Hysan Development Co Ltd
Annual Report 2011

Plain-text annual report

H y s a n D e v e l o p m e n t C o m p a n y L i m i t e d A n n u a l R e p o r t 2 0 1 1 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 C M Y K A BETTER FUTURE TODAY Annual Report 2011 stock code 00014 Contents 1 Overview 16 Who We Are 16 Mission 16 Responsible Business as the Guiding Principle 17 Our Values 18 2011 Performance at a Glance 20 Chairman’s Statement 2 Strategy in Action 24 Our Marketplace and Our Response 28 The Hysan Community – Our Investment Property Portfolio 30 Management’s Discussion and Analysis 30 Review of Results 32 Review of Operations 37 Financial Review 40 Treasury Policy Internal Controls and Risk Management 45 48 Human Resources 3 Corporate Governance 52 Board of Directors and Senior Management 56 Corporate Governance Report 73 Directors’ Report 81 Directors’ Remuneration and Interests Report 89 Audit Committee Report 4 Financial Statements and Valuation 92 Directors’ Responsibility for the Financial Statements Independent Auditor’s Report 93 94 Financial Statements 170 Five-Year Financial Summary 172 Report of the Valuer 173 Schedule of Principal Properties 175 Shareholding Analysis 176 Shareholder Information THE ESSENTIAL READ AND WHY 18 2011 financial and non-financial performance 20 A year in review and 2012 outlook 24 2011 market conditions and how Hysan responded 30 Results highlights including key performance indicators 32 Review of our core leasing segments 37 Report on financial position and management 40 Prudent treasury policy 45 Risk control and management 48 Our people, our assets 56 Governance structure and the Board’s work in 2011 Photos on front and back covers: Hysan Place, Hysan’s next milestone A BETTER FUTURE TODAY 2011 was a productive year for Hysan. Against the backdrop of continued global economic uncertainties, we delivered a sound business performance across our core leasing activities. In addition, we made good progress with our Hysan Place redevelopment project and continued to enhance our existing assets, strategically adding longer-term competitiveness to our portfolio. We shall continue to further transform Hysan’s Causeway Bay as a location of choice for both work and play. Largest commercial landlord in vibrant Causeway Bay Asset enhancements: Lee Theatre area at the western gateway of the Hysan community Next milestone: Hysan Place Prime offices in a dynamic and green community An energetic and unique district in further transformation 1 Overview This section begins by stating who we are, in terms of our mission and core values. An at-a-glance table gives an overview of our 2011 financial and non-financial performances. The Chairman’s Statement reviews the year’s work, and highlights our efforts to further transform our unique district of Causeway Bay. 14 Hysan Annual Report 2011 16 Who We Are Mission 16 16 Responsible Business as the Guiding Principle 17 Our Values 18 2011 Performance at a Glance 20 Chairman’s Statement O v e r v i e w Hysan Annual Report 2011 15 Who We Are 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. 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. 16 Hysan Annual Report 2011 OUR VALUES 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 beneficial 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. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 17 2011 Performance at a Glance FINANCIAL PERFORMANCE With a clear focus and strategic actions, we continued to achieve results in a fast-changing business environment. It is also important that we do things the right way. Key financial and non-financial performance indicators are set out below. Turnover Office Sector’s Revenue HK$820m 6.5% Retail Sector’s Revenue HK$789m 12.7% HK$1,922m 9.0% 11 10 09 08 07 820 770 747 720 584 11 10 09 08 07 789 700 648 626 522 11 10 09 08 07 0 (HK$ million) 200 400 600 800 1,000 100 0 (HK$ million) 200 300 400 500 600 700 800 0 (HK$ million) 50 100 150 200 250 300 350 • Occupancy at 96% • Overall positive rental reversion • Flagship Lee Gardens achieved rentals exceeding 2008 peak and set rental tone for new Hysan Place pre-leasing • Virtually fully-let • Significant rise of turnover rent by 64.8% to HK$89 million • Mainland tourist spending increased by 84% in The Lee Gardens and Lee Gardens Two shopping centres Recurring Underlying Profit HK$1,310m 14.1% 11 10 09 08 07 Recurring Underlying Profit HK$1,310m 14.1% 1,310 1,148 1,110 1,066 950 Recurring Underlying Earnings per Share HK123.92cents 13.5% 11 10 09 08 07 123.92 109.15 106.09 102.57 90.32 11 10 09 08 07 0 (HK$ million) 300 600 900 1,200 1,500 0 (HK cents) 30 60 90 120 150 0 10 (HK cents) 20 30 40 50 60 70 80 • Increase reflects improvements in gross profit generated from core leasing activities and higher investment income • Being Recurring Underlying Profit divided by weighted average number of ordinary shares for the purpose of basic earnings per share 313 294 285 292 262 79 74 68 68 60 Net Asset Value per Share HK$46.00 19.1% 11 10 09 08 07 Property Value HK$49,969m 22.4% 49,969 40,833 37,363 35,850 35,711 Shareholders’ Funds HK$48,753m 19.9% 48,753 40,677 37,216 34,811 35,214 11 10 09 08 07 11 10 09 08 07 46.00 38.61 35.42 33.44 33.94 0 (HK$ million) 10,000 20,000 30,000 40,000 50,000 0 (HK$ million) 10,000 20,000 30,000 40,000 50,000 0 (HK$) 10 20 30 40 50 Valuation Surplus Cost • Investment property portfolio valued by an independent professional valuer, on the basis of open market value • Valuation reflects improved rental rates as well as the increase in site value of and construction costs expended on Hysan Place, which is near completion • Increase mainly due to a rise in valuation of investment properties 18 Hysan Annual Report 2011 Chairman’s Statement Overview The Hong Kong economy expanded strongly in the first quarter of 2011. This was followed by more moderate growth during the remaining part of 2011, principally attributable to weakened exports in light of increased uncertainties in the global economic environment. Nevertheless, domestic demand remained robust on the back of favourable labour market conditions and strength in inbound tourism. Strong consumption momentum continued to fuel growth in the retail leasing market. For the Grade “A” office leasing market, tight supply offered support amidst slowing new demand. Business Performance Against this backdrop, Hysan recorded a satisfactory performance in 2011 with revenue growth across our entire core leasing business. The Group’s 2011 turnover was HK$1,922 million, up 9.0% from HK$1,764 million in 2010. The retail sector showed a growth of 12.7%, while both the office and residential sectors recorded an increase of 6.5%. The retail sector was virtually fully-let. Occupancy of office and residential sectors at year-end 2011 stood at 96% and 95% respectively. Recurring Underlying Profit, the key measurement of our core leasing business performance, was up 14.1% to HK$1,310 million (2010: HK$1,148 million), reflecting improvement in gross profit generated from our core leasing activities. Higher investment income was also recorded. Our Underlying Profit, which excludes unrealised changes in fair value of investment properties, was also HK$1,310 million (2010: HK$1,148 million). Basic earnings per share based on Recurring Underlying Profit correspondingly rose to HK123.92 cents (2010: HK109.15 cents). At year-end 2011, the external valuation of the Group’s investment property portfolio increased by 22.4% to HK$49,969 million (2010: HK$40,833 million), reflecting improved rental rates for our core portfolio as well as the increase in site value of and construction costs expended on Hysan Place, which is near completion. Taking into consideration the fair value change of investment properties, the Group’s Reported Profit for 2011 was HK$8,545 million (2010: HK$3,844 million). Shareholders’ Funds increased by 19.9% to HK$48,753 million (2010: HK$40,677 million). Our financial position remains strong, with net interest coverage of 12.3 times (2010: 14.0 times) and net debt to equity ratio of 7.6% (2010: 6.4%). The Board of Directors (the “Board”) recommends the payment of a final dividend of HK64 cents per share (2010: HK60 cents). Together with the interim dividend of HK15 cents per share (2010: HK14 cents), there is an aggregate distribution of HK79 cents per share, representing a year-on-year increase of 6.8%. Subject to shareholder approval, the final dividend will be payable in cash with a scrip dividend alternative. 20 Hysan Annual Report 2011 2 Strategy in Action This section starts with an overview of Hong Kong’s macroeconomic environment and property leasing markets in 2011, followed by Hysan’s strategic actions in response to the market developments. We then discuss in detail our operations and performances, finance, risks and people management during the year. 22 Hysan Annual Report 2011 24 Our Marketplace and Our Response 28 The Hysan Community – Our Investment Property Portfolio 30 Management’s Discussion and Analysis 30 Review of Results 32 Review of Operations 37 Financial Review 40 Treasury Policy 45 Internal Controls and Risk Management 48 Human Resources S t r a t e g y i n A c t i o n Hysan Annual Report 2011 23 Our Marketplace and Our Response In 2011, uncertain global economic environment set the backdrop for the property leasing market in Hong Kong. Our three leasing segments responded successfully to such market changes. Hong Kong Economy The Hong Kong economy recorded a moderate GDP growth of 5% in 2011. The growth moderation was mainly caused by a slowdown in exports since the second quarter of 2011 amid a worsening global economic environment. Domestic consumption nevertheless displayed remarkable resilience throughout the year, thereby rendering a strong cushion to overall economic performance. Total employment in Hong Kong rose to 3.7 million as of December 2011, while the unemployment rate fell to 3.3%. Inflation rate was 5.3% in 2011. Kong amounted to 2.0 million square feet in the year. Decentralised Kowloon East recorded a significant net- absorption. Among the core districts (Central, Causeway Bay/ Wanchai and Tsim Sha Tsui), Causeway Bay/Wanchai was the largest contributor with a positive net take-up of around 160,000 square feet. Despite a slowdown in new demand and expansion activities, the market saw considerable demand from companies seeking cost-saving relocation opportunities – especially those from Central – to more affordable options in other sub- markets as mentioned above. At the end of December 2011, the overall vacancy rate in Causeway Bay/Wanchai fell to 1.9%. The graph on the right shows the vacancy rate of Grade “A” office in Central, Causeway Bay/Wanchai, Tsim Sha Tsui and Kowloon East for both 2010 and 2011. All Grade “A” office sub-markets witnessed double-digit rental growth in 2011. Recording an annual rental growth of 20.2%, Causeway Bay/Wanchai outperformed the other two core districts, namely Central (10.2%) and Tsim Sha Tsui (19.2%). During the last quarter, Central rental levels fell by 4.5%. Rents in Causeway Bay/Wanchai fell by 1.1%, while those of Tsim Sha Tsui grew by 2.4%. It should be noted that the rental gap between Causeway Bay/Wanchai and Central remained wide during the year (see the graph on the right). * The new supply and net take-up figures in 2011 exclude Hong Kong Government Headquarters in Admiralty. Source: Jones Lang LaSalle (data as of March 2012) The Hong Kong economy recorded a moderate GDP growth in 2011 Office The Grade “A” office market started strongly with buoyant demand in the first half of 2011. However, concerns over the growing global economic uncertainties led to slowing new demand and expansion activities since mid-year. New Grade “A” office supply* totalled 1.6 million square feet in 2011. The majority of space was located in decentralised areas. Such a new supply level was considerably lower than that in 2008 (3.7 million square feet), which then coincided with reduced demand amidst the global financial crisis. Overall net take-up* in Hong Hysan’s office portfolio maintains a balanced tenant mix 24 Hysan Annual Report 2011 Our Marketplace and Our Response Retail Overall annual retail sales in Hong Kong remained buoyant during the year, with an increase of 24.9% in 2011 over the previous year (see the graph below). Consumer confidence remained high, with private consumption expenditure rising by 8.6% in 2011. Retailers continued to benefit from the influx of Mainland visitors in Hong Kong. In 2011, Mainland arrivals hit 28.1 million, accounting for 67.0% of the total arrivals in the year (see the graph below). In terms of new supply, two major retail developments were completed in 2011. They are located in Kowloon and the New Territories. Rents for premium prime shopping centres rose by 16.1% in 2011. Hong Kong Total Retail Sales Total Number of Visitors HK$ billion 450 400 350 300 250 200 150 100 247 12.8% 273 10.6% 07 08 275 0.6% 09 Total Retail Sales Year-on-Year % Change 406 24.9% 325 18.3% 10 11 30% 25% 20% 15% 10% 5% 0 Million 50 40 30 20 10 0 42 33.0% 67.0% 36 37.0% 63.0% 28 45.0% 55.0% 30 42.9% 30 39.3% 57.1% 60.7% 07 08 09 10 11 Number of Other Visitors Number of Mainland China Visitors Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 07 08 09 10 11 Source: Census and Statistics Department (data as of March 2012) Source: Hong Kong Tourism Board (data as of March 2012) Source: Jones Lang LaSalle (data as of March 2012) Luxury Residential During the first half of the year, the luxury residential leasing market was characterised by a positive market sentiment on the back of increasing new expatriate arrivals. However, the market was affected by sluggish corporate expansion activity in the second half of the year, especially in the financial sector. It has resulted in reduced new demand for luxury residential leasing for expatriate staff. Leasing activity was mainly driven by local relocations as some expatriates embarked on cost-saving exercises. Rents for luxury properties edged down marginally by less than 1% in the second half of 2011 after rising by about 5% in the first half. Overall, luxury residential rents increased by 4.4% in 2011 but were still below the market highs of 2008 (see the graph on the right). Luxury Residential Rental Index (2009 Q4=100) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 07 08 09 10 11 Source: Jones Lang LaSalle (data as of March 2012) Index 140 130 120 110 100 90 80 Index 135 130 125 120 115 110 105 100 95 90 Premium Prime Shopping Centre Rental Index (2009 Q4=100) Social and cultural activities in our Bamboo Grove help build a thriving community for residents 26 Hysan Annual Report 2011 Hong Kong Total Retail Sales HK$ billion Total Number of Visitors 450 400 350 300 250 200 150 100 247 12.8% 273 10.6% 325 18.3% 275 0.6% 09 406 24.9% 30% 25% 20% 15% 10% 5% 0 Million 50 40 30 20 10 0 42 33.0% 67.0% 36 37.0% 63.0% 28 45.0% 55.0% 30 42.9% 30 39.3% 57.1% 60.7% 07 08 10 11 07 08 09 10 11 The renovated retail podium at Leighton Centre has become a trendy shopping venue Premium Prime Shopping Centre Rental Index (2009 Q4=100) Index 140 130 120 110 100 90 80 Total Retail Sales Year-on-Year % Change Number of Other Visitors Number of Mainland China Visitors Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 07 08 09 10 11 Source: Census and Statistics Department (data as of March 2012) Source: Hong Kong Tourism Board (data as of March 2012) Source: Jones Lang LaSalle (data as of March 2012) Luxury Residential Rental Index (2009 Q4=100) Index 135 130 125 120 115 110 105 100 95 90 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 07 08 09 10 11 Source: Jones Lang LaSalle (data as of March 2012) Hysan’s Response Riding on strong private consumption and inbound tourism, our retail portfolio recorded a sound growth. We captured market opportunities by reinforcing the luxury positioning of the Lee Gardens hub and rejuvenating the trendy Lee Theatre hub. Our marketing strategies include strengthening our customer base and loyalty of shoppers and launching promotion activities to attract tourists. See Review of Operations on Retail Sector on page 34 for more details. Hysan’s Response In a changing market, we focused on optimising occupancy to maximise revenue. At the same time, we enhanced our facilities and services. Refurbishment of selected units successfully established a new pricing benchmark, surpassing the peak of 2008. We also strengthened tenant relations and our direct marketing initiatives. See Review of Operations on Residential Sector on page 35 for more details. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 27 The Hysan Community – Our Investment Property Portfolio Our investment property interests totaled some 3.8 million gross square feet of high quality office, retail and residential space in Hong Kong. Hysan Place at 500 Hennessy Road, currently under redevelopment, will add an additional 710,000 square feet to our portfolio upon its completion in 2012. HYSAN PLACE 500 Hennessy Road, Causeway Bay Hysan Place, formerly the Hennessy Centre, is Hysan’s major redevelopment project with its shopping mall opening in August 2012. It includes 15 floors of Grade “A” offices and 17 floors of retail outlets. Situated at the northern gateway of Hysan’s portfolio and the heart of bustling Causeway Bay, Hysan Place offers full harbour view offices, a shopping mall of exciting tenant mix and green building features that conform to the highest international sustainability standards. Estimated Total Gross Floor Area Approx. 710,000 ft2 See page 36 for more details Shopping Mall Opening August 2012 BAMBOO GROVE Mid-Levels CENTRAL SOG O H E N N E S S Y R O A D HYSAN PLACE CROSS HARBOUR TUNNEL GRADE “A” OFFICES LEE GARDENS RETAIL HUB LEE THEATRE RETAIL HUB RESIDENTIAL NORTH POINT P E R C I V A L S T R E E T L E E G A R D E N R O A D Y U N PIN G R O A D THE LEE GARDENS LEE GARDENS TWO Times Square LEE THEATRE PLAZA ONE HYSAN AVENUE E E N U V A A N S H Y LEIGHTON CENTRE LEIG HTO N R O A D 18 HYSAN AVENUE SUNNING PLAZA 111 LEIGHTON ROAD SUNNING COURT ABERDEEN TUNNEL Not to scale Not to scale OFFICE RETAIL Our office portfolio’s Grade “A” offices provide a core location with premium facilities and prestige for tenants and their clients. Hysan Place will further strengthen our Grade “A” office positioning with its world-class building specifications. Other office buildings provide quality office space for tenants’ diversified use. The Lee Gardens hub provides elegant and luxury premium retail spaces for high-end brands, while the Lee Theatre hub is home to stylish and chic lifestyle shops and renowned restaurants. Hysan Place represents an increase of 50% by gross floor area to our overall retail portfolio, offering a new and exciting shopping destination with international brands new to Hong Kong. 28 Hysan Annual Report 2011 THE LEE GARDENS 33 Hysan Avenue, Causeway Bay The Lee Gardens is the Group’s flagship property comprising an office tower 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. Approx. Gross Floor Area 900,000 ft2 \ Number of Floors 53 \ Parking Spaces 200 \ Completed 1997 LEE GARDENS TWO 28 Yun Ping Road, Causeway Bay Lee Gardens Two is an office 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 floor. Approx. Gross Floor Area 627,000 ft2 \ Number of Floors 34 \ Parking Spaces 176 \ Completed 1992 \ Renovation of retail podium 2003 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. Approx. Gross Floor Area 277,000 ft2 \ Number of Floors 30 \ Parking Spaces 150 (jointly owned with Sunning Court) \ Completed 1982 18 HYSAN AVENUE 18 Hysan Avenue, Causeway Bay 18 Hysan Avenue, formerly known as AIA Plaza, is a 25-level office and retail complex at the corner of Hysan Avenue. The building boasts a bright and spacious lobby. Approx. Gross Floor Area 132,000 ft2 \ Number of Floors 25 \ Completed 1989 \ Renovated 2009 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 office location offering convenience as well as privacy. The retail shops include some trend-setting stores. Approx. Gross Floor Area 80,000 ft2 \ Number of Floors 24 \ Completed 1988 \ Renovated 2004 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. Approx. Gross Floor Area 317,000 ft2 \ Number of Floors 26 \ Completed 1994 LEIGHTON CENTRE 77 Leighton Road, Causeway Bay This office 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 address. Its completed renovation in 2011 has given a fresh look to its office lobby, while the retail podium has become a stylish shopping venue of international brands. Approx. Gross Floor Area 430,000 ft2 \ Number of Floors 28 \ Parking Spaces 264 \ Completed 1977 \ Renovated 2011 ONE HYSAN AVENUE 1 Hysan Avenue, Causeway Bay Located at the junction of three busy streets in the heart of Causeway Bay, this office and retail complex enjoys a prime location with a variety of retail facilities in the surrounding area. Approx. Gross Floor Area 169,000 ft2 \ Number of Floors 26 \ Completed 1976 \ Renovated 2002 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. Approx. Gross Floor Area 691,000 ft2 \ Number of Units 345 \ Parking Spaces 436 \ Completed 1985 \ Renovated 2002 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. Approx. Gross Floor Area 98,000 ft2 \ Number of Units 59 \ Parking Spaces 150 (jointly owned with Sunning Plaza) \ Completed 1982 \ Renovated 2003 O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 Note: The Approximate Gross Floor Areas shown above are based on accountable gross floor area of the relevant building and rounded to the nearest 1,000 ft2. Hysan Annual Report 2011 29 Management’s Discussion and Analysis Hysan is principally engaged, together with its subsidiaries and associates, in investment, development and management of quality properties in prime locations, and the Group’s turnover and results are primarily derived from leasing of investment properties located in Hong Kong. Throughout the year, our investment property interests totaled some 3.8 million gross square feet of high-quality office, retail and residential space in Hong Kong, excluding Hysan Place at 500 Hennessy Road, which is currently under redevelopment. Review of Results The Group’s turnover continued to record growth and reached HK$1,922 million in 2011, representing an increase of 9.0% from HK$1,764 million in 2010. The rise principally reflected the further improvement in occupancy and positive rental reversion. Higher retail turnover rent also contributed to the revenue growth of our retail sector. The turnover of each sector was recorded as below: Turnover Growth How is it measured? Rental revenue in 2011 as compared to that in 2010 Occupancy Rate How is it measured? Percentage of total area leased to tenants over total lettable area of each sector Property Expenses Property Expenses as a Percentage of Turnover How are they measured? Principally being costs directly associated with the day-to-day operations of the Group’s property portfolio How is it measured? Calculated by dividing property expenses by turnover Recurring Underlying Profit, arrived at by excluding the fair value change of investment properties and items that are non-recurring in nature (such as gains or losses on disposal of long-term assets; impairment or its reversal; and tax provisions for prior years), was the key measurement of the Group’s core leasing business. In 2011, our Recurring Underlying Profit was HK$1,310 million, up 14.1% from HK$1,148 million in 2010. Our Underlying Profit*, arrived at by excluding the fair value change of investment properties only, was also HK$1,310 million, up 14.1% from HK$1,148 million in 2010. Both profit indicators primarily reflected the improvement in gross profit generated from our core leasing activities. Higher investment income was also recorded. Taking into consideration the fair value change of investment properties, our Reported Profit* was HK$8,545 million, an increase of 122.3% from HK$3,844 million in 2010. Basic earnings per share based on Recurring Underlying Profit correspondingly rose to HK123.92 cents (2010: HK109.15 cents). 2011 HK$ million 2010 HK$ million Change HK$ million Recurring Underlying Profit Underlying Profit Fair value change on investment properties located in – Hong Kong – Shanghai Reported Profit 1,310 1,310 7,177 58 8,545 1,148 1,148 2,469 227 3,844 Change % +14.1 +14.1 162 162 4,708 (169) 4,701 +190.7 -74.4 +122.3 * * In 2011, the Group had applied Hong Kong Financial Reporting Standard 9 (“HKFRS 9”) (as revised in December 2011) prospectively in advance of its effective date of 1 January 2015. Following the application of HKFRS 9, the Group’s Underlying Profit and Reported Profit in 2011 was decreased by HK$31 million as the cumulative gain of HK$33 million on disposal of investments in listed equity securities which would have been reclassified from investments revaluation reserve to profit or loss is now recognised as a transfer from investments revaluation reserve to retained profits, as well as the impairment loss of HK$2 million on investments in unlisted equity securities which would have been recognised as impairment loss in profit or loss is now recognised in investments revaluation reserve. Why is it significant? Reflects the combined effect of changes in rental rate and occupancy rate Performance Growth was recorded in all three leasing sectors Why is it significant? • Rental revenue and Performance • Retail sector was virtually fully-let • Occupancy levels were further improved in both office and residential sectors Office Sector 6.5% for 2011 ( 3.1% for 2010) Retail Sector 12.7% for 2011 ( 8.0% for 2010) Residential Sector 6.5% for 2011 ( 3.2% for 2010) Office Sector 96% at year- end 2011 (95% at year- end 2010) Retail Sector Virtually Fully-Let at year- end 2011 (96% at year- end 2010) Residential Sector 95% at year- end 2011 (94% at year- end 2010) management fees are directly proportional to occupancy rate • Optimises revenue by balancing occupancy rate and rental level Why are they significant? Measures the costs incurred in operating the Group’s property portfolio Performance Property expenses rose principally due to higher marketing expenses (including for new Hysan Place promotion), partly offset by lower agency fees on account of strong occupancy Total Property Expenses HK$262million for 2011 (HK$250 million for 2010) Why is it significant? An indication of the gross margin of our business Performance Ratio improved slightly in 2011 Property Expenses to Turnover Ratio 13.6% for 2011 (14.2% for 2010) O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 31 Management’s Discussion and Analysis Review of Operations All three leasing sectors continued to record growth during the year. The portfolio, strategies and performance of each sector are discussed in detail below. OFFICE SECTOR Hysan owns and manages 2.1 million gross square feet of premium office space in the core commercial district of Causeway Bay. Our office portfolio’s Grade “A” offices (comprising The Lee Gardens, Lee Gardens Two, Sunning Plaza and 18 Hysan Avenue) provide a core location with premium facilities and prestige for tenants and their clients. Other office buildings within our portfolio (comprising One Hysan Avenue, 111 Leighton Road and Leighton Centre) provide quality office space for tenant use. In 2011, we completed the renovation work for Leighton Centre, giving a fresh look to its lobby and common areas. Our office sector’s revenue grew 6.5% to HK$820 million (2010: HK$770 million). Occupancy at year-end 2011 increased to 96%, as compared to 95% on both 30 June 2011 and 31 December 2010. On renewing and negotiating new leases, we achieved positive rental reversion as a whole as compared to rental levels in 2008, the last market peak. This reflects the success of our marketing activities. In particular, the rental level of The Lee Gardens climbed above the peak of 2008, setting the rental tone for the pre-leasing of Hysan Place. The impact of overall positive rental reversion successfully offset the brought forward effect of low rental rates committed during the market troughs of 2009. 32 Hysan Annual Report 2011 O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 33 Our office has a balanced tenant mix. The top four industry groups are insurance, banking and finance, professional and consulting, and high-end retailers. Together they take up around 56.3% of total lettable area, with no single industry group accounting for more than 20% of total lettable area. The charts below illustrate our office portfolio tenant profile as analysed by area occupied. Office Tenant Profile by Area Occupied as at Year- end 19.3% 19.8% 18.5% 18.2% 4.6% 5.1% 5.8% 2011 13.9% 5.2% 4.9% 6.4% 2010 13.9% 8.9% 12.6% 9.1% 14.9% 10.0% 8.9% Insurance Banking and Finance Professional and Consulting High-end Retailers Semi-retail Marketing Consumer Products Trading Others To increase our office portfolio’s longer-term competitiveness, we continued to raise property service standards across our portfolio and form closer tenant relationships. Management’s Discussion and Analysis RETAIL SECTOR Hysan’s retail portfolio, approximately 0.9 million gross square feet in size, takes full advantage of its position in Causeway Bay, Hong Kong’s prime retail area. The Lee Gardens hub (comprising The Lee Gardens, Lee Gardens Two, Sunning Plaza and 18 Hysan Avenue) provides elegant and luxury premium retail spaces for high-end brands, while the Lee Theatre hub (comprising Lee Theatre Plaza, Leighton Centre and One Hysan Avenue) is home to stylish and chic lifestyle shops and renowned restaurants. Riding on strong private consumption on the back of a favourable labour market and increased spending by Mainland tourists in 2011, Hysan’s retail sector revenue recorded strong growth of 12.7% to HK$789 million (2010: HK$700 million). Turnover rent increased significantly by 64.8% to HK$89 million (2010: HK$54 million), further reflecting the benefits generated by buoyant retail sales. Retail spaces were virtually fully-let after the completed renovation of Leighton Centre’s retail podium, as compared to 95% on 30 June 2011 and 96% on 31 December 2010. Tenant sales of our overall retail portfolio recorded an increase of 22.2% over 2010. In 2011, tenant sales of the retail units in The Lee Gardens and Lee Gardens Two increased by 29.1%. Mainland tourist spending in The Lee Gardens and Lee Gardens Two increased by 84% compared to 2010. These results reflect the success of our leasing and marketing strategies, which placed emphasis on reinforcing the luxury positioning of the Lee Gardens hub and rejuvenating the trendy Lee Theatre hub. In the Lee Gardens hub, our tenant mix and facilities were further upgraded to enhance the area’s stylish ambience. We strengthened our customer base and the loyalty of our local shoppers. In addition, we launched promotion activities to target Mainland tourists including conducted tours for members of the Mainland media. These programmes helped stimulate shopper traffic and consumption. In the Lee Theatre hub, the completed renovation of Leighton Centre complemented the arrival of a new fashion flagship store at One Hysan Avenue. These efforts helped redefine the hub as an even more fashionable shopping venue with a new wave of contemporary fashion brands and flagship stores. The completion of these projects paves the way for the next phase of renovation and rejuvenation of Lee Theatre Plaza planned for 2012. 