowgate Limited 25 February 2004 and 3 years commencing two Supplemental Appointment Letters of 19 July 2004 and 7 February 2007 from 1 April 2004 (renewed for further 3 years) Whole premises of Lee Gardens Two HK$13,004,618 (i) and HK$2,324,977 (ii) (Note l) Hysan Annual Report 2008 63 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Directors’ Report continued Continuing Connected Transactions continued Notes: (a) The annual considerations are based on current rates of rental, operating charges, (for retail premises) promotional levies and (for carparking spaces) licence fees for each of the relevant financial years. The rental, operating charges, promotional levies and licence fees (as the case may be) are payable monthly in advance. (b) Oxer was considered a connected person by virtue of its being a company controlled by Mr. Michael Tze Hau LEE, former Managing Director of the Company (until 8 May 2007). It has ceased to be a connected person upon expiry of 12 months, on 8 May 2008. (c) The monthly operating charges were revised with effect from 1 January 2009 while the rental, promotional levies and licence fees (as the case may be) remained unchanged. (d) Jebsen and Company Limited (“Jebsen and Company”) and Hang Seng Bank Limited (“Hang Seng”) are beneficial substantial shareholders of Barrowgate having equity interest of 10% and 24.64% respectively in Barrowgate. (e) 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)(ii) above with effect from 14 February 2008. (f) Barrowgate and Hang Seng entered into an agreement for lease dated 15 October 2007. A formal lease agreement and a supplemental deed in respect of the premises mentioned under I(b)(iii) above were entered into between Barrowgate and Hang Seng on 15 February 2008 and 13 May 2008 respectively. (g) The term of the lease mention under I(b)(iii) exceeds 3 years and according to Listing Rules requirement, an independent financial adviser to the Board was engaged and it formed the view that the term of this lease with duration longer than 3 years was required and it was normal business practice for leases of this type to be of such duration. (h) 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. (i) (j) Pearl Investments (HK) Limited is a connected person by virtue of its being an associate of Mr. Chien LEE, a Non-executive Director of the Company. This lease expired on 15 January 2008 and was not renewed. (k) This is a renewal of the lease mentioned under I(d)(i) above. (l) These represent the actual considerations for the year ended 31 December 2008, 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 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 financial years in which the relevant Transactions are subsisting. The Company confirms 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 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; 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 findings on these procedures to the Board 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 fell within the range of rentals offered to independent third parties. All Independent non-executive Directors of the Company have reviewed the Transactions and the report of the auditor and confirmed 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. 64 Hysan Annual Report 2008 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 significance due to the annual consideration of the lease having a percentage ratio of 1.26% from the calculation of the revenue test (the percentage ratios for assets ratio and consideration ratio are 0.05% and 0.16% respectively) as at 31 December 2008. Details of the transaction are set out under I(b)(i) of Continuing Connected Transactions. Major Customers and Suppliers During the year, both the aggregate amount of purchases attributable to the Group’s 5 largest suppliers and the aggregate amount of turnover attributable to the Group’s 5 largest customers were less than 30% of total purchases and turnover of the Group respectively. Purchase, Sale or Redemption of the Company’s Listed Securities During the year, neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities. 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 float 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 of approximately HK$2 million to charitable and non-profit-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 2009 AGM. On behalf of the Board Peter T.C. LEE Chairman Hong Kong, 10 March 2009 Hysan Annual Report 2008 65 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n O u r G o v e r n a n c e Directors’ Remuneration and Interests Report Director Compensation Emoluments Review Committee The Board recognises the significance of having in place a transparent and objective process for determining executive Director compensation, particularly in light of the fact that the Company’s founding family is a major shareholder. The Emoluments Review Committee was first established in 1987 to review and determine the remuneration of executive Directors. The Committee is currently chaired by Sir David AKERS-JONES, Independent non-executive Deputy Chairman. Its other members are Fa-kuang HU and Dr. Geoffrey Meou-tsen YEH. It has 100% Independent non-executive Director membership. 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 Officer may be invited to Committee meetings. No Director is involved in deciding his own remuneration. Remuneration Policy The Group’s remuneration policy aims to provide a fair market remuneration in a form and value to attract, retain and motivate high quality staff. At the same time, such awards must be aligned with shareholder interests. The following principles had been established: • Remuneration package will consist of several components: (i) fixed part (base salary and benefits); (ii) performance-based (bonus); (iii) long-term incentives (executive share options). The structure will reflect a fair system of reward for all the participants, emphasizing performance. • 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. • The Committee will determine the overall amount of each component of remuneration, taking into account both quantitative and qualitative assessment of performance. • Remuneration policy and practice will be as transparent as possible. • Executive Directors will develop a significant personal shareholding pursuant to the executive share options in order to align their interests with those of shareholders. • Pay and employment conditions elsewhere in the Group will be taken into account, especially in setting annual salary increases. • The remuneration policy for executive Directors will be reviewed regularly, independently of executive management. 2008 Review The Committee met in March 2008 to review executive Director compensation packages. It also considered packages for two new executive Directors. Advice of independent advisers was taken in consideration. All members attended the meeting without any executive Director presence. Details are set out in note 7 to the financial statements. The most recent meeting of the Committee held in March 2009 was attended by Sir David AKERS-JONES and Dr. Geoffrey Meou-tsen YEH to review executive Director compensation packages. Details of Directors’ (including individual executive Directors) emoluments and options are set out in notes 7 and 38 respectively to the financial statements. Non-executive Director emoluments Director fees are subject to shareholder approval at general meeting. Key elements of our non-executive Director remuneration policy include: • Remuneration should be sufficient to attract and retain first class non-executive talent. • Remuneration of non-executive Directors is (subject to shareholder approval) set by the Board and should be proportional to their contribution towards the interests of the Company. • Remuneration practice should be consistent with recognised best practice standards for non-executive Directors’ remuneration. • Remuneration should be in the form of cash fees, payable annually. • Non-executive Directors do not receive share options from the Company. 66 Hysan Annual Report 2008 Director Compensation continued Non-executive Director emoluments continued Taking into consideration the level of responsibility, experience and abilities required of the Directors, and fees offered for similar positions in comparable companies, the fee structure of Directors (approved at annual general meeting (the “AGM”) held on 10 May 2005) is as follows: 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 receives any pension benefits from the Company, nor do they participate in any bonus or incentive schemes. The Non-executive Directors (including the Independent non-executive Directors) received fees totalling HK$1,100,000 and the Independent non-executive Deputy Chairman received a total annual fee of HK$230,000 for 2008 (Please refer to note 7 to the financial statements). Long-term incentives: Share Option Schemes The Company has granted options under 2 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 the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The Chairman or the Managing Director may make grants to management staff below executive Director level. O u r G o v e r n a n c e 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 2008, shares issuable under options granted under the 1995 scheme was 189,000 representing less than 0.02% 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). For the options granted under the 1995 Scheme currently outstanding, the basis for determining the exercise price is 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 5 business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration on each grant of option was HK$1 and was paid within 30 days from the date of grant of option, with full payment for exercise price to be made on exercise of the relevant option. Hysan Annual Report 2008 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 i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Directors’ Remuneration and Interests Report continued Director Compensation continued Long-term incentives: Share Option Schemes continued The 2005 Share Option Scheme (the “2005 Scheme”) The Company adopted the 2005 Scheme at its AGM held on 10 May 2005, which has a term of 10 years and will expire on 9 May 2015 (together with the 1995 Scheme are referred to as the “Schemes”). 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 as at 10 May 2005, the date of the AGM approving the 2005 Scheme (being 104,996,365 shares). 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 shareholder approval, being 10,499,636 shares). 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 5 business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration on each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of option, with full payment for exercise price to be made on exercise of the relevant option. Grant and vesting structures Grants made prior to 8 March 2005 had a holding period of 2 years and a vesting period of 5 years. With effect from 8 March 2005, the Board has approved a new grant and vesting structure. Grants will be made on a periodic basis. Vesting period is 3 years in equal proportions. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. Movement of share options During the year, a total of 903,000 shares options were granted under the 2005 Scheme. As at 31 December 2008, an aggregate of 1,981,000 shares are issuable for options granted under the Schemes, representing approximately 0.19% of the issued share capital of the Company. As at the date of this Report, 98,808,765 shares are issuable under the Schemes representing 9.49% of the issued share capital. Details of options granted, exercised, cancelled/lapsed and outstanding under the Schemes during the year are as follows: Name Date of grant Exercise price HK$ Exercisable period (Note a) Balance as at 1.1.2008 Changes during the year Granted Exercised Cancelled/ Balance as at lapsed 31.12.2008 30.3.2005 15.850 30.3.2005 15.850 30.3.2005 15.850 30.3.2005 – 29.3.2015 30.3.2005 – 29.3.2015 30.3.2005 – 29.3.2015 120,000 96,000 87,667 – – – (40,000) (Note j) – (74,667) (Note k) – – – 80,000 96,000 13,000 1995 Scheme Executive Directors Ricky Tin For TSANG (Note b) Wendy Wen Yee YUNG (Note b) Eligible employees (Note c) 68 Hysan Annual Report 2008 Director Compensation continued Long-term incentives: Share Option Schemes continued Movement of share options continued Exercise price HK$ Exercisable period (Note a) Balance as at 1.1.2008 Changes during the year Granted Exercised Cancelled/ Balance as at lapsed 31.12.2008 Name Date of grant 2005 Scheme Executive Directors Peter Ting Chang LEE 6.3.2007 21.380 6.3.2007 – 5.3.2017 235,000 – 13.3.2008 21.450 (Note e) 13.3.2008 – 12.3.2018 – 260,000 Ricky Tin For TSANG (Note b) 30.3.2006 22.000 30.3.2007 21.250 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 120,000 95,000 – – 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 – 100,000 Wendy Wen Yee YUNG (Note b) 26.6.2006 20.110 30.3.2007 21.250 26.6.2006 – 25.6.2016 30.3.2007 – 29.3.2017 110,000 95,000 – – Pauline Wah Ling YU WONG (Note d) Eligible employees (Note c) 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 – 100,000 6.3.2007 21.380 30.3.2006 22.000 30.3.2007 21.250 6.3.2007 – 30.6.2009 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 108,000 99,000 132,000 – – – – – – – – – – – – – – 235,000 – 260,000 – 120,000 – 95,000 – 100,000 – 110,000 – 95,000 – 100,000 – 108,000 O u r G o v e r n a n c e (32,000) (Note m) 67,000 73,000 (2,000) (Note l) (57,000) (Note m) 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 2.5.2008 23.900 (Note g) 2.5.2008 – 1.5.2018 9.9.2008 21.300 (Note h) 9.9.2008 – 8.9.2018 2.10.2008 20.106 (Note i) 2.10.2008 – 1.10.2018 – 178,000 – – – 95,000 85,000 85,000 – – – – (14,000) (Note m) 164,000 – – – 95,000 85,000 85,000 1,297,667 903,000 (116,667) (103,000) 1,981,000 Hysan Annual Report 2008 69 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Directors’ Remuneration and Interests Report continued Director Compensation continued Long-term incentives: Share Option Schemes continued Movement of share options continued Notes: (a) Save otherwise stated, all options granted have a vesting period of 3 years in equal proportions. (b) Ricky Tin For TSANG and Wendy Wen Yee YUNG were appointed as Executive Directors on 1 April 2008. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (d) Pauline Wah Ling YU WONG retired from the Board of the Company by rotation as from the conclusion of 2008 AGM held on 14 May 2008. She remained as Senior Advisor to the Company until 31 December 2008 when she retired from the Company and her outstanding options remain exercisable until 30 June 2009. (e) The closing price of the shares of the Company immediately before the date of grant (as of 12 March 2008) was HK$22.100. (f) The closing price of the shares of the Company immediately before the date of grant (as of 28 March 2008) was HK$21.950. (g) The closing price of the shares of the Company immediately before the date of grant (as of 30 April 2008) was HK$22.600. (h) The closing price of the shares of the Company immediately before the date of grant (as of 8 September 2008) was HK$21.300. (i) The closing price of the shares of the Company immediately before the date of grant (as of 30 September 2008) was HK$19.980. (j) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$22.700. (k) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$22.337. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$22.950. (m) The options lapsed during the year upon 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 Schemes are set out in note 38 to the financial 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 a number of 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: Date of grant 2.10.2008 9.9.2008 2.5.2008 31.3.2008 13.3.2008 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 values per share option HK$19.160 HK$20.106 2.936% 10 years 38.86% HK$0.463 HK$6.940 HK$21.300 HK$21.300 2.833% 10 years 38.19% HK$0.463 HK$8.130 HK$23.900 HK$23.900 2.668% 10 years 35.51% HK$0.463 HK$8.990 HK$21.800 HK$21.450 HK$21.960 HK$21.450 2.486% 10 years 33.03% HK$0.463 HK$6.970 2.607% 10 years 34.25% HK$0.463 HK$7.390 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 5 financial years. 