34 Hysan Annual Report 2011 RESIDENTIAL SECTOR Our residential portfolio comprises the Bamboo Grove residential development located in Mid-Levels and Sunning Court in Causeway Bay. We offer top quality facilities and one-stop personalised services to provide an expatriate-focused living experience. Residential leases are typically for two years. The Group’s residential sector’s revenue increased by 6.5% to HK$313 million (2010: HK$294 million). Occupancy remained strong, at 95% at the end of 2011, as compared to 96% on 30 June 2011 and 94% on 31 December 2010. Rising rental levels led to positive rental reversion in 2011. Our tenant retention remained high, reflecting our continued efforts to enhance our facilities, services and clubhouse activities. Refurbishment of selected units has successfully established a new pricing benchmark, surpassing the peak of 2008. Strengthened tenant relations and direct marketing initiatives have helped increase tenant referrals and deals made directly with us. Our team of experienced, bilingual Resident Services Associates will continue to provide personalised assistance to residents, while our regular social and cultural activities will help create a thriving community and foster long-term partnerships with residents. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 35 Management’s Discussion and Analysis HYSAN PLACE The next milestone for Hysan will be the redevelopment project of Hysan Place at 500 Hennessy Road, comprising 15 levels of office space and 17 floors of retail outlets, totaling 710,000 square feet. Hysan Place will bring long-term strategic significance to the overall Hysan portfolio: • Hysan Place’s retail portion will significantly strengthen Hysan’s overall retail portfolio, in terms of both its size, which represents an increase of 50% by gross floor area, and its tenant mix, bringing many tenants which are new to Hong Kong. • Hysan Place will also be an important part of Hysan’s office cluster evolution, providing top quality space to strengthen our Grade “A” office positioning as the most natural extension of Central. Hysan Place will be the only triple A grade building to open on Hong Kong Island in 2012. Its sustainability design features are based on world-class building specifications and the building offers full harbour views from all office floors. • Hysan Place demonstrates Hysan’s commitment to find greener solutions for all our buildings and for Causeway Bay as a whole. The project is built to the highest international environmental and sustainability standards, having achieved pre-certification at the Platinum level for the United States Green Building Council’s Leadership in Energy and Environmental Design (USGBC LEED), as well as the Hong Kong Building Environmental Assessment Method (HK BEAM) standard. With its specially designed “Urban Windows” and roof gardens, Hysan Place is set to become a green landmark in the heart of thriving Causeway Bay. Construction of the building is making good progress. Leasing for the overall building proceeded well during the year, with over 90% of retail space leased by the end of February 2012. The shopping mall is expected to open in August 2012, to allow for better co-ordinated launch of retail outlets from August onwards. The arrangement should better ensure the long-term success of the mall. Our retail tenants will include international brands new to Hong Kong, catering to the needs of trendy shoppers. The entire project promises to bring additional shopping dynamics and an exciting new variety to the district of Causeway Bay. In terms of office leasing, following the commitment to one-third of the entire office space by an international accounting firm, the rest of the office space is under negotiation with prospective tenants. Leasing strategy will balance occupancy and strategic contribution towards further enhancing the tenant profile and hence attraction of our office portfolio. Hysan Place: express escalators in the building facilitate shopper circulation in the vertical mall 36 Hysan Annual Report 2011 Financial Review A review of the Group’s results and operations is covered in the preceding sections. This section deals with other financial matters. OPERATING COSTS The Group’s operating costs were generally classified as property expenses and administrative expenses. Property expenses were the costs directly associated with the day-to-day operations of our investment properties, being primarily related to front-line staff wages and benefits, utilities costs, repairs and maintenance, marketing expenses and agency fees, as well as cleaning expenses. In 2011, higher marketing expenses were incurred for capturing local and tourist spending, as well as for Hysan Place’s pre-leasing promotion activities. These were partly offset by a reduction in agency fees as occupancy and direct marketing further improved. As a result, property expenses rose 4.8% to HK$262 million (2010: HK$250 million). Coupled with the increase in turnover, the property expenses to turnover ratio improved slightly from 14.2% to 13.6% as compared to 2010. Administrative expenses were the costs indirectly associated with the day-to-day operations of our investment properties, largely representing the payroll costs and related expenses of management and head-office staff. In addition to costs for continuing human resources upskilling for Hysan’s existing property portfolio, additional payroll costs were incurred in 2011 for hiring new staff in relation to the upcoming Hysan Place. These factors resulted in administrative expenses increasing by 23.6% to HK$173 million (2010: HK$140 million). FINANCE COSTS Finance costs, after capitalisation of HK$44 million (2010: HK$12 million) interest expenses and related borrowing costs as part of the construction costs of Hysan Place, were HK$122 million in 2011, up 4.3% from HK$117 million in 2010. If the capitalised interest expenses and related borrowing costs were included, the Group’s finance costs in 2011 would have been HK$166 million, an increase of HK$37 million or 28.7% as compared to last year (2010: HK$129 million). It was predominantly due to the increase in the Group’s gross borrowings. During the year, the Group issued notes of HK$554 million from the Medium Term Notes Programme and drew down bank loans of HK$2,350 million, mainly for preparing for the repayment of debts maturing in early 2012. The Group’s average finance costs in 2011 (defined as interest expenses divided by average gross debt for the year) were 2.7%, at a level similar to 2010. Further discussion of the Group’s treasury policy, including debt and interest rate management, is set out in the “Treasury Policy” section on pages 40 to 44. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 37 Management’s Discussion and Analysis REVALUATION OF INVESTMENT PROPERTIES The Group’s investment property portfolio was valued at 31 December 2011 by Knight Frank Petty Limited, an independent professional valuer, on the basis of open market value. The amount of this valuation was HK$49,969 million, an increase of 22.4% from HK$40,833 million at 31 December 2010. The valuation at year-end 2011 principally reflected improved rental rates for the Group’s investment property portfolio as well as the increase in site value of and construction costs expended on Hysan Place, which is near completion. The following shows the property valuation of each portfolio at year-end. Office portfolio Retail portfolio Residential portfolio Property under redevelopment (Hysan Place)* 2011 HK$ million 2010 HK$ million Change HK$ million 16,954 15,089 8,426 9,500 49,969 14,708 11,896 7,821 6,408 40,833 2,246 3,193 605 3,092 9,136 Change % +15.3 +26.8 +7.7 +48.3 +22.4 * Property under redevelopment is valued at site value plus construction costs expended up to date. Excluding capital expenditures for the Group’s property portfolio, fair value gain on investment properties of HK$7,532 million (2010: HK$2,594 million) was recognised in the Group’s consolidated income statement for the year. INVESTMENTS IN ASSOCIATES The Group’s share of results of associates decreased by 35.5% to HK$254 million (2010: HK$394 million), principally due to a smaller revaluation gain on the Shanghai Grand Gateway project, of which the Group owns 24.7%, as compared to last year. At 31 December 2011, properties at Shanghai Grand Gateway had 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$58 million (2010: HK$227 million). The Shanghai Grand Gateway project continued to deliver a good performance in 2011. The Group’s share of results, excluding revaluation gains on investment properties held by the associate, recorded a 17.4% increase year-on-year. As at the end of 2011, the residential properties were continuing to enjoy high occupancy while the retail and office properties remained virtually fully-let. OTHER INVESTMENTS In addition to placing surplus funds as time deposits in banks with strong credit ratings, the Group also invested in highly liquid listed securities, debt securities as well as principal- protected investments. This helped to preserve the Group’s liquidity and to diversify counterparty risk exposure. In 2011, higher interest income from bank deposits was experienced as the average bank deposits rate increased. In addition, higher dividend income was derived from the Group’s equity investments. As a result, the Group’s investment income increased by 83.7% to HK$90 million from HK$49 million in 2010. 38 Hysan Annual Report 2011 CASH FLOwS Cash flow of the Group during the year is summarised below. Operating cash inflow Financing Capital expenditure Investments Interest and taxation Dividends paid and share issues Net cash inflow 2011 HK$ million 2010 HK$ million Change HK$ million 1,592 2,041 (1,547) (1,040) (273) (679) 94 1,460 620 (828) (147) (246) (732) 127 132 1,421 (719) (893) (27) 53 (33) Change % +9.0 +229.2 +86.8 +607.5 +11.0 -7.2 -26.0 Including the movements of working capital, the Group reported operating cash inflow of HK$1,592 million (2010: HK$1,460 million) in 2011, reflecting the growth in our core leasing business and better working capital management. Cash flow from financing rose to HK$2,041 million (2010: HK$620 million), mainly due to new borrowings of HK$2,350 million bank loans and HK$554 million fixed rate notes during the year, which was partly offset by the cash outflow for debts repayment. Capital expenditure in 2011 was HK$1,547 million (2010: HK$828 million), largely used for the payment of construction costs of Hysan Place and other costs for building renovations. Cash used in investments was HK$1,040 million (2010: HK$147 million), of which the majority were time deposits with tenor matching debts maturing in early 2012. CAPITAL ExPENDITURE AND MANAGEMENT The Group is committed to enhancing the asset value of its investment property portfolio through selective refurbishment, repositioning and redevelopment. The Group has also in place a portfolio-wide whole-life cycle maintenance programme as part of its ongoing strategy to pro-actively implement preventive maintenance activities. Total cash outlay of capital expenditure (excluding principally purchase of plant and equipment) during the year was HK$1,520 million (2010: HK$871 million). The rise was mostly attributable to the increase in payments of construction costs for Hysan Place and other renovation costs for Hysan’s existing portfolio. The Group has an internal control system for scrutinising capital expenditures. Detailed analysis of expected risks and returns is submitted to business unit heads, Executive Directors or the Board for consideration and approval, depending on strategic importance, cost/benefit and the size of the projects. The criteria for assessment of financial feasibility are generally based on net present value, payback period and internal rate of return from projected cash flow. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2011 39 Treasury Policy MARKET HIGHLIGHT The global economic recovery remained slow and uncertain in 2011. Concerns about sovereign debt risks in the Euro zone and economic slowdown and high unemployment rates in the developed economies exerted pressure on the financial markets. Although the Asian economies maintained its growth trend in 2011, the pace slowed down as tight liquidity led to depressed financial assets prices and increased borrowing costs in the second half of the KEY PERFORMANCE INDICATORS Average Finance Costs Bank Facilities: Capital Market Issuance Average Debt Maturity Floating Rate Debt (% on Total Debt) Net Interest Coverage Net Debt to Equity The following graph shows the percentages of total outstanding gross debts sourced from banks and the debt capital markets in the past five years. Sources of Financing at Year- end HK$ million 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 75.3% 24.7% 07 75.1% 24.9% 08 62.8% 37.2% 09 Bilateral Bank Loans Capital Market Issuances 70.3% 29.7% 10 56.9% 43.1% 11 The Group also strives to maintain an appropriate maturity profile. As at 31 December 2011, the average maturity of the debt portfolio was about 4.2 years (2010: 4.3 years), of which about HK$2,207 million or 33.4% (2010: HK$2,007 million or 44.2%) of the outstanding debts will be due in less than two years. As the Group has already arranged funding for the repayment of maturing debts in 2012, there is little re-financing pressure for the year. The Group, however, will continue to monitor the financial markets closely to identify the appropriate opportunity to tap the market if needed. The graph below shows the debt maturity profile of the Group at 2011 and 2010 year-end. Debt Maturity Profile at 2011 and 2010 Year- end 1,507 700 2,600 1,803 650 1,357 1,298 1,235 0 1,000 2,000 3,000 4,000 5,000 7,000 Gross Debt Amount (HK$ million) 6,000 Maturing in not exceeding one year Maturing in more than two years but not exceeding five years Maturing in more than one year but not exceeding two years Maturing in more than five years LIqUIDITY MANAGEMENT The Group always places great emphasis on liquidity management in order to withstand any possible liquidity crunch amidst turbulent financial market conditions. Recurring cash flows from our business continued to remain steady and strong. As at 31 December 2011, the Group had cash and bank deposits totaling about HK$2,961 million (2010: HK$1,993 million), which will be used for capital expenditure and maturing debt repayments. All the deposits are placed with banks with strong credit ratings and the counterparty risk is monitored on a regular basis. In order to preserve liquidity and enhance interest yields, the Group also invested HK$1,060 million (2010: HK$725 million) in debt securities and principal-protected investments. Additional liquidity reserve was maintained in the form of highly liquid securities listed on The Stock Exchange of Hong Kong Limited. The market value of these securities amounted to HK$988 million at year-end 2011 (2010: HK$1,147 million). Further liquidity, if needed, is available from the undrawn committed facilities offered by the Group’s relationship banks. These facilities, which amounted to HK$1,000 million at year-end 2011 (2010: HK$2,550 million), essentially allow the Group to obtain additional liquidity as the needs arise. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e G o v e r n a n c e F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n Hysan Annual Report 2011 43 6,6104,54020102011 Management’s Discussion and Analysis INTEREST RATE MANAGEMENT Interest expenses account for a significant proportion of the Group’s total expenses and warrant close monitoring. Appropriate hedging strategies are adopted to manage exposure to projected movements in the interest rates. Despite the tight liquidity in the credit market, 3-month Hong Kong Inter-bank Offered Rate (HIBOR) remained low, hovering between 0.19% and 0.38%. The benefit of low interest rates offset the impact of the slightly increased credit margin of new borrowings. As a result, the Group maintained the average cost of financing at 2.7% in 2011, same as 2010. The Group managed the floating rate debt ratio at 54.8% at year-end 2011, similar to the level of last year-end at 53.6%. The diagram below shows the Group’s debt levels and average finance costs in the past five years. Debt Levels and Average Finance Costs HK$ million 7,000 6,000 5,000 4,000 3,000 2,000 1,000 5.6% 2,921 2,437 4.4% 3,698 3,889 3.1% 1,983 1,905 4,540 2,547 2.7% 07 Year-end Gross Debt 08 09 10 Year-end Net Debt (Gross debt less short-term investments, time deposits, cash and bank balances) 6,610 7.0% 6.0% 5.0% 3,649 4.0% 3.0% 2.0% 1.0% 2.7% 11 Average Finance Costs FOREIGN ExCHANGE MANAGEMENT The Group aims to have minimal mismatches in currency and does not speculate in currency movements for debt management. With the exception of the US$174 million 10-year notes, the US$26 million and AUD37 million bank loans, which have been hedged by appropriate hedging instruments, all of the Group’s other borrowings were denominated in Hong Kong dollars. In regard to foreign exchange exposure on the investment side, the Group’s outstanding investment in time deposits, principal-protected investments and debt securities amounted to US$60 million and RMB317 million, of which US$55 million and RMB167 million were hedged by foreign exchange forward contracts. Other foreign exchange exposure mainly relates to investments in the Shanghai project. These foreign exchange exposures amounted to the equivalent of HK$3,423 million (2010: HK$3,153 million) or 5.8% (2010: 6.5%) of total assets. USE OF DERIVATIVES As at 31 December 2011, outstanding derivatives mainly related to the hedging of interest rate and foreign exchange exposures. Strict internal guidelines have been established to ensure derivatives are used mainly to manage volatilities or adjust the appropriate risk profile of the Group’s Treasury assets and liabilities. Before entering into any hedging transaction, the Group will ensure that its counterparty possesses strong investment-grade ratings to control credit risk. As part of our risk management, a limit on maximum risk-adjusted credit exposure is assigned to each counterparty, which reflects the credit quality of the counterparty. 44 Hysan Annual Report 2011 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. 2011 Review of Internal Controls Effectiveness The Board is responsible for the Group’s system of internal controls and for reviewing its effectiveness. Internal Audit reports on reviews of the business processes and activities, including action plans to address any identified control weaknesses. Management assesses and presents to the Audit Committee its own assessments of the strengths and weaknesses of the overall internal controls systems, with action plans to address the weaknesses. External auditors also report on any control issues identified in the course of their work. Taking these into consideration, the Audit Committee reviews the effectiveness of the Group’s system of internal controls at least once each year and reports to the Board on such reviews. In respect of the year ended 31 December 2011, the Board considered the internal controls system effective and adequate. No significant areas of concern that might affect the operational, financial reporting, and compliance functions of the Group were identified. The scope of this review covers the adequacy of resources, qualification/experience of staff of the Group’s accounting and financial reporting function, and their training and budget. 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 five 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 organisational structure and the nature of our 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 that 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 the Audit Committee Chairman. We aim to build risk awareness and control responsibility into our culture and regard them as the foundation of our internal controls system. • Control Activities --- our core property leasing and management business involves well- established business processes. Control activities have traditionally been built on top-level reviews, segregation of duties; and physical controls. Over the past few years, we have been formalising and documenting the control processes in line with a general desire to move towards a management style based on systematic and structured control principles. During 2011, we established a plan, and are in progress of further strengthening the use of automation (information processing) in phases. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 45  1 • d e v e i h c a y H e t a r o p r o c e n fi e R s s e n i s u b c s s C i c e p n i s m e n i m o t g n i t r o p e r f d e r u t c u r t •2012 focus: more frequent and s e c n a n r o d o o g g n i s i s a h p m o e c • • • m t n e m e v e r a s e v i t c r e e j h b o t e e g t o a t r o k p r r o o w c e h t g n i t c a p m n y o l l a d i e t n s e a t b o p s e s v e i t g i c n e a j b h o c a r o C e t a r o p s l n ’ o n r e e D Environ Documented key control • operate information r t n o c l a s a t i t g n i r o M n o i 2f cor porate o ment of objectives rol ont r o : m e t s y n s s E e v e v C i a c tion i n u m m C o i e o s d t a f f e h d n e a t a y l g e i t t t i a m r a , p r e e s h t n h e t g o o b t e m s t r A o e r t n c l i t a p 20 e d n d a n d a r a e e e n i o - e e B t t Identify andanalyse risks to achi t t Annual review update of risk registers by d i i y m m b m m t h o o g C C i s t t Determine e r i i how each of the other internalcontrols components, d d e such risks t e •has five components that policies and processes •is designed to ensure and communication to support internal controls•Internal audit function impact of such identified risks on the achie Human resources policies Strong tradition of u u v Implement and objectives rporate g Board of cor ve ev e D O A A v r i n m t e e t d n a n o i t r t o n f I e t p y t e c j b O S a e o r Internal Controls and Risk Management Currently, the key features of our system of internal controls include: – Strategic and business planning: each business unit produces and obtains Board approval on a business plan each year, against which its performance is regularly monitored. Targets for a wide variety of key performance indicators are set. There is a Schedule of Matters Reserved for the Full Board to cover all major policies and directions of the Group. (See the separate Corporate Governance Report for details) – Investment appraisal: capital projects are reviewed in detail and approved by the Chief Executive Officer, or the Board where appropriate, in accordance with delegated authority limits. – Financial monitoring: profitability, cash flow and capital expenditure are closely monitored and key financial information is reported to the Board on a regular basis, including explanations of variances between actual and budgeted performance. – Systems of control procedures and delegated authorities: there are clearly defined guidelines and approval limits for capital and operating expenditure and other key business transactions and decisions. Our Approach to Risk Management We maintain a simple and practical approach to risk management. Given the size and nature of our business, we do not have a separate risk management function. Instead, we seek to have risk management features embedded in our operations. The following summarizes our process to identify, evaluate, and manage the risks faced by the Group. Methodology: We capture and report risk in a consistent manner across the Group by way of “risk registers”, enabling management to assess the significance of risks by considering the relationship between the likelihood and consequence of their occurrence. We monitor and report risk as appropriate on both “Inherent” and “Residual” risk bases, the latter reflecting how management has reduced risks through appropriate controls and mitigating activities. Annual assessments: department heads review and update the relevant risk registers once a year, providing assurances that controls are both embedded and effective within the business. Potential weaknesses and action items are regularly monitored by the management team. Internal audit: responsible for reviewing and testing key business processes and controls in accordance with its audit plan, including following up the implementation of management actions and reporting any overdue actions to the Audit Committee. The Head of Internal Audit reports to the Chief Executive Officer and has direct access to the Audit Committee Chairman. Way Forward We recognise that the strengthening of internal controls is a continuing process. We shall continually review our business processes and control activities accordingly. During 2012, our focus will centre around the following directions: • Risk Identification and Assessment • Control Activities We shall further refine the risk registers in phases by adopting a more risk-based approach, with clearer description of specific year- on-year risks. Training sessions and workshops will be provided to department heads, with guidance, facilitation, and discussions throughout the process. We shall continue to enhance our Control Activities by refining our documented policies and procedures, including greater use of automation (information processing). There will be a greater use of performance indicators, also facilitating top-level reviews. • More Structured and Frequent Reporting to Audit Committee In addition to meetings scheduled primarily for reviewing annual and interim results, an additional Audit Committee meeting will be held to review and monitor risk management activities. Management will report on progress in action plans against our principal risks. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 47 Human Resources Hysan’s people are a highly valuable asset and the key to our continuous growth and success. We believe in teamwork and the development of talents. As at 31 December 2011, we employed a total of 541 staff, including our head office management team and front-line building management colleagues. Our workforce adheres strongly to the Group’s core values of maintaining high standards of business ethics and deep respect for each individual staff member. Building and Engaging a Strong Team Hysan’s team is strengthened from time to time by new members at all levels who enhance our capability to meet the Group’s strategic objectives. Integration of teamwork by all staff members is key to ensuring that we achieve sustainable growth. To this end, a key activity to help build a winning team is the annual Company Day, an off-site one-day staff meeting attended by all head office staff and front-line building managers. With the motto “Together We Can Take the Lead”, the Company Day provides an excellent platform to communicate the Group’s directions and objectives for the year from the senior management to staff, and to align company goals with those of each individual. A key component of the Company Day is the afternoon team-building session. Staff members participate in fun-filled activities that inspire better communication and encourage more effective cooperation to help maximise individual contributions to the Group. Engaging closely with staff members plays an important role in achieving business success. Among various engagement channels, our staff briefing sessions on company annual and interim results hosted by senior management are useful avenues for employees to share success, obtain updates and provide feedback. Chairman shares her vision on the Company Day An enthusiastic team participates in games on the Company Day Staff members share success at the annual results staff briefing hosted by top management 48 Hysan Annual Report 2011 Talent Management Our people management strategy focuses on creating a talented organisation by attracting, retaining and developing high-performing employees. ATTRACTING THE BEST TALENTS Hysan attracts talents by providing them with a motivating work environment that fosters open communication. The year 2011 saw intensive efforts made to attract new talents in preparation for the opening of Hysan Place, our key redevelopment project to be completed in 2012. More than 100 new career opportunities were offered at the operational level including the areas of customer service, property management and technical support, as well as at the management level with marketing and retail leasing being particularly important. To meet demand for a strengthened team, we launched a hiring campaign by expanding recruitment channels, including Recruitment Days and employee referrals. RETAINING AND DEVELOPING OUR STAFF To create a culture of high performance, we focus on a strong performance management process to ensure that employee performance is objectively assessed and rewarded. We adopt the principle of “reward for performance” to motivate our employees and recognise their contribution. In addition, we are committed to investing in our people and to helping them pursue career paths that match their aspirations. We promote continuous learning and offer a well-designed training curriculum for managerial and general staff to upgrade their competencies and capabilities. The training programmes include specialised business-related workshops such as Finance for Non-finance Managers, and Sales Behaviour for Success, both of which aim to enhance the professional training of staff. Operational training courses covering customer services and the development of service standards are organised on an on-going basis. We also offer training sponsorships to encourage our staff to remain well informed about the industry and to enhance their professional skills and knowledge. A focus of operating staff development in 2011 was the preparation for the opening of Hysan Place. As Hysan Place features a 17-floor shopping mall and prime offices of sustainable design, operating staff are provided with training to equip them with skills and new knowledge related to green features for offices, technical features designed for a vertical shopping mall, and electronic applications that aim at enhancing shoppers’ experiences. Way Forward As Hysan’s portfolio continues to evolve with the completion of Hysan Place, our human capital is playing an increasingly instrumental role in ensuring our sustainable development and future success. Collaborative teamwork and people development will continue to be central pillars for supporting the Group’s transformation and for nurturing the next generation of Hysan leaders to maintain the succession pipeline. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 49 3 Corporate Governance This section introduces our Board of Directors and senior management, and gives an account of our governance structure and systems. It explains our best practices in corporate governance in place and reviews the Board’s work focus in 2011. 50 Hysan Annual Report 2011 52 Board of Directors and Senior Management 56 Corporate Governance Report 73 Directors’ Report 81 Directors’ Remuneration and Interests Report 89 Audit Committee Report C o r p o r a t e G o v e r n a n c e Hysan Annual Report 2011 51 Board of Directors and Senior Management THE BOARD MANAGEMENT Audit Committee Remuneration Committee Nomination Committee Strategy Committee (A) (R) (N) (S) Finance Corporate Services Property Investment Property Services Property Development Chairman (chairing N, S) Irene Yun Lien LEE Ms. Lee is the non-executive chairman of Keybridge Capital Limited, a financial services company listed on the Australian Stock Exchange, a non-executive director of Cathay Pacific Airways Limited, QBE Insurance Group Limited (listed on the Australian Stock Exchange) and Noble Group Limited (listed on Singapore Exchange Limited). She is a member of the Advisory Council of JP Morgan Australia. She has held senior positions in investment banking and fund management in a number of renowned international financial institutions. Previously, Ms. Lee has been an executive director of Citicorp Investment Bank Limited in New York, London and Sydney; head of corporate finance at Commonwealth Bank of Australia and chief executive officer of Sealcorp Holdings Limited, both based in Sydney; and a non-executive director of ING Bank (Australia) Limited and The Myer Family Company Pty Limited. Ms. Lee was formerly a member of the Australian Government Takeovers Panel. She is a member of the founding Lee family, a sister of Mr. Anthony Hsien Pin LEE (Non-executive Director) and his alternate on the Board. Ms. Lee holds a Bachelor of Arts Degree from Smith College, United States of America, and is a Barrister-at-Law in England and Wales and a member of the Honourable Society of Gray’s Inn, United Kingdom. She was appointed a Non-executive Director in March 2011 and became Non-executive Chairman in May 2011. She was appointed Executive Chairman in March 2012. She is aged 58. 52 Hysan Annual Report 2011 Non-executive Deputy Chairman (S) Siu Chuen LAU Mr. Lau is a private investor. Previously, he has worked as a management consultant at McKinsey & Company, a consumer analyst at Morgan Stanley Asia, and a brand manager of a French luxury product. He subsequently co-founded and became a Responsible Officer of a SFC licensed investment advisory firm. Mr. Lau was the acting Head of Finance of Hysan Group in 1999. He is a member of the founding Lee family and an alternate director of Lee Hysan Company Limited, a substantial shareholder of the Company. Mr. Lau holds a Bachelor of Social Sciences Degree in Management and Economics from The University of Hong Kong, and a Master of Business Administration Degree from INSEAD, France. He was appointed a Non-executive Director in May 2011 and became Non-executive Deputy Chairman in March 2012. He is aged 53. Chief Executive Officer (S) Gerry Lui Fai YIM Mr. Yim leads the management team and is responsible for the entire Group’s business and development. Prior to joining Hysan, he was managing director (for the Americas, Middle East and Africa) of the ports division of a conglomerate and has held senior positions in general management, finance, and investment banking at major organisations in Hong Kong. Mr. Yim holds a Bachelor’s degree in Economics from the University of Leeds, United Kingdom. He is a member of the Institute of Chartered Accountants in England and Wales and the Hong Kong Institute of Certified Public Accountants. He was appointed Executive Director in December 2009 and Chief Executive Officer in March 2010. He is aged 52. Independent non-executive Director (N, S, chairing A) Nicholas Charles ALLEN Mr. Allen is an independent non-executive director of CLP Holdings Limited, Lenovo Group Limited and VinaLand Limited. He has extensive experience in accounting and auditing and was a partner of PricewaterhouseCoopers (PwC) from 1988 until his retirement in June 2007. His other appointments in Hong Kong prior to his retirement from PwC included: Member of the Securities and Futures Appeal Panel; Member of the Takeovers & Merger Panel; Member of the Takeovers Appeal Committee; Member of the Share Registrars’ Disciplinary Committee and Member of the Disciplinary Panel of the Hong Kong Institute of Certified Public Accountants. Mr. Allen holds a Bachelor of Arts degree in Economics/Social Studies from Manchester University, United Kingdom. He is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. He was appointed an Independent non-executive Director in November 2009 and is aged 56. Independent non-executive Director (A, N, S, chairing R) Philip Yan Hok FAN Mr. Fan is a non-executive director of China Everbright International Limited, an independent non-executive director of HKC (Holdings) Limited, an independent director of Zhuhai Zhongfu Enterprise Co. Ltd. and Goodman Group. Mr. Fan holds a Bachelor’s Degree in Industrial Engineering and a Master’s Degree in Operations Research from Stanford University, as well as a Master’s Degree in Management Science from Massachusetts Institute of Technology. He was appointed Independent non-executive Director in January 2010. He is aged 62. Independent non-executive Director (R, N) joseph Chung Yin POON Mr. Poon is group managing director and deputy chief executive officer of a private company and an independent non-executive director of AAC Technologies Holdings Inc. He was formerly managing director and deputy chief executive of Hang Seng Bank Limited and had held senior management posts in HSBC Group and a number of international renowned financial institutions. Mr. Poon is a member of the Board of Inland Revenue of Hong Kong Special Administrative Region and the Environment and Conservation Fund Investment Committee, also a committee member of the Chinese General Chamber of Commerce. He was the former chairman of Hang Seng Index Advisory Committee, Hang Seng Indexes Company Limited. Mr. Poon holds a Bachelor of Commerce degree from the University of Western Australia, is a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants in Australia. He was appointed Independent non-executive Director in January 2010. He is aged 57. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 (A) Audit Committee (R) Remuneration Committee (N) Nomination Committee (S) Strategy Committee Hysan Annual Report 2011 53 Board of Directors and Senior Management Non-executive Director Hans Michael jEBSEN B.B.S. Non-executive Director (R) Michael Tze Hau LEE 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 55. Non-executive Director (A) 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 films. He is also a non-executive 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, the brother of Ms. Irene Yun Lien LEE 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 54. Non-executive Director (N, S) Chien LEE Mr. Lee is a private investor and a non-executive director of Swire Pacific 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 58. Mr. Lee is currently the managing director of MAP Capital Limited, an investment management company. He is also an independent non-executive director of Hong Kong Exchanges and Clearing Limited, Chen Hsong Holdings Limited, Trinity Limited; and a Steward of The Hong Kong Jockey Club. Mr. Lee was an independent non-executive director of Tai Ping Carpets International Limited and a member of the Main Board and Growth Enterprise Market Listing Committees of The Stock Exchange of Hong Kong Limited. 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 joined the Board in January 2010 having previously served as a Director from 1990 to 2007. Mr. Lee received his Bachelor of Arts Degree from Bowdoin College and his Master of Business Administration Degree from Boston University. He is aged 50. Executive Director and Company Secretary wendy wen Yee YUNG Ms. Yung joined the Group in 1999 and was appointed an Executive Director in 2008. She advises the Board on all matters of corporate governance, and is responsible for the Group’s shareholder communications and key stakeholder relations management. In addition, she has an oversight of all aspects of the Group’s legal matters. As a member of the management team, she participates in the Group’s strategic planning matters. Ms. Yung holds a Master of Arts degree from Oxford University, United Kingdom and is qualified as a solicitor of the Supreme Court of England and Wales as well as High Court of Hong Kong. She was a partner of an international law firm prior to joining the Group. Ms. Yung is also qualified as a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants, and sits on the Institute’s Professional Accountants in Business Leadership Panel. Her public services include serving as a member of the Securities and Futures Appeal Panel, and a member of the Hong Kong Selection Committee of the Rhodes Scholarships. She is aged 50. (A) Audit Committee (R) Remuneration Committee (N) Nomination Committee (S) Strategy Committee 54 Hysan Annual Report 2011 O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 Senior management team (from left) Lai Kiu CHAN Wendy Wen Yee YUNG Gerry Lui Fai YIM Cissy Ching Sze CHAN Roger Shu Yan HAO Director, Retail Portfolio and Marketing Cissy Ching Sze CHAN Chief Financial Officer Roger Shu Yan HAO Mr. Hao is responsible for the Group’s financial control, treasury and information technology function. 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 Certified Accountants and an Associate of the Hong Kong Institute of Certified Public Accountants. Mr. Hao accumulated extensive experience in auditing, financial management and control, while holding senior positions in multinational corporations. He is aged 46. 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 46. Director, Design and Project Lai Kiu CHAN 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 qualified 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 49. Hysan Annual Report 2011 55 Corporate Governance Report Refreshing of the Board and Board Leadership Hysan believes that embracing strong governance is the foundation to delivering on its strategic objective of consistent and sustainable performance over the long term. At the heart of Hysan’s governance structure is an effective Board that is committed to upholding strong governance principles and to reinforcing Hysan’s long-established and deeply engrained corporate governance tradition and culture of accountability, transparency and integrity. We recognise the importance of having a broad complement of skills, experience and competencies on our Board to ensure the continued effective oversight of, and informed decision making with respect to, issues affecting Hysan. We are committed to continuing Board renewal to ensure that the Board is infused with fresh perspectives from time to time and that it always has the necessary skills and attributes required to oversee and govern in the ever-changing operating environment. Since October 2009, six Non-executive Directors with backgrounds in the areas of finance, general management and professional practices have joined our Board. Irene Yun Lien LEE was appointed Non-executive Chairman in May 2011, succeeding Sir David AKERS-JONES who has served the Board for over 20 years in a number of capacities. Gerry Lui Fai YIM, Chief Executive Officer, has resigned from the Board effective as from the conclusion of the Annual General Meeting (“AGM”) to be held on 14 May 2012. Effective 8 March 2012, the Chairman will assume an executive capacity. In addition to her role in leading the Board, she will advise, support and coach the management team, particularly regarding the long-term strategic development of the Group and management matters that drive shareholder value. Siu Chuen LAU, currently Non-executive Director, will be appointed Non-executive Deputy Chairman at the same time, to deputize and support the Chairman in her Board leadership role. Meeting and Exceeding Compliance Requirements 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 “HKSE”), with the exception that its Remuneration Committee (established since 1987) has the responsibility of determining compensation at Executive Director-level only. The Board is of the view that, in light of the current organisational structure and the nature of Hysan’s business activities, this arrangement is appropriate. However, the Board will continue to review this arrangement going forward in light of the evolving needs of the Group. The Board has reviewed the composition of the Remuneration Committee. Philip Yan Hok FAN and Joseph Chung Yin POON, both being Independent non-executive Directors, were appointed Committee chairman and member respectively in March 2012. The other member is Michael Tze Hau LEE, Non-executive Director. Hysan’s system of corporate governance practices exceed the Corporate Governance Code in a number of key areas, some of which are contained in the new Code Provisions effective 1 April 2012 (“New April Code Provisions”). 56 Hysan Annual Report 2011 Exceeded Code Provisions Best Practices in Corporate Governance in Place at Hysan ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ The Board first established a formal Corporate Governance Policy* in 2004. (It is a New April Code Provision that the Board takes special responsibilities for corporate governance.) The Board has established formal mandates and responsibilities* for itself, with a clear division of roles with management. The Board’s responsibilities in the formulation of strategy, in addition to its monitoring function, are expressly provided for. The Board has established formal criteria and requirements* for Non-executive Director appointments. Newly appointed Non-executive Directors are given formal letters of appointment, which address (among other things) the expected time commitment of the Non-executive Director. (Time commitment of directors is a New April Code Provision.) Board evaluation: The Chairman and Non-executive Directors meet at regularly scheduled sessions without management presence. (Board evaluation is a recommended best practice as from April 2012.) We have three Corporate Governance-related Committees, being the Audit Committee, Remuneration Committee and Nomination Committee. The Terms of Reference* of each Corporate Governance Committee provides for in-camera meetings without management presence to further encourage objective and independent discussions and assessment. The Audit, Remuneration, and Nomination Committees currently have a majority of Independent non-executive Directors. (Formation of a nomination committee is a New April Code requirement.) The Audit Committee meets the external auditors twice annually without management presence. (Such meeting frequency is a New April Code requirement.) The Group has a written Code of Ethics* applicable to all staff and Directors. Monitoring of the “whistle blowing” mechanism is performed by an external independent third party provider to further enhance independence. Such service provider reports directly to the Audit Committee. (The establishment of a “whistle blowing” policy is a proposed recommended best practice effective April 2012.) 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 stakeholder communications and the determination of price sensitive information in order to ensure consistent and timely disclosure and fulfillment of the Group’s continuous disclosure obligations. The Group has established an Auditor Service Policy* to identify areas of conflict and prohibit the 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) Internal Controls and Risk Management Report. The Group has a formal Corporate Responsibility Policy and publishes a separate Corporate Responsibility Report. Since 2004, the Group has operated a new form of AGM that goes beyond discharging statutory business by including a detailed business review. All voting at AGMs has been conducted by poll since 2004. The Group has initiated and funded a programme inviting major nominee companies to proactively forward communication materials to the ultimate beneficial shareholders at the Group’s expense. In 2012, the Group published its annual results within 70 days, well within the required time period of three months from the end of accounting period. 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 the Corporate Governance Committees are posted and publicly available. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 * Detailed policies/terms of reference are available on the Company’s website: www.hysan.com.hk. Hysan Annual Report 2011 57 Corporate Governance Report What the Board has done during 2011 During the year, 4 Board meetings were held. The focus of these meetings included the following topics of discussion and yielded the following results: 1. Leadership • appointment of Non-executive Chairman • appointments of new Board members who bring new insights to the Board • reviewed composition of Board Committees 2. Strategy • reviewed strategic plans for the Group’s core leasing (Office, Retail, and Residential segments) to meet short-term objectives and to strengthen medium-term competitiveness • ongoing assessment of Hysan Place project, with a view to enabling it to take the Group to another level of commercial success and sustainability • reviewed the positioning of our core property portfolio in Causeway Bay as a choice location for work and play; and management’s plan to further strengthen its branding and marketing • reviewed further opportunities in our core property portfolio with management Roles of Board • Strategic Planning • Internal Controls and Risk Management • Culture and Values • Capital Management • Corporate Governance • Board Succession 3. Risk Management • Audit Committee received presentation on best practices in risk management and endorsed management’s plans to further strengthen the risk identification and assessment process, and to adopt more frequent and structured reporting to the Audit Committee and the Board 4. Relations with Shareholders • investor relations added as standing item for each Board meeting • investor relations reports describing investor and analyst opinions are provided regularly to the Board • enhanced investor relations programme to • assessed effectiveness of financial controls, and expand coverage by analysts other internal controls (Please refer to separate “Internal Controls and Risk Management Report”) • legal and regulatory compliance added as standing item for each Board meeting 58 Hysan Annual Report 2011 Governance Framework The Group operates within a clear governance structure, which is illustrated in the diagram that follows. Shareholders Auditors Board of Directors Management Audit Committee Remuneration Committee Nomination Committee Strategy Committee We also ensure the presence of a capable and qualified Board with diverse backgrounds and skills. Over the years, the Board has developed, maintained and continues to supplement a robust set of governance policies and procedures as the basis of our governance system. Hysan’s governance framework serves as a guide for the Board and management in the performance and fulfillment of their respective obligations to Hysan and its stakeholders. The guidelines, policies, and procedures which form this framework (as listed below) work together to ensure the existence of a capable and qualified Board with diverse backgrounds and skills, the establishment of appropriate roles for the Board and various committees, and a collaborative and constructive relationship between the Board and management. As part of its ongoing review, the Board regularly assesses and enhances its governance practices and principles in light of regulatory regimes, international best practices, as well as Company needs. 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 the various corporate governance related Board Committees • Code of Ethics for Employees • Auditor Service Policy • Corporate Disclosure Policy These are reviewed periodically and a comprehensive review is scheduled for early 2012 in light of Board changes and the coming on board of Executive Chairman and Non-executive Deputy Chairman as from March. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 59 Corporate Governance Report Board Leadership BOARD SIzE AND COMPOSITION During the year, there are eleven Directors on the Board throughout: the Chairman, eight other Non-executive Directors (including three Independent non-executive Directors) and two Executive Directors. The roles of the Chairman and the Chief Executive Officer are currently separate. The Board will review its size and composition from time to time to ensure there is an appropriate and diverse mix of skills and experience. During the year, the following changes were made: • Sir David AKERS-JONES stepped down from the conclusion of the AGM held on 9 May 2011 and was succeeded by Irene Yun Lien LEE. • Deanna Ruth Tak Yung RUDGARD also stepped down as Non-executive Director and Siu Chuen LAU was appointed Non-executive Director as from the conclusion of the 2011 AGM. Further description of the backgrounds of the Non-executive Directors is set out in the section “Board Effectiveness – Skills and Balance” below. Non-executive Directors are appointed for a term of 3 years and are required to submit their candidacy for re-election at the first AGM following their appointment. Under the Group’s Articles of Association, every Director will be subject to retirement by rotation at least once every 3 years. Retiring Directors are eligible for re-election at the AGM at which he retires. There is no cumulative voting in Director elections. The election of each candidate is done through a separate resolution. At the AGM to be held on 14 May 2012, Nicholas Charles ALLEN, Philip Yan Hok FAN, Anthony Hsien Pin LEE and Siu Chuen LAU will retire and, being eligible, offer themselves for re-election. Gerry Lui Fai YIM will not seek re-election and will step down from the Board. Details with respect to the candidates standing for election as Directors are set out in the AGM circular to shareholders. 60 Hysan Annual Report 2011 Board and Management At the core of our governance structure is our Board, which is accountable to shareholders for the long-term performance of the Company. The Board relies on management for the day-to-day operation of the business. It monitors what management is doing, and holds them accountable for the performance of the Company as measured against established targets. In terms of strategy formulation, the Board works closely with management in thinking through our direction and long-term plans, as well as the various opportunities and risks associated therewith and facing the Company generally. The Non-executive Directors provide independent challenge and review, bringing a wide range of experiences, specific expertise, and fresh objective perspectives. As members of the various Board committees, they also undertake detailed governance work with a particular focus as noted under the respective terms of reference of the various Board committees. The Board and management fully appreciate their respective roles and are supportive of the development and maintenance of a healthy corporate governance culture. The role of the Board is governed by a formal Board of Directors Mandate (details are also available on the Company’s website: www.hysan.com.hk), which sets out the key responsibilities of the Board in fulfilling its stewardship roles. These are strategic planning, internal controls and risk management, culture and values, capital management, corporate governance, and Board succession. Best Corporate Governance Disclosure Awards 2011: Non-Hang Seng Index (Large Market Capitalisation) Category – Platinum Award Organised by the Hong Kong Institute of Certified Public Accountants “The company’s mission and values prefaced the report, with its aim to be a responsible business, fostering the highest standard of ethics and accountability and developing thought leadership and partnerships with stakeholders, whilst giving back to the community.” - Judges’ Report O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 61 Corporate Governance Report Schedule of Corporate Matters Reserved for the Board A detailed list of Matters Reserved for Board Decisions sets out the key matters that are to be retained for the decision of the full Board. These include the following: General • Long term objectives and strategies • Extension of activities into new business areas / cease to operate any material part of existing business Structure and capital • Capital management framework and policy; material changes to capital structure • Changes to the Company’s listing status Financial reporting and controls • Announcements of results; annual report and accounts; dividends • Treasury policies; annual funding plan and annual treasury investment plan • Material banking facilities; material treasury investment transactions • Annual operating and capital expenditure budgets • Material acquisitions / disposals of fixed assets Internal controls and risk management Approval of resolutions and corresponding documentation for shareholder approval Board membership and other appointments Remuneration • Remuneration policy for Chairman, Executive Directors; and non-executive director fee • New share incentive plans or major changes • Major changes to rules of pension scheme • Key terms of new compensation and benefit plans with material financial, reputational or strategic impact Delegation of authority by Board Corporate governance matters Major prosecution, defence or settlement of litigation Where applicable, “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. These thresholds are subject to review periodically and in any event, at least once a year. 62 Hysan Annual Report 2011 Board Effectiveness SKILLS AND BALANCE During 2011, we have 9 Non-executive Directors, drawn from diverse and complementary backgrounds: Primary Background Names General management Philip Yan Hok FAN, Irene Yun Lien LEE, Joseph Chung Yin POON Finance and investment Chien LEE, Anthony Hsien Pin LEE, Irene Yun Lien LEE, Joseph Chung Yin POON, Michael Tze Hau LEE, Siu Chuen LAU Consumer products, marketing and distribution Hans Michael JEBSEN, Siu Chuen LAU Professional Nicholas Charles ALLEN (accounting) (Directors’ full biographies are set out on pages 52 to 54 and are also available on the Company’s website: www.hysan.com.hk.) INDEPENDENCE The Board has established “independence” standards as contained in our Corporate Governance Guidelines. It considers “independence” to be a matter of judgment and conscience. A Director is considered to be independent only where he or she is free from any business or other relationship that might interfere with the exercise of his or her 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. Independent non-executive Directors are identified in our Annual and Interim Reports and other communications with shareholders. The Board carried out a detailed review of director independence in March 2012. It concluded that each of the 3 Independent non-executive Directors was independent as at that time. The Board will continually monitor and review whether there are relationships or circumstances that are likely to affect (or could appear to affect) independence. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 63 Corporate Governance Report Independence Status Name Management Independent Independent Reason for Independence Status Not March 2012 Review- ✓ ✓ ✓ N/A 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 Sir David AKERS-JONES (up to 9 May 2011) Nicholas Charles ALLEN Philip Yan Hok FAN Hans Michael JEBSEN Siu Chuen LAU Anthony Hsien Pin LEE Chien LEE Irene Yun Lien LEE Michael Tze Hau LEE Joseph Chung Yin POON ✓ Dr. Deanna Ruth Tak Yung RUDGARD (up to 9 May 2011) Gerry Lui Fai YIM Wendy Wen Yee YUNG ✓ ✓ SUPPLY OF INFORMATION The Board recognises the significance of providing timely and relevant information to Non-executive Directors so as to enable them to discharge their duties effectively. The Board regularly receives presentations, including from non-Board management members, on significant issues or new opportunities for the Group. This also facilitates the build-up of constructive relations and dialogue between the Board and the management team. SUPPLY AND ACCESS TO INFORMATION The Board receives detailed quarterly reports from members of 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. Monthly reports to Non-executive Directors are issued, covering financial and operating highlights. Directors are also kept updated of any material developments from time to time through notifications and circulars detailing the relevant background and explanatory information. Directors also have access to non-Director members of management and staff where appropriate. Collectively, these processes ensure that the Board receives the answers and information it needs to fulfill its obligations. 64 Hysan Annual Report 2011 INDEPENDENT ADVICE The Board recognises that there may be occasions when one or more Directors feel that it is necessary to obtain independent legal and/or financial advice for the purposes of fulfilling their obligations. Such advice may be obtained at the Company’s expense and there is an agreed upon procedure to enable Directors to obtain such advice, as stated in our Corporate Governance Guidelines. INDUCTION, BUSINESS AwARENESS AND DEVELOPMENT Upon 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 businesses, the operations of the Board and the main issues it faces, as well as an overview of the additional responsibilities of Non-executive Directors. Discussion sessions with key members of management are also held. Through the course of their directorship, Directors are updated on any developments or changes affecting the Company and their obligations to it at regular Board meetings. In order to ensure that Directors continue to further their understanding of the issues facing the Group, we shall further strengthen the provision of management presentations, visits, and training sessions to our Directors. These will include visits to our property portfolio, presentations on market environment affecting the property leasing industry, and expert presentations on regulatory issues. EVALUATION Hysan evaluates the performance of the Board and members of management at meetings between the Chairman and Non-executive Directors without the presence of management. The table overleaf sets out the number of meetings of the Board and its committees in 2011, individual attendance by Board and committee members at these meetings and the attendance of the Board members at the 2011 AGM. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 65 Corporate Governance Report Directors Executive Gerry Lui Fai YIM Wendy Wen Yee YUNG Independent non-executive Sir David AKERS-JONES ( Nicholas Charles ALLEN Philip Yan Hok FAN Joseph Chung Yin POON Non-executive Hans Michael JEBSEN Irene Yun Lien LEE Siu Chuen LAU Anthony Hsien Pin LEE Michael Tze Hau LEE Chien LEE Dr. Deanna Ruth Tak Yung RUDGARD Board Audit Committee Remuneration Committee Strategy Committee AGM 4/4 4/4 2/2 4/4 4/4 3/4 4/4 3/3 2/2 4/4 4/4 4/4 2/2 4/4 4/4 2/2 2/2 4/4 2/2 3/3 2/2 1/1 3/3 3/3 2/2 1/2 3/3 3/3 1/2 2/2 3/3 – 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 – 1/1 1/1 1/1 1/1 1. The attendance figure represents actual attendance / the number of meetings a Director is entitled to attend. 2. On 9 March 2011 and 9 May 2011, Irene Yun Lien LEE and Siu Chuen LAU were appointed Directors respectively. 3. The Strategy Committee convened its first meeting in March 2011. Invitation to attend was extended to all Board members as from May 2011 onwards. 4. Sir David AKERS-JONES stepped down as Board Chairman, Chairman of the Remuneration Committee, Nomination Committee and Strategy Committee on 9 May 2011. Dr. Deanna Ruth Tak Yung RUDGARD stepped down as a Director on 9 May 2011. Board Committees in 2011 In order to provide effective oversight and leadership and pursuant to its Corporate Governance Guidelines, the Board has established 3 governance-related Board Committees as detailed below. Like the Board, each Committee has access to independent advice and counsel as required and each is supported by the Company Secretary. The terms of reference of these Committees are available on the Company’s website. In addition, the Board established a Strategy Committee to review the long-term strategy of the Group. It is currently chaired by Irene Yun Lien LEE, Board Chairman, and its other members are Nicholas Charles ALLEN, Philip Yan Hok FAN, Siu Chuen LAU, Chien LEE and Gerry Lui Fai YIM (Chief Executive Officer). During the year, 3 meetings were held, with invitations extended to all Board members as from May 2011. 66 Hysan Annual Report 2011 ( N o t e s 1 , 2 ) ( N o t e 1 ) ( N o t e 1 ) ( N o t e 3 ) ( N o t e s 1 , 2 ) ( a s a t t e n d e e ) N o t e 4 ) ( a s a t t e n d e e ) ( 1 b y a l t e r n a t e ) ( a s a t t e n d e e ) ( a s a t t e n d e e ) ( a s a t t e n d e e ) ( N o t e 4 ) ( 1 b y a l t e r n a t e ) N o t e s : Pre-meeting sessions with external and internal auditors held without management presence AUDIT COMMITTEE COMPOSITION AND MEETINGS SCHEDULE The Audit Committee is currently chaired by Nicholas Charles ALLEN (Independent non-executive Director), and its other members are Anthony Hsien Pin LEE and Philip Yan Hok FAN. There is an overall majority of Independent non-executive Directors. Nicholas Charles ALLEN (Chairman) is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Hong Kong Institute of Certified Public Accountants. He has extensive experience in auditing and accounting, which he developed while working with a “Big Four” international firm. The Audit Committee had four meetings during the year and will have three scheduled meetings as for 2012. At the invitation of the Audit Committee, meetings are also attended by the Chairman and members of management (including the Chief Executive Officer and Chief Financial Officer). ROLES AND AUTHORITY Hysan believes a clear appreciation of the separate roles of management, the external auditors and Audit Committee members is crucial to the effective functioning of an audit committee. Management of Hysan is responsible for selecting appropriate accounting policies and the preparation of the financial statements. Formal statements of responsibilities of Directors in relation thereto are contained elsewhere in this Annual Report. 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 is responsible for overseeing the entire process. The Audit Committee also has the responsibility of reviewing the Group’s “whistle-blowing” procedures allowing employees to raise concerns, in confidence or anonymously, about possible breaches of the Group’s 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 2011 AND TO DATE Full details of the activities of the Audit Committee are also set out in the “Audit Committee Report” on pages 89 and 90. Four meetings were held during the year. Attendance of Audit Committee meetings is set out in the table on page 66. In addition to reviewing and approving annual and interim financial statements, the Committee has placed a focus on further strengthening our risk identification and assessment process, and adopting more frequent and structured internal controls and risk management reporting to the Committee and the Board. O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 67 In-camera meetings held without management presence Corporate Governance Report REMUNERATION COMMITTEE (FORMERLY TITLED EMOLUMENTS REVIEw COMMITTEE) COMPOSITION AND MEETINGS SCHEDULE The Group established the Remuneration Committee in 1987 to review the compensation of Executive Directors. The current Remuneration Committee is chaired by Philip Yan Hok FAN, Independent non-executive Director. The other members of the Remuneration Committee are Michael Tze Hau LEE and Joseph Chung Yin POON (Independent non-executive Director, appointed in March 2012). It currently has an overall majority of Independent non-executive Directors. The Remuneration Committee generally meets at least once every year. ROLES AND AUTHORITY Management makes recommendations to the Remuneration Committee on Hysan’s framework for, and cost of, the remuneration of Executive Directors and the Committee then reviews these, and makes recommendations to the Board. The Remuneration Committee also reviews the remuneration fee payable to (where applicable) the Chairman and Non-executive Directors respectively prior to its being submitted for approval at the AGM. In addition, it also reviews new share option plans, changes to key terms of pension plans, and key terms of new compensation and benefits plans with material financial reputational and strategic impact. No Director is involved in deciding his or her own remuneration. ACTIVITIES AND REPORT IN 2011 AND TO DATE Full details of the activities of the Remuneration Committee are set out in the “Directors’ Remuneration and Interests Report” on pages 81 to 88. Two meetings were held during the year. Attendance of Remuneration Committee meetings is set out in the table on page 66. NOMINATION COMMITTEE COMPOSITION AND MEETINGS SCHEDULE The Board established a Nomination Committee in 2005. The Nomination Committee is currently chaired by Irene Yun Lien LEE, Chairman of the Board and has a majority of Independent non-executive Directors. The other members of the Nomination Committee during the year are Philip Yan Hok FAN and Chien LEE. Nicholas Charles ALLEN and Joseph Chung Yin POON, both Independent non-executive Directors, were appointed in March 2012. Gerry Lui Fai YIM (Chief Executive Officer) resigned from the Committee at the same time, in line with good corporate governance practices. It currently has a majority of Independent non-executive Directors. The Nomination Committee meets when it is considered necessary. ROLES AND AUTHORITY The Nomination Committee is responsible for nominating candidates, for Board approval, to fill Board vacancies as and when they arise, and for evaluating the balance of skills, knowledge and experience of the Board. The terms of reference of the Nomination Committee clearly set out that the Chairman of the Board shall not chair the Nomination Committee when it is dealing with the matter of succession of the chairmanship. 68 Hysan Annual Report 2011 Shareholders The Board and management fully recognise the significance and importance of 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 to 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. Recognising that we are accountable to our stakeholders, reporting financial and non-financial results in a transparent fashion is critical. 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’s corporate website provides an additional channel for shareholders and other interested parties to access information about the Group. The Group’s key corporate governance policies and supporting documents, including the terms of reference of the various Board Committees, as well as the Group’s financial reports, press releases and announcements are available on the website. Shareholders are given the option of electing to receive corporate communications by electronic means. We continue to review how to better utilise the Company’s website for the purposes of timely disclosure and to enhance transparency. Shareholders may raise enquiries to the Board by contacting the Group’s Investor Relations function. The analyst briefing on the annual results is one of the effective channels of our stakeholder engagement O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 69 Corporate Governance Report INSTITUTIONAL SHAREHOLDERS We are committed to maintaining a continuing open dialogue with institutional investors, fund managers and analysts as a means of developing their understanding of our strategy, operations, management and plans, and enabling them to raise any issues they may have. The Company has an ongoing programme of dialogue and meetings between Chief Executive Officer, Chief Financial Officer, and institutional investors, fund managers and analysts. At these meetings, a wide range of relevant issues, including strategy, performance, management and governance, are discussed within the constraints of information already made public. There are presentations to or conference calls with analysts and investors at the time of announcement of results. During the year, we have further strengthened our programme and extended the scope of our coverage of investors and analysts, including attending overseas investor roadshows. To provide more detailed knowledge of the Group, the Company also arranged analyst visits to Company sites. Investor relations reports describing investor and analyst opinions are provided regularly to the Board. CONSTRUCTIVE USE OF AGM The Board is equally interested in the concerns of private shareholders. The Company Secretary, on behalf of the Board, oversees communication with these investors. The Board recognises the significance of the constructive use of AGMs as a means to enter into a dialogue with private shareholders based on the mutual understanding of objectives. Individual shareholders can put questions to the Chairman at the AGM. The Chairmen of the various Board Committees, as provided under their respective terms of references, attend AGMs to respond to any shareholder questions on the activities of those Committees. Since 2004, to enable shareholders to gain a better understanding of our business activities, we have included a “business review” session to our AGMs, in addition to the statutory part of the meeting. Topics covered at the last AGM included the business environment in 2010, a review of business activities, and the Company’s outlook for 2011. The Company values the contributions of its shareholders during the question and answer session following the statutory part of the meeting. 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 responsibilities for communications with various stakeholders groups. (Details of the Corporate Disclosure Policy are available at the Company’s website: www.hysan.com.hk). 70 Hysan Annual Report 2011 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. PROVISION OF SUFFICIENT AND TIMELY INFORMATION We recognise the significance of providing information to shareholders to enable them to make an informed assessment for the purposes of voting on each of the items put before shareholders at the AGM. Copies of the Annual Report, and financial statements and related papers were dispatched to shareholders 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’ rights in exercising control proportionate to their equity ownership and we support the principle of voting by poll. Since 2004, the Company has conducted all voting at its AGMs by poll. 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 are again explained to the general meeting prior to the taking of the poll. Poll results are announced and posted on the websites of both the HKSE and the Company. The AGM provides a good opportunity for communications with shareholders O v e r v i e w S t r a t e g y i n A c t i o n C o r p o r a t e 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 2011 71 Corporate Governance Report 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 (“5% Shareholder”) may convene an extraordinary general meeting by requisition stating the objects of the meeting, and deposit the signed requisition at the Company’s registered office (49/F, The Lee Gardens, 33 Hysan Avenue, Hong Kong. Attention: The Company Secretary). Any 5% Shareholder may also requisition for the circulation of resolutions to be moved at a general meeting; and circulation of statements regarding resolution proposed. The special documents should be deposited at the Company’s registered address as detailed above. Hong Kong Companies Ordinance also provides 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. 72 Hysan Annual Report 2011 The Directors submit their report together with the audited financial statements for the year ended 31 December 2011, which were approved by the Board of Directors (the “Board”) on 8 March 2012. PRINCIPAL ACTIVITIES The principal activities of the Group continued throughout 2011 to be property investment, management and development. Details of the Group’s principal subsidiaries and associates as at 31 December 2011 are set out in notes 18 and 19 respectively to the financial statements. The turnover and results of the Group are principally derived from leasing of investment properties located in Hong Kong. The Group’s turnover and results by operating segment are set out in note 5. 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 2011 are set out in the consolidated income statement on page 94. An interim dividend of HK15 cents per share, amounting to approximately HK$159 million, was paid to shareholders during the year. The Board recommends the payment of a final dividend of HK64 cents per share with a scrip alternative to the shareholders on the register of members on 18 May 2012, absorbing approximately HK$678 million. The dividends proposed and paid for ordinary shares in respect of the full year 2011 will absorb approximately HK$837 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 98 and 99 and note 33 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 2011 using the fair value model. Details of movements during the year in the investment properties of the Group are set out in note 16 to the financial statements. Details of the major investment properties of the Group as at 31 December 2011 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 17 to the financial statements. SHARE CAPITAL Details of movements in the share capital of the Company during the year are set out in note 32 to the financial statements. 73 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewDirectors’ Report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, meets the requirements of 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”). Where appropriate, the Company has early- adopted new code provisions effective 1 April 2012. Further information on the Company’s corporate governance practices is set out in the following separate reports: (a) “Corporate Governance Report” (pages 56 to 72) – 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 81 to 88) – it gives detailed information of Directors’ remuneration and interests (including information on Directors’ compensation, service contracts, Directors’ interests in shares; contracts and competing business); (c) “Audit Committee Report” (pages 89 and 90) – it sets out the terms of reference, work performed and findings of the Audit Committee for the year; (d) “Internal Controls and Risk Management Report” (pages 45 to 47) – it sets out the Company’s framework on internal controls and risks assessment including control environment, control activities, work done during the year and the focus for 2012; 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 is currently chaired by Irene Yun Lien LEE, Chairman, with Siu Chuen LAU as Non-executive Deputy Chairman. The other Executive Directors are Gerry Lui Fai YIM (Chief Executive Officer) and Wendy Wen Yee YUNG (Executive Director and Company Secretary). There are seven other Non-executive Directors. Irene Yun Lien LEE was appointed Non-executive Chairman as from the conclusion of the 2011 Annual General Meeting held on 9 May 2011 (“2011 AGM”). She succeeded Sir David AKERS-JONES, who stepped down following the 2011 AGM. Ms. Lee also serves as alternate Director to Anthony Hsien Pin LEE (as from 11 January 2011), and was appointed Non-executive Director on 9 March 2011. She assumed an executive capacity as from 8 March 2012. Siu Chuen LAU was appointed Non-executive Director as from the conclusion of the 2011 AGM. He had previously served as alternate Director to Dr. Deanna Ruth Tak Yung RUDGARD, who stepped down as Non-executive Director as from the conclusion of the 2011 AGM. He was appointed Non-executive Deputy Chairman effective 8 March 2012. Kam Wing LI served as alternate Director throughout the year. Save as otherwise mentioned, other Directors whose names and biographies appear on pages 52 to 54 have been Directors of the Company throughout the year. 74 Hysan Annual Report 2011Directors’ Report continuedTHE BOARD continued According to Article 97 of the Company’s current Articles of Association, a Director appointed either to fill a casual vacancy or as an addition to the Board shall hold office only until the next following annual general meeting. Under Article 114 of the Company’s current Articles of Association, one-third (or such other number as may be required under applicable legislation) of the Directors; and where the applicable number is not an integral number, to be rounded upwards, who have been longest in office shall retire from office by rotation. A retiring Director is eligible for re-election. Gerry Lui Fai YIM will step down as Chief Executive Officer and Executive Director as from the conclusion of annual general meeting to be held on 14 May 2012. Particulars of Directors seeking for re-election at the forthcoming annual general meeting are set out in the related 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 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 81 to 88. SUBSTANTIAL SHAREHOLDERS’ AND OTHER PERSONS’ INTERESTS IN SHARES As at 31 December 2011, 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) % of the issued share capital (Note a) 40.87 433,130,735 (Note b) 40.87 Silchester International Investors LLP Investment manager 85,161,000 8.04 Notes: (a) The percentage has been compiled based on the total number of shares of the Company in issue as at 31 December 2011 (i.e. 1,059,754,415 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 2011. 75 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview RELATED PARTY TRANSACTIONS The Group entered into certain transactions with parties regarded as “Related Parties” under applicable accounting principles. These mainly relate to contracts entered into by the Group in the ordinary course of business, which contracts were negotiated on normal commercial terms and on an arm’s length basis. Further details are set out in note 39 to the 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: Leases 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”), an associate of Michael Tze Hau LEE, Non-executive Director of the Company. Details of the lease arrangement are set out below: Connected person Date of agreement Terms Premises Annual consideration (Note a) Oxer Limited (Note b) 14 June 2010 (Lease and Carpark Licence Agreement) 3 years commencing from 1 July 2010 Rooms 3703 and 3704 on the 37th Floor and 1 carparking space 2011: HK$1,638,876 2012: HK$1,638,876 HK$819,438 2013: (on pro-rata basis) (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 c) (ii) Hang Seng Bank Limited (Note c) 31 March 2010 3 years commencing from 1 September 2010 15 October 2007 (Note d) 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 e) Office units on the 28th, 30th and 31st Floors Shop G13A on the Ground Floor and Shops 2-10 and 11-12 on the Lower Ground Floor Annual consideration (Note a) 2011: HK$20,802,552 2012: HK$20,802,552 2013: HK$13,868,368 (on pro-rata basis) 2011: HK$17,706,600 2012: HK$17,869,680 2013: HK$14,074,775 (on pro-rata basis) (Notes f & g) 76 Hysan Annual Report 2011Directors’ Report continued CONTINUING CONNECTED TRANSACTIONS continued I. (b) Lee Gardens Two, 28 Yun Ping Road, Hong Kong (“Lee Gardens Two”) continued Leases granted by the Group continued Connected person Date of agreement Terms Premises Annual consideration (Note a) (iii) Pearl (1) 23 May 2008 Investments (HK) Limited (Note h) 3 years commencing from 15 May 2008 Room 1401C on the 2011: 14th Floor HK$739,226 (on pro-rata basis) 3 years commencing from 15 May 2011 (2) 24 May 2011 (Lease and Carpark Licence Agreement) (renewal) Room 1401C on the 2011: HK$1,294,231 14th Floor and 1 (on pro-rata basis) 2012: HK$2,057,496 carparking space 2013: HK$2,057,496 HK$763,265 2014: (on pro-rata basis) (iv) MF Jebsen (1) 22 December International Limited (Note i) 2008 3 years commencing from 1 February 2008 Office units on the 24th and 25th Floors 2011: HK$1,127,761 (on pro-rata basis) (2) 7 September 2010 (renewal) 3 years commencing from 1 February 2011 Office units on the 25th Floor 2011: HK$6,612,419 (on pro-rata basis) 2012: HK$7,213,548 2013: HK$7,213,548 HK$601,129 2014: (on pro-rata basis) (c) 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, as landlord with Atlas Corporate Management Limited, a wholly-owned subsidiary of LHE, a substantial shareholder of the Company (holding 40.87% interest). Details of the lease are set out below: Connected person Date of agreement Terms Premises Annual consideration (Note a) Atlas Corporate Management Limited (1) 14 November 2008 3 years commencing from Whole of 1 November 2008 21st Floor 2011: HK$2,103,300 (on pro-rata basis) (2) 4 November 2011 (renewal) 3 years commencing from Whole of 1 November 2011 21st Floor 2011: HK$466,590 (on pro-rata basis) 2012: HK$2,799,540 2013: HK$2,799,540 2014: HK$2,332,950 (on pro-rata basis) 77 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview CONTINUING CONNECTED TRANSACTIONS continued II. Provision of leasing and property management services to a non wholly-owned subsidiary regarding Lee Gardens Two (a) The following management agreement was entered into by Hysan Leasing Company Limited, a wholly-owned subsidiary of the Company, with Barrowgate for the provision of leasing, marketing and lease administration services to Lee Gardens Two: Connected person Date of agreement Terms Premises Consideration Barrowgate Limited 31 March 2010 3 years commencing from Whole premises of Lee Gardens Two 1 April 2010 HK$15,634,021 (Note j) (b) The following management agreement was entered into by Hysan Property Management Limited, a wholly-owned subsidiary of the Company, with Barrowgate for the provision of property management services to Lee Gardens Two: Connected person Date of agreement Terms Premises Consideration Barrowgate Limited Notes: 31 March 2010 3 years commencing from Whole premises of Lee Gardens Two 1 April 2010 HK$3,039,590 (Note j) (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 as provided in the relevant agreements. The rental, operating charges, promotional levies and licence fees (as the case may be) are payable monthly in advance. (b) Oxer is a connected person of the Company by virtue of its being an associate of Michael Tze Hau LEE, Non-executive Director of the Company. (c) Jebsen and Company Limited (“Jebsen and Company”) and Hang Seng Bank Limited (“Hang Seng”) are beneficial substantial shareholders of Barrowgate and having equity interest of 10% and 24.64% respectively in Barrowgate. (d) Barrowgate and Hang Seng entered into an agreement for lease dated 15 October 2007. A formal lease agreement, a supplemental deed and an endorsement (following rent review as provided under the lease arrangements) in respect of the premises mentioned under I(b)(ii) above were entered on 15 February 2008, 13 May 2008 and 22 November 2010 respectively. (e) The term of the lease mentioned under I(b)(ii) above 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. (f) Pursuant to an endorsement dated 22 November 2010 as mentioned in Note (d) above, the rent for the period from 15 October 2010 to 14 October 2013 was revised at the then prevailing market rent. (g) The monthly operating charges were revised with effect from 1 January 2012 while the rental and promotional levies remained unchanged. (h) Pearl Investments (HK) Limited is a connected person of the Company by virtue of its being an associate of Chien LEE, Non-executive Director of the Company. (i) MF Jebsen International Limited is a connected person of the Company by virtue of its being controlled (more than 50%) by the brother of Hans Michael JEBSEN, Non-executive Director of the Company. (j) These represent the actual consideration received for the year ended 31 December 2011, calculated on the basis of the fee schedules as prescribed in the respective management agreements. 78 Hysan Annual Report 2011Directors’ Report continued CONTINUING CONNECTED TRANSACTIONS continued 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 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 Company’s auditor was engaged to report on the Group’s continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” and with reference to Practice Note 740 “Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants. The auditor has issued his unqualified letter containing his findings and conclusions in respect of the continuing connected transactions disclosed by the Group in pages 76 to 79 of the Annual Report in accordance with Rule 14A.38 of the Listing Rules. A copy of the auditor’s letter has been provided by the Company to the Stock Exchange. 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. INTEREST IN CONTRACTS OF SIGNIFICANCE The lease arrangement between Barrowgate and Jebsen and Company is considered contract of significance under paragraph 15 of Appendix 16 of the Listing Rules due to the annual consideration of the lease having a percentage ratio of 1.18% from the calculation of the revenue test (the percentage ratios for assets ratio and consideration ratio are 0.04% and 0.08% respectively). 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. 79 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewDONATIONS During the year, the Group made donations of approximately HK$0.5 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 2012 AGM. On behalf of the Board Irene Yun Lien LEE Chairman Hong Kong, 8 March 2012 80 Hysan Annual Report 2011Directors’ Report continuedDIRECTOR COMPENSATION Remuneration Committee The Board recognises the significance of having in place a transparent and objective process for determining Executive Director compensation. The Remuneration Committee (first established in 1987, formerly known as “Emoluments Review Committee”), reviews and determines the remuneration of Executive Directors as well as recommending for shareholder approval fees payable to the Chairman and Non-executive Directors. The Remuneration Committee currently has 3 members (with a majority of Independent non-executive Directors). It is chaired by Philip Yan Hok FAN, Independent non-executive Director and the other members are Joseph Chung Yin POON, Independent non-executive Director and Michael Tze Hau LEE, Non-executive Director. Sir David AKERS-JONES stepped down as Independent non-executive Chairman as well as chairman of the Committee after the conclusion of the May 2011 Annual General Meeting. 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. Fees payable to the Chairman and other Non-executive Directors are reviewed from time to time. Independent professional advice will be sought where appropriate. On matters other than those concerning him, the Chief Executive Officer may be invited to Committee meetings. No Director is involved in deciding his own remuneration. Executive Director 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. Details of Director (including individual Executive Director) emoluments for year 2011 and options movement during the year are set out in notes 12 and 40 respectively to the financial statements. Non-executive Director Remuneration Policy 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. 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 81 Hysan Annual Report 2011Strategy in ActionOverviewDirectors’ Remuneration and Interests ReportCorporate Governance DIRECTOR COMPENSATION continued Non-executive Director Remuneration Policy continued Non-executive Directors received no other compensation from the Group except for the fees disclosed below. None of the Non-executive Directors receives any pension benefits from the Company, nor do they participate in any bonus or incentive schemes. Non-executive Directors (including the Independent non-executive Directors) received fees totalling HK$2,119,643.78 for 2011. 