70 Hysan Annual Report 2008 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 1 year without payment of compensation (other than statutory compensation). Directors’ Interests in Shares As at 31 December 2008, 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 notified 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 Name Number of ordinary shares held Personal Interests Family Interests Corporate Interests Other Interests Total % of the issued share capital (Note a) Peter Ting Chang LEE 3,370,708 Tom BEHRENS-SORENSEN Fa-kuang HU Hans Michael JEBSEN Chien LEE 10,000 – 60,000 800,000 Deanna Ruth Tak Yung RUDGARD 1,871,600 Ricky Tin For TSANG Geoffrey Meou-tsen YEH Wendy Wen Yee YUNG V-nee YEH (alternate to Geoffrey Meou-tsen YEH) (Note d) 40,000 265,364 28,000 43,259 – – – – – – – – – – – – 200,000 (Note b) 2,432,914 (Note c) – – – – – – – – – 3,370,708 10,000 200,000 0.324 0.001 0.019 – 2,492,914 0.239 – – – – – – 800,000 1,871,600 40,000 265,364 28,000 43,259 0.077 0.180 0.004 0.025 0.003 0.004 O u r G o v e r n a n c e Notes: (a) This percentage has been compiled based on the total number of shares of the Company in issue (i.e. 1,041,114,578 ordinary shares) as at 31 December 2008. (b) Such shares were held by a company which was wholly-owned by Fa-kuang HU and he was deemed to have a beneficial 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. (d) V-nee YEH resigned as alternate Director to Dr. Geoffrey Meou-tsen YEH effective from 20 January 2009. Certain executive Directors of the Company have been granted share options under the 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. Aggregate long positions in shares of associated corporations Listed below is a Director’s interest in the shares of Barrowgate Limited (“Barrowgate”), a 65.36% subsidiary of the Company: Name Hans Michael JEBSEN Number of ordinary shares held Corporate interests Other interests % of the issued share capital Total 1,000 – 1,000 10 (Note) Note: 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 a controlling shareholder of Jebsen and Company. Hysan Annual Report 2008 71 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Directors’ Remuneration and Interests Report continued Directors’ Interests in Shares continued Aggregate long positions in shares of associated corporations continued 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 2008 were recorded in the register required to be kept under Section 352 of the SFO; or as otherwise notified 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 confirmed, following specific enquiry by the Company, that they have complied with the required standards set out in the Model Code throughout the year. Directors’ Interests in Contracts During the year, certain Directors are parties to contracts with the Group. These contracts constitute Related Party Transactions, Connected Transactions or Contracts of Significance 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) 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: (i) Peter Ting Chang LEE, Anthony Hsien Pin LEE, Chien LEE 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) Hans Michael JEBSEN and his alternate, Kam Wing LI, hold the offices of directors in each of Jebsen and Company and Jebsen China Services Limited 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. (iii) Chien LEE is an independent non-executive director of Swire Pacific Limited whose business includes, inter alia, property investment and trading in Hong Kong, the People’s Republic of China and the United States of America. 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, and project management in both the People’s Republic of China and Hong Kong. Mr. Hu was re-designated as Independent non-executive Director effective 27 March 2008. The Company’s management team is separate and independent from that of the companies identified above. In addition, save and except Peter Ting Chang 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 W.Y. YUNG Executive Director and Company Secretary Hong Kong, 10 March 2009 72 Hysan Annual Report 2008 Audit Committee Report The Audit Committee has 3 members and is chaired by Sir David AKERS-JONES, Independent non-executive Deputy Chairman. The Committee has a majority of Independent non-executive Directors namely, Tom BEHRENS-SORENSEN, Independent non-executive Director, and Chien LEE, Non-executive Director. Under its terms of reference, the Committee oversees the Company’s financial reporting process; it also reviews the Company’s internal controls and risk management systems and its relationship with external auditor. Effective from 1 January 2009, the Committee’s terms of reference was revised in light of the changes to the Listing Rules. The Committee also has the responsibility to review the adequacy of resources, qualifications and experience of staff of the Group’s accounting and financial reporting function, and their training programmes and budget. The Committee presents a report to the Board on its findings after each Committee meeting. The Committee held 3 meetings during 2008, on 1 February, 12 March and 4 August. The meetings held in March and August 2008 were attended by all members to consider the financial statements for the annual and interim reports respectively. An additional meeting held in February 2008 was attended by Sir David AKERS-JONES and Chien LEE to consider matters relating to the new Internal Audit function. The Committee last met on 9 March 2009 to consider the financial statements for the year ended 31 December 2008. Details of the meetings held in February and March 2008 were set out in the 2007 Annual Report. Significant matters, as reviewed and discussed in the other meetings, include the following: Financial Reporting In the process of financial reporting, management is responsible for the preparation of Group financial statements including the selection of suitable accounting policies. The external auditor is responsible for auditing and attesting to Group financial statements and evaluating Group’s system of internal controls in such regard. The Committee oversees the respective work of management and the external auditor to endorse the processes and safeguards employed by them. • August 2008 : The Committee reviewed and recommended to the Board for approval the unaudited financial statements for the first 6 months of 2008, prior to public announcement and filing. The Committee received reports from and met with the external auditor to discuss the scope of their review and findings. The Committee had discussions with management on significant judgments affecting Group’s financial statements. • March 2009 : The Committee reviewed and discussed with management and the external auditor the 2008 financial statements included in the Annual Report 2008, prior to public announcement and filing. The Committee received reports from and met with external auditor and internal auditor to discuss the general scope of their respective work and findings. The Committee had discussions with management with regard to significant judgments affecting the Group financial statements. Based on these review and discussions, and the report of the external auditor, the Audit Committee recommended to the Board approval of the financial statements for the year ended 31 December 2008, with the Independent Auditor’s Report thereon. O u r G o v e r n a n c e Review of Internal Controls and Risk Management Systems • August 2008 : The Committee considered the report of internal audit, including status in implementing recommendations following 2007 annual internal controls review and was satisfied. • March 2009 : For 2008 annual internal controls review, the Committee considered reports from and upon receiving confirmation of management and internal audit, was satisfied as to the effectiveness of the Company’s internal controls system (including the adequacy of resources, qualifications and experience of staff of the Group’s accounting and financial reporting function, and their training programmes and budget). There were no matters of material concern relating to financial, operational, or compliance controls. Hysan Annual Report 2008 73 O v e r v i e w O u r S t r a t e g y i n A c t i o n F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Audit Committee Report continued Relationship with External Auditor • March 2008 and : August 2008 The Committee reviewed and considered the terms of engagement of the external auditor in respect of the 2008 interim results reviews and 2008 annual audit and the related results announcement and annual confirmation. • March 2009 : 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 auditor. The Committee recommended to the Board that the shareholders be asked to re-appoint Deloitte Touche Tohmatsu as the Group’s external auditor for 2009. For the year ended 31 December 2008, external auditor received a total fee of HK$2,104,000 (audit services: HK$1,800,000 and non-audit services HK$304,000). Members of the Audit Committee David AKERS-JONES (Chairman) Tom BEHRENS-SORENSEN Chien LEE Hong Kong, 10 March 2009 74 Hysan Annual Report 2008 4. Financial Statements and Valuation 76 Directors’ Responsibilities for the Financial Statements 77 Independent Auditor’s Report 78 Consolidated Income Statement 79 Consolidated Balance Sheet 81 Balance Sheet 82 Consolidated Statement of Changes in Equity 84 Consolidated Cash Flow Statement 86 Signifi cant Accounting Policies 93 Notes to the Financial Statements 125 Financial Risk Management 133 Five-Year Financial Summary 135 Report of the Valuer 136 Schedule of Principal Properties 137 Shareholding Analysis Hysan Annual Report 2008 75 Directors’ Responsibilities for the Financial Statements The Companies Ordinance requires the Directors to prepare financial statements for each financial 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 financial year and of their respective profit or loss for the year then ended. In preparing the financial 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 significant departure from accounting standards; and (c) prepare the financial 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. 76 Hysan Annual Report 2008 Independent Auditor’s Report To the Members of Hysan Development Company Limited (incorporated in Hong Kong with limited liability) We have audited the financial statements of Hysan Development Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 78 to 132, which comprise the consolidated and Company’s balance sheets as at 31 December 2008, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant 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 financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified 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 financial 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 financial 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 Certified 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial 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 financial 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2008 and of the Group’s profit and cash flows 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 Certified Public Accountants Hong Kong 10 March 2009 Hysan Annual Report 2008 77 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Consolidated Income Statement For the year ended 31 December 2008 Turnover Property expenses Gross profit Investment income Other gains and losses Administrative expenses Finance costs Change in fair value of investment properties Share of results of associates Profit before taxation Taxation Profit 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 2008 HK$ million 2007 HK$ million 4 5 6 9 10 11 12 12 13 13 1,638 (217) 1,421 63 146 (134) (155) (212) 590 1,719 (1) 1,718 1,594 124 1,718 644 562 1,368 (208) 1,160 98 302 (106) (175) 3,131 452 4,862 (745) 4,117 3,949 168 4,117 549 498 153.37 153.36 375.46 375.25 78 Hysan Annual Report 2008 Consolidated Balance Sheet At 31 December 2008 Non-current assets Investment properties Property, plant and equipment Prepaid lease payments Investments in associates Available-for-sale investments Other financial assets Other receivables Current assets Accounts receivable and other receivables Amount due from an associate Other financial assets Short-term investments Time deposits Cash and bank balances Current liabilities Accounts payable and accruals Other financial liabilities Rental deposits from tenants Amounts due to minority shareholders Borrowings Taxation payable Net current assets Total assets less current liabilities Non-current liabilities Borrowings Other financial liabilities Rental deposits from tenants Deferred taxation Net assets O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes 2008 HK$ million 2007 HK$ million 14 15 16 18 19 20 21 23 20 24 25 25 26 20 27 28 28 20 30 35,850 80 123 1,750 1,022 242 29 39,096 94 590 41 700 964 51 35,711 73 123 1,011 2,479 235 22 39,654 66 590 1 95 478 6 2,440 1,236 320 – 158 327 550 351 1,706 734 278 40 124 327 – 270 1,039 197 39,830 39,851 3,201 41 230 3,648 7,120 2,861 17 215 3,910 7,003 32,710 32,848 Hysan Annual Report 2008 79 Consolidated Balance Sheet continued At 31 December 2008 Capital and reserves Share capital Reserves Equity attributable to equity holders of the Company Minority interests Total equity Notes 31 2008 HK$ million 2007 HK$ million 5,206 26,263 31,469 1,241 32,710 5,187 26,465 31,652 1,196 32,848 The consolidated financial statements on pages 78 to 132 were approved and authorised for issue by the Board of Directors on 10 March 2009 and are signed on its behalf by: Peter T.C. LEE Director David AKERS-JONES Director 80 Hysan Annual Report 2008 Balance Sheet At 31 December 2008 Non-current assets Property, plant and equipment Investments in subsidiaries Investments in associates Available-for-sale investments Other receivables Current assets Other receivables Amounts due from subsidiaries Time deposits Cash and bank balances Current liabilities Other payable and accruals Amounts due to subsidiaries Taxation payable Net current assets Net assets Capital and reserves Share capital Reserves Total equity Notes 2008 HK$ million 2007 HK$ million 15 17 18 19 22 25 25 22 31 32 5 – – 2 1 8 3 12,869 100 41 13,013 31 59 40 130 12,883 12,891 5,206 7,685 5 – – 2 1 8 2 12,781 – 6 12,789 19 42 50 111 12,678 12,686 5,187 7,499 12,891 12,686 The financial statements on pages 78 to 132 were approved and authorised for issue by the Board of Directors on 10 March 2009 and are signed on its behalf by: Peter T.C. LEE Director David AKERS-JONES Director Hysan Annual Report 2008 81 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Consolidated Statement of Changes in Equity For the year ended 31 December 2008 Attributable to equity holders of the Company At 1 January 2007 Change in fair value of available-for-sale investments Surplus on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Exchange differences on translation of an overseas associate Change in fair value of derivatives designated as cash flow hedge Net income recognised directly in equity Transfer to profit and loss on disposal of available-for-sale investments Transfer to profit and loss for cash flow hedges Profit 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 12) Share capital HK$ million Share premium HK$ million 5,276 1,453 – – – – – – – – – – 25 7 (121) – – – – – – – – – – – – – – – 79 9 – – – – – – At 31 December 2007 5,187 1,541 Change in fair value of available-for-sale investments Surplus on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Share of reserve of an associate Change in fair value of derivatives designated as cash flow hedge Net expense recognised directly in equity Transfer to profit and loss on disposal of available-for-sale investments Transfer to profit and loss for cash flow hedges Profit 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 Forfeiture of share options Dividends paid during the year (note 12) – – – – – – – – – – 18 1 – – – – – – – – – – – – – 63 2 – – – At 31 December 2008 5,206 1,606 Share options reserve HK$ million Investments revaluation reserve HK$ million 5 – – – – – – – – – – – (1) – – 4 (2) – – 6 – – – – – – – – – – – (1) 5 (1) – 9 1,313 1,192 – – – – 1,192 (382) – – 810 – – – – – – – – 2,123 (1,165) – – – – (1,165) (186) – – (1,351) – – – – – 772 82 Hysan Annual Report 2008 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 profits HK$ million Total HK$ million Minority interests HK$ million Total HK$ million 155 100 422 19,099 27,828 1,080 28,908 2 – 8 (1) – – 7 – – – 7 – – – – – – – – 9 – 4 (1) – – 3 – – – 3 – – – – – 2 – – – – 1 1 – (2) – (1) – – – – – – – – 1 – – – – (31) (31) – 3 – (28) – – – – – 1 – – – (2) – (2) – – – (2) – – – – – – – – (1) – – – 155 – 155 – – – 155 – – – – – – – – – – – – – – – – – 121 – – – – – 276 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 – – – – – – – – – – – – – – – 12 (27) 154 276 100 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n – – – – – – – – – – – – – – – – 127 (549) – – – – – – – – – – – – – – – – – – – – – – – – – 3,949 1,192 8 (1) (2) 1 1,198 (382) (2) 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 1,198 (382) (2) 4,117 4,931 104 15 (511) (2) 4 – – (601) 22,410 31,652 1,196 32,848 – – – – – – – – 1,594 1,594 – – – 1 (644) (1,165) 4 (1) 155 (31) (1,038) (186) 3 1,594 373 81 2 5 – (644) – – – – – – – – 124 124 – – – – (79) (1,165) 4 (1) 155 (31) (1,038) (186) 3 1,718 497 81 2 5 – (723) 23,361 31,469 1,241 32,710 Hysan Annual Report 2008 83 Consolidated Cash Flow Statement For the year ended 31 December 2008 Operating activities Profit 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 Depreciation of property, plant and equipment Share-based payment expenses Operating cash flows before movements in working capital (Increase) decrease in accounts receivable and other receivables Increase in held-for-trading investments Increase in accounts payable and accruals Decrease in equity derivatives Increase in rental deposits from tenants Cash generated from operations Hong Kong profits tax paid Hong Kong profits tax refund Net cash from operating activities Investing activities Interest received Dividends received from available-for-sale investments Proceeds on disposal of available-for-sale investments Proceeds upon maturity of principal-protected deposits Repayment from associates Repayment from investees Payments in respect of investment properties Purchases of property, plant and equipment Additions to principal-protected deposits Net cash from investing activities 2008 HK$ million 2007 HK$ million 1,719 4,862 (146) 155 212 (590) (48) (15) – 6 5 1,298 (17) (56) 23 65 49 1,362 (189) 6 1,179 12 48 272 78 6 – (345) (5) – 66 (302) 175 (3,131) (452) (53) (30) (11) 7 4 1,069 3 (102) 58 18 54 1,100 (141) 1 960 34 53 394 81 132 8 (125) (3) (278) 296 84 Hysan Annual Report 2008 Financing activities Interest paid Bank charges Medium Term Note Programme expenses Payment for front-end fees Payment for hedging expenses Dividends paid Dividends paid to minority shareholders of a subsidiary New bank loan Issue of fixed rate notes Consideration paid for repurchase of shares Expenses paid for repurchase of shares Proceeds on exercise of share options Net cash used in financing activities Net increase 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 Held-to-maturity debt securities maturing within three months Time deposits Cash and bank balances O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 2008 HK$ million 2007 HK$ million (125) (8) (1) (4) (2) (562) (79) 200 565 – – 2 (14) 1,231 484 1,715 700 964 51 1,715 (151) (8) (1) – (2) (445) (52) – – (511) (2) 15 (1,157) 99 385 484 – 478 6 484 Hysan Annual Report 2008 85 Significant Accounting Policies For the year ended 31 December 2008 1. Basis of Preparation These financial statements have been prepared on the historical cost basis except for certain properties and financial instruments, which are measured at revalued amounts or fair values, as explained in the accounting policies set out below. These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance. In addition, these financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The principal accounting policies adopted are as follows: 2. Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits 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. Where necessary, adjustments are made to the financial 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. 3. Investments in Subsidiaries Investments in subsidiaries are included in the Company’s balance sheet at cost less any identified impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable during the year. 4. Investments in Associates An associate is an entity over which the Group or the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial 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 financial 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 identified 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 identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits 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 identified impairment loss. The results of associates are accounted for by the Company on the basis of dividends received and receivable during the year. 86 Hysan Annual Report 2008 5. 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 properties are included in profit 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 benefits 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. 6. 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 sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. 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 profits. 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 values, using the straight-line method. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits 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. 7. Prepaid Lease Payments The land and buildings elements of a lease of land and buildings are considered separately for the purpose of lease classification. 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 classified 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. 8. Impairment of Non-Financial Assets At each balance sheet date, the Group and the Company review the carrying amounts of their 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 profit 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 profit 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. Hysan Annual Report 2008 87 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Significant Accounting Policies continued For the year ended 31 December 2008 9. Financial Instruments Financial assets and financial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. (a) Financial assets The Group’s financial assets are classified into one of the four categories, including (i) financial assets at fair value through profit or loss (“FVTPL”), (ii) loans and receivables, (iii) held-to-maturity investments and (iv) available-for-sale financial assets. The Company’s financial assets are classified into (i) loans and receivables and (ii) available-for-sale financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial 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 financial assets are set out below. (i) Financial assets at FVTPL Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified 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 financial 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. At each balance sheet date subsequent to initial recognition, financial assets at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial asset. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed 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, other receivables, amounts due from subsidiaries, amount due from an associate, time deposits and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment of financial assets below). (iii) Held-to-maturity investments Held-to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. The Group designated listed debt securities, which are denominated in Hong Kong dollars and US dollars (see note 24 to the financial statements), as held-to-maturity investments. At each balance sheet date subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment of financial assets below). (iv) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated as such or not classified as financial assets at FVTPL, loans and receivables or held-to-maturity investments. The Group and the Company designated investments in equity securities and club debentures (if any) as available-for-sale financial assets. At each balance sheet date subsequent to initial recognition, available-for-sale financial assets (including certain equity securities investments and club debentures) are measured at fair value. Changes in fair value are recognised in equity in the investments revaluation reserve until the financial 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 profit or loss (see accounting policy on impairment of financial 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 identified impairment losses at each balance sheet date subsequent to initial recognition (see accounting policy on impairment of financial assets below). (v) Effective interest method The effective interest method is a method of calculating the amortised cost of a financial 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 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 financial asset or, where appropriate, a shorter period. Interest income is recognised on an effective interest basis for debt instruments, other than those financial assets at FVTPL, of which interest income is included in net gains or losses. 88 Hysan Annual Report 2008 9. Financial Instruments continued (a) Financial assets continued (vi) 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 financial asset, the estimated future cash flows of the financial assets have been impacted. For an available-for-sale equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: • • • significant financial difficulty 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 financial re-organisation. For certain categories of financial asset, such as accounts receivable, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, an impairment loss is recognised in profit 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 flows discounted at the original effective interest rate. For financial 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 flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial 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 profit 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 profit or loss. For financial 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 profit 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. Impairment losses on available-for-sale equity investments will not be reversed in profit 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. (vii) Derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group or the Company has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial 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 profit or loss. (b) Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group or the Company after deducting all of its liabilities. The Group’s financial liabilities are generally classified into (i) financial liabilities at FVTPL and (ii) other financial liabilities. The Company’s financial liabilities are generally classified into other financial liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below. Hysan Annual Report 2008 89 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Significant Accounting Policies continued For the year ended 31 December 2008 9. Financial Instruments continued (b) Financial liabilities and equity continued (i) 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, financial liabilities at FVTPL are measured at fair value, with changes in fair value recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any interest paid on the financial liabilities. (ii) Other financial liabilities Other financial liabilities (including accounts payable, accruals, other payable, amounts due to subsidiaries, amounts due to minority shareholders and borrowings) are subsequently measured at amortised cost, using the effective interest method. (iii) 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 profit or loss. (iv) Effective interest method The effective interest method is a method of calculating the amortised cost of a financial 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 financial liability, or, where appropriate, a shorter period. Interest expense is recognised on an effective interest basis for financial liabilities, other than those financial liabilities at FVTPL, of which the interest expense is included in net gains or losses. (v) Derecognition of financial liabilities Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. (c) 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 profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit 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 fluctuation. (d) 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 profit or loss. (e) Hedge accounting The Group designates certain derivatives as hedging instruments as either fair value hedge or cash flow 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 flows of the hedged item. (i) Fair value hedge Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair values of the hedged items that are attributable to the hedged risk. The adjustment to the carrying amount of the hedged item for which the effective interest is used is amortised to profit or loss when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. The adjustment is based on a recalculated effective interest rate at the date the amortisation begins. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. 90 Hysan Annual Report 2008 9. Financial Instruments continued (e) Hedge accounting continued (ii) Cash flow hedge The effective portion of changes in the fair values of derivatives that are designated and qualify as cash flow hedges are deferred in equity (hedging reserve). The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as other gains or losses. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit 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 qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. 10. 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 financial assets at FVTPL is recognised when the shareholders’ right to receive payments has been established. Interest income from a financial asset excluding financial 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 financial asset to that asset’s net carrying amount. 11. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. (a) 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. (b) The Company as lessee Rentals payable under operating leases, including the leasehold interests in land, are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits 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. 12. Foreign Currencies In preparing the financial 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 profit 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 financials statements. For the purposes of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Group (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 fluctuate significantly 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 profit or loss in the period in which the foreign operation is disposed of. Hysan Annual Report 2008 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 i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Significant Accounting Policies continued For the year ended 31 December 2008 13. Borrowing Costs All borrowing costs are recognised as and included in finance costs in the consolidated income statement in the period in which they are incurred. 14. Retirement Benefit Costs Payments to the Mandatory Provident Fund Scheme are charged as an expense when employees have rendered service entitling them to the contributions. 15. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. (a) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit 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 or the Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. (b) Deferred tax Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, 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 profits 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 profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group or the Company 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 sufficient taxable profits 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 profit 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. 16. Equity-Settled Share-Based Payment Transactions Share options granted to employees 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 and the Company revise their estimates of the number of options that are expected to ultimately vest. The impact of the revision of the estimates during the vesting period, if any, is recognised in profit or loss, 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 profits. 92 Hysan Annual Report 2008 Notes to the Financial Statements For the year ended 31 December 2008 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 office 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 financial 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 and the Company had adopted, for the first time, the following amendments and new interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants, which are or have become effective. HKAS 39 and HKFRS 7 (Amendments) HK(IFRIC) – INT 11 HK(IFRIC) – INT 12 HK(IFRIC) – INT 14 Reclassification of Financial Assets HKFRS 2 – Group and Treasury Share Transactions Service Concession Arrangements HKAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The adoption of the new HKFRSs had no material effect on how the Group’s or the Company’s results and financial position for the current or prior accounting years have been prepared and presented. Accordingly, no prior year adjustment has been required. The Group and the Company have not early applied the following new and revised standards, amendments or interpretations that have been issued but not yet effective. HKFRSs (Amendments) HKAS 1 (Revised) HKAS 23 (Revised) HKAS 27 (Revised) HKAS 32 and HKAS 1 (Amendments) HKAS 39 (Amendment) HKFRS 1 and HKAS 27 (Amendments) HKFRS 2 (Amendment) HKFRS 3 (Revised) HKFRS 8 HK(IFRIC) – INT 13 HK(IFRIC) – INT 15 HK(IFRIC) – INT 16 HK(IFRIC) – INT 17 HK(IFRIC) – INT 18 Improvements to HKFRSs 1 Presentation of Financial Statements 2 Borrowing Costs 2 Consolidated and Separate Financial Statements 3 Puttable Financial Instruments and Obligations Arising on Liquidation 2 Eligible Hedged Items 3 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate 2 Vesting Conditions and Cancellation 2 Business Combinations 3 Operating Segments 2 Customer Loyalty Programmes 4 Agreements for the Construction of Real Estate 2 Hedges of a Net Investment in a Foreign Operation 5 Distribution of Non-cash Assets to Owners 5 Transfer of Assets from Customers 6 1 Effective for annual periods beginning on or after 1 January 2009, except the amendments to HKFRS 5, effective for annual periods beginning on or after 1 July 2009. 2 Effective for annual periods beginning on or after 1 January 2009. 3 Effective for annual periods beginning on or after 1 July 2009. 4 Effective for annual periods beginning on or after 1 July 2008. 5 Effective for annual periods beginning on or after 1 October 2008. 6 Effective for transfers on or after 1 July 2009. The Directors of the Company anticipate that the application of these new and revised standards, amendments or interpretations will have no material impact on the results and the financial position of the Group or the Company. O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 93 Notes to the Financial Statements continued For the year ended 31 December 2008 3. Critical Accounting Judgments and Key Sources of Estimation Uncertainty In the application of the Group’s accounting policies, which are described in the “Significant Accounting Policies” section, 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. Critical judgment in applying the Group’s accounting policies The following is the critical judgment, apart from those involving estimates (see below), the management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in financial statements. Held-to-maturity investments The management of the Company has reviewed the Group’s held-to-maturity investments in the light of its capital maintenance and liquidity requirements and has confirmed the Group’s positive intention and ability to hold those assets to maturity. The carrying amount of the held-to-maturity investments is HK$700 million (2007: nil). Details of these assets are set out in note 24. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. (a) Fair value of investment properties At the balance sheet date, the Group’s investment properties are stated at fair value of HK$35,850 million (2007: HK$35,711 million) based on the valuation performed by an independent qualified professional valuer. In determining the fair value, the valuers have based on market value 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 judgment and is satisfied that the method of valuation is reflective of the current market conditions. (b) Fair values of financial instruments Financial instruments, such as interest rate swaps, cross currency swaps, foreign exchange derivatives and equity derivatives, are carried in the balance sheet at fair value, as disclosed in note 20. The best evidence of fair value is quoted prices in an active market, where quoted prices are not available for a particular financial instrument, the Group uses the fair values determined by independent financial institutions or internal or external valuation models to estimate the fair value. The use of methodologies, models and assumptions in pricing and valuing these financial assets and liabilities is subjective and requires varying degrees of judgment by management, which may result in significantly different fair values and results. Details of the assumptions used and of the results of sensitivity analyses regarding these assumptions are provided in the “Financial Risk Management” section. 4. Turnover Turnover represents gross rental income from investment properties for the year. The Group’s principal activities are property investment, management and development. As the Group did not have any active development projects during the years ended 31 December 2008 and 2007 and its turnover and results are principally derived from investment properties located in Hong Kong, no business or geographical segment analysis is presented. 94 Hysan Annual Report 2008 5. 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 Sundry income Investment income earned on financial 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-financial assets Investment income recognised in respect of financial assets designated as at FVTPL is disclosed in note 6. 6. Other Gains and Losses Other gains and losses comprise: Gains on fair value change of financial assets designated as at FVTPL Losses on fair value change of financial assets or financial liabilities classified as held for trading Recycling of gains from reserve on disposal of available-for-sale equity investments Gains on hedging instruments under fair value hedge Losses on hedged items under fair value hedge 7. Directors’ Emoluments Directors’ fees Other emoluments Basic salaries, housing and other allowances Bonus Share-based payments (note 38) Retirement benefits scheme contributions O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 2008 HK$ million 2007 HK$ million 47 1 15 – – 63 41 12 30 11 4 98 2008 HK$ million 2007 HK$ million 15 48 63 – 63 24 60 84 14 98 2008 HK$ million 2007 HK$ million – (52) 186 124 (112) 146 6 (99) 382 41 (28) 302 2008 HK$ million 2007 HK$ million 1 10 3 3 – 17 1 9 2 1 – 13 Hysan Annual Report 2008 95 Notes to the Financial Statements continued For the year ended 31 December 2008 7. Directors’ Emoluments continued The emoluments paid or payable to each of the Directors of the Company for the two years ended 31 December 2008, calculated with reference to their employment as Directors of the Company, are set out below: For the year ended 31 December 2008 Basic salaries, housing and other allowances HK$’000 Directors’ fees HK$’000 (Note a) Bonus HK$’000 Share-based payments HK$’000 Retirement benefits scheme contributions HK$’000 190 75 75 37 120 130 130 100 230 140 130 120 4,454 2,085 2,085 1,040 1,457 526 526 608 – – – – – – – – – – – – – – – – (Note b) 1,395 638 656 96 – – – – – – – – 12 9 9 104 – – – – – – – – Total HK$’000 7,508 3,333 3,351 1,885 120 130 130 100 230 140 130 120 1,477 9,664 3,117 2,785 134 17,177 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 (Note b) Retirement benefits scheme contributions HK$’000 190 100 42 120 130 130 100 120 230 140 85 46 4,304 2,925 1,215 1,183 344 38 862 396 – 12 273 5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total HK$’000 6,551 4,038 1,300 120 130 130 100 120 230 140 85 46 1,433 8,444 1,565 1,258 290 12,990 Executive Directors Peter Ting Chang LEE (Note c) Ricky Tin For TSANG (Note d) Wendy Wen Yee YUNG (Note d) Pauline Wah Ling YU WONG (Note e) Non-executive Directors 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 Fa-kuang HU Executive Directors Peter Ting Chang LEE (Note c) Pauline Wah Ling YU WONG Michael Tze Hau LEE (Note f) Non-executive Directors Hans Michael JEBSEN Anthony Hsien Pin LEE Chien LEE Dr. Deanna Ruth Tak Yung RUDGARD Fa-kuang HU Independent non-executive Directors Sir David AKERS-JONES Dr. Geoffrey Meou-tsen YEH Tom BEHRENS-SORENSEN (Note g) Per JORGENSEN (Note h) 96 Hysan Annual Report 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 i o n O u r G o v e r n a n c e 7. Directors’ Emoluments continued Notes: (a) Breakdown of Directors’ fees of each of the Directors of the Company for the year ended 31 December 2008 is set out below: Executive Directors Peter Ting Chang LEE Ricky Tin For TSANG (Note d) Wendy Wen Yee YUNG (Note d) Pauline Wah Ling YU WONG (Note e) Michael Tze Hau LEE (Note f) Non-executive Directors Hans Michael JEBSEN Anthony Hsien Pin LEE Chien LEE Dr. Deanna Ruth Tak Yung RUDGARD Fa-kuang HU Independent non-executive Directors Sir David AKERS-JONES Dr. Geoffrey Meou-tsen YEH Tom BEHRENS-SORENSEN (Note g) Fa-kuang HU Per JORGENSEN (Note h) Audit Committee HK$’000 Emoluments Review Committee HK$’000 Board HK$’000 Investment Nomination Committee Committee HK$’000 HK$’000 2008 Total HK$’000 2007 Total HK$’000 140 75 75 37 – 100 100 100 100 – 120 100 100 100 – – – – – – – – 30 – – 60 – 30 – – 1,147 120 – – – – – – – – – – 30 20 – 20 – 70 20 – – – – 20 30 – – – – – – – – 70 30 – – – – – – – – – 20 20 – – – 70 190 75 75 37 – 120 130 130 100 – 230 140 130 120 – 190 – – 100 42 120 130 130 100 120 230 140 85 – 46 1,477 1,433 (b) Share-based payments are the fair values of share options granted to Directors, which are determined at the date of grant and expensed over the vesting period, regardless of whether the Directors exercise the share options or not during the year. (c) Year 2008: The Emoluments Review Committee reviewed his 2008 fixed base salary and determined his 2007 performance-based bonus in March 2008. It was decided to make an increment on his base salary as from April 2008. Accordingly, his fixed base package (including housing allowance which amount remains unchanged) paid during the year was HK$4,454,000. The stated bonus figure includes adjustment for 2007 bonus accrued in 2007 accounts (following finalisation of bonus by the Emoluments Review Committee in March 2008), and 2008 target bonus figures pending finalisation by the Emoluments Review Committee after year-end in March 2009. Year 2007: The Emoluments Review Committee reviewed his 2007 fixed 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 fixed base package (including housing allowance which amount remains unchanged) paid during the year was HK$4,304,000. The stated bonus figure includes adjustment for 2006 bonus accrued in 2006 accounts (following finalisation of bonus by the Emoluments Review Committee in March 2007), and 2007 target bonus figures pending finalisation by the Emoluments Review Committee after year-end in March 2008. (d) Ricky Tin For TSANG and Wendy Wen Yee YUNG were appointed as Executive Directors on 1 April 2008. The figures stated refer to their respective emoluments received or receivable as Executive Directors. The stated bonus figures are 2008 target bonus figures pending finalisation by the Emoluments Review Committee after year-end in March 2009. (e) Pauline Wah Ling YU WONG retired from the Board of the Company by rotation as from the conclusion of 2008 Annual General Meeting held on 14 May 2008. She remained as Senior Advisor to the Company until 31 December 2008 when she retired from the Company. The figure stated refers to her emoluments received as Executive Director. (f) Michael Tze Hau LEE stepped down as Managing Director as from the conclusion of 2007 Annual General Meeting held on 8 May 2007. Year 2007: The Emoluments Review Committee reviewed his 2007 fixed base salary and determined his 2006 performance-based bonus in March 2007. Accordingly, his fixed base package (including housing allowance which amount remains unchanged) paid during the year was HK$1,215,000. The stated bonus figure includes adjustment for 2006 bonus accrued in 2006 accounts (following finalisation of bonus by the Emoluments Review Committee in March 2007). (g) Tom BEHRENS-SORENSEN was appointed as Independent non-executive Director as from the conclusion of 2007 Annual General Meeting held on 8 May 2007. (h) Per JORGENSEN stepped down as Independent non-executive Director as from the conclusion of 2007 Annual General Meeting held on 8 May 2007. F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 97 Notes to the Financial Statements continued For the year ended 31 December 2008 8. Employees’ Emoluments Of the five individuals with the highest emoluments in the Group, four (2007: two) are Directors of the Company, including three directors appointed or resigned during the year, details of whose emoluments as Directors are included in note 7 above. The emoluments of all of the five individuals with the highest emoluments for the year ended 31 December 2008 and 2007 were as follows: Basic salaries, housing and other allowances Bonus Incentive paid on joining Share-based payments (Note) 2008 HK$ million 2007 HK$ million 15 4 4 3 26 15 3 – 3 21 Note: Share-based payments are the fair values of share options granted to Directors and eligible employees, which are determined at the date of grant and expensed over the vesting period, regardless of whether the Directors or eligible employees exercise the share options or not during the year. Their emoluments are within the following bands: Number of individuals 2008 2007 – – 2 2 – 1 5 1 2 1 – 1 – 5 2008 HK$ million 2007 HK$ million 27 17 99 11 12 166 (29) 3 8 1 6 35 26 100 – 12 173 (7) (2) 8 1 2 155 175 HK$2,000,001 to HK$2,500,000 HK$3,500,001 to HK$4,000,000 HK$4,000,001 to HK$4,500,000 HK$5,000,001 to HK$5,500,000 HK$6,500,001 to HK$7,000,000 HK$7,500,001 to HK$8,000,000 9. Finance Costs Finance costs comprise: Interest on bank loans and overdrafts wholly repayable within five years Interest on floating rate notes wholly repayable within five years Interest on fixed rate notes wholly repayable within five years Interest on fixed rate notes not wholly repayable within five years Imputed interest on zero coupon notes not wholly repayable within five years Total interest expenses Net interest receipts on interest rate swap and cross currency swaps designated as fair value hedges Recycling of losses (gains) from reserve on financial instruments designated as cash flow hedges Bank charges Medium Term Note Programme expenses Other finance costs 98 Hysan Annual Report 2008 10. Taxation Current tax Hong Kong profits tax – current year – under(over)provision in prior years – prior years’ tax provision (Note) Deferred tax (note 30) Change in fair value of investment properties Other temporary differences Attributable to change in tax rate 2008 HK$ million 2007 HK$ million 166 26 72 264 (28) (12) (223) (263) 1 130 (3) 58 185 540 20 – 560 745 Hong Kong profits tax is calculated at 16.5% (2007: 17.5%) of the estimated assessable profit for the year. In June 2008, the Hong Kong profits tax rate was decreased from 17.5% to 16.5% with effect from the 2008/09 year of assessment. The effect of this decrease has been reflected in the calculation of current and deferred tax balances as at and for the year ended 31 December 2008. The taxation for the year can be reconciled to the profit before taxation per the consolidated income statement as follows: Profit before taxation Tax at Hong Kong profits tax rate of 16.5% (2007: 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 Tax effect of deductible temporary differences not recognised Reversal of previously recognised taxable temporary differences Utilisation of estimated tax losses previously not recognised Effect of change in tax rate Under(over)provision in prior years Prior years’ tax provision Others Taxation for the year 2008 HK$ million 2007 HK$ million 1,719 4,862 284 (97) 11 (51) 21 6 (24) (24) (223) 26 72 – 1 851 (79) 8 (85) 20 1 – (12) – (3) 58 (14) 745 In addition to the amount charged to the consolidated income statement, deferred tax relating to the revaluation of the Group’s buildings held for own use has been charged directly to equity (see note 30). Note: As disclosed in the annual and interim reports published in previous years, the Group has over the past few years been in dispute with the Hong Kong Inland Revenue Department (“IRD”) on interest deductions made in years of assessment dated back to 1995/96. Taking into consideration professional advice and recent development, the Group has been in discussions with IRD to settle the claims. A formal proposal was submitted to IRD at the end of December 2008 to settle the claims at HK$450 million, inclusive of tax principal, interest and all amount payable. Full provision for such estimated exposure has been made at the balance sheet date, of which HK$31 million and HK$41 million were provided in the first and second half of the year, respectively. Total cash exposure (net of tax reserve certificates already purchased) amounted to HK$268 million will be satisfied out of cash deposits and credit facilities. The Group expects to settle the claims in the region of such amount within the next few months. Hysan Annual Report 2008 99 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 11. Profit for the Year Profit for the year has been arrived at after charging (crediting): Auditor’s remuneration Amortisation of prepaid lease payments (note 16) Depreciation of property, plant and equipment Gross rental income from investment properties Less: – Direct operating expenses arising from properties that generated rental income – Direct operating expenses arising from properties that did not generate rental income Staff costs, comprising: – Directors’ emoluments (note 7) – Share-based payments – Other staff costs Share of income tax of an associate (included in share of results of associates) 12. Dividends (a) Dividends recognised as distributions during the year: 2008 interim dividend paid – HK14 cents per share 2007 interim dividend paid – HK12 cents per share 2007 final dividend paid – HK48 cents per share 2006 final dividend paid – HK40 cents per share 2008 HK$ million 2007 HK$ million 2 – 6 2 – 7 (1,638) (1,368) 214 3 205 3 (1,421) (1,160) 17 2 126 145 181 13 3 111 127 81 2008 HK$ million 2007 HK$ million 146 – 498 – 644 – 127 – 422 549 Scrip dividend alternatives were offered to the shareholders in respect of the above dividends. These alternatives were accepted by the shareholders as follows: 2008 HK$ million 2007 HK$ million 135 11 428 70 644 99 28 346 76 549 2008 interim dividend (2007 interim dividend): – Cash payment – Share alternative 2007 final dividend (2006 final dividend): – Cash payment – Share alternative 100 Hysan Annual Report 2008 12. Dividends continued (b) Dividends proposed after the balance sheet date: 2008 HK$ million 2007 HK$ million Final dividend proposed – HK54 cents per share (2007: HK48 cents per share) 562 498 The 2008 final dividend of HK54 cents per share (2007: HK48 cents per share) has been proposed by the Directors on 10 March 2009 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 2008. The proposed 2008 final dividend will be payable in cash with a scrip dividend alternative. 13. 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: Profit 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 2008 HK$ million 2007 HK$ million 1,594 3,949 Number of shares 2008 2007 1,039,339,066 1,051,770,437 73,471 607,460 1,039,412,537 1,052,377,897 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. Hysan Annual Report 2008 101 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 13. 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 profit for the year attributable to the equity holders of the Company should be adjusted in the calculation of basic earnings per share as follows: Profit for the year attributable to equity holders of the Company Change in fair value of investment properties Effect of deferred taxation on change in fair value of investment properties Effect of minority interests’ shares Share of change in fair value of investment 2008 2007 Profit HK$ million 1,594 212 (236) 43 Basic earnings per share HK cents 153.37 20.40 (22.71) 4.14 Profit HK$ million Basic earnings per share HK cents 3,949 (3,131) 375.46 (297.69) 540 111 51.34 10.55 properties (net of deferred taxation) of an associate (412) (39.64) (311) (29.57) Underlying profit attributable to equity holders of the Company Prior years’ tax provision Gain on disposal of investment properties of an associate Net realised gain on disposal of available-for-sale investments Reversal of impairment loss recognised in respect of investment in an associate Recurring underlying profit 1,201 72 115.56 6.93 1,158 58 110.09 5.52 (41) (3.95) – – (166) (15.97) (255) (24.24) – – 1,066 102.57 (11) 950 (1.05) 90.32 The denominators used are the same as those detailed above for basic earnings per share. 14. Investment Properties Fair value At 1 January Additions Transfer to property, plant and equipment Net change in fair value At 31 December The carrying amount of investment properties shown above comprises: Leasehold land in Hong Kong: – Medium-term lease – Long lease 102 Hysan Annual Report 2008 The Group 2008 HK$ million 2007 HK$ million 35,711 355 (4) (212) 35,850 32,473 107 – 3,131 35,711 The Group 2008 HK$ million 2007 HK$ million 6,240 29,610 35,850 6,200 29,511 35,711 14. Investment Properties continued The fair value of the Group’s investment properties at 31 December 2008 have been arrived at on the basis of a valuation carried out on that date by Knight Frank Petty Limited, an independent qualified professional valuer not connected with the Group. Knight Frank Petty Limited has appropriate qualifications and recent experiences in the valuation of similar properties in the relevant locations. The Group’s investment properties have been valued individually, on market value basis, which conforms to Hong Kong Institute of Surveyors Valuation Standards on Properties. The valuation was mainly arrived at by reference to comparable market transactions for similar properties and on the basis of capitalisation of the net income with due allowance for the reversionary income and redevelopment potential. 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 classified and accounted for as investment properties. 15. Property, Plant and Equipment Buildings in Hong Kong HK$ million Furniture, fixtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million The Group Cost or Valuation At 1 January 2007 Additions Disposals Surplus on revaluation At 31 December 2007 Additions Transfer from investment properties Disposals Surplus on revaluation At 31 December 2008 Comprising: At cost At valuation 2008 Accumulated Depreciation At 1 January 2007 Provided for the year Eliminated on disposals Eliminated on revaluation At 31 December 2007 Provided for the year Eliminated on disposals Eliminated on revaluation At 31 December 2008 Carrying Amounts At 31 December 2008 At 31 December 2007 55 – – 7 62 – 4 – 2 68 – 68 68 – 1 – (1) – 2 – (2) – 68 62 51 2 – – 53 3 – – – 56 56 – 56 43 3 – – 46 2 – – 48 8 7 21 1 (1) – 21 1 – – – 22 22 – 22 15 3 (1) – 17 2 – – 19 3 4 1 – – – 1 1 – (1) – 1 1 – 1 1 – – – 1 – (1) – – 1 – 128 3 (1) 7 137 5 4 (1) 2 147 79 68 147 59 7 (1) (1) 64 6 (1) (2) 67 80 73 Hysan Annual Report 2008 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 i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 15. Property, Plant and Equipment continued The Company Cost At 1 January 2007 Additions Disposals At 31 December 2007 Additions Disposals At 31 December 2008 Accumulated Depreciation At 1 January 2007 Provided for the year Eliminated on disposals At 31 December 2007 Provided for the year Eliminated on disposals At 31 December 2008 Carrying Amounts At 31 December 2008 At 31 December 2007 Furniture, fixtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million 21 1 – 22 – – 22 20 1 – 21 – – 21 1 1 20 1 (1) 20 1 – 21 14 3 (1) 16 2 – 18 3 4 1 – – 1 1 (1) 1 1 – – 1 – (1) – 1 – 42 2 (1) 43 2 (1) 44 35 4 (1) 38 2 (1) 39 5 5 The above items of property, plant and equipment are depreciated on a straight-line basis at the following rates per annum: Buildings Furniture, fixtures and equipment Computers Motor vehicles Over the shorter of the term of the lease or 40 years 20% 20% 25% The Group’s buildings were revalued at 31 December 2008 by Knight Frank Petty Limited, an independent qualified professional valuer, on market value basis, by reference to comparable market transactions for similar properties and on the basis of capitalisation of net income with due allowance for the reversionary income. The surplus of HK$4 million (2007: HK$8 million) arising on revaluation have been credited to the properties revaluation reserve. Had the Group’s buildings been measured on a historical cost basis, their carrying amounts would have been HK$53 million (2007: HK$50 million) at the balance sheet date. Furniture, fixtures and equipment of the Group include assets carried at cost of HK$20 million (2007: HK$19 million) and accumulated depreciation of HK$18 million (2007: HK$17 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 (2007: 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. 16. 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 (2007: HK$163,000). 104 Hysan Annual Report 2008 17. Investments in Subsidiaries The Company’s investments in subsidiaries are the interest in unlisted shares stated at cost. The table below lists the principal subsidiaries of the Group at 31 December 2008 and 2007: 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 Place of incorporation/ operation Issued share capital 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 HK$2 HK$2 HK$2 US$1 HK$1 HK$2 HK$2 HK$2 HK$1 HK$1,000 HK$2 HK$2 HK$300,000 Teamfine Enterprises Limited Tohon Development Limited Bamboo Grove Recreational Services Hong Kong Hong Kong Hong Kong HK$2 HK$2 HK$2 HK$1 HK$1 HK$1 HK$1 Hong Kong Hong Kong British Virgin Islands British Virgin Islands 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 Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong HK$10 HK$2 HK$2 HK$2 HK$2 HK$20 HK$10,000 Proportion of nominal value of issued share capital held by the Company directly indirectly 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – – – – – – – – – – – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 65.36% Principal activities Investment holding Investment holding Treasury operation Treasury operation Investment holding Leasing administration Property management Treasury operation Investment holding Property investment Property investment Property investment Provision of security services Investment holding Property investment Resident club management Property investment Property development Investment holding Capital market investment Property investment Property investment Investment holding Property investment Property investment Property investment Property investment The Directors are of the opinion that a complete list of all subsidiaries and their particulars will be of excessive length and therefore the above table contains only those subsidiaries which materially contribute to the net income of the Group or hold a material portion of the assets or liabilities or otherwise are operating subsidiaries of the Group. Other than floating rate notes, fixed rate notes and zero coupon notes issued by Hysan (MTN) Limited as disclosed in note 28, none of the subsidiaries had issued any debt securities at the balance sheet date. Hysan Annual Report 2008 105 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 18. Investments in Associates Cost of unlisted investments Share of post-acquisition profits and reserves, net of dividend received Loan to an associate Share of post-acquisition losses and reserves, net of dividend received The Group The Company 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million 3 3 1,744 1,747 106 (103) 3 999 1,002 112 (103) 9 1,750 1,011 – – – – – – – – – – – – – – Loan to an associate of HK$106 million (2007: HK$112 million) is unsecured and interest-free. In the opinion of the Directors, the loan is considered as part of the Group’s net investment in the associate and, accordingly, the loan is included in the amount of investments in associates. At 31 December 2007, the Company’s investment in an associate was the interest in unlisted shares stated at cost of approximately HK$3,000. The associate was dissolved during the year and net gain of approximately HK$36,000 was recognised in income statement. Details of the Group’s associates at 31 December 2008 and 2007 are as follows: Name of associate Wingrove Investment Pte Ltd Form of business structure Private company limited by shares Place of registration and operation Class of share held/ registered capital Effective interest held by the Group Singapore Ordinary share 25.0%* Principal activities Property development and investment, and being inactive in 2008 Hong Kong Ordinary share 26.3%* Investment holding Country Link Enterprises Limited Private limited company Shanghai Kong Hui Property Development Co., Ltd Sino-Foreign equity joint venture Shanghai Grand Gateway Plaza Property Management Co., Ltd Sino-Foreign equity joint venture US$165,000,000# 24.7%* US$140,000# 23.7%* The People’s Republic of China The People’s Republic of China Property development and leasing Property management Under liquidation in 2007 and dissolved on 29 May 2008 Parallel Asia Engineering Company Limited Private limited company Hong Kong Ordinary share 25.0% * Indirectly held # Registered capital 106 Hysan Annual Report 2008 18. Investments in Associates continued The summarised financial information in respect of the Group’s associates based on the unaudited management accounts for the year ended 31 December 2008 is as follows: Total assets Total liabilities Net assets Group’s share of net assets of associates Turnover Profit for the year Group’s share of results of associates for the year 19. Available-for-Sale Investments 2008 HK$ million 2007 HK$ million 11,968 (5,182) 6,786 1,750 952 2,240 590 8,445 (4,272) 4,173 1,011 1,055 1,723 452 The Group The Company 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million Available-for-sales investments comprise: Listed investments: – Equity securities listed in Hong Kong, at fair value 982 2,439 Unlisted investments: – Equity securities in overseas, at cost Less: Impairment loss recognised – Club debentures, at fair value 93 (55) 38 2 93 (55) 38 2 1,022 2,479 – – – – 2 2 – – – – 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 identified impairment loss at each balance sheet date because the range of reasonable fair value estimates is so significant that the management is of the opinion that their fair values cannot be measured reliably. During the year ended 31 December 2007, the Group disposed of an unlisted equity security at its carrying amount of HK$19 million, which had been carried at cost less impairment before the disposal. Hysan Annual Report 2008 107 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 20. Other Financial Assets/Liabilities Other financial assets Derivatives under hedge accounting: Cash flow hedges – Foreign exchange derivatives – Cross currency swap Fair value hedges – Interest rate swaps – Cross currency swaps Financial assets designated as at FVTPL: Principal-protected deposits Total Other financial liabilities Derivatives under hedge accounting: Cash flow hedges – Interest rate swaps Other derivatives classified as held for trading (not under hedge accounting): – Foreign exchange derivatives – Equity derivatives Total Current Non-current The Group 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million 1 – – – 1 40 41 – – – – – 1 – – – 1 – 1 2 – 38 38 40 1 2 71 83 157 85 242 31 10 – 10 41 2 – – 30 32 203 235 – 17 – 17 17 The fair values of principal-protected deposits, equity derivatives and the interest rate swap designated as fair value hedge for zero coupon notes are determined based on market values derived from prevailing market data and provided by the counterparty financial institutions using valuation models developed from valuation techniques commonly applied by the market participants. The fair values of principal- protected deposits are calculated using valuation models developed from discounted cash flow analysis based on observable market data, such as the quoted interest rates and quoted spot and forward foreign exchange rates. The fair values of equity derivatives are calculated using the Black-Scholes option pricing model with observable market prices and rates, such as the strike price and the market price of the underlying equities, as input. The fair values of the interest rate swap and other derivatives are calculated using discounted cash flow analysis based on the applicable yield curves derived from quoted interest rates and quoted spot and forward foreign exchange rates. (a) Cash flow hedges (i) Foreign currency risk The Group designates forward foreign exchange contracts and a cross currency swap as cash flow hedges to manage its foreign currency exposure. The forward foreign exchange contracts are used to hedge the foreign currency exposure in relation to the semi-annual coupon payments of the US$65 million (HK$507 million equivalent) out of the US$182 million fixed rate notes. The cross currency swap is to convert the US dollar interest and principal payments of the US$26 million (HK$200 million equivalent) bank loan into Hong Kong dollar by matching the loan amount, interest rate fixing basis and the interest and principal payment dates. The interest of US$26 million bank loan is paid on a quarterly basis and the principal will be paid upon maturity in 2013. The principal terms of the forward foreign exchange contracts and the cross currency swap have been negotiated to match the principal terms of the hedged items and the management considers that the hedges are highly effective. The amount deferred in equity is recognised in profit or loss over the period that the interest expense is recognised and impacts profit or loss. 108 Hysan Annual Report 2008 20. Other Financial Assets/Liabilities continued (a) Cash flow hedges continued (i) Foreign currency risk continued At the balance sheet date, the maturity periods of the forward foreign exchange contracts and the cross currency swap at notional amounts were as follows: Forward foreign exchange contracts Within one year More than one year, but not exceeding five years Cross currency swap More than one year, but not exceeding five years The Group 2008 HK$ million 2007 HK$ million 34 84 118 200 34 118 152 – As at 31 December 2008, fair value gains of HK$4 million (2007: HK$3 million) from the forward foreign exchange contracts and the cross currency swap have been deferred in equity and are expected to be recognised in profit or loss at various dates when the hedged items are recognised in profit or loss. During the year, the Group had recycled gains of approximately HK$3 million (2007: HK$1 million) on forward foreign exchange contracts and the cross currency swap from the hedging reserve to profit or loss as finance costs. Interest rate risk (ii) The Group uses interest rate swaps to manage its exposure to interest rate changes of the quarterly interest payments of the HK$325 million (2007: nil) bank loans and the interest rate changes in relation to the semi-annual or quarterly floating-interest-rate payments of certain financial instruments with notional amount of HK$400 million (2007: HK$200 million). For the year ended 31 December 2007, the Group also used interest rate swaps, which matured during the year, to manage its exposure to interest changes of HK$460 million floating rate notes. The interest rate swaps match the major terms of the hedged underlying items such that the management considers that the interest rate swaps are highly effective hedging instruments. The amount deferred in equity is recognised in profit or loss over the period that the interest expense is recognised and impacts profit or loss. At the balance sheet date, the maturity periods of interest rate swaps at notional amount were as follows: Within one year More than one year, but not exceeding five years The Group 2008 HK$ million 2007 HK$ million – 725 725 660 – 660 As at 31 December 2008, the floating-to-fixed interest rate swaps locked in the interest rates ranging from 2.78% to 3.83% (2007: 4.31% to 4.71%) per annum. As at 31 December 2008, fair value losses of HK$31 million (2007: HK$2 million) from the interest rate swaps under cash flow hedges have been deferred in equity and are expected to be recognised in profit or loss at various dates during the lives of the swaps when the hedged interest expense is recognised and impacts profit or loss. During the year, the Group had recycled losses of approximately HK$6 million (2007: gains of approximately HK$1 million) on interest rate swaps from the hedging reserve to profit or loss as finance costs. Hysan Annual Report 2008 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 i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 20. Other Financial Assets/Liabilities continued (b) Fair value hedges As at 31 December 2008 and 2007, 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 (note 28(d)), 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 (HK$913 million equivalent) out of the US$182 million fixed rate notes. During the year ended 31 December 2008, the Group has also designated an interest rate swap as fair value hedge to minimise its interest rate risk exposure in relation to the HK$300 million fixed-rate notes (note 28(c)). The principal terms of interest rate swaps and cross currency swaps match the corresponding notes and the management considers that the swaps are highly effective hedging instruments. At the balance sheet date, the maturity periods of the swaps at notional amounts were as follows: Interest rate swaps More than five years Cross currency swaps More than one year, but not exceeding five years The Group 2008 HK$ million 2007 HK$ million 539 913 227 913 As a result of the hedge accounting, the carrying amount of the fixed rate notes as at 31 December 2008 was adjusted by losses of approximately HK$22 million (2007: gains of approximately HK$54 million) while the carrying amount of the zero coupon notes as at 31 December 2008 was adjusted by losses of approximately HK$36 million (2007: HK$72,000). The changes in fair values of the notes for the hedged risk were included in profit or loss at the same time that the changes in fair value of the swaps were included in profit or loss. The fixed-to-floating interest rate swap hedging the zero coupon notes converted a fixed rate of 5.19% per annum to Hong Kong Interbank Offered Rate (“HIBOR”) plus 0.69% per annum for both years, and the other interest rate swap hedging HK$300 million fixed rate notes converted a fixed rate of 4.18% per annum to HIBOR in 2008. The cross currency swaps hedging the 7% USD fixed rate notes converted the USD coupon payments into Hong Kong dollars at HIBOR plus 1.93% per annum in average for both years. (c) Financial assets designated as at FVTPL The Group entered into certain contracts of structured deposits with certain financial institutions. 