2011 Review The Committee met twice in March 2011 with all members being present. The first meeting reviewed 2011 Executive Director compensation packages. The second meeting focused on reviewing (i) its terms of reference; and (ii) fee levels for Non-executive Directors and Board Committee members. The executive packages and fee levels were 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. Clear performance targets were set for Executive Directors. The Committee’s terms of reference were refined to include reviewing the fee levels of Non-executive Directors (including additional fees for serving as Board Committee members). Taking into consideration the level of responsibility, experience, abilities required of the Directors, level of care and amount of time needed to be spent, and fees offered for similar positions in companies competing for the same talent, new fee levels of Non-executive Directors and Board Committee members were proposed and approved at the May 2011 Annual General Meeting. Effective 1 June 2011, Executive Directors will not receive Director fees. March 2012 Review The Committee met in March 2012 to review 2012 Executive Director compensation packages, including new package of the Chairman (who will assume an executive capacity as from 8 March 2012). New package of the Chairman was set at the same level as the former executive Chairman, with inflationary adjustment since 2010. Independent professional advice was also sought. All members attended the meeting. Current Director Fee Levels Director fees are subject to shareholder approval at general meeting. The current fee scale for Directors and Board Committee members are set out below. Executive Directors will not receive any fee. Board of Directors Chairman Director Audit Committee Chairman Member Remuneration Committee Chairman Member Other Committees Chairman Member 82 Per annum HK$ 400,000 200,000 100,000 60,000 50,000 40,000 30,000 20,000 Hysan Annual Report 2011Directors’ Remuneration and Interests Report continued DIRECTOR COMPENSATION continued 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 Remuneration 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 Chief Executive Officer may make grants to management staff below Executive Director level. Key terms of the share option schemes of the Company are summarised as follows: The 1995 Share Option Scheme (the “1995 Scheme”) The 1995 Scheme was approved by shareholders on 28 April 1995 and had a term of 10 years. It expired on 28 April 2005. As at 31 December 2011, all options granted under the 1995 Scheme had been exercised. 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 that are 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. 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 be expiring 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$1 and is required to be paid within 30 days from the date of grant of option, with full payment for exercise price to be made on exercise of the relevant option. Grant and vesting structures Under the Company’s current policy, grants will be made on a periodic basis. Vesting period is 3 years in equal proportions. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. F i n a n c i a l S t a t e m e n t s a n d V a l u a t i o n 83 Hysan Annual Report 2011Strategy in ActionOverviewCorporate Governance DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes continued Movement of share options During the year, a total of 713,000 shares options were granted under the 2005 Scheme. As at 31 December 2011, an aggregate of 2,294,669 shares are issuable for options granted under the Schemes, representing approximately 0.22% of the issued share capital of the Company. As at the date of this Report, 97,202,433 shares are issuable under the Schemes representing 9.17% of the issued share capital. Details of options granted, exercised, cancelled/lapsed and outstanding under the Schemes during the year are as follows: Name Date of grant Exercise price HK$ Exercisable period (Note a) 1995 Scheme Executive Director Changes during the year Balance as at 1.1.2011 Granted Exercised Cancelled/ Balance as at lapsed 31.12.2011 Wendy Wen Yee YUNG 30.3.2005 15.850 30.3.2005 – 29.3.2015 96,000 – (96,000) (Note b) 2005 Scheme Executive Directors Peter Ting Chang LEE (Note c) 6.3.2007 21.380 6.3.2007 – 16.1.2011 235,000 13.3.2008 21.450 13.3.2008 – 16.1.2011 260,000 11.3.2009 11.760 11.3.2009 – 16.1.2011 500,000 Gerry Lui Fai YIM 1.12.2009 22.800 1.12.2009 – 218,000 30.11.2019 – – – – 10.3.2011 35.710 10.3.2011 – (Note e) 9.3.2021 – 217,000 Wendy Wen Yee YUNG 26.6.2006 20.110 26.6.2006 – 25.6.2016 110,000 30.3.2007 21.250 30.3.2007 – 95,000 29.3.2017 31.3.2008 21.960 31.3.2008 – 100,000 30.3.2018 11.3.2009 11.760 11.3.2009 – 10.3.2019 300,000 11.3.2010 22.100 11.3.2010 – 10.3.2020 185,000 – – – – – 10.3.2011 35.710 10.3.2011 – (Note e) 9.3.2021 – 103,000 (235,000) (Note d) (173,333) (Note d) (166,666) (Note d) – – (110,000) (Note b) – – (200,000) (Note b) – – – – (86,667) (333,334) – – – – – 218,000 – 217,000 – – – 95,000 – 100,000 – 100,000 – 185,000 – 103,000 84 Hysan Annual Report 2011Directors’ Remuneration and Interests Report continued DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes continued Movement of share options continued Name Date of grant Exercise price HK$ Exercisable period (Note a) 2005 Scheme continued Eligible employees (Note f) 30.3.2006 22.000 30.3.2006 – 29.3.2016 30.3.2007 21.250 30.3.2007 – 29.3.2017 31.3.2008 21.960 31.3.2008 – 30.3.2018 2.5.2008 23.900 2.5.2008 – 1.5.2018 Balance as at 1.1.2011 15,000 15,000 78,000 95,000 2.10.2008 20.106 2.10.2008 – 85,000 1.10.2018 31.3.2009 13.300 31.3.2009 – 30.3.2019 363,334 31.3.2010 22.450 31.3.2010 – 30.3.2020 523,000 Changes during the year Granted Exercised Cancelled/ Balance as at lapsed 31.12.2011 – – – – – – – (15,000) (Note g) (15,000) (Note h) (55,000) (Note i) – – – – – – – 23,000 – 95,000 – 85,000 (86,999) (Note j) (37,999) (Note l) (13,667) 262,668 (Note k) (44,000) 441,001 (Note k) 31.3.2011 32.000 31.3.2011 – (Note m) 30.3.2021 – 393,000 – (23,000) 370,000 (Note k) 3,273,334 713,000 (1,190,997) (500,668) 2,294,669 Notes: (a) All options granted have a vesting period of 3 years in equal proportions. (b) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$34.25. (c) The late Chairman, Peter Ting Chang LEE, passed away on 17 October 2009. An extension in time (to 16 January 2011) for exercising his options was granted to his legal personal representative pursuant to the 2005 Scheme. Share options of 235,000, 173,333 and 166,666, which were granted to him on 6 March 2007, 13 March 2008 and 11 March 2009 respectively, were exercised by the sole executrix to his estate on 3 January 2011. The unvested share options of 420,001 lapsed on 17 January 2011. (d) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$36.60. (e) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 9 March 2011) was HK$35.70. (f) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$33.65. (h) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$36.25. (i) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$34.68. 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 85 Hysan Annual Report 2011Strategy in ActionOverviewCorporate Governance DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes continued Movement of share options continued (j) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$34.98. (k) The unvested options lapsed during the year upon resignations of certain eligible employees. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$35.06. (m) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 30 March 2011) was HK$31.95. 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 40 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 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 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 Notes: 31.3.2011 10.3.2011 HK$32.000 HK$32.000 2.687% 10 years 34.151% HK$0.640 HK$12.409 HK$34.000 HK$35.710 2.717% 10 years 34.026% HK$0.640 HK$12.553 (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 10 years immediately before the date of grant, matching the expected life of the options of 10 years. (d) Expected dividend per annum: being the approximate average annual cash dividend for the past 5 financial years. 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). 86 Hysan Annual Report 2011Directors’ Remuneration and Interests Report continuedREVIEw OF INTERNAL CONTROLS AND RISK MANAGEMENT SYSTEMS continued • March 2012 : 2011 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. RELATIONSHIP wITH ExTERNAL AUDITOR • August 2011 : The Committee reviewed and considered the terms of engagement of the external auditor in respect of the 2011 annual audit and the related results announcement and annual confirmation. • March 2012 : 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 2012. The Committee also reviewed and considered the terms of engagement of the external auditor in respect of the 2012 interim results review. For the year ended 31 December 2011, external auditor received a total fee of HK$2,242,000 (audit services: HK$1,910,000 and non-audit services: HK$332,000). Members of the Audit Committee Nicholas Charles ALLEN (Chairman) Philip Yan Hok FAN Anthony Hsien Pin LEE Hong Kong, 8 March 2012 90 Hysan Annual Report 2011Audit Committee Report continued91 92 Directors’ Responsibility for the Financial Statements 93 Independent Auditor’s Report 94 Consolidated Income Statement 95 Consolidated Statement of Comprehensive Income 96 Consolidated Statement of Financial Position 97 Statement of Financial Position 98 Consolidated Statement of Changes in Equity 100 Consolidated Statement of Cash Flows 102 Significant Accounting Policies 112 Notes to the Financial Statements 160 Financial Risk Management 170 Five-Year Financial Summary 172 Report of the Valuer 173 Schedule of Principal Properties 175 Shareholding Analysis 176 Shareholder InformationStrategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewHysan Annual Report 2011Financial Statements and Valuation4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. 92 Hysan Annual Report 2011Directors’ Responsibility for the Financial StatementsTo the Members of Hysan Development Company Limited (incorporated in Hong Kong with limited liability) We have audited the consolidated financial statements of Hysan Development Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 94 to 169, which comprise the consolidated and Company’s statements of financial position as at 31 December 2011, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Directors’ Responsibility for the Consolidated Financial Statements The directors of the Company are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated 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 about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view 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 consolidated 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 consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2011, 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 8 March 2012 93 Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewHysan Annual Report 2011Independent Auditor’s Report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 Profit for the year attributable to: Owners of the Company Non-controlling interests Earnings per share (expressed in HK cents) Basic Diluted Notes 2011 HK$ million 2010 HK$ million 4 6 7 8 9 10 15 1,922 (262) 1,660 90 (34) (173) (122) 7,532 254 9,207 (217) 8,990 8,545 445 8,990 1,764 (250) 1,514 49 (42) (140) (117) 2,594 394 4,252 (201) 4,051 3,844 207 4,051 808.34 807.71 365.47 365.16 94 Hysan Annual Report 2011Consolidated Income StatementFor the year ended 31 December 2011 Profit for the year Other comprehensive income: Losses arising from equity investments designated as at fair value through other comprehensive income Gains arising from available-for-sale investments Net gains (losses) on cash flow hedges Gain on revaluation of properties held for own use Share of translation reserve of an associate Other comprehensive income for the year (net of tax) Total comprehensive income for the year Total comprehensive income attributable to: Owners of the Company Non-controlling interests 2011 HK$ million 2010 HK$ million 8,990 4,051 Note 11 (121) – 4 71 155 109 – 150 (22) 29 103 260 9,099 4,311 8,654 445 9,099 4,104 207 4,311 95 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewConsolidated Statement of Comprehensive IncomeFor the year ended 31 December 2011 Non-current assets Investment properties Property, plant and equipment Investments in associates Principal-protected investments Term notes Equity investments Available-for-sale investments Other financial assets Other receivables Current assets Accounts receivable and other receivables Amount due from an associate Principal-protected investments Term notes Other financial assets Time deposits Cash and bank balances Current liabilities Accounts payable and accruals Rental deposits from tenants Amounts due to non-controlling interests Borrowings Other financial liabilities 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 Capital and reserves Share capital Reserves Equity attributable to owners of the Company Non-controlling interests Total equity Notes 2011 HK$ million 2010 HK$ million 16 17 19 20 21 22 22 23 24 26 20 21 23 27 27 28 29 30 23 30 23 31 32 49,969 530 3,423 365 259 989 – 68 163 55,766 134 – 265 171 71 2,899 62 3,602 532 170 327 1,507 19 73 2,628 974 40,833 429 3,014 378 168 – 1,152 90 79 46,143 98 139 84 95 2 1,930 63 2,411 433 175 327 650 – 50 1,635 776 56,740 46,919 5,156 50 430 360 5,996 3,937 52 276 337 4,602 50,744 42,317 5,299 43,454 48,753 1,991 50,744 5,267 35,410 40,677 1,640 42,317 The consolidated financial statements on pages 94 to 169 were approved and authorised for issue by the Board of Directors on 8 March 2012 and are signed on its behalf by: 96 Irene Y.L. LEE Director Gerry L.F. YIM Director Hysan Annual Report 2011Consolidated Statement of Financial PositionAt 31 December 2011 Non-current assets Property, plant and equipment Investments in subsidiaries Available-for-sale investments Other financial assets Amounts due from subsidiaries 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 Total assets less current liabilities Non-current liability Deferred taxation Net assets Capital and reserves Share capital Reserves Total equity Notes 2011 HK$ million 2010 HK$ million 17 18 22 23 25 25 27 27 25 31 32 33 10 1,904 – 2 5,126 7,042 5 6,088 466 25 6,584 36 480 5 521 9 – 2 – – 11 5 12,671 547 33 13,256 38 175 2 215 6,063 13,105 13,041 13,052 1 – 13,104 13,052 5,299 7,805 5,267 7,785 13,104 13,052 The financial statements on pages 94 to 169 were approved and authorised for issue by the Board of Directors on 8 March 2012 and are signed on its behalf by: Irene Y.L. LEE Director Gerry L.F. YIM Director 97 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewStatement of Financial PositionAt 31 December 2011 At 1 January 2010 5,253 1,703 10 276 100 809 (22) 175 153 28,759 37,216 1,516 38,732 Attributable to owners of the Company Share capital HK$ million Share premium HK$ million Share options reserve HK$ million Capital redemption reserve HK$ million Attributable to owners of the Company General reserve Investments revaluation reserve Hedging reserve Properties revaluation reserve Translation reserve Retained profits HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Non-controlling Total interests HK$ million Total HK$ million Profit for the year Change in fair value of available-for-sale investments Change in fair value of derivatives designated as cash flow hedges Transfer to profit and loss for cash flow hedges Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Share of translation reserve of an associate Total comprehensive income (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 Dividends paid during the year (note 14) – – – – – – – – 14 – – – – – – – – – – – 50 1 – – – – – – – – – – – – 6 – – – – – – – – – – – – – At 31 December 2010 5,267 1,754 16 276 100 959 (44) 204 256 31,889 40,677 1,640 42,317 Profit for the year Change in fair value of equity investments Change in fair value of derivatives designated as cash flow hedges Transfer to profit and loss for cash flow hedges Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Share of translation reserve of an associate Total comprehensive (expenses) income 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 14) Transfer to retained profits upon disposal of equity investments – – – – – – – – 26 6 – – – – – – – – – – – – 159 21 – – – – – – – – – – – – – (6) 7 (2) – – – – – – – – – – – – – – – – At 31 December 2011 5,299 1,934 15 276 100 (40) 275 411 39,678 48,753 1,991 50,744 150 (22) 3,844 4,104 207 4,311 – – – – – – – – – – – – – – – – – – – – – – – – – – 150 (40) 18 (121) (25) 29 – – – – – – – – – – – – – – – – – – – – – (33) 805 – – – – – – – – – – – – – – 4 – – – – – – – – – – 34 (5) – 29 – – – – – – – – – – – – – – 85 (14) – 71 103 103 155 155 – – – – – – – – – – – – – – – – – – – – – – 3,844 3,844 207 4,051 (714) (714) (83) (797) 8,545 445 – – – – – – – – – – – – – – – – – – 2 150 (40) 18 34 (5) 103 64 1 6 8,545 (121) (25) 29 85 (14) 155 185 21 7 – – – – – – – – – – – – – – – – – – – – – – 150 (40) 18 34 (5) 103 64 1 6 8,990 (121) (25) 29 85 (14) 155 185 21 7 – – (791) 33 (791) (94) (885) (121) 8,545 8,654 445 9,099 98 Hysan Annual Report 2011Consolidated Statement of Changes in EquityFor the year ended 31 December 2011 Attributable to owners of the Company Share capital Share premium Share options reserve Capital redemption reserve HK$ million HK$ million HK$ million HK$ million Attributable to owners of the Company General reserve HK$ million Investments revaluation reserve HK$ million Hedging reserve HK$ million Properties revaluation reserve HK$ million Translation reserve HK$ million Retained profits HK$ million Total HK$ million Non-controlling interests HK$ million Total HK$ million At 1 January 2010 Profit for the year Change in fair value of available-for-sale investments Change in fair value of derivatives designated as cash flow hedges Transfer to profit and loss for cash flow hedges Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Share of translation reserve of an associate Total comprehensive income (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 Dividends paid during the year (note 14) At 31 December 2010 Profit for the year Change in fair value of equity investments Change in fair value of derivatives designated as cash flow hedges Transfer to profit and loss for cash flow hedges Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use Share of translation reserve of an associate Total comprehensive (expenses) income 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 14) Transfer to retained profits upon disposal of equity investments 14 – – – – – – – – – – – – – – – – – – – 26 6 – – – – 50 1 – – – – – – – – – – – – – – – – – – – – – – 159 21 – – – – – – – – – – 6 – – – – – – – – – – (6) 7 (2) – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5,253 1,703 10 276 100 – – – – – – – – – – – – 5,267 1,754 16 276 100 – – – – – – – – – – – – – – 809 – 150 – – – – – 150 – – – – 959 – (121) – – – – – (121) – – – – – (33) (22) – – (40) 18 – – – (22) – – – – (44) – – (25) 29 – – – 4 – – – – – – 175 153 28,759 37,216 1,516 38,732 – – – – 34 (5) – 29 – – – – – – – – – – 103 103 – – – – 3,844 – – – – – – 3,844 150 (40) 18 34 (5) 103 3,844 4,104 – – – (714) 64 1 6 (714) 207 – – – – – – 207 – – – (83) 4,051 150 (40) 18 34 (5) 103 4,311 64 1 6 (797) 204 256 31,889 40,677 1,640 42,317 – – – – 85 (14) – 71 – – – – – – – – – – – – 155 155 – – – – – – 8,545 – – – – – – 8,545 (121) (25) 29 85 (14) 155 8,545 8,654 – – – 2 (791) 33 185 21 7 – (791) – 445 – – – – – – 445 – – – – (94) – 8,990 (121) (25) 29 85 (14) 155 9,099 185 21 7 – (885) – At 31 December 2011 5,299 1,934 15 276 100 805 (40) 275 411 39,678 48,753 1,991 50,744 99 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview Note 2011 HK$ million 2010 HK$ million 9,207 4,252 34 122 (7,532) (254) (54) (36) 8 7 1,502 (28) (31) 149 1,592 (185) – 1,407 40 54 – – 40 85 91 1,928 139 (1,520) (8) (264) (60) (251) (19) (2,802) (2,547) 42 117 (2,594) (394) (34) (15) 8 6 1,388 (45) 66 51 1,460 (171) 10 1,299 12 – 34 50 – 169 – 2,225 230 (871) (7) (266) – (432) – (2,107) (963) 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 Depreciation of property, plant and equipment Share-based payment expenses Operating cash flows before movements in working capital Increase in accounts receivable and other receivables (Decrease) increase in accounts payable and accruals 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 equity investments Dividends received from available-for-sale investments Proceeds on disposal of an investment property Proceeds on disposal of equity investments Proceeds upon maturity of principal-protected investments Proceeds upon maturity of term notes Proceeds upon maturity of time deposits with original maturity over three months Repayment from an associate Payments in respect of investment properties Purchases of property, plant and equipment Purchases of term notes Purchases of other financial assets Additions to principal-protected investments Acquisition of a subsidiary Additions to time deposits with original maturity over three months 34 Net cash used in investing activities 100 Hysan Annual Report 2011Consolidated Statement of Cash FlowsFor the year ended 31 December 2011 Note 2011 HK$ million 2010 HK$ million Financing activities Interest paid Payment of other finance costs Medium Term Note Programme expenses Dividends paid Dividends paid to non-controlling interests of a subsidiary Repayment of bank loans Redemption of fixed rate notes New bank loans Issue of fixed rate notes Proceeds on exercise of share options Net cash from (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 27 (128) (12) (2) (606) (94) (849) – 2,350 554 21 1,234 94 560 654 (97) (11) (1) (650) (83) (600) (68) 500 800 1 (209) 127 433 560 101 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 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: 1. 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 in full on consolidation. Non-controlling interests in subsidiaries are presented separately from the Group’s equity therein. Total comprehensive income and expenses of a subsidiary are attributed to the owners of the Company and to the non- 102 6. IMPAIRMENT OF NON-FINANCIAL ASSETS At the end of the reporting period, the Group or the Company reviews the carrying amounts of their assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the 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 as an expense 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 as income 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. 7. FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised in the statement of financial position 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. Financial assets (a) Classification and measurement prior to 1 January 2011 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 Hong Kong Accounting Standard (“HKAS”) 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial assets at FVTPL are measured at fair value, with changes in fair value arising from remeasurement 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 assets. (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. Subsequent to initial recognition, loans and receivables (including accounts receivable and other receivables, amounts due from subsidiaries, amount due from an associate, unlisted debt securities (see note 21 of the Notes to the Financial Statements section), 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). 104 Hysan Annual Report 2011Significant Accounting Policies continuedFor the year ended 31 December 20117. FINANCIAL INSTRUMENTS continued Financial assets continued (a) Classification and measurement prior to 1 January 2011 continued (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 classified its listed debt securities, which are denominated in US dollars (“USD”) (see note 21 of the Notes to the Financial Statements section), as held-to-maturity investments. 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 or the Company designated investments in equity securities and club debentures (if any) as available-for-sale financial assets. 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 other comprehensive income and accumulated 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 accumulated in the investments revaluation reserve is reclassified to profit or loss (see accounting policy on impairment of financial assets below). Subsequent to initial recognition, 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 (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 to the net carrying amount on initial recognition. Interest income is recognised on an effective interest basis for debt instruments, other than those financial assets classified as at FVTPL for which interest income is included in other gains and losses as disclosed in note 7 of the Notes to the Financial Statements section. (b) Classification and measurement on and after 1 January 2011 All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. (i) Classification of financial assets Debt instruments and hybrid contracts that meet the following conditions are subsequently measured at amortised cost less impairment loss (except for debt investments that are designated as at fair value through profit or loss on initial recognition): • • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other financial assets are subsequently measured at fair value. (ii) Amortised cost and effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument 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 and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Interest income is recognised on an effective interest basis for debt instruments measured subsequently at amortised cost. Interest income is recognised in profit or loss and is included in the investment income as disclosed in note 6 of the Notes to the Financial Statements section. 105 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview7. FINANCIAL INSTRUMENTS continued Financial assets continued (b) Classification and measurement on and after 1 January 2011 continued (iii) Financial assets at FVTPL Investments in equity instruments are classified as at FVTPL, unless the Group designates such investment that is not held for trading as at fair value through other comprehensive income (FVTOCI) on initial recognition (see (b)(iv) below). Debt instruments that do not meet the amortised cost criteria (see (b)(i) above) are measured at FVTPL. In addition, debt instruments that meet the amortised cost criteria but are designated as at FVTPL are measured at FVTPL. A debt instrument may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The Group or the Company has not designated any debt instrument as at FVTPL on initial application of Hong Kong Financial Reporting Standard (“HKFRS”) 9 and during the year. Debt instruments are reclassified from amortised cost to FVTPL when the business model is changed such that the amortised cost criteria are no longer met. Reclassification of debt instruments that are designated as at FVTPL on initial recognition is not allowed. Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss is included in other gains and losses as disclosed in note 7 of the Notes to the Financial Statements section. Fair value is determined in the manner described in note 3 of the notes to the Financial Risk Management section. Interest income on debt instruments as at FVTPL is included in other gains and losses described above. (iv) Financial assets at FVTOCI On initial recognition, the Group or the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments as at FVTOCI. Designation at FVTOCI is not permitted if the equity investment is held for trading. A financial asset is held for trading if it has been acquired principally for the purpose of selling it in the near term or it is a derivative that is not designated and effective as a hedging instrument. Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value with gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investments revaluation reserve. The cumulative gain or loss will not be reclassified to profit or loss on disposal of the investments. The Group or the Company has designated all investments in equity instruments (listed or unlisted) that are not held for trading as at FVTOCI on initial application of HKFRS 9 and during the year (see note 22 of the Notes to the Financial Statements section). Dividends on these investments in equity instruments are recognised in profit or loss when the Group’s or the Company’s right to receive the dividends is established in accordance with HKAS 18 “Revenue”, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends earned are recognised in profit or loss and are included in investment income as disclosed in note 6 of the Notes to the Financial Statements section. Impairment of financial assets (c) Financial assets, other than those at FVTPL and FVTOCI, are assessed for indicators of impairment at the end of the reporting period. 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 affected. Prior to 1 January 2011, 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. When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period in which the impairment takes place. Impairment losses for available-for-sale equity investments will not be reversed through profit or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in other comprehensive income and accumulated in investments revaluation reserve. 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. 106 Hysan Annual Report 2011Significant Accounting Policies continuedFor the year ended 31 December 20117. FINANCIAL INSTRUMENTS continued Financial assets continued (c) For all other financial assets, objective evidence of impairment could include: Impairment of financial assets continued • • • • significant financial difficulty of the issuer or counterparty; or breach of contract, such as default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or the disappearance of an active market for that financial asset because of financial difficulties. 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. Prior to 1 January 2011, 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 receivable and amounts due from subsidiaries and an associate, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When an account receivable or an amount due from a subsidiary or 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. (d) Derecognition of financial assets Financial assets are derecognised when the contractual 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 in its entirely, except for a financial asset that is classified as at FVTOCI, 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 in other comprehensive income and accumulated in investments revaluation reserve is recognised in profit or loss. On derecognition of a financial asset that is classified as at FVTOCI, the cumulative gain or loss previously accumulated in the investments revaluation reserve is not reclassified to profit or loss, but is transferred to retained profits. Financial liabilities and equity (a) Classification and measurement 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 subsequently measured at amortised cost. The Company’s financial liabilities are generally classified into other financial liabilities subsequently measured at amortised cost. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below. 107 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview7. FINANCIAL INSTRUMENTS continued Financial liabilities and equity continued (a) Classification and measurement continued (i) Financial liabilities at FVTPL Financial liabilities at FVTPL, representing those as held for trading, comprise derivatives that are not designated and effective as hedging instruments. Financial liabilities at FVTPL are measured at fair value, with changes in fair value arising on remeasurement 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 and is included in other gains and losses as disclosed in note 7 of the Notes to the Financial Statements section. (ii) Other financial liabilities subsequently measured at amortised cost Other financial liabilities (including accounts payable and accruals, other payable, amounts due to subsidiaries, amounts due to non-controlling interests and borrowings) are subsequently measured at amortised cost, using the effective interest method. Interest expense that is not capitalised as part of costs of an asset is included in finance costs as disclosed in note 8 of the Notes to the Financial Statements section. (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 is deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. (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 to the net carrying amount on initial recognition. 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 other gains and losses as disclosed in note 7 of the Notes to the Financial Statements section. (b) 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. Derivative financial instruments and hedging The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts and interest rate swaps. Further details of derivative financial instruments are disclosed in note 23 of the Notes to the Financial Statements section. 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 the end of the reporting period. 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. Embedded derivatives Derivatives embedded in non-derivative host contracts that are not financial assets within the scope of HKFRS 9 (e.g. financial liabilities) 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 FVTPL. Derivatives embedded in hybrid contracts that contain financial asset hosts within the scope of HKFRS 9 are not separated. The entire hybrid contracts are classified and subsequently measured as either amortised cost or FVTPL as appropriate. Prior to 1 January 2011, 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. 108 Hysan Annual Report 2011Significant Accounting Policies continuedFor the year ended 31 December 20117. FINANCIAL INSTRUMENTS continued Hedge accounting The Group designates certain derivatives as hedging instruments as either fair value hedges or cash flow hedges. At the inception of the hedging relationship, the Group 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 attributable to the hedged risk. Note 23 of the Notes to the Financial Statements section sets out details of the fair values of the derivative instruments used for hedging purposes. (a) Fair value hedges 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, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. (b) Cash flow hedges The effective portion of changes in the fair values of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated in hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in other gains and losses as disclosed in note 7 of the Notes to the Financial Statements section. Amounts previously recognised in other comprehensive income and accumulated in hedging reserve are reclassified to profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line of the consolidated income statement as the recognised hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any cumulative gain or loss accumulated in hedging reserve 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 accumulated in hedging reserve is recognised immediately in profit or loss. 8. 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. Turnover rent is recognised when earned. Management fee income and security service income are recognised when services are rendered. Dividends on investments in equity instruments are recognised in profit or loss when the shareholders’ right to receive payments has been established (provided that it is probable that the economic benefits will flow to the Group or the Company and the amount of revenue can be measured reliably), unless the dividends clearly represent a recovery of part of the cost of the investment in equity instruments designated as at FVTOCI. Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group or the Company and the amount of revenue can be measured reliably. 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 on initial recognition. 109 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview9. 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. The Group as lessor Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term. The Company as lessee Operating lease payments are recognised as an expense on a straight-line basis over the term of the relevant lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense over the lease term on a straight-line basis. 10. 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 the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that 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 retranslation 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 other comprehensive income and accumulated in translation reserve and will be reclassified from translation reserve to profit or loss on disposal of the foreign operation. 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 end of the reporting period, 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 in other comprehensive income and accumulated in translation reserve. 11. BORROwING COSTS Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 12. 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. 13. TAxATION Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable 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 end of the reporting period. 110 Hysan Annual Report 2011Significant Accounting Policies continuedFor the year ended 31 December 201113. TAxATION continued Deferred tax Deferred tax is recognised on temporary 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. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are generally 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 associated with 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. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of the reporting period 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 assets and liabilities are measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group or the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. For the purposes of measuring deferred tax liabilities and deferred tax assets for investment properties that are measured using the fair value model in accordance with HKAS 40 “Investment Property”, such properties’ value are presumed to be recovered through sale. Such a presumption is rebutted when the investment property is depreciable and is held within a business model of the Group or the Company whose business objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. If the presumption is rebutted, deferred tax liabilities and deferred tax assets for such investment properties are measured in accordance with the above general principles set out in HKAS 12 (i.e based on the expected manner as to how the properties will be recovered). Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively. 14. 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 share options reserve. At the end of the reporting period, 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. 111 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview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 (“HKD”), 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 have applied all of the new and revised Standards, Amendments to Standards and Interpretations (“new and revised HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are relevant to its operations and effective for the financial year beginning on 1 January 2011. In addition, the Group and the Company have applied Hong Kong Financial Reporting Standard (“HKFRS”) 9 “Financial Instruments” (as revised in December 2011) in advance of its effective date of 1 January 2015 in the current year. Except as described below, the adoption of these new and revised HKFRSs had no other material effect on the financial statements of the Group or the Company for the current and/or prior accounting years. HKFRS 9 “Financial Instruments” (as revised in December 2011) In the current year, the Group and the Company have applied HKFRS 9 in its entirety and the related consequential Amendments in advance of its effective date. The Group and the Company have chosen 1 January 2011 as its date of initial application (i.e. the date on which the Group and the Company have reassessed the classification of its financial assets and financial liabilities in accordance with requirements of HKFRS 9). The classification is based on the facts and circumstances as at 1 January 2011. In accordance with transition provisions set out in HKFRS 9, the Group and the Company have chosen not to restate comparative information, any difference between the carrying amount previously measured under Hong Kong Accounting Standard (“HKAS”) 39 “Financial Instruments: Recognition and Measurement” and the carrying amount subsequently measured under HKFRS 9 as at 1 January 2011 is recognised in the opening retained profits at the date of initial application. HKFRS 9 does not apply to financial assets and financial liabilities that have already been derecognised at date of initial application. Other than the changes in classification of certain financial assets, the changes in accounting policies had no material financial impact on the amounts recognised on the statement of financial position of the Group or the Company as at 1 January 2011. Accordingly, the statement of financial position of the Group or the Company as at 1 January 2010 is not presented. 112 Hysan Annual Report 2011Notes to the Financial StatementsFor the year ended 31 December 20112. APPLICATION OF NEw AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued HKFRS 9 “Financial Instruments” (as revised in December 2011) continued Financial assets HKFRS 9 introduces new classification and measurement requirements for financial assets that are within the scope of HKAS 39. Specifically, HKFRS 9 requires all financial assets to be classified and subsequently measured at either amortised cost or fair value on the basis of the Group’s or the Company’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. As required by HKFRS 9, debt instruments and hybrid contracts are subsequently measured at amortised cost only if (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (collectively referred to as the “amortised cost criteria”). All other financial assets are subsequently measured at fair value. However, the Group or the Company may choose at initial recognition to designate a debt instrument that meets the amortised cost criteria as at fair value through profit or loss (“FVTPL”) if doing so eliminates or significantly reduces an accounting mismatch. Debt instruments that are subsequently measured at amortised cost are subject to impairment. Investments in equity instruments are classified and measured as at FVTPL except when the equity investment is not held for trading and is designated by the Group as at fair value through other comprehensive income (“FVTOCI”). If the equity investment is designated as at FVTOCI, all gains and losses are recognised in other comprehensive income and are not subsequently reclassified to profit or loss except for dividend income, which is recognised in profit or loss in accordance with HKAS 18 “Revenue” unless the dividend income clearly represents a recovery of part of the cost of the investments. As at 1 January 2011, the Directors of the Company have reviewed and reassessed the Group’s financial assets on that date. The initial application of HKFRS 9 has had impacts on the following financial assets of the Group: (i) (ii) the Group’s investments in listed equity securities (not held for trading) of HK$1,147 million that were previously classified as available-for-sale investments and measured at fair value at each reporting date under HKAS 39 have been designated as at FVTOCI; and the Group’s investments in unlisted equity securities (not held for trading) of HK$3 million that were previously classified as available-for-sale investments and measured at cost less impairment at each reporting date under HKAS 39 have been designated as at FVTOCI. 113 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview2. APPLICATION OF NEw AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued HKFRS 9 “Financial Instruments” (as revised in December 2011) continued Financial assets continued The list below illustrates the classification and measurement of the financial assets under HKAS 39 and HKFRS 9 at the date of initial application. Original measurement category under HKAS 39 New measurement category under HKFRS 9 Financial assets designated as at FVTPL Financial assets at FVTPL Held-to-maturity investments/loans and receivables Financial assets at amortised cost Financial assets designated as at FVTOCI Financial assets designated as at FVTOCI Available-for-sale investments (Note 22) Financial assets at FVTPL (Note 23) Derivatives designated as hedging instruments Derivatives designated as hedging instruments Derivatives designated as hedging instruments Derivatives designated as hedging instruments Derivatives designated as hedging instruments Derivatives designated as hedging instruments Original carrying amount under HKAS 39 HK$ million New carrying amount under HKFRS 9 HK$ million 462 263 462 263 1,147 1,147 3 2 1 2 1 3 2 1 2 1 Derivatives designated as hedging instruments Derivatives designated as hedging instruments 50 50 Financial assets at FVTPL Financial assets at FVTPL 38 38 Loans and receivables Loans and receivables Loans and receivables Loans and receivables Financial assets at amortised cost Financial assets at amortised cost Financial assets at amortised cost Financial assets at amortised cost 177 139 177 139 1,930 1,930 63 63 Principal-protected investments (Note 20) Term notes (Note 21) Investments in listed equity securities (Note 22) Available-for-sale investments Investments in unlisted equity securities (Note 22) Available-for-sale investments Investments in club debentures Other financial assets: Forward foreign exchange contracts under cash flow hedges (Note 23) Other financial assets: Cross currency swaps under cash flow hedges (Note 23) Other financial assets: Basis swaps under cash flow hedges (Note 23) Other financial assets: Interest rate swaps under fair value hedges (Note 23) Other financial assets: Cross currency swaps classified as held for trading (not under hedge accounting) (Note 23) Accounts receivable and other receivables (Note 24) Amount due from an associate (Note 26) Time deposits (Note 27) Cash and bank balances (Note 27) 114 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 2. APPLICATION OF NEw AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued HKFRS 9 “Financial Instruments” (as revised in December 2011) continued Financial assets continued The application of HKFRS 9 affected the Group’s result in the current year as follows: (i) The cumulative gain resulted upon disposal of investments in listed equity securities of HK$33 million that would have been reclassified from investments revaluation reserve to profit or loss under HKAS 39 is now recognised as a transfer from investments revaluation reserve to retained profits. Accordingly, both the investment income and profit reported for the year ended 31 December 2011 have been decreased by HK$33 million as a result of the change in accounting policy, resulting in a decrease on both the Group’s basic and diluted earnings per share by HK3.12 cents for the year ended 31 December 2011. (ii) The Group’s unlisted equity securities previously measured at cost less impairment under HKAS 39 are now measured at fair value under HKFRS 9 and have been designated as at FVTOCI. The carrying amounts of these investments approximated their fair values as at 1 January 2011. During the year ended 31 December 2011, net fair value losses of HK$2 million, which would have been recognised as impairment losses in profit or loss under HKAS 39, have been recognised as other comprehensive expense. Accordingly, both the investment income and profit reported for the year ended 31 December 2011 have been increased by HK$2 million as a result of the change in accounting policy, resulting in an increase on both the Group’s basic and diluted earnings per share by HK0.19 cents for the year ended 31 December 2011. The fair value measurements of the Group’s unlisted equity securities are grouped into Level 3, which are derived from valuation techniques that include inputs for the assets that are not based on observable market data (unobservable inputs). Financial liabilities HKFRS 9 also contains requirements for the classification and measurement of financial liabilities. One major change in the classification and measurement of financial liabilities relates to the accounting for changes in fair value of a financial liability (designated as at FVTPL) attributable to changes in the credit risk of that liability. 115 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview2. APPLICATION OF NEw AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued HKFRS 9 “Financial Instruments” (as revised in December 2011) continued Financial liabilities continued The list below illustrates the classification and measurement of the financial liabilities under HKAS 39 and HKFRS 9 at the date of initial application. Original measurement category under HKAS 39 New measurement category under HKFRS 9 Financial liabilities at amortised cost Financial liabilities at amortised cost Financial liabilities at amortised cost Financial liabilities at FVTPL Financial liabilities at amortised cost Financial liabilities at amortised cost Financial liabilities at amortised cost Financial liabilities at FVTPL Original carrying amount under HKAS 39 HK$ million New carrying amount under HKFRS 9 HK$ million 433 327 433 327 4,587 4,587 48 48 Financial liabilities at FVTPL Financial liabilities at FVTPL 4 4 Accounts payable and accruals (Note 28) Amounts due to non-controlling interests (Note 29) Borrowings (Note 30) Other financial liabilities: Interest rate swaps under cash flow hedges (Note 23) Other financial liabilities: Net basis swaps classified as held for trading (not under hedge accounting) (Note 23) The Group and the Company have not early applied the following new and revised Standards, Amendments to Standards and Interpretations that have been issued but are not yet effective. HKAS 1 (Amendments) HKAS 19 (2011) HKAS 27 (2011) HKAS 28 (2011) HKAS 32 (Amendments) HKFRS 7 (Amendments) HKFRS 10 HKFRS 11 HKFRS 12 HKFRS 13 HK(IFRIC) – Int 20 Presentation of Items of Other Comprehensive Income1 Employee Benefits2 Separate Financial Statements2 Investments in Associates and Joint Ventures2 Offsetting Financial Assets and Financial Liabilities3 Disclosure – Transfers of Financial Assets4 Disclosure – Offsetting Financial Assets and Financial Liabilities2 Consolidated Financial Statements2 Joint Arrangements2 Disclosure of Interests in Other Entities2 Fair Value Measurement2 Stripping Costs in the Production Phase of a Surface Mine2 1 Effective for annual periods beginning on or after 1 July 2012. 2 Effective for annual periods beginning on or after 1 January 2013. 3 Effective for annual periods beginning on or after 1 January 2014. 4 Effective for annual periods beginning on or after 1 July 2011. 116 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 2. APPLICATION OF NEw AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued Amendments to HKAS 32 “Offsetting Financial Assets and Financial Liabilities” and Amendments to HKFRS 7 “Disclosures – Offsetting Financial Assets and Financial Liabilities” The amendments to HKAS 32 clarify existing application issues relating to the offsetting requirements. Specifically, the amendments clarify the meaning of “currently has a legally enforceable right of set-off” and “simultaneous realisation and settlement”. The amendments to HKFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. The amended offsetting disclosures are required for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. The disclosures should also be provided retrospectively for all comparative periods. However, the amendments to HKAS 32 are not effective until annual periods beginning on or after 1 January 2014, with retrospective application required. HKFRS 13 “Fair Value Measurement” HKFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The Standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of HKFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other HKFRSs require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in HKFRS 13 are more extensive than those in the current standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under HKFRS 7 “Financial Instruments: Disclosures” will be extended by HKFRS 13 to cover all assets and liabilities within its scope. HKFRS 13 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. The Directors of the Company anticipate that the application of this new Standard may result in more extensive disclosures in the consolidated financial statements. Other than as described above, the Directors of the Company anticipate that the application of the other new and revised Standards, Amendments to Standards and Interpretations will have no material impact on the results and the financial position of the Group or the Company. 117 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview3. 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 is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Fair value of investment properties At the end of the reporting period, the Group’s investment properties are stated at fair value of HK$49,969 million (2010: HK$40,833 million) based on the valuation performed by an independent qualified professional valuer. In determining the fair value, the valuers have applied a 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. Fair value of financial instruments Financial instruments, such as interest rate swaps, cross currency swaps and foreign exchange derivatives, are carried in the consolidated statement of financial position at fair value, as disclosed in note 23. The management of the Company uses its judgment in selecting an appropriate valuation technique for financial instruments not quoted in an active market. Valuation techniques commonly used by market practitioners are applied. For derivative financial instruments, assumptions are made based on quoted market rates. Most of the financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market prices or rates. 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 and management fee income for the year. The Group’s principal activities are property investment, management and development, and its turnover and results are principally derived from investment properties located in Hong Kong. 5. SEGMENT INFORMATION Based on the internal reports about components of the Group that are regularly reviewed by the chief operating decision maker (i.e. Chief Executive Officer of the Group) in order to allocate resources to segments and to assess their performance, the Group’s operating segments are as follows: Office segment – leasing of high quality office space and related facilities Retail segment – leasing of space and related facilities to a variety of retail and leisure operators Residential segment – leasing of luxury residential properties and related facilities 118 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 20115. SEGMENT INFORMATION continued Segment turnover and results 119 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview6. INVESTMENT INCOME Investment income comprises: Dividends from – listed investments – unlisted investments Interest income The following is an analysis of investment income: Held-to-maturity investments Available-for-sale equity investments Loans and receivables (including term notes, time deposits and bank balances) Dividends from equity investments designated as at FVTOCI Financial assets measured at amortised cost Reclassification of losses from hedging reserve on financial instruments designated as cash flow hedges 2011 HK$ million 2010 HK$ million 43 11 36 90 34 – 15 49 2011 HK$ million 2010 HK$ million – – – 54 40 (4) 90 1 34 14 – – – 49 Fair value gains and losses and interest income on financial assets classified or designated as at FVTPL are disclosed in note 7. 7. OTHER GAINS AND LOSSES Other gains and losses comprise: Change in fair value of financial assets or financial liabilities classified as at FVTPL Change in fair value of financial assets designated as at FVTPL Change in fair value of financial assets or financial liabilities classified as held for trading Gains on hedging instruments under fair value hedge Losses on adjustment for hedged items under fair value hedge Amortisation of fair value gain adjusted to hedged items under fair value hedge in prior years 2011 HK$ million 2010 HK$ million (33) – – 16 (17) – (34) – (1) (18) 19 (19) (23) (42) 121 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 8. 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 Other finance costs Less: Amounts capitalised (Note) Net interest receipts on interest rate swaps and cross currency swaps Reclassification of losses from hedging reserve on financial instruments designated as cash flow hedges Premium on redemption of fixed rate notes Medium Term Note Programme expenses 2011 HK$ million 2010 HK$ million 24 2 116 44 14 200 7 (44) 163 (68) 25 – 2 122 13 3 116 18 13 163 10 (12) 161 (69) 18 6 1 117 Note: Interest expenses have been capitalised to investment properties under redevelopment at an average interest rate of 2.88% (2010: 1.60%) per annum. 9. TAxATION Current tax Hong Kong profits tax – current year – underprovision (overprovision) in prior years Deferred tax (note 31) 2011 HK$ million 2010 HK$ million 207 1 208 9 217 172 (6) 166 35 201 Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit for both years. 122 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 9. TAxATION continued 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% 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 previously unrecognised unused tax losses now recognised as deferred tax assets Reversal of previously recognised taxable temporary differences Utilisation of estimated tax losses previously not recognised Underprovision (overprovision) in prior years Taxation for the year 2011 HK$ million 2010 HK$ million 9,207 1,519 (42) 46 (1,298) 3 (10) (2) – 1 217 4,252 701 (65) 18 (447) 1 – – (1) (6) 201 In addition to the amount charged to the consolidated income statement, deferred tax relating to the revaluation of the Group’s properties held for own use has been charged directly to properties valuation reserve (see note 31). 