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, such as foreign exchange rates. The entire combined contracts have been designated as financial assets at FVTPL on initial recognition. At the balance sheet date, the maturity periods of the structured deposits at notional amount were as follows: Within one year More than one year, but not exceeding five years During the year, the Group has early redeemed a structured deposit at notional amount of HK$78 million. The Group 2008 HK$ million 2007 HK$ million 40 80 120 – 198 198 110 Hysan Annual Report 2008 20. Other Financial Assets/Liabilities continued (d) Other derivatives classified as held for trading (not under hedge accounting) At the balance sheet date, the notional amounts and the maturity periods of other derivatives classified as for held for trading not under hedge accounting are as follows: Derivatives Forward foreign exchange contracts Net basis swaps Equity derivatives 2008 Notional amount Maturity 2007 Notional amount Maturity The Group US$32 million US$65 million – 2009 2012 – US$6 million US$65 million HK$147 million 2008 2012 2008 As at 31 December 2008, the forward foreign exchange contracts are mainly used for managing the foreign currency exposure of listed debt securities denominated in US dollar. As at 31 December 2008 and 2007, 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 fixed rate notes. As at 31 December 2007, the equity derivatives were call options of certain listed securities in Hong Kong. 21. Accounts Receivable Rents from leasing of investment properties are normally received in advance. At the balance sheet date, accounts receivable of the Group with carrying amount of HK$10 million (2007: HK$10 million) mainly represented rents receipts in arrears, which were aged less than 90 days. 22. Amounts due from/to Subsidiaries The amounts due from/to subsidiaries are unsecured, interest-free and repayable on demand. 23. Amount due from an Associate The amount due from an associate is unsecured, interest-free and repayable on demand. 24. Short-Term Investments At the balance sheet date, the Group’s short-term investments were as follows: Held for trading marketable securities, at market value Equity securities listed in Hong Kong Held-to-maturity debt securities maturing within one year, at amortised cost Debt securities listed in Hong Kong Debt securities listed in overseas Market value of held-to-maturity debt securities Debt securities listed in Hong Kong Debt securities listed in overseas The Group 2008 HK$ million 2007 HK$ million – 491 209 700 700 491 209 700 95 – – – 95 – – – At the balance sheet date, the effective yield of the debt securities ranged from -1.34% to 0.06% per annum with maturity of three months or less. Hysan Annual Report 2008 111 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 25. 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 0.01% to 1.54% (2007: 0.88% to 3.45%) per annum with an original maturity of three months or less. 26. Accounts Payable At the balance sheet date, accounts payable of the Group with carrying amount of HK$90 million (2007: HK$69 million) were aged less than 90 days. 27. Amounts due to Minority Shareholders The amounts due to minority shareholders are unsecured, interest-free and repayable on demand. 28. Borrowings The analysis of the carrying amounts of borrowings is as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes Current Non-current The Group 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million – 550 – – 550 – – – – – 920 – 2,003 278 3,201 720 549 1,362 230 2,861 (a) Unsecured bank loans The unsecured bank loans of HK$920 million (2007: HK$720 million) are guaranteed as to principal and interest by the Company and are repayable as follows: More than one year, but not exceeding two years More than two years, but not exceeding five years The Group 2008 HK$ million 2007 HK$ million 70 850 920 – 720 720 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 0.79% to 5.11% (2007: 3.94% to 4.17%) per annum. As at 31 December 2008 and 2007, bank loans of HK$720 million are denominated in Hong Kong dollars. Out of the HK$720 million bank loan, HK$325 million is hedged as to its interest rate risk exposure arising from the quarterly interest payments until maturity of the bank loans in 2011 by interest rate swaps as detailed in note 20(a)(ii). As at 31 December 2008, bank loans of HK$200 million equivalent are denominated in US dollars. The foreign currency risk related to the interest and the principal payments have been hedged by a cross currency swap as detailed in note 20(a)(i). Interest rate is normally re-fixed at every one to six months. (b) Floating rate notes In 2004, HK$550 million five-year floating rate notes were issued by Hysan (MTN) Limited, a wholly-owned subsidiary of the Company. The notes are guaranteed as to principal and interest by the Company, bear effective interest rates (which are equal to contracted interest rates) ranging from 1.30% to 4.04% (2007: 3.98% to 5.08%) per annum at the balance sheet date and are repayable in full in 2009. During the year ended 31 December 2007, the Group entered into interest rate swaps, that matured in 2008, to hedge against the interest rate risk of certain floating rate notes (see note 20(a)(ii)). 112 Hysan Annual Report 2008 28. Borrowings continued (c) Fixed rate notes Fixed rate notes Add: Net loss (gain) attributable to hedged risks The Group 2008 HK$ million 2007 HK$ million 1,981 22 2,003 1,416 (54) 1,362 In February 2002, US$200 million 10-year fixed 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. The coupon payments are paid on a semi-annual basis and the principal 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 the balance sheet dates was US$182 million. During the year, HK$300 million and HK$100 million 7-year fixed rate notes were issued in August and HK$165 million 12-year fixed rate notes were issued in September 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) ranging from 5.1% to 5.38% per annum and are repayable in full in August 2015 and September 2020. The coupon payments for the HK$100 million 7-year and the HK$165 million 12-year fixed rate notes are paid on an annual basis whilst the coupon payments for the HK$300 million 7-year fixed rate notes are paid on a quarterly basis. The Group has entered into cross currency swaps to hedge against the interest rate and foreign exchange rate risks in relation to the coupon payments and principal repayment of the US$117 million (2007: US$117 million) fixed rate notes under fair value hedge (see note 20(b)). The Group has also entered into forward foreign exchange contracts and net basis swaps to hedge against the foreign exchange rate risk arising from the coupon payments and principal repayment of the remaining US$65 million fixed rate notes. The forward foreign exchange contracts are accounted for as cash flow hedges (see note 20 (a)(i)) and the net basis swaps are classified as held for trading (see note 20 (d)). The Group has also entered into an interest rate swap to hedge against the interest rate risk of HK$300 million fixed rate notes under fair value hedge (see note 20(b)). The net losses of HK$22 million (2007: gains of HK$54 million) represented changes in fair value attributable to the hedged interest rate and foreign exchange rate risks of the US$117 million (2007: US$117 million) fixed rate notes under fair value hedge and hedged interest rate risk of the HK$300 million (2007: nil) fixed rate notes under fair value hedge. (d) Zero coupon notes Zero coupon notes Add: Net loss attributable to hedged risk The Group 2008 HK$ million 2007 HK$ million 242 36 278 230 – 230 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 20(b)). The net loss of approximately HK$36 million (2007: HK$72,000) represented changes in fair value attributable to the hedged interest rate risk of the zero coupon notes under fair value hedge. Hysan Annual Report 2008 113 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 29. Categories of Financial Instruments Financial assets Financial assets at FVTPL – designated as at FVTPL – held for trading Derivative instruments under hedge accounting Available-for-sale financial assets Held-to-maturity investments Loans and receivables (including cash and cash equivalents) Financial liabilities Financial liabilities at FVTPL – held for trading Derivative instruments under hedge accounting Amortised cost The Group The Company 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million 125 – 158 1,022 700 1,728 3,733 10 31 4,398 4,439 203 95 33 2,479 – 1,162 3,972 55 2 3,466 3,523 – – – 2 – – – – 2 – 13,014 13,016 12,790 12,792 – – 90 90 – – 61 61 30. Deferred Taxation The following are the major deferred tax liabilities (assets) recognised by the Group and movements thereon during the year: The Group At 1 January 2007 Charge to consolidated income statement for the year (note 10) Charge to equity for the year At 31 December 2007 Charge (credit) to consolidated income statement for the year (note 10) Charge to equity for the year Effect of change in tax rate At 31 December 2008 Accelerated tax depreciation HK$ million Revaluation of properties HK$ million Tax losses HK$ million Total HK$ million 244 20 – 264 1 – (15) 250 3,106 540 1 3,647 (28) 1 (208) 3,412 (1) – – (1) (13) – – (14) 3,349 560 1 3,910 (40) 1 (223) 3,648 At the balance sheet date, the Group has unused estimated tax losses of HK$655 million (2007: HK$400 million), of which HK$312 million (2007: nil) has not been agreed by IRD, available for offset against future profits. A deferred tax asset has been recognised in respect of HK$85 million (2007: HK$5 million) of such losses. No deferred tax asset has been recognised in respect of the remaining estimated tax losses of HK$570 million (2007: HK$395 million) as the utilisation of these estimated tax losses is uncertain. These estimated tax losses may be carried forward indefinitely. At the balance sheet date, the Group has deductible temporary differences of HK$49 million (2007: HK$4 million) arisen from the revaluation of properties. No deferred tax asset has been recognised in relation to such deductible temporary differences as it is not probable that taxable profit 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. 114 Hysan Annual Report 2008 31. Share Capital Ordinary shares of HK$5 each Authorised: Number of shares Share capital 2008 2007 2008 HK$ million 2007 HK$ million At 1 January and 31 December 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 1,037,469,756 1,055,137,409 5,057,681 1,507,666 (24,233,000) 3,528,155 116,667 – 1,041,114,578 1,037,469,756 5,187 18 1 – 5,206 5,276 25 7 (121) 5,187 (a) Issue of shares pursuant to scrip dividend schemes For the year ended 31 December 2008 On 18 June 2008 and 12 September 2008 respectively, the Company issued and allotted a total of 3,031,113 shares and 497,042 shares of HK$5 each in the Company at HK$23.10 and HK$21.59 to the shareholders who elected to receive shares in the Company in lieu of cash for the 2007 final and 2008 interim dividends pursuant to the scrip dividend schemes announced by the Company on 14 May 2008 and 21 August 2008. These shares rank pari passu in all respects with other shares in issue. For the year ended 31 December 2007 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 final 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 For the year ended 31 December 2008 During the year ended 31 December 2008, options to subscribe for a total of 114,667 shares and 2,000 shares were exercised at the exercise prices of HK$15.85 and HK$21.25 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 38. For the year ended 31 December 2007 During the year ended 31 December 2007, 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 38. Hysan Annual Report 2008 115 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 31. Share Capital continued (c) Cancellation upon repurchase of own shares The Company was authorised at the respective annual general meetings held in 2007 and 2008 to purchase its own ordinary shares not exceeding 10% of the aggregate nominal amount of the then issued share capital of the Company. For the year ended 31 December 2008 Neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year ended 31 December 2008. For the year ended 31 December 2007 During the year ended 31 December 2007, the Company repurchased its ordinary shares on the Stock Exchange when they were significantly trading at a discount in order to enhance shareholder value. The details were set out below: 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 ended 31 December 2007 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 profits. 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 profits 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 ended 31 December 2007. 116 Hysan Annual Report 2008 32. Reserves of the Company The Company’s reserves available for distribution to its equity holders as at 31 December 2008 amounted to HK$5,794 million (2007: HK$5,676 million), being its general reserve, dividend reserve and retained profits at that date. Share premium Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million General reserve Dividend reserve Retained profits Share options reserve Capital redemption reserve At 1 January 2007 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 Profit for the year Interim dividend declared for 2007 Dividends paid during the year (note 12) At 31 December 2007 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 Forfeiture of share options Profit for the year Dividends paid during the year (note 12) 1,453 79 9 – – – – – – – 1,541 63 2 – – – – At 31 December 2008 1,606 Note: General reserve was set up from the transfer of retained profits. (Note) 155 100 422 5,475 7,610 – – 121 – – – – – – – – – – – – – – – 276 100 – – – – – – – – – – – – 276 100 – – – – – – – 127 (549) – – – – – – – – – 79 – (511) (2) – 2 739 (127) – 8 (390) (2) 4 – 739 – (549) 5,576 7,499 – – – 1 761 (644) 63 1 5 – 761 (644) 5,694 7,685 5 – (1) – – 4 (2) – – – 6 – (1) 5 (1) – – 9 33. Retirement Benefits Plans With effect from 1 December 2000, the Group set up an enhanced Mandatory Provident Fund Scheme (the “Enhanced MPF Scheme”), a defined 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 fixed percentages of members’ salaries, ranging from 5% of MPF Relevant Income to 15% of basic salary. Members’ mandatory contributions are fixed 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 (2007: HK$5 million). Forfeited contributions for the year amounted to HK$3 million (2007: HK$3 million) were refunded to the Group. Hysan Annual Report 2008 117 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 34. Contingent Liabilities At the balance sheet date, there were contingent liabilities in respect of the following: Corporate guarantee to note holders – for issue of floating rate notes – for issue of fixed rate notes – for issue of zero coupon notes Guarantees to banks for providing financing facilities to subsidiaries The Group The Company 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million – – – – – – – – – – 550 1,985 430 2,965 550 1,420 430 2,400 920 720 35. 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 The Group 2008 HK$ million 2007 HK$ million 2,068 123 1,006 134 36. 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 fifth year inclusive The Company 2008 HK$ million 2007 HK$ million 8 3 11 15 6 21 Operating lease payments represent rentals payable by the Company to its subsidiaries for its staff quarters and office premises which are negotiated and rental are fixed for two years and three years respectively. At the balance sheet date, the Group had no commitment under non-cancellable operating lease. 118 Hysan Annual Report 2008 36. Lease Commitments continued (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 fifth year inclusive Over five years The Group 2008 HK$ million 2007 HK$ million 1,266 1,349 – 2,615 1,104 1,468 10 2,582 Operating lease payments represent rentals receivable by the Group from leasing of its investment properties. Typically, leases are negotiated and rentals are fixed for lease term of one to three years. Certain leases include contingent rentals calculated with reference to turnover of the tenants. 37. 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: The Group Substantial shareholders Directors 2008 HK$ million 2007 HK$ million 2008 HK$ million 2007 HK$ million Gross rental income received from (Note a) Amount due to a minority shareholder (Note b) 2 – 6 – 24 94 26 94 Notes: (a) The sum of transactions with Directors represented the aggregate gross rental income received under various leases respectively with Directors of approximately HK$882,000 (2007: HK$754,000), and companies controlled by Directors or their associates in aggregate of approximately HK$23,337,000 (2007: HK$25,199,000). (b) The sum represents outstanding loan advanced to a non wholly-owned subsidiary of the Group, Barrowgate Limited (“Barrowgate”) by Mightyhall Limited, a wholly-owned subsidiary of Jebsen and Company Limited of which Hans Michael JEBSEN is a director and shareholder, as shareholders loan in proportion to its shareholding in Barrowgate for general funding purpose. The amount is unsecured, interest-free and repayable on demand. The Company has the following balances with its subsidiaries at the balance sheet date: Amounts due from subsidiaries Less: Allowances on amounts due therefrom Amounts due to subsidiaries Details of amounts due from/to subsidiaries are disclosed in note 22. The Company 2008 HK$ million 2007 HK$ million 13,368 (499) 13,039 (258) 12,869 12,781 59 42 Hysan Annual Report 2008 119 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 37. Related Party Transactions and Balances continued (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 benefits Share-based payments Retirement benefits scheme contributions 2008 HK$ million 2007 HK$ million 26 4 1 31 17 3 1 21 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. 38. 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). For the options granted under the 1995 Scheme currently outstanding, the basis for determining the exercise price is 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 five business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration on each grant of option was HK$1 and was paid within 30 days from the date of grant of option, with full payment for exercise price to be made on exercise of the relevant option. The 2005 Share Option Scheme (the “2005 Scheme”) The Company adopted the 2005 Scheme 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 (together with the 1995 Scheme are referred to as the “Schemes”). 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 benefit 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 to the development and growth of the Company and its 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 Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”), currently being 10% of the shares in issue as at 10 May 2005, the date of the AGM approving the 2005 Scheme (being 104,996,365 shares). 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. 120 Hysan Annual Report 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 i o n O u r G o v e r n a n c e 38. Share-Based Payment Transactions continued (a) Equity-settled share option schemes continued The 2005 Share Option Scheme (the “2005 Scheme”) continued 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 shareholder approval, being 10,499,636). 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 five business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration on each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of option, with full payment for exercise price to be made on exercise of the relevant option. (b) Grant and vesting structures Grants made prior to 8 March 2005 had a holding period of 2 years and a vesting period of 5 years. With effect from 8 March 2005, the Board has approved a new grant and vesting structure. Grants will be made on a periodic basis. Vesting period is 3 years in equal proportion. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. (c) Movement of share options The following table discloses movements of the Company’s share options held by the Directors and employees during the current year: Date of grant Exercise price HK$ Exercisable period (Note a) Balance as at 1.1.2008 Changes during the year Cancelled/ Balance as at lapsed 31.12.2008 Granted Exercised Name 1995 Scheme Executive Directors Ricky Tin For TSANG (Note b) (Note c) 2005 Scheme Executive Directors Peter Ting Chang LEE 30.3.2005 15.850 Wendy Wen Yee YUNG 30.3.2005 15.850 (Note b) Eligible employees 30.3.2005 15.850 30.3.2005 – 29.3.2015 30.3.2005 – 29.3.2015 30.3.2005 – 29.3.2015 120,000 96,000 87,667 – – – (40,000) (Note j) – (74,667) (Note k) 6.3.2007 21.380 6.3.2007 – 5.3.2017 235,000 – 13.3.2008 21.450 (Note e) 13.3.2008 – 12.3.2018 – 260,000 Ricky Tin For TSANG 30.3.2006 22.000 (Note b) 30.3.2007 21.250 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 120,000 95,000 – – 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 – 100,000 Wendy Wen Yee YUNG 26.6.2006 20.110 (Note b) 30.3.2007 21.250 26.6.2006 – 25.6.2016 30.3.2007 – 29.3.2017 110,000 95,000 – – 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 – 100,000 Pauline Wah Ling YU WONG 6.3.2007 21.380 (Note d) 6.3.2007 – 30.6.2009 108,000 – – – – – – – – – – – – – 80,000 96,000 13,000 – 235,000 – 260,000 – 120,000 – 95,000 – 100,000 – 110,000 – 95,000 – 100,000 – 108,000 F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 121 Notes to the Financial Statements continued For the year ended 31 December 2008 38. Share-Based Payment Transactions continued (c) Movement of share options continued Name 2005 Scheme continued Date of grant Exercise price HK$ Exercisable period (Note a) Balance as at 1.1.2008 Changes during the year Cancelled/ Balance as at lapsed 31.12.2008 Granted Exercised Eligible employees 30.3.2006 22.000 (Note c) 30.3.2007 21.250 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 99,000 132,000 – – – (32,000) (Note m) (2,000) (Note l) (57,000) (Note m) 67,000 73,000 31.3.2008 21.960 (Note f) 31.3.2008 – 30.3.2018 2.5.2008 23.900 (Note g) 2.5.2008 – 1.5.2018 9.9.2008 21.300 (Note h) 9.9.2008 – 8.9.2018 2.10.2008 20.106 (Note i) 2.10.2008 – 1.10.2018 – 178,000 – 95,000 – 85,000 – 85,000 – – – – (14,000) (Note m) 164,000 – – – 95,000 85,000 85,000 1,297,667 903,000 (116,667) (103,000) 1,981,000 Notes: (a) Save otherwise stated, all options granted have a vesting period of 3 years in equal proportions. (b) Ricky Tin For TSANG and Wendy Wen Yee YUNG were appointed as Executive Directors on 1 April 2008. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (d) Pauline Wah Ling YU WONG retired from the Board of the Company by rotation as from the conclusion of 2008 AGM held on 14 May 2008. She remained as Senior Advisor to the Company until 31 December 2008 when she retired from the Company and her outstanding options remain exercisable until 30 June 2009. (e) The closing price of the shares of the Company immediately before the date of grant (as of 12 March 2008) was HK$22.100. (f) The closing price of the shares of the Company immediately before the date of grant (as of 28 March 2008) was HK$21.950. (g) The closing price of the shares of the Company immediately before the date of grant (as of 30 April 2008) was HK$22.600. (h) The closing price of the shares of the Company immediately before the date of grant (as of 8 September 2008) was HK$21.300. (i) (j) The closing price of the shares of the Company immediately before the date of grant (as of 30 September 2008) was HK$19.980. The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$22.700. (k) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$22.337. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$22.950. (m) The options lapsed during the year upon resignations of certain eligible employees. 122 Hysan Annual Report 2008 38. Share-Based Payment Transactions continued (c) Movement of share options continued The following table discloses movements of the Company’s share options held by the Directors and employees in prior year: Date of grant Exercise price HK$ Exercisable period (Note a) Balance as at 1.1.2007 7.1.1999 9.220 7.1.2001 – 1,350,000 6.1.2009 30.3.2005 – 29.3.2015 401,333 Changes during the year Cancelled/ Balance as at lapsed 31.12.2007 Granted Exercised – – (1,350,000) (Note g) – – (77,666) (Note h) (20,000) (Note j) 303,667 Eligible employees 30.3.2005 15.850 Name 1995 Scheme Executive Director Peter Ting Chang LEE (Note b) (Note c) 2005 Scheme Executive Directors Peter Ting Chang LEE 6.3.2007 21.380 (Note e) 6.3.2007 – 5.3.2017 – 235,000 – – 235,000 Michael Tze Hau LEE 10.5.2005 16.600 (Note d) 30.3.2006 22.000 10.5.2005 – 9.5.2015 30.3.2006 – 29.3.2016 240,000 188,000 – – Pauline Wah Ling YU WONG 6.3.2007 21.380 (Note e) 6.3.2007 – 5.3.2017 6.3.2007 21.380 (Note e) 6.3.2007 – 5.3.2017 – 185,000 – 108,000 Eligible employees 9.8.2005 18.790 (Note c) 9.8.2005 – 8.8.2015 96,000 12.10.2005 18.210 12.10.2005 – 11.10.2015 120,000 30.3.2006 22.000 26.6.2006 20.110 30.3.2006 – 29.3.2016 26.6.2006 – 25.6.2016 325,000 110,000 – – – – 30.3.2007 21.250 (Note f) 30.3.2007 – 29.3.2017 – 335,000 (80,000) (Note i) (160,000) (Note j) – – – (188,000) (Note j) (185,000) (Note j) – 108,000 (96,000) (Note j) (120,000) (Note j) (106,000) (Note j) – – 219,000 – 110,000 (13,000) (Note j) 322,000 – – – – – – – – 2,830,333 863,000 (1,507,666) (888,000) 1,297,667 Notes: (a) Save otherwise stated, all options granted have a vesting period of 3 years in equal proportions. (b) Options granted to Peter Ting Chang LEE on 7 January 1999 had a holding period of 2 years and a vesting period of 5 years. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. Among the Eligible Employees, Ricky Tin For TSANG and Wendy Wen Yee YUNG were appointed as Directors with effect from 1 April 2008. Their options are disclosed as held by Directors in current year. (d) Michael Tze Hau LEE stepped down from the Board of the Company as from the conclusion of 2007 AGM on 8 May 2007. Hysan Annual Report 2008 123 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Notes to the Financial Statements continued For the year ended 31 December 2008 38. Share-Based Payment Transactions continued (c) Movement of share options continued Notes: continued (e) The closing price of the shares of the Company immediately before the date of grant (as of 5 March 2007) was HK$20.500. (f) The closing price of the shares of the Company immediately before the date of grant (as of 29 March 2007) was HK$21.300. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$19.600. (h) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$21.090. (i) (j) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$21.200. The options lapsed during the year upon the stepping down of Michael Tze Hau LEE and resignations of certain eligible employees. (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 2005. 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$5 million (2007: HK$4 million) in relation to share options granted by the Company, of which HK$3 million (2007: HK$1 million) related to the Directors (see note 7), 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 a number of 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: Date of grant 2.10.2008 9.9.2008 2.5.2008 31.3.2008 13.3.2008 30.3.2007 6.3.2007 Closing share price at the date of grant HK$19.160 HK$21.300 HK$23.900 HK$21.800 HK$21.450 HK$21.250 HK$20.800 Exercise price HK$20.106 HK$21.300 HK$23.900 HK$21.960 HK$21.450 HK$21.250 HK$21.380 Risk free rate (Note a) 2.936% 2.833% 2.668% 2.607% 2.486% 4.192% 4.188% Expected life of option (Note b) 10 years 10 years 10 years 10 years 10 years 10 years 10 years Expected volatility (Note c) 38.86% 38.19% 35.51% 34.25% 33.03% 29.53% 30.12% Expected dividend per annum (Note d) HK$0.463 HK$0.463 HK$0.463 HK$0.463 HK$0.463 HK$0.416 HK$0.416 Estimated fair value per share option HK$6.940 HK$8.130 HK$8.990 HK$7.390 HK$6.970 HK$7.470 HK$7.210 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 five financial years. 124 Hysan Annual Report 2008 Financial Risk Management For the year ended 31 December 2008 1. Financial Risk Management Objectives and Policies The Group’s major financial instruments include cash and bank balances, time deposits, held-to-maturity investments, amount due from an associate, accounts receivable, other receivables, available-for-sale financial assets, accounts payable, accruals, rental deposits from tenants, amounts due to minority shareholders, borrowings and derivative financial instruments. The Company’s major financial instruments include cash and bank balances, time deposits, other receivables, amounts due from/to subsidiaries, other payable and accruals. Details of these financial instruments are disclosed in respective notes to the financial statements. The risks associated with these financial 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. (a) Credit Risk The credit risk of the Group and the Company are primarily attributable to rents receivable from tenants, amounts due from subsidiaries, amount due from an associate, derivative financial instruments, held-to-maturity investments, time deposits and bank balances. The Group’s and the Company’s maximum exposure to credit risk which will cause a financial loss to the Group and the Company due to failure to discharge an obligation by the counterparties and financial guarantees issued by the Company are arising from: (i) the carrying amount of the respective recognised financial assets as stated in the consolidated and Company’s balance sheets; and (ii) the amount of contingent liabilities in relation to financial guarantee issued by the Company as disclosed in note 34 to the financial statements. 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 financial institutions with strong investment-grade credit ratings, limits exposure to each financial 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 financial institution. The Group’s listed debt securities are issued by Hong Kong Monetary Authority or national government with high sovereign credit rating. To minimise the credit risk of amounts due from subsidiaries and an associate, the management of the Group and the Company review the recoverable amount of each individual balance at each balance sheet date to ensure adequate impairment losses are made for irrecoverable amounts. Other than concentration of credit risk on amount due from an associate, the Group and the Company have no significant concentration of credit risk, with exposure spread over a number of counterparties and tenants. O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 125 Financial Risk Management continued For the year ended 31 December 2008 1. Financial Risk Management Objectives and Policies continued (b) Liquidity Risk The Group and the Company closely monitor their liquidity requirements and the sufficiency 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 financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group and the Company is required to pay. The table includes both interest and principal cash flows. The interest payments are computed using contractual rates or, if floating, based on the prevailing market rate at the balance sheet date. For cash flows denominated in currency other than Hong Kong dollars, the prevailing foreign exchange rates at the balance sheet date are used to convert the cash flows into Hong Kong dollars. Carrying amount HK$ million Total contractual undiscounted cash flow HK$ million Within 1 year or on demand HK$ million More than 1 year but not exceeding 2 years HK$ million More than 2 years but not exceeding 5 years HK$ million More than 5 years HK$ million (320) (388) (327) (920) (550) (2,003) (278) (320) (388) (327) (970) (557) (2,570) (430) (320) (158) (327) (21) (557) (128) – (4,786) (5,562) (1,511) (278) (339) (327) (720) (549) (1,362) (230) (278) (339) (327) (809) (589) (1,866) (430) (3,805) (4,638) (278) (124) (327) (29) (22) (99) – (879) – (88) – (85) – (129) – (302) – (104) – (29) (567) (99) – (799) – (132) – (864) – (1,648) – – (10) – – – (665) (430) (2,644) (1,105) – (107) – (751) – (1,668) – (2,526) – (4) – – – – (430) (434) The Group As at 31 December 2008 Non-derivative financial 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 2007 Non-derivative financial 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 126 Hysan Annual Report 2008 1. Financial Risk Management Objectives and Policies continued (b) Liquidity Risk continued Carrying amount HK$ million Total contractual undiscounted cash flow HK$ million Within 1 year or on demand HK$ million More than 1 year but not exceeding 2 years HK$ million More than 2 years but not exceeding 5 years HK$ million More than 5 years HK$ million The Company As at 31 December 2008 Non-derivative financial liabilities Other payable and accruals Amounts due to subsidiaries As at 31 December 2007 Non-derivative financial liabilities Other payable and accruals Amounts due to subsidiaries (31) (59) (90) (19) (42) (61) (31) (59) (90) (19) (42) (61) (31) (59) (90) (19) (42) (61) – – – – – – – – – – – – – – – – – – Hysan Annual Report 2008 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 i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Financial Risk Management continued For the year ended 31 December 2008 1. Financial Risk Management Objectives and Policies continued (b) Liquidity Risk continued The following table details the Group’s remaining contractual maturity for its derivative financial instruments. The table has been drawn up based on the undiscounted net cash inflows (outflows) on the derivative instruments that settle on a net basis and undiscounted gross inflows (outflows) on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by the prevailing market rate at the balance sheet date. For cash flows denominated in currency other than Hong Kong dollars, the prevailing foreign exchange rates at the balance sheet date are used to convert the cash flows into Hong Kong dollars. Carrying amount HK$ million Total contractual undiscounted cash flow HK$ million Within 1 year or on demand HK$ million More than 1 year but not exceeding 2 years HK$ million More than 2 years but not exceeding 5 years HK$ million More than 5 years HK$ million The Group As at 31 December 2008 Derivative settled net Interest rate swaps Derivative settled gross Forward foreign exchange contracts Outflow Inflow Cross currency and net basis swaps Outflow Inflow As at 31 December 2007 Derivative settled net Interest rate swaps Derivative settled gross Forward foreign exchange contracts Outflow Inflow 40 2 75 (2) 3 Cross currency and net basis swaps 13 Outflow Inflow 139 5 4 28 102 (366) 368 (1,758) 1,856 (282) 283 (43) 70 (35) 35 (36) 68 (49) 50 (1,679) 1,718 – – – – 41 – 2 8 31 (201) 206 (1,659) 1,707 (83) 85 (57) 64 (34) 35 (52) 64 (84) 86 (1,550) 1,579 – – – – At the balance sheet date, the Company has no derivative financial instruments. 