10. PROFIT FOR THE YEAR Profit for the year has been arrived at after charging (crediting): Auditor’s remuneration Depreciation of property, plant and equipment Gross rental income from investment properties including contingent rentals of HK$89 million (2010: HK$54 million) Less: – Direct operating expenses arising from properties that generated rental income – Direct operating expenses arising from properties that did not generate rental income Staff costs, comprising: – Directors’ emoluments (note 12) – Share-based payments – Other staff costs Share of income tax of an associate (included in share of results of associates) 2011 HK$ million 2010 HK$ million 2 8 2 8 (1,705) (1,554) 233 29 247 3 (1,443) (1,304) 21 4 168 193 92 14 4 147 165 153 123 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 11. OTHER COMPREHENSIVE INCOME Other comprehensive income comprises: Losses arising from equity investments designated as at FVTOCI Gain arising from available-for-sale investments Cash flow hedges: – Losses arising during the year – Reclassification adjustments for losses included in profit or loss Gain on revaluation of properties held for own use Share of translation reserve of an associate Other comprehensive income (before tax) Income tax relating to components of other comprehensive income (see below) Other comprehensive income for the year (net of tax) Tax effect relating to other comprehensive income: 2011 HK$ million 2010 HK$ million (121) – (25) 29 4 85 155 123 (14) 109 – 150 (40) 18 (22) 34 103 265 (5) 260 Before-tax amount Net-of-tax amount HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Before-tax amount Net-of-tax amount 2011 Tax expense 2010 Tax expense Fair value losses arising from equity investments Fair value gains arising from available-for-sale investments Net gains (losses) on cash flow hedges Gain on revaluation of properties held for own use Share of translation reserve of an associate (121) – (121) – – 4 85 155 123 – – (14) – (14) – 4 71 155 109 150 (22) 34 103 265 – – – (5) – (5) – 150 (22) 29 103 260 12. DIRECTORS’ EMOLUMENTS Directors’ fees Other emoluments Basic salaries, housing and other allowances Bonus Share-based payments (note 40) Retirement benefits scheme contributions 2011 HK$ million 2010 HK$ million 2 8 7 3 1 21 2 8 2 2 – 14 124 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 12. DIRECTORS’ EMOLUMENTS continued The emoluments paid or payable to each of the Directors of the Company for the two years ended 31 December 2011, calculated with reference to their employment as Directors of the Company, are set out below: Basic salaries, housing and other allowances HK$’000 (Note b) Directors’ fees HK$’000 (Note a) Share-based Retirement benefits scheme payments contributions HK$’000 HK$’000 (Note c) Bonus HK$’000 (Note b) Total HK$’000 For the year ended 31 December 2011 Executive Directors Gerry Lui Fai YIM (Note d) Wendy Wen Yee YUNG Non-executive Directors Irene Yun Lien LEE (Note e) Hans Michael JEBSEN Siu Chuen LAU (Note f) Anthony Hsien Pin LEE Chien LEE (Note d) Michael Tze Hau LEE Dr. Deanna Ruth Tak Yung RUDGARD (Note g) Independent non-executive Directors Sir David AKERS-JONES (Notes d & h) Nicholas Charles ALLEN (Note d) Philip Yan Hok FAN (Note d) Joseph Chung Yin POON For the year ended 31 December 2010 Executive Directors Gerry Lui Fai YIM (Note i) Wendy Wen Yee YUNG Non-executive Directors Hans Michael JEBSEN Anthony Hsien Pin LEE (Note j) Chien LEE (Note k) Michael Tze Hau LEE (Note l) Dr. Deanna Ruth Tak Yung RUDGARD Independent non-executive Directors Sir David AKERS-JONES (Note m) Fa-kuang HU (Note n) Dr. Geoffrey Meou-tsen YEH (Note o) Nicholas Charles ALLEN Philip Yan Hok FAN (Note p) Joseph Chung Yin POON (Note q) 57 38 5,255 2,977 4,424 2,520 1,880 1,351 12 274 11,628 7,160 318 159 140 206 201 191 35 177 265 281 159 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 318 159 140 206 201 191 35 177 265 281 159 2,227 8,232 6,944 3,231 286 20,920 108 100 107 130 119 105 100 652 43 61 160 132 97 4,854 2,805 – 1,476 1,089 1,293 13 259 6,064 5,933 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 107 130 119 105 100 652 43 61 160 132 97 1,914 7,659 1,476 2,382 272 13,703 125 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 12. DIRECTORS’ EMOLUMENTS continued Notes: (a) Directors fees scales for Board and Board Committees were revised and approved by shareholders at the annual general meeting held on 9 May 2011 and took effect on 1 June 2011. Details are set out in Directors’ Remuneration and Interests Report. Director’s fees are paid on annual basis. For Directors not having served the full year on a position, the fees will be paid on pro rata basis. Breakdown of Directors’ fees of each of the Directors of the Company for the year ended 31 December 2011 is set out below: Board HK$’000 Audit Remuneration Committee HK$’000 Committee HK$’000 Strategy Nomination Committee HK$’000 Committee HK$’000 2011 Total HK$’000 2010 Total HK$’000 Executive Directors Gerry Lui Fai YIM (Note d) Wendy Wen Yee YUNG Non-executive Directors Irene Yun Lien LEE (Note e) Hans Michael JEBSEN Siu Chuen LAU (Note f) Anthony Hsien Pin LEE Chien LEE (Note d) Michael Tze Hau LEE Dr. Deanna Ruth Tak Yung RUDGARD (Note g) Independent non-executive Directors Sir David AKERS-JONES (Notes d & h) Nicholas Charles ALLEN (Note d) Philip Yan Hok FAN (Note d) Joseph Chung Yin POON Fa-kuang HU (Note n) Dr. Geoffrey Meou-tsen YEH (Note o) 38 38 276 159 124 159 159 159 35 141 159 159 159 – – – – – – – 47 – – – – 84 48 – – – 1,765 179 – – – – – – – 32 – 11 – 32 – – – 75 11 – 23 – 16 – 22 – – 14 22 22 – – – 8 – 19 – – – 20 – – 11 – 20 – – – 57 38 318 159 140 206 201 191 35 177 265 281 159 – – 108 100 – 107 – 130 119 105 100 652 160 132 97 43 61 130 78 2,227 1,914 (b) Year 2011: The Remuneration Committee reviewed the 2011 fixed base salary of the Company’s executive Directors and determined their 2010 performance-based bonus in March 2011. The stated bonus figures show the 2010 performance-based bonus approved by the Committee and paid to Executive Directors, namely HK$4,424,000 for Gerry Lui Fai YIM and HK$2,520,000 for Wendy Wen Yee YUNG respectively. Year 2010: The Remuneration Committee reviewed the 2010 fixed base salary of the Company’s executive Directors and determined their 2009 performance-based bonus in March 2010. In reviewing their 2010 compensation structure, changes in their roles and responsibilities were also taken into consideration. Their base salary was raised as from April 2010. The stated bonus figures show the 2009 performance-based bonus approved by the Committee and paid to Executive Director, namely HK$1,475,512 for Wendy Wen Yee YUNG. (c) 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. (d) The Strategy Committee was formed on 16 November 2010. Sir David AKERS-JONES was appointed Chairman of the Committee. Gerry Lui Fai YIM, Chien LEE, Nicholas Charles ALLEN and Philip Yan Hok FAN were appointed members of the Committee on the same date. (e) Irene Yun Lien LEE was appointed Non-executive Director and member of Strategy Committee on 9 March 2011. She was appointed Non-executive Chairman of the Board, Chairman of the Nomination Committee and the Strategy Committee respectively as from the conclusion of 2011 Annual General Meeting held on 9 May 2011. (f) Siu Chuen LAU (as alternate to Deanna Ruth Tak Yung RUDGARD) was appointed member of Strategy Committee on 9 March 2011. He was also appointed Non-executive Director as from the conclusion of 2011 Annual General Meeting held on 9 May 2011. (g) Dr. Deanna Ruth Tak Yung RUDGARD stepped down as Non-executive Director as from the conclusion of 2011 Annual General Meeting held on 9 May 2011. (h) Sir David AKERS-JONES stepped down as Independent non-executive Chairman and Chairman of the Remuneration Committee, the Nomination Committee and the Strategy Committee respectively as from the conclusion of 2011 Annual General Meeting held on 9 May 2011. 126 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 12. DIRECTORS’ EMOLUMENTS continued (i) Gerry Lui Fai YIM was appointed Chief Executive Officer on 10 March 2010 and member of the Nomination Committee on 10 August 2010. (j) Anthony Hsien Pin LEE was appointed member of the Audit Committee as from the conclusion of 2010 Annual General Meeting held on 11 May 2010. (k) Chien LEE was appointed member of the Nomination Committee on 10 August 2010. (l) Michael Tze Hau LEE was appointed Non-executive Director and member of the Remuneration Committee on 11 January 2010 and 10 August 2010 respectively. (m) Sir David AKERS-JONES was appointed Independent non-executive Chairman on 11 January 2010. A special fee of HK$300,000 was granted to Sir David AKERS-JONES in recognition of his special roles during the period from 18 October 2009 to the appointment of the Chief Executive Officer on 10 March 2010. The annual fee for the Independent non-executive Chairman was revised from HK$140,000 to HK$400,000 effective from 1 June 2010. (n) Fa-kuang HU stepped down as Independent non-executive Director and member of the Remuneration Committee as from the conclusion of 2010 Annual General Meeting held on 11 May 2010. (o) Dr. Geoffrey Meou-tsen YEH stepped down as Independent non-executive Director and member of the Audit Committee, Remuneration Committee and Nomination Committee as from the conclusion of 2010 Annual General Meeting held on 11 May 2010. (p) Philip Yan Hok FAN was appointed Independent non-executive Director on 11 January 2010 and member of the Audit Committee as from 11 May 2010. He was also appointed member of the Remuneration Committee and the Nomination Committee on 10 August 2010. (q) Joseph Chung Yin POON was appointed Independent non-executive Director on 11 January 2010. 13. EMPLOYEES’ EMOLUMENTS Of the five individuals with the highest emoluments in the Group, two (2010: two) were Directors of the Company, details of whose emoluments are included in note 12 above. The emoluments of all of the five individuals with the highest emoluments for the year ended 31 December 2011 and 2010 were as follows: Basic salaries, housing and other allowances Bonus Share-based payments (Note) 2011 HK$ million 2010 HK$ million 16 9 5 30 14 4 4 22 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: HK$2,500,001 to HK$3,000,000 HK$3,000,001 to HK$3,500,000 HK$3,500,001 to HK$4,000,000 HK$4,000,001 to HK$4,500,000 HK$4,500,001 to HK$5,000,000 HK$5,500,001 to HK$6,000,000 HK$6,000,001 to HK$6,500,000 HK$7,000,001 to HK$7,500,000 HK$11,500,001 to HK$12,000,000 Number of individuals 2011 2010 – 1 1 – 1 – – 1 1 5 1 1 – 1 – 1 1 – – 5 The five individuals with the highest emoluments in the Group were also the senior management of the Group. 127 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 14. DIVIDENDS (a) Dividends recognised as distribution during the year: 2011 interim dividend paid – HK15 cents per share 2010 interim dividend paid – HK14 cents per share 2010 final dividend paid – HK60 cents per share 2009 final dividend paid – HK54 cents per share 2011 HK$ million 2010 HK$ million 159 – 632 – 791 – 147 – 567 714 Scrip dividend alternatives were offered to the shareholders in respect of the above dividends. These alternatives were accepted by the shareholders as follows: 2011 interim dividend (2010 interim dividend): – Cash payment – Share alternative 2010 final dividend (2009 final dividend): – Cash payment – Share alternative (b) Dividends proposed after the end of the reporting period: 2011 HK$ million 2010 HK$ million 142 17 464 168 791 112 35 538 29 714 2011 HK$ million 2010 HK$ million Final dividend proposed – HK64 cents per share (2010: HK60 cents per share) 678 632 The 2011 final dividend of HK64 cents per share (2010: HK60 cents per share) has been proposed by the Directors on 8 March 2012 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 2011. The proposed 2011 final dividend will be payable in cash with a scrip dividend alternative. 128 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 15. EARNINGS PER SHARE (a) Basic and diluted earnings per share The calculation of the basic and diluted earnings per share attributable to the owners 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 owners 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 2011 HK$ million 2010 HK$ million 8,545 3,844 Number of shares 2011 2010 1,057,109,763 1,051,785,240 817,621 900,002 1,057,927,384 1,052,685,242 For 2011, 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 of those options are higher than the average market price for shares. (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 owners of the Company should be adjusted in the calculation of basic earnings per share as follows: Profit for the year attributable to owners of the Company Change in fair value of investment properties Effect of non-controlling interests’ shares Share of change in fair value of investment properties (net of deferred taxation) of an associate Underlying Profit Recurring Underlying Profit Notes: 2011 2010 Basic earnings per share HK cents 808.34 (712.51) 33.58 Profit HK$ million 3,844 (2,594) 125 Basic earnings per share HK cents 365.47 (246.63) 11.89 Profit HK$ million 8,545 (7,532) 355 (58) (5.49) (227) (21.58) 1,310 1,310 123.92 123.92 1,148 1,148 109.15 109.15 (1) Recurring Underlying Profit is arrived at by excluding from Underlying Profit items that are non-recurring in nature (such as gains or losses on disposal of long-term assets; impairment or its reversal; and tax provisions for prior years). As there were no such adjustments in both years, the Recurring Underlying Profit is the same as the Underlying Profit. (2) The denominators used are the same as those detailed above for basic earnings per share. 129 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 16. INVESTMENT PROPERTIES Fair value At 1 January Additions Acquisition of a subsidiary (note 34) Disposal Transfer to property, plant and equipment Change in fair value recognised in profit or loss At 31 December The carrying amount of investment properties shown above comprises: Land in Hong Kong: – Medium-term lease – Long lease The Group 2011 HK$ million 2010 HK$ million 40,833 1,601 19 – (16) 7,532 49,969 37,363 926 – (50) – 2,594 40,833 The Group 2011 HK$ million 2010 HK$ million 7,680 42,289 49,969 7,130 33,703 40,833 The fair value of the Group’s investment properties at 31 December 2011 and 2010 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. 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 net income with due allowance for the reversionary income and redevelopment potential. For the investment properties under redevelopment, residual method of valuation was adopted. The valuation was mainly arrived at by reference to actual sales or rental information publicly available to determine the value of the proposed development as if it were completed as at the date of valuation. All of the Group’s property interests held under operating leases to earn rentals or for capital appreciation purposes are measured using the fair value model and are classified and accounted for as investment properties. During the year ended 31 December 2011, certain investment properties with a fair value of HK$16 million became property, plant and equipment because their uses have changed as evidenced by commencement of owner-occupation. 130 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 17. PROPERTY, PLANT AND EQUIPMENT Leasehold land and buildings in Hong Kong HK$ 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 2010 Additions Surplus on revaluation At 31 December 2010 Additions Transfer from investment properties Surplus on revaluation At 31 December 2011 Comprising: At cost At valuation 2011 Accumulated depreciation At 1 January 2010 Provided for the year Eliminated on revaluation At 31 December 2010 Provided for the year Eliminated on revaluation At 31 December 2011 Carrying amounts At 31 December 2011 At 31 December 2010 381 – 32 413 – 16 83 512 – 512 512 – 2 (2) – 2 (2) – 512 413 59 3 – 62 4 – – 66 66 – 66 51 3 – 54 3 – 57 9 8 27 4 – 31 4 – – 35 35 – 35 21 2 – 23 3 – 26 9 8 1 – – 1 – – – 1 1 – 1 – 1 – 1 – – 1 – – 468 7 32 507 8 16 83 614 102 512 614 72 8 (2) 78 8 (2) 84 530 429 131 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 17. PROPERTY, PLANT AND EQUIPMENT continued Furniture, fixtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million The Company Cost At 1 January 2010 Additions At 31 December 2010 Additions At 31 December 2011 Accumulated depreciation At 1 January 2010 Provided for the year At 31 December 2010 Provided for the year At 31 December 2011 Carrying amounts At 31 December 2011 At 31 December 2010 23 1 24 1 25 21 1 22 1 23 2 2 25 3 28 3 31 20 1 21 2 23 8 7 1 – 1 – 1 – 1 1 – 1 – – 49 4 53 4 57 41 3 44 3 47 10 9 The above items of property, plant and equipment are depreciated on a straight-line basis at the following rates per annum: Leasehold land and buildings Furniture, fixtures and equipment Computers Motor vehicles Over the term of the lease or 40 years 20% 20% 25% The Group’s leasehold land and buildings were revalued at 31 December 2011 and 2010 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 gain of HK$85 million (2010: HK$34 million) arising on revaluation have been recognised in other comprehensive income and accumulated in properties revaluation reserve. Had the Group’s land and buildings been measured on a historical cost basis, their carrying amounts would have been HK$182 million (2010: HK$168 million) at the end of the reporting period. Furniture, fixtures and equipment of the Group include assets carried at cost of HK$25 million (2010: HK$24 million) and accumulated depreciation of HK$21 million (2010: HK$20 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 (2010: HK$1 million). There is no property, plant and equipment of the Company held for renting out under operating leases for the year or at the end of the reporting period. 132 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 18. INVESTMENTS IN SUBSIDIARIES Investments in subsidiaries comprise: Unlisted shares, at cost Deemed capital contribution in subsidiaries The Company 2011 HK$ million 2010 HK$ million – 1,904 1,904 – – – The table below lists the principal subsidiaries of the Group at 31 December 2011 and 2010: Name of subsidiary Place of incorporation/ operation Issued share capital Proportion of nominal value of issued share capital held by the Company indirectly directly Admore Investments Limited Golden Capital Investment Limited HD Treasury Limited Hysan (MTN) Limited Hysan China Holdings Limited Hysan Corporate Services Limited Hong Kong Hong Kong Hong Kong British Virgin Islands/ Hong Kong British Virgin Islands Hong Kong HK$2 HK$2 HK$2 US$1 HK$1 HK$2 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 HK$2 Hong Kong HK$2 Hong Kong HK$2 Hong Kong HK$1 British Virgin Islands HK$1,000 Hong Kong HK$2 Hong Kong Hong Kong HK$2 Hong Kong HK$300,000 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – – – – – – Teamfine Enterprises Limited Bamboo Grove Recreational Services Limited Earn Extra Investments Limited Gearup Investments Limited HD Investment Limited Kochi Investments Limited Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands British Virgin Islands HK$2 HK$2 HK$1 HK$1 HK$1 HK$1 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$10,000 100% – – 100% – – – – 100% 100% 100% 100% 100% – 100% – 100% – 100% – 100% – – 100% – 65.36% Principal activities Investment holding Investment holding Treasury operation Treasury operation Investment holding Provision of corporate services Leasing administration Property management Treasury operation Investment holding Property investment Property investment Property investment Provision of security services Investment holding Resident club management Property investment Property development Investment holding Capital market investment Property investment Property investment Investment holding Property investment Property investment Property investment Property investment The Directors are of the opinion that a complete list of all subsidiaries and their particulars will be of excessive length and therefore the above table contains only those subsidiaries which materially contribute to the net income of the Group or hold a material portion of the assets or liabilities or otherwise are operating subsidiaries of the Group. Other than floating rate notes, fixed rate notes and zero coupon notes issued by Hysan (MTN) Limited as disclosed in note 30, none of the subsidiaries had issued any debt securities at the end of the reporting period. 133 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 19. INVESTMENTS IN ASSOCIATES Cost of unlisted investments Share of post-acquisition profits and other comprehensive income, net of dividends received Loan to an associate Less: Loss allocated in excess of cost of investments The Group 2011 HK$ million 2010 HK$ million 3 3 3,417 3,420 118 (115) 3 3,008 3,011 119 (116) 3 3,423 3,014 Loan to an associate of HK$118 million (2010: HK$119 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. Details of the Group’s associates at 31 December 2011 and 2010 are as follows: Name of associate Form of business structure Place of registration and operation Class of share held/ registered capital Effective interest held by the Group Principal activities Country Link Enterprises Limited Private limited company Shanghai Kong Hui Property Development Co., Ltd Shanghai Grand Gateway Plaza Property Management Co., Ltd Sino-Foreign equity joint venture Sino-Foreign equity joint venture Hong Kong Ordinary share 26.3%* Investment holding The PRC US$165,000,000# 24.7%* Property development and leasing The PRC US$140,000# 23.7%* Property management Wingrove Investment Pte Ltd Private company limited by shares Singapore Ordinary share 25.0%* Property development and investment (inactive in both 2011 and 2010) * # Indirectly held Registered capital 134 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 19. INVESTMENTS IN ASSOCIATES continued The summarised financial information in respect of the Group’s associates based on the unaudited management accounts for the year ended 31 December 2011 and 2010 is as follows: Total assets Total liabilities Net assets Group’s share of net assets of associates Turnover Profit for the year Group’s share of results of associates for the year 2011 HK$ million 2010 HK$ million 18,055 (4,677) 13,378 3,305 1,317 964 254 16,690 (4,920) 11,770 2,895 1,184 1,498 394 20. PRINCIPAL-PROTECTED INVESTMENTS The carrying amounts of principal-protected investments based on the maturity dates of respective contracts are analysed as follows: Within 1 year More than 1 year but not exceeding 5 years The Group 2011 HK$ million 2010 HK$ million 265 365 630 84 378 462 The Group entered into certain contracts of structured investments with certain financial institutions. The structured investments are principal-protected at the maturity dates and contain embedded derivatives which are not closely related to the host contracts. The interest rates of such investments vary in relation to the relative movements of the underlying variables, such as foreign exchange rates and 3-month Hong Kong Interbank Offered Rate (“HIBOR”). Prior to 1 January 2011, the entire combined contracts have been designated as financial assets at FVTPL on initial recognition. Upon the application of HKFRS 9 on 1 January 2011, the Group’s principal-protected investments that were previously designated as financial assets at FVTPL have been classified as financial assets at FVTPL. The investments previously designated as at FVTPL under HKAS 39, continue to be measured at FVTPL because they do not meet the amortised cost criteria under HKFRS 9. The notional amount and the maturity period of the principal-protected investments are as follows: Within 1 year More than 1 year but not exceeding 5 years The Group 2011 2010 Notional amount HK$ million Fair value HK$ million Notional amount HK$ million Fair value HK$ million 262 371 633 265 365 630 81 382 463 84 378 462 135 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 21. TERM NOTES Term notes, at amortised cost, comprise: – Debt securities listed in Hong Kong – Debt securities listed in overseas – Unlisted debt securities Total Analysed for reporting purposes as: Current assets Non-current assets The Group 2011 HK$ million 2010 HK$ million 19 120 291 430 171 259 430 – 216 47 263 95 168 263 136 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 23. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges (i) Foreign currency risk During the year, the Group used forward foreign exchange contracts and cross currency swaps to manage its foreign currency exposure. The principal terms of the forward foreign exchange contracts and cross currency swaps have been negotiated to match the major terms of the respective designated hedged items and the management considers that the hedges are highly effective. The table below is prepared based on the maturity dates of respective contracts. The major terms of these outstanding forward foreign exchange contracts and cross currency swaps at the end of the reporting period are as follows: 2011 2010 The Group Average exchange Foreign rate* currency Fair value HK$ million million million Notional amount HK$ Average exchange Foreign rate* currency Notional amount HK$ Fair value HK$ million million million Forward foreign exchange contracts Buy US dollars (“USD”) (Note a) Within 1 year More than 1 year but not exceeding 5 years Sell USD (Note b) Within 1 year More than 1 year but not exceeding 5 years Sell Renminbi (“RMB”) (Note c) Within 1 year Cross currency swaps Hedging interest and principal of Australian dollars (“AUD”) bank loan (Note d) More than 1 year but not exceeding 5 years Hedging interest and principal of USD bank loans (Note e) More than 1 year but not exceeding 5 years Total 7.6059 USD – USD 7.6059 USD 2 – 2 15 – 15 7.7865 USD 18 140 7.7309 USD 7.7667 USD 10 28 77 217 1 – 1 – – – 7.6169 USD 7.6059 USD 7.6134 USD 4 2 6 30 15 45 7.7373 USD 16 125 – USD – – 7.7373 USD 16 125 1.2065 RMB 167 202 (2) – RMB – – 1 – 1 – – – – 8.1497 AUD 37 300 (10) – AUD – – – 7.8000 USD 26 200 934 – 7.7753 USD 51 399 (11) 569 2 3 * Average exchange rate represented the average exchange rate of HKD versus respective currencies weighted by the notional amounts of the contracts or the swaps. 139 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 23. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges continued (i) Foreign currency risk continued Notes: (a) The Group used HK$15 million (2010: HK$45 million) forward foreign exchange contract to hedge the foreign exchange rate risk in relation to the semi-annual coupon payment of US$57 million (2010: US$57 million) out of the US$174 million (2010: US$174 million) fixed rate notes. (b) The Group used HK$217 million (2010: HK$125 million) forward foreign exchange contracts to hedge the foreign exchange rate risk of part of the principal amount of term notes and principal-protected investments denominated in USD at their respective maturity dates. (c) The Group used HK$202 million (2010: nil) forward foreign exchange contracts to hedge the foreign exchange rate risk of the principal and interest amount of a time deposit denominated in RMB at its maturity date. (d) The Group used HK$300 million (2010: nil) cross currency swap to convert AUD interest and principal of AUD37 million (2010: nil) bank loan into HKD. (e) The Group used HK$200 million (2010: HK$399 million) cross currency swap to convert USD interest and principal of US$26 million (2010: US$51 million) bank loan into HKD. As at 31 December 2011, cumulative fair value gains of HK$5 million (2010: HK$3 million) from the forward foreign exchange contracts and cross currency swaps have been recognised in other comprehensive income and accumulated in hedging reserve, and are expected to be released to the consolidated income statements at various dates when the hedged items impact the profit or loss. During the year, net losses of HK$3 million (2010: gains of HK$3 million) on forward foreign exchange contracts and cross currency swaps were reclassified from hedging reserve to profit or loss as finance costs and losses of HK$4 million (2010: nil) on forward foreign exchange contracts were reclassified from hedging reserve to profit or loss as investment income. The fair values of forward foreign exchange contracts and cross currency swaps are measured using quoted forward exchange rates and yield curves from quoted interest rates matching maturities of the contracts and swaps. Interest rate risk (ii) During the year, the Group used interest rate swaps and basis swaps to hedge its interest rate risk exposure. The terms of the swaps have been negotiated to match the major terms of the respective hedged underlying items so that the management considers that the interest rate swaps and basis swaps are highly effective hedging instruments. 140 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 201123. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges continued (ii) The table below is prepared based on the maturity dates of respective contracts. The major terms of these outstanding interest rate swaps and basis swaps at the end of the reporting period are as follows: Interest rate risk continued 2011 2010 Average interest rate* Notional amount US$ million HK$ million Fair value HK$ million Average interest rate* Notional amount US$ million HK$ million Fair value HK$ million The Group Interest rate swaps Hedging interest of HKD bank loans (Note a) Within 1 year More than 1 year but not exceeding 5 years Hedging floating-interest –rate payments of financial instruments (Note b) Within 1 year More than 1 year but not exceeding 5 years Basis swaps Hedging interest of HKD bank loans (Note c) Within 1 year Hedging interest of USD bank loans (Note d) Within 1 year Total 0.32% 3.32% 2.49% 3.80% 2.99% 3.39% n/a n/a n/a n/a n/a n/a 200 525 725 200 200 400 – (28) (28) (5) (12) (17) – 3.32% 3.32% – 3.39% 3.39% – n/a n/a – n/a n/a – 525 525 – 400 400 – (26) (26) – (22) (22) 0.08% n/a 325 – 0.11% n/a 325 – 0.07% 26 200 1,650 – 0.14% 51 399 (45) 1,649 1 (47) * For interest rate swaps, the average interest rate represented the average fixed interest rate paid by the Group against receipts of 3-month HIBOR or 6-month HIBOR weighted by the notional amounts of the swaps. For basis swaps, the average interest rate represented the average spread (weighted by the notional amounts of the swaps) that was added to 1-month HIBOR or 1-month London-Interbank Offered Rate (“LIBOR”) received by the Group against 3-month HIBOR or 3-month LIBOR paid by the Group. Notes: (a) The Group used HK$725 million (2010: HK$525 million) interest rate swaps to manage its exposure to interest rate changes of the monthly or quarterly interest payments of HKD bank loans. HK$200 million of the swaps will be effective in 2012 for hedging forecast transactions of borrowings at that time. (b) The Group used HK$400 million (2010: HK$400 million) interest rate swaps to hedge the interest rate risk in relation to the quarterly floating-interest-rate payments of certain financial instruments. (c) The Group used HK$325 million (2010: HK$325 million) basis swaps to combine with interest rate swaps referred to note (a) to hedge the interest rate changes of the monthly or quarterly interest payments of HK$325 million (2010: HK$325 million) bank loans. (d) The Group used HK$200 million (2010: HK$399 million) basis swaps to combine with cross currency swaps referred to note (e) of “foreign currency risk” to hedge the interest rate changes of the monthly or quarterly interest payments of US$26 million (2010: US$51 million) bank loan. 141 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview Interest rate risk continued 23. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges continued (ii) As at 31 December 2011, net cumulative fair value losses of HK$45 million (2010: HK$47 million) from the interest rate swaps and basis swaps under cash flow hedges have been recognised in other comprehensive income and accumulated in hedging reserve, and are expected to be released to the consolidated income statement at various dates during the lives of the swaps when the hedged interest expenses are recognised and impact the profit or loss. During the year, losses of HK$22 million (2010: HK$21 million) on interest rate swaps and basis swaps were reclassified from hedging reserve to profit or loss as finance costs. The fair values of interest rate swaps and basis swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. (b) Fair value hedges The Group used interest rate swaps to minimise its exposure to fair value changes of its HKD fixed rate notes and zero coupon notes by swapping the notes from fixed rates to floating rates. The major terms of the interest rate swaps match the corresponding notes and the management considers that the swaps are highly effective hedging instruments. The table below is prepared based on the maturity dates of respective contracts. The major terms of these outstanding interest rate swaps at the end of the reporting period are as follows: 2011 2010 Average interest rate* Notional amount US$ million HK$ million Fair value HK$ million Average interest rate* Notional amount US$ million HK$ million Fair value HK$ million The Group Interest rate swaps (Note) Within 1 year More than 1 year but not exceeding 5 years More than 5 years – 4.18% 4.50% 4.33% n/a n/a n/a n/a – 300 278 578 – 1.42% 35 31 66 4.18% 4.50% 4.03% n/a n/a n/a n/a 65 300 264 629 – 30 20 50 * The average interest rate represented the average fixed interest rate (weighted by the notional amounts of the interest rate swaps) received by the Group against payments of 3-month HIBOR. Note: The Group designated HK$300 million (2010: HK$365 million) fixed-to-floating interest rate swaps to hedge interest rate risk related to part of the coupon payments of the HK$300 million (2010: HK$365 million) fixed rate notes. The Group also designated a fixed-to-floating interest rate swap with nominal amount of HK$278 million (2010: HK$264 million) as at 31 December 2011 to hedge the zero coupon notes with nominal amount of HK$430 million by converting a fixed rate of 5.19% per annum to HIBOR plus 0.69% per annum. As a result of the hedge accounting, the carrying amount of the fixed rate notes as at 31 December 2011 was adjusted by losses of HK$35 million (2010: HK$30 million) while the carrying amount of the zero coupon notes as at 31 December 2011 was adjusted by losses of HK$32 million (2010: HK$20 million). The changes in fair values of the notes for the hedged risk were included in profit or loss at the same time that the changes in fair value of the swaps were included in profit or loss. The fair values of interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. 