128 Hysan Annual Report 2008 1. Financial Risk Management Objectives and Policies continued (c) 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 financial position arising from volatility. The Group’s policy is to maintain the proportion of borrowings in fixed rates and floating rates within an appropriate range. Accordingly, the Group entered into (i) interest rate swaps to hedge the interest rate risk of the Group’s floating rate borrowings including bank loans and floating rate notes; and (ii) cross currency swaps and interest rate swaps to hedge the interest rate risk of certain amounts of the Group’s fixed rate notes. The Group reviews the continuing effectiveness of hedging instruments at least at each balance sheet date and until the hedging instrument expires or is terminated or the hedge no longer meets the criteria for hedge accounting. The Group mainly used regression analysis and comparison of change in fair value of the hedging instruments and the hedged items for assessing the hedging effectiveness. As at 31 December 2008, about 59.5% (2007: 60.1%) of the Group’s gross debts were effectively on a floating rate basis. The ratio could be adjusted with changes to the interest rate trend going forward. In addition, the Group is exposed to (i) cash flow interest rate risk as the interest income derived from time deposits and bank balances is subject to interest rate changes; and (ii) fair value interest rate risk in relation to its held-to-maturity investments in fixed-rate debt securities. Other than the concentration of interest rate risk related to the movements in HIBOR, the Group has no significant concentration of interest rate risk. 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 financial instruments that would have affected the profit or loss and equity. A change of 50 basis points (“bps”) (2007: 75 bps) was applied to the yield curves at the balance sheet date. The applied change of bps represented management’s assessment of the reasonably possible change in interest rates based on the current market conditions. The decrease in applied change of bps is mainly due to the lower prevailing market interest rates at the balance sheet date. In management’s opinion, the sensitivity analysis is unrepresentative of the interest rate risk as the year end exposure does not reflect the exposure during the year. The Group Increase (decrease) in profit or loss 50 bps increase HK$ million 50 bps decrease HK$ million Increase (decrease) in equity 50 bps increase HK$ million 50 bps decrease HK$ million As at 31 December 2008 (1) 2 11 (12) As at 31 December 2007 2 (2) 1 (1) 75 bps increase HK$ million 75 bps decrease HK$ million 75 bps increase HK$ million 75 bps decrease HK$ million Hysan Annual Report 2008 129 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Financial Risk Management continued For the year ended 31 December 2008 1. Financial Risk Management Objectives and Policies continued (d) 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 are located, and all rental income are derived, in Hong Kong, and denominated in Hong Kong dollars. As at 31 December 2008, the Group held US$27 million listed debt securities and all of the Group’s debts were denominated in Hong Kong dollars with the exception of the US$182 million 10-year fixed rate notes and the US$26 million bank loan. Other than concentration of currency risk of USD in relation to the US$182 million 10-year fixed rate notes, the US$26 million bank loan and the US$27 million listed debt securities, the Group has no other significant currency risk. The Group has entered into appropriate hedging instruments, mentioned in notes 20(a)(i) and 20(b) to the financial statements, to hedge against the potential currency risk. The Group reviews the continuing effectiveness of hedging instruments at least at each balance sheet date and until the hedging instrument expires or is terminated or the hedge no longer meets the criteria for hedge accounting. The Group mainly used regression analysis and comparison of change in fair value of the hedging instruments and the hedged items for assessing the hedging effectiveness. Sensitivity analysis The sensitivity analysis below has been determined assuming that a change in exchange rate had occurred at the balance sheet date and had been applied to both derivative and non-derivative financial instruments that would have affected the profit or loss and equity. A change of 650 bps (2007: 300 bps) was applied to the HKD:USD spot rate at the balance sheet date with the upper and lower boundaries at 7.75 and 7.85 respectively due to the peg of Hong Kong dollars against US dollars. The applied change of bps represented management’s assessment of the reasonably possible change in foreign exchange rates. As the HKD:USD spot rate as at the balance sheet date was close to 7.75, implying a greater room for increase in the exchange rate in the coming year, the applied change of bps is therefore increased. The forward points (the difference between spot rate and the forward rates) were assumed the same as the prevailing market forward points at respective balance sheet date. The Group Increase (decrease) in profit or loss 650 bps increase HK$ million 650 bps decrease HK$ million Increase (decrease) in equity 650 bps increase HK$ million 650 bps decrease HK$ million As at 31 December 2008 (2) – 3 – As at 31 December 2007 2 (2) 1 (1) 300 bps increase HK$ million 300 bps decrease HK$ million 300 bps increase HK$ million 300 bps decrease HK$ million 130 Hysan Annual Report 2008 1. Financial Risk Management Objectives and Policies continued (e) 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 prices. Therefore, the Group is exposed to equity price risk and the management will monitor the price movements and take appropriate actions when it is required. As at 31 December 2007, the Group had outstanding equity derivatives. The equity derivatives are not qualified as hedging instrument and hence are measured at fair value through profit 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 the investments that would have affected the profit or loss and equity. A change of 25% (2007: 10%) in stock prices was applied at the balance sheet date. The applied change of percentage represented management’s assessment of the reasonably possible change in stock prices. The increase in applied change of percentage is due to the increased volatility of stock prices during the year. The Group Increase (decrease) in profit or loss 25% increase HK$ million 25% decrease HK$ million Increase (decrease) in equity 25% increase HK$ million 25% decrease HK$ million As at 31 December 2008 – – 246 (246) 10% increase HK$ million 10% decrease HK$ million 10% increase HK$ million 10% decrease HK$ million As at 31 December 2007 (10) 9 251 (251) 2. Fair Value Estimation The fair value of financial assets and financial liabilities are determined as follows: • • • the fair value of listed investments traded on active liquid markets and classified as held for trading, available-for-sale financial assets and held-to-maturity investments are determined with reference to the published price quotations; the fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions; and the fair value of derivative instruments are calculated using quoted prices from independent financial institutions or using discounted cash flow analysis based on the applicable yield curves derived from quoted interest rates and quoted spot and forward 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 financial assets and financial liabilities measured at amortised costs approximate their fair values, except for the carrying amount of HK$2,003 million (2007: HK$1,362 million) fixed rate notes as stated in note 28 to the financial statements with fair value of HK$2,117 million (2007: HK$1,543 million). Hysan Annual Report 2008 131 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Financial Risk Management continued For the year ended 31 December 2008 3. Capital Risk Management The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year. The Group monitors its capital structure on the basis of a net debt to adjusted capital ratio. For this purpose, the Group defines net debt as borrowings as shown in the consolidated balance sheet less total cash and cash equivalents. Adjusted capital comprises all components of equity, adjusted by cumulative deferred tax provided on fair value gain on the investment and owner-occupied properties attributable to equity holders. The management reviews the Group’s net debt to adjusted capital ratio regularly and adjust the ratio through the payment of dividends, the issue of new share or debt, the repurchase of shares and the redemption of existing debt. The net debt to adjusted capital ratio at the year end was as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes Borrowings Less: Held-to-maturity debt securities Time deposits Cash and bank balances Net debt Equity attributable to equity holders of the Company Add: Group’s share of cumulative deferred tax on properties revaluation Adjusted capital Net debt to adjusted capital Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. The Group 2008 HK$ million 2007 HK$ million 920 550 2,003 278 3,751 (700) (964) (51) 2,036 31,469 3,191 34,660 5.9% 720 549 1,362 230 2,861 – (478) (6) 2,377 31,652 3,420 35,072 6.8% 132 Hysan Annual Report 2008 Five-Year Financial Summary For the year ended 31 December 2008 Results Turnover Property expenses Gross profit 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 Profit before taxation Taxation Profit for the year Minority interests Profit attributable to equity holders of the Company Underlying profit for the year Recurring underlying profit for the year Dividends Dividends paid Dividends proposed Dividends per share (HK cents) Earnings per share (HK$), based on: Profit for the year – basic – diluted Underlying profit for the year – basic Recurring underlying profit for the year – basic Performance Indicators Net debt to equity Net interest coverage (times) Net assets value per share (HK$) Adjusted net assets value per share (HK$) Net debt per share (HK$) Year end share price (HK$) 2008 HK$ million 2007 HK$ million 2006 HK$ million 2005 HK$ million 1,638 (217) 1,421 63 146 (134) (155) (212) 590 – – 1,719 (1) 1,718 (124) 1,594 1,201 1,066 644 562 68.00 1.53 1.53 1.16 1.03 5.9% 10.2x 30.23 33.29 1.96 12.52 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 2004 HK$ million (restated) 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 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 133 Five-Year Financial Summary continued For the year ended 31 December 2008 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 2008 HK$ million 2007 HK$ million 2006 HK$ million 2005 HK$ million 35,850 2,340 1,022 1,015 1,309 41,536 (3,751) (3,999) (1,076) (8,826) 32,710 (1,241) 31,469 34,660 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 2004 HK$ million (restated) 27,917 855 1,018 22 335 30,147 (5,603) (2,332) (815) (8,750) 21,397 (831) 20,566 22,399 Definitions: (1) Underlying profit for the year: profit adjusted for group’s share of unrealised fair value changes on investment properties net of deferred tax (2) Recurring underlying profit for the year: underlying profit 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 profit 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 Note: The figures for 2004 have been restated to reflect the prior year adjustments arising from (i) reclassification 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) reclassification of leasehold interests in land to prepaid lease payments under operating leases according to HKAS 17 “Leases”. 134 Hysan Annual Report 2008 Report of the Valuer To the Board of Directors Hysan Development Company Limited Dear Sirs, Annual revaluation of investment properties as at 31 December 2008 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 2008 was in the approximate sum of Hong Kong Dollars Thirty Five Billion Eight Hundred Fifty Million Only (i.e. HK$35,850 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, 20 February 2009 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 135 Schedule of Principal Properties As at 31 December 2008 Investment Properties Address Lot No. 1. 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% 2. Bamboo Grove I.L. 8624 Residential Medium-term 100% 74-86 Kennedy Road Mid-Levels Hong Kong 3. Lee Gardens Two 28 Yun Ping Road Causeway Bay Hong Kong 4. Leighton Centre 77 Leighton Road Causeway Bay Hong Kong 5. Lee Theatre Plaza 99 Percival Street Causeway Bay Hong Kong 6. Sunning Plaza 10 Hysan Avenue Causeway Bay Hong Kong 7. Sunning Court 8 Hoi Ping Road Causeway Bay Hong Kong 8. One Hysan Avenue 1 Hysan Avenue Causeway Bay Hong Kong lease 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% 9. AIA Plaza Sec. N of I.L. 457 and Sec. LL of I.L. 29 Commercial Long lease 100% 18 Hysan Avenue Causeway Bay Hong Kong 10. 111 Leighton Road 111 Leighton Road Causeway Bay Hong Kong 11. 500 Hennessy Road * Causeway Bay Hong Kong Sec. KK of I.L. 29 Commercial Long lease 100% Sec. FF of I.L. 29 and the R.P. of Marine Lot 365 Commercial Long lease 100% * The property (the site of the former Hennessy Centre) is currently under redevelopment. The site has a registered site area of approximately 47,738 square feet. Demolition work for existing basement and sub-structure work are currently underway. The redevelopment has a projected gross floor area of around 710,000 square feet and is expected to be completed in 2011. 136 Hysan Annual Report 2008 Shareholding Analysis Share Capital As at 31 December 2008: Authorised share capital Issued and fully paid-up capital Number of Ordinary shares HK$ Nominal Value HK$ 7,250,000,000 5,205,572,890 1,450,000,000 1,041,114,578 5 5 There was one class of ordinary shares of HK$5 each with equal voting rights. Distribution of Shareholdings (as at 31 December 2008, as per register of members of the Company) Size of registered shareholdings 5,000 or below 5,001 – 50,000 50,001 – 100,000 100,001 – 500,000 500,001 – 1,000,000 Above 1,000,000 Total Number of shareholders % of shareholders Number of shares % of the issued share capital (Note) 2,578 995 91 55 3 20 3,742 68.89 26.59 2.43 1.47 0.08 0.54 4,781,921 15,262,447 6,808,391 11,359,998 2,298,394 1,000,603,427 100 1,041,114,578 0.46 1.47 0.65 1.09 0.22 96.11 100 Types of Shareholders (as at 31 December 2008, 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 Number of shares held % of the issued share capital (Note) 433,130,735 561,255,967 46,727,876 1,041,114,578 41.60 53.91 4.49 100 O v e r v i e w O u r S t r a t e g y i n A c t i o n O u r G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2008 137 Shareholding Analysis continued Location of Shareholders (as at 31 December 2008, as per register of members of the Company) Location of shareholders Hong Kong United States and Canada United Kingdom Singapore Others Total Number of shares held % of the issued share capital (Note) 1,035,412,143 4,299,846 1,132,138 63,556 206,895 1,041,114,578 99.45 0.41 0.11 0.01 0.02 100 Note: The percentages have been compiled based on the total number of shares of the Company in issue as at 31 December 2008 (i.e. 1,041,114,578 ordinary shares). 138 Hysan Annual Report 2008 Shareholder Information Financial Calendar Full year results announced Ex-dividend date for final dividend Closure of register of members Annual General Meeting Record date for final dividend Dispatch of scrip dividend circular and election form Dispatch of final dividend warrants / definitive share certificates 2009 interim results to be announced * subject to change Dividend The Board recommends the payment of a final dividend of HK54 cents per share. Subject to shareholder approval, the final dividend will be payable in cash with a scrip dividend alternative to shareholders on the register of members as at Monday, 18 May 2009. 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, 20 May 2009. 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, 3 June 2009. Definitive share certificates 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 Tuesday, 9 June 2009. The register of members will be closed from Thursday, 14 May 2009 to Monday, 18 May 2009, both dates inclusive, for the purpose of determining shareholders’ entitlements to attend and vote at the Annual General Meeting to be held on 18 May 2009 (the “AGM”) and the proposed final dividend, during which period no transfer of shares will be registered. In order to qualify for attending and voting at the AGM and the proposed final dividend, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s Registrars not later than 4:00 p.m. on Wednesday, 13 May 2009. 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 g n u F i s n n e D • e e L y b b o B - ) 5 . p ( s e u a V l e t a r o p r o C • p I n u r e K - s g n d i l i u B : y h p a r g o t o h P 10 March 2009 12 May 2009 14 to 18 May 2009 18 May 2009 18 May 2009 (on or about) 20 May 2009 (on or about) 9 June 2009 11 August 2009 * 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 difficulty 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”. 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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