142 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 23. OTHER FINANCIAL ASSETS/LIABILITIES continued (c) Other derivatives classified as held for trading (not under hedge accounting) At the end of the reporting period, the Group had certain derivatives classified as held for trading and not under hedge accounting. The table below is prepared based on the maturity dates of respective contracts. The major terms of these derivatives are as follows: 2011 2010 The Group Average interest/ exchange rate* Notional amount US$ million HK$ million Fair value HK$ million Average interest/ exchange rate* Notional amount US$ million HK$ million Fair value HK$ million Net basis swaps (Note a) Within 1 year More than 1 year but not exceeding 5 years Cross currency swaps (Note b) Within 1 year More than 1 year but not exceeding 5 years Interest rate swap (Note c) Within 1 year Forward foreign exchange contracts (Note d) More than 1 year but not exceeding 5 years Asset swap (Note e) Within 1 year 7.8000 – 7.8000 7.7998 – 7.7998 57 – 57 117 – 117 445 – 445 913 – 913 (2) – – 7.8000 (2) 7.8000 – – – – 7.7998 7.7998 – 57 57 – 117 117 – 445 445 – 913 913 – – – – 1.49% n/a 65 7.8400 27 212 – – – 2.00% n/a 60 (10) n/a n/a – – – (4) (4) – 38 38 – – – * For net basis swaps, cross currency swaps and forward foreign exchange contracts, the average exchange rate represented the average HKD:USD exchange rate weighted by their notional amounts. For interest rate swap, the average interest rate represented the fixed interest rate received by the Group against payment of 3-month HIBOR. For asset swap, the interest rate represented the spread added to 3-month HIBOR received by the Group. Notes: (a) The Group used US$57 million (2010: US$57 million) net basis swaps to minimise the foreign currency exposure in relation to the principal payment and part of the coupon payment of the US$57 million (2010: US$57 million) of the US$174 million (2010: US$174 million) fixed rate notes at maturity. (b) The Group used US$117 million (2010: US$117 million) cross currency swaps to manage the interest rate and foreign exchange risks of US$117 million (2010: US$117 million) of the US$174 million (2010: US$174 million) fixed rate notes. (c) The Group had no interest rate swap classified as held for trading as at 31 December 2011. As at 31 December 2010, the Group used HK$65 million fixed-to-floating interest rate swap to manage the interest rate risk in relation to the quarterly interest payment of part of the Group’s borrowings. (d) The Group used HK$212 million (2010: nil) forward foreign exchange contracts to manage the foreign exchange rate risk in relation to investment amount of US$27 million (2010: nil) of term notes and principal-protected investments. The contracts will effectively manage the foreign exchange rate risk if HKD:USD is above 7.74 at the respectively maturity dates. If HKD:USD is at or below 7.74, the contracts will be knocked out and the Group will have no obligation on the settlement of the contracts. (e) The Group used a HK$60 million (2010: nil) asset swap to convert the return of a zero coupon convertible note of investment amount of HK$60 million (2010: nil) into a floating rate note with interest income of 3-month HIBOR plus 2%. The mark-to-market losses were offset by corresponding mark-to-market gains of the note. 143 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 23. OTHER FINANCIAL ASSETS/LIABILITIES continued (d) Financial assets measured at FVTPL (i) Zero coupon convertible note During the year, the Group purchased a zero coupon convertible note of HK$60 million with an embedded equity option of a listed company in Hong Kong. The note will mature in February 2012. As disclosed in note (c) of other derivatives classified as held for trading, an asset swap was used to manage the fair value exposure to the notes at the end of the reporting period. The entire combined contracts have been classified as financial assets measured at FVTPL on initial recognition. (ii) Club debentures Upon the application of HKFRS 9 on 1 January 2011, the Group’s and the Company’s investments in unlisted club debentures that were previously classified as available-for-sale investments (see note 22) have been classified as financial assets measured at FVTPL. The Group’s and the Company’s club debentures previously measured at fair value at each reporting date under HKAS 39, continued to be measured at FVTPL under HKFRS 9. 24. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES Rents from leasing of investment properties are normally received in advance. At the end of the reporting period, accounts receivable of the Group with carrying amount of HK$6 million (2010: HK$5 million) mainly represented rents receipts in arrears, which were aged less than 90 days. 25. AMOUNTS DUE FROM/TO SUBSIDIARIES Amounts due from subsidiaries are classified as: – Current assets (Note a) – Non-current assets (Note b) Amounts due to subsidiaries (Note a) Notes: The Company 2011 HK$ million 2010 HK$ million 6,088 5,126 11,214 480 12,671 – 12,671 175 (a) The amounts due from/to subsidiaries are unsecured, interest-free and repayable on demand. (b) The amounts due from subsidiaries are unsecured, interest-free with no fixed terms of repayment and classified as non-current assets as they are not expected to be recoverable within the next twelve months. 26. AMOUNT DUE FROM AN ASSOCIATE The amount due from an associate is unsecured, interest-free and repayable on demand. During the year ended 31 December 2011, all outstanding balances were fully recovered. 144 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 27. TIME DEPOSITS/CASH AND BANK BALANCES Time deposits Cash and bank balances Cash and deposits with banks shown in the consolidated statement of financial position Less: Time deposits with original maturity over three months Cash and cash equivalents shown in the consolidated statement of cash flows The Group 2011 HK$ million 2010 HK$ million 2,899 62 2,961 (2,307) 654 1,930 63 1,993 (1,433) 560 Included in the Company’s time deposits as at 31 December 2011, were HK$395 million (2010: HK$497 million) of time deposits with original maturity over three months. The bank balances and remaining time deposits of the Company were with original maturity of three months or less. Time deposits, cash and bank balances comprise cash and bank deposits carrying effective interest rates ranging from 0.205% to 2.46% (2010: 0.005 % to 1.55%) per annum. 28. ACCOUNTS PAYABLE AND ACCRUALS At the end of the reporting period, accounts payable of the Group with carrying amount of HK$324 million (2010: HK$229 million) were aged less than 90 days. 29. AMOUNTS DUE TO NON-CONTROLLING INTERESTS The amounts due to non-controlling interests are unsecured, interest-free and repayable on demand. 30. BORROwINGS The analysis of the carrying amounts of borrowings is as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes Current Non-current The Group 2011 HK$ million 2010 HK$ million 2011 HK$ million 2010 HK$ million 150 – 1,357 – 1,507 650 – – – 650 2,690 200 1,952 314 5,156 699 200 2,750 288 3,937 In the current year, the average finance cost of the Group’s total borrowings calculated based on their contracted interest rates was 3.7% (2010: 3.9%). To manage the interest rate and foreign exchange risks, the Group used certain derivatives to hedge part of the borrowings, which resulted in a reduction of the Group’s average finance cost to 2.7% (2010: 2.7%). As at 31 December 2011, the floating rate debt ratio was 54.8% (2010: 53.6%). 145 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 30. BORROwINGS continued (a) Unsecured bank loans The unsecured bank loans of HK$2,840 million (2010: HK$1,349 million) are guaranteed as to principal and interest by the Company and are repayable, based on the scheduled repayment dates set out in the respective loan agreement, as follows: Within 1 year More than 1 year, but not exceeding 2 years More than 2 years, but not exceeding 5 years The Group 2011 HK$ million 2010 HK$ million 150 699 1,991 2,840 650 – 699 1,349 All the Group’s unsecured bank loans are variable-rate borrowings with effective interest rates (which were also equal to contracted interest rates) ranging from 0.59% to 5.37% (2010: 0.69% to 1.51%) per annum at the end of the reporting period. Interest rates of the loans are normally re-fixed at every one to six months. As disclosed in note 23(a), cross currency swaps, interest rate swaps and basis swaps were designated as cash flow hedges to hedge the foreign exchange and interest rate risks of part of the Group’s unsecured bank loans. (b) Floating rate notes In October 2009, HK$200 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) of 1.26% (2010: 1.30%) per annum at the end of reporting period and are repayable in full in 2014. The HK$200 million five-year floating rate notes were not hedged by any derivative in both years. 146 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 30. BORROwINGS continued (c) Fixed rate notes Fixed rate notes – principal amount Add: Net loss attributable to hedged risks The Group 2011 HK$ million 2010 HK$ million 3,274 35 3,309 2,720 30 2,750 Details of the Group’s fixed rate notes at 31 December 2011 and 2010 are as follows: Principal amount US$174 million* HK$300 million HK$100 million HK$165 million HK$400 million HK$200 million HK$200 million HK$150 million HK$404 million Contracted interest rate per annum 7.00% 5.25% 5.10% 5.38% 3.78% 4.00% 3.70% 3.86% 4.10% Coupon payment term semi-annual basis quarterly basis annual basis annual basis quarterly basis annual basis quarterly basis quarterly basis annual basis Issue date Maturity date February 2002 August 2008 August 2008 September 2008 August 2010 September 2010 October 2010 May 2011 December 2011 February 2012 August 2015 August 2015 September 2020 August 2020 September 2025 October 2022 May 2018 December 2023 * In February 2002, US$200 million 10-year fixed rate notes were issued by Hysan (MTN) Limited. In 2006 and 2010, US$18 million and US$8 million of the notes were repurchased and cancelled respectively. The outstanding amount of the notes at the end of the reporting period was US$174 million (2010: US$174 million). All the fixed rate notes were issued by Hysan (MTN) Limited. The notes are guaranteed as to principal and interest by the Company and bear an effective interest rate equal to their respective contracted interest rate. As detailed in note 23, forward foreign exchange contracts, interest rate swaps, cross currency swaps and net basis swaps were used to hedge or manage the foreign exchange and interest rate risks of the Group’s fixed rate notes at the end of the reporting period. The net loss of HK$35 million (2010: HK$30 million) represented the change in fair value attributable to the hedged interest rate risk of the HK$300 million (2010: HK$365 million) fixed rate notes under fair value hedge. (d) Zero coupon notes Zero coupon notes Add: Loss attributable to hedged risk The Group 2011 HK$ million 2010 HK$ million 282 32 314 268 20 288 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 23(b) for details). The loss of HK$32 million (2010: HK$20 million) represented changes in fair value attributable to the hedged interest rate risk of the zero coupon notes under fair value hedge. 147 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 31. DEFERRED TAxATION The following are the major deferred tax liabilities (assets) recognised by the Group and movements thereon during the current and prior years: The Group At 1 January 2010 Charge to profit or loss (note 9) Charge to other comprehensive income At 31 December 2010 Charge (credit) to profit or loss (note 9) Charge to other comprehensive income At 31 December 2011 Accelerated tax depreciation HK$ million Revaluation of properties HK$ million Tax losses HK$ million Total HK$ million 266 31 – 297 30 – 327 35 – 5 40 – 14 54 (4) 4 – – (21) – (21) 297 35 5 337 9 14 360 At the end of the reporting period, the Group has unused estimated tax losses of HK$648 million (2010: HK$570 million), of which HK$327 million (2010: HK$253 million) has not been agreed by the Hong Kong Inland Revenue Department, available for offset against future profits. A deferred tax asset has been recognised in respect of HK$126 million (2010: nil) of such losses. No deferred tax asset has been recognised in respect of the estimated tax losses of HK$522 million (2010: HK$570 million) as the utilisation of these estimated tax losses is uncertain. These estimated tax losses may be carried forward indefinitely. The Company does not have any unused tax loss at the end of the reporting period. During the year, deferred tax liability of the Company has been recognised in respect of the accelerated tax depreciation of HK$1 million (2010: nil). At the end of the reporting period, the Company has deferred tax liability of HK$1 million (2010: nil). 148 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 32. SHARE CAPITAL Ordinary shares of HK$5 each Authorised: At 1 January and 31 December Issued and fully paid: At 1 January Issue of shares pursuant to scrip dividend schemes (Note a) Issue of shares under share option scheme (Note b) Number of shares 2011 2010 Share capital 2011 HK$ million 2010 HK$ million 1,450,000,000 1,450,000,000 7,250 1,053,426,635 1,050,608,090 5,267 5,136,783 2,762,879 1,190,997 55,666 26 6 7,250 5,253 14 – At 31 December 1,059,754,415 1,053,426,635 5,299 5,267 Notes: (a) Issue of shares pursuant to scrip dividend schemes For the year ended 31 December 2011 On 2 June 2011 and 20 September 2011 respectively, the Company issued and allotted a total of 4,584,611 shares and 552,172 shares of HK$5 each in the Company at HK$36.55 and HK$30.43 to the shareholders who elected to receive shares in the Company in lieu of cash for the 2010 final and 2011 interim dividends pursuant to the scrip dividend schemes announced by the Company on 9 May 2011 and 25 August 2011. These shares rank pari passu in all respects with other shares in issue. For the year ended 31 December 2010 On 3 June 2010 and 21 September 2010 respectively, the Company issued and allotted a total of 1,321,595 shares and 1,441,284 shares of HK$5 each in the Company at HK$21.68 and HK$24.19 to the shareholders who elected to receive shares in the Company in lieu of cash for the 2009 final and 2010 interim dividends pursuant to the scrip dividend schemes announced by the Company on 11 May 2010 and 26 August 2010. These shares rank pari passu in all respects with other shares in issue. (b) Issue of shares under share option schemes During the year, options to subscribe for shares of the Company for a total of 1,190,997 shares (2010: 55,666 shares) were exercised at various exercise prices. These shares rank pari passu in all respects with other shares in issue. Details of options outstanding and movements during the year are set out in note 40. 149 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 33. RESERVES OF THE COMPANY The Company’s reserves available for distribution to its owners as at 31 December 2011 amounted to HK$5,580 million (2010: HK$5,739 million), being its general reserve and retained profits at that date. Share premium HK$ million Share options reserve HK$ million Capital redemption reserve HK$ million General reserve HK$ million (Note) Retained profits HK$ million Total HK$ million At 1 January 2010 Issue of shares pursuant to scrip dividend schemes Issue of shares under share option schemes Recognition of equity-settled share-based payments Profit for the year Dividends paid during the year (note 14) At 31 December 2010 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 Profit for the year Dividends paid during the year (note 14) 1,703 10 276 100 5,760 7,849 50 1 – – – – – 6 – – – – – – – – – – – – – – – 593 (714) 50 1 6 593 (714) 1,754 16 276 100 5,639 7,785 159 21 – – – – – (6) 7 (2) – – – – – – – – – – – – – – – – – 2 630 (791) 159 15 7 – 630 (791) At 31 December 2011 1,934 15 276 100 5,480 7,805 Note: General reserve was set up from the transfer of retained profits. 34. ACQUISITION OF A SUBSIDIARY During the year ended 31 December 2011, the Group acquired 100% interest in Moral Hill Investment Limited (“Moral Hill”) from an independent third party, for a cash consideration of HK$19 million. The major asset of Moral Hill is an investment property situated in Hong Kong and as such, the acquisition has been accounted for as acquisition of an asset rather than a business combination. 35. 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$6 million (2010: HK$6 million). Forfeited contributions for the year amounting to HK$1 million (2010: HK$1 million) were refunded to the Group. 150 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 36. CONTINGENT LIABILITIES At the end of the reporting period, there were contingent liabilities in respect of the following: Corporate guarantee to note holders – for issue of floating rate notes – for issue of fixed rate notes – for issue of zero coupon notes Guarantees to banks for providing financing facilities to subsidiaries The Group 2011 HK$ million 2010 HK$ million The Company 2011 HK$ million 2010 HK$ million – – – – – – – – – – 200 3,276 430 3,906 200 2,722 430 3,352 2,850 1,349 37. CAPITAL COMMITMENTS At the end of the reporting period, the Group and the Company had the following capital commitments in respect of its investment properties and property, plant and equipment: Authorised but not contracted for Contracted but not provided for The Group 2011 HK$ million 2010 HK$ million The Company 2011 HK$ million 2010 HK$ million 505 885 535 1,535 7 6 11 – 38. LEASE COMMITMENTS (a) The Group as lessor At the end of the reporting period, 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 2011 HK$ million 2010 HK$ million 1,795 3,708 2,229 7,732 1,260 1,586 252 3,098 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. 151 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 38. LEASE COMMITMENTS continued (b) The Company as lessee At the end of the reporting period, 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 2011 HK$ million 2010 HK$ million 7 – 7 22 9 31 Operating lease payments represent rentals payable by the Company to its subsidiaries for its office premises which are negotiated and rentals are fixed for three years. At the end of the reporting period, the Group had no commitment under non-cancellable operating lease. 39. RELATED PARTY TRANSACTIONS AND BALANCES (a) Transactions and balances with related parties The Group has the following transactions with related parties during the year and has the following balances with them at the end of the reporting period: The Group Gross rental income received from (Note a) Amount due to a non-controlling interest (Note b) 2011 HK$ million 2010 HK$ million 2011 HK$ million 2010 HK$ million 3 – 26 3 1 25 – – 94 – – 94 Substantial shareholder Directors Companies controlled by Directors or their associates Notes: (a) The sum of transactions with substantial shareholder represented the aggregate gross rental income received from Atlas Corporate Management Limited, a wholly-owned subsidiary of Lee Hysan Estate Company, Limited, which holds 40.87% (2010: 41.12%) beneficial interest in the Company. (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. 152 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 39. RELATED PARTY TRANSACTIONS AND BALANCES continued (a) Transactions and balances with related parties continued The Company has the following balances with its subsidiaries at the end of the reporting period: Amounts due from subsidiaries Less: Allowances on amounts due therefrom Amounts due to subsidiaries The Company 2011 HK$ million 2010 HK$ million 11,462 (248) 11,214 480 12,919 (248) 12,671 175 Details of amounts due from/to subsidiaries are disclosed in note 25. (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 were as follows: Directors’ fees, salaries and other short-term employee benefits Share-based payments Retirement benefits scheme contributions 2011 HK$ million 2010 HK$ million 27 5 – 32 18 4 – 22 The remuneration of the Directors and key executives is determined by the Remuneration Committee and Chief Executive Officer respectively having regard to the performance of individuals and market trends. 40. SHARE-BASED PAYMENT TRANSACTIONS (a) Equity-settled share option schemes The 1995 Share Option Scheme (the “1995 Scheme”) The 1995 Scheme was approved by shareholders on 28 April 1995 and had a term of 10 years. It expired on 28 April 2005. As at 31 December 2011, all options granted under the 1995 Scheme had been exercised. The purpose of the 1995 Scheme was to strengthen the links between individual staff and shareholder interests. Under the 1995 Scheme, options to subscribe for ordinary shares of the Company may be granted to employees of the Company or any of its wholly-owned subsidiaries selected by the Board at its discretion. 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) was 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). 153 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 40. SHARE-BASED PAYMENT TRANSACTIONS continued 154 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 201140. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued Name Date of grant Exercise price HK$ Exercisable period (Note a) Changes during the year Balance as at 1.1.2011 Granted Exercised Cancelled/ Balance as at lapsed 31.12.2011 2005 Scheme continued Eligible employees (Note f) 30.3.2006 22.000 30.3.2007 21.250 31.3.2008 21.960 2.5.2008 23.900 2.10.2008 20.106 31.3.2009 13.300 31.3.2010 22.450 31.3.2011 32.000 (Note m) 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 31.3.2008 – 30.3.2018 2.5.2008 – 1.5.2018 2.10.2008 – 1.10.2018 31.3.2009 – 30.3.2019 31.3.2010 – 30.3.2020 31.3.2011 – 30.3.2021 15,000 15,000 78,000 95,000 85,000 363,334 523,000 – – – – – – – (15,000) (Note g) (15,000) (Note h) (55,000) (Note i) – – – – – – – 23,000 – 95,000 – 85,000 (86,999) (Note j) (13,667) 262,668 (Note k) (37,999) (Note l) (44,000) 441,001 (Note k) – 393,000 – (23,000) 370,000 (Note k) 3,273,334 713,000 (1,190,997) (500,668) 2,294,669 Notes: (a) All options granted have a vesting period of 3 years in equal proportions. (b) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$34.25. (c) The late Chairman, Peter Ting Chang LEE, passed away on 17 October 2009. An extension in time (to 16 January 2011) for exercising his options was granted to his legal personal representative pursuant to the 2005 Scheme. Share options of 235,000, 173,333 and 166,666, which were granted to him on 6 March 2007, 13 March 2008 and 11 March 2009 respectively, were exercised by the sole executrix to his estate on 3 January 2011. The unvested share options of 420,001 lapsed on 17 January 2011. (d) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$36.60. (e) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 9 March 2011) was HK$35.70. (f) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$33.65. (h) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$36.25. (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$34.68. The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$34.98. (k) The unvested options lapsed during the year upon resignations of certain eligible employees. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$35.06. (m) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 30 March 2011) was HK$31.95. Apart from the above, the Company had not granted any share option under the Schemes to any other persons as required to be disclosed under Rule 17.07 of the Listing Rules. 156 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 2011 40. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued The following table discloses movements of the Company’s share options held by the Directors and eligible employees in prior year: Name Date of grant Exercise price HK$ Exercisable period (Note a) Changes during the year Balance as at 1.1.2010 Granted Exercised Cancelled/ Balance as at lapsed 31.12.2010 30.3.2005 15.850 30.3.2005 – 29.3.2015 96,000 – – – 96,000 1995 Scheme Executive Director Wendy Wen Yee YUNG 2005 Scheme Executive Directors Peter Ting Chang LEE (Note b) 6.3.2007 21.380 13.3.2008 21.450 11.3.2009 11.760 Gerry Lui Fai YIM 1.12.2009 22.800 Wendy Wen Yee YUNG 26.6.2006 20.110 Eligible employees (Note d) 30.3.2007 21.250 31.3.2008 21.960 11.3.2009 11.760 11.3.2010 22.100 (Note c) 30.3.2006 22.000 30.3.2007 21.250 31.3.2008 21.960 2.5.2008 23.900 2.10.2008 20.106 31.3.2009 13.300 31.3.2010 22.450 (Note h) 6.3.2007 – 16.1.2011 13.3.2008 – 16.1.2011 11.3.2009 – 16.1.2011 1.12.2009 – 30.11.2019 26.6.2006 – 25.6.2016 30.3.2007 – 29.3.2017 31.3.2008 – 30.3.2018 11.3.2009 – 10.3.2019 11.3.2010 – 10.3.2020 30.3.2006 – 29.3.2016 30.3.2007 – 29.3.2017 31.3.2008 – 30.3.2018 2.5.2008 – 1.5.2018 2.10.2008 – 1.10.2018 31.3.2009 – 30.3.2019 31.3.2010 – 30.3.2020 235,000 260,000 500,000 218,000 110,000 95,000 100,000 300,000 – – – – – – – – – 185,000 23,000 31,000 88,000 95,000 85,000 411,000 – – – – – – – – – – – – – – – (8,000) (Note e) (16,000) (Note e) (10,000) (Note e) – – – 235,000 – 260,000 – 500,000 – 218,000 – 110,000 – 95,000 – 100,000 – 300,000 – 185,000 – 15,000 – 15,000 – 78,000 – 95,000 – 85,000 (21,666) (Note f) (26,000) 363,334 (Note g) – 529,000 – (6,000) 523,000 (Note g) 2,647,000 714,000 (55,666) (32,000) 3,273,334 157 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 40. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued Notes: (a) All options granted have a vesting period of 3 years in equal proportions. (b) The late Chairman, Peter Ting Chang LEE, passed away on 17 October 2009. An extension in time (to 16 January 2011) for exercising his options was granted to his legal personal representative pursuant to the 2005 Scheme. Share options of 235,000, 173,333 and 166,666, which were granted to him on 6 March 2007, 13 March 2008 and 11 March 2009 respectively, were exercised by the sole executrix to his estate on 3 January 2011. The unvested share options of 420,001 lapsed on 17 January 2011. (c) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 10 March 2010) was HK$22.40. (d) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (e) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$33.40. (f) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$28.62. (g) The options lapsed during the year upon resignations of certain eligible employees. (h) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 30 March 2010) was HK$22.55. 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. 158 Hysan Annual Report 2011Notes to the Financial Statements continuedFor the year ended 31 December 201140. SHARE-BASED PAYMENT TRANSACTIONS continued (d) Fair values of share options The Group has applied HKFRS 2 “Share-based Payments” to account for its share options granted after 7 November 2002 and vested after 1 January 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$7 million (2010: HK$6 million) in relation to share options granted by the Company, of which HK$3 million (2010: HK$2 million) related to the Directors (see note 12), 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 31.3.2011 10.3.2011 31.3.2010 11.3.2010 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 Notes: HK$32.000 HK$32.000 2.687% 10 years 34.151% HK$0.640 HK$12.409 HK$34.000 HK$35.710 2.717% 10 years 34.026% HK$0.640 HK$12.553 HK$22.450 HK$22.450 2.843% 10 years 35.489% HK$0.582 HK$8.598 HK$22.100 HK$22.100 2.780% 10 years 35.459% HK$0.582 HK$8.425 (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 appropriate historical volatility of closing prices of the shares of the Company in the past 10 years immediately before the date of grant, matching the expected life of the options of 10 years. (d) Expected dividend per annum: being the approximate average annual cash dividend for the past 5 financial years. 159 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s major financial instruments include cash and bank balances, time deposits, principal-protected investments, term notes, amount due from an associate, accounts receivable, other receivables, equity investments, available-for-sale financial assets, zero coupon convertible note, accounts payable, accruals, rental deposits from tenants, amounts due to non-controlling interests, 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 or the Company are primarily attributable to rents receivable from tenants, amounts due from subsidiaries, amount due from an associate, principal-protected investments, derivative financial instruments, zero coupon convertible note, term notes, 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 is arising from: (i) (ii) the carrying amount of the respective recognised financial assets as stated in the consolidated and Company’s statement of financial position; and the amount of contingent liabilities in relation to financial guarantee issued by the Company as disclosed in note 36 of the Notes to the Financial Statements section. 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 the end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. For derivative financial instruments, zero coupon convertible note, principal-protected investments, term notes, time deposits and bank balances, the Group and the Company only deal with financial institutions and invest in debt securities issued by issuers that have strong credit ratings to mitigate counterparty risk. In order to limit exposure to each financial institution and debt securities issuer, an exposure limit was set with each counterparty according to their credit rating with regular review by management. Credit exposure to financial institutions and debt securities issuers are monitored and reported regularly to the management. The exposure to each counterparty comprised (i) investment value of financial assets (including time deposits, principal- protected investments and term notes; (ii) net positive value of derivative financial instruments and zero coupon convertible note and; (iii) potential exposures to derivatives which are based on the remaining term and the notional amount of the derivative financial instruments. The table below provides a high level summary of the Group’s exposure to each counterparty at the end of the reporting period. Category of counterparty Credit rating of AA- or above or note issuing banks Credit rating BBB- to A+ 2011 Number of counterparty Exposure HK$ million 2010 Number of counterparty Exposure HK$ million 5 23 180 to 385 1 to 295 5 13 9 to 379 10 to 297 To minimise the credit risk of amounts due from subsidiaries and an associate, the management reviews the recoverable amount of each individual balance at the end of the reporting period 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. 160 Hysan Annual Report 2011Financial Risk ManagementFor the year ended 31 December 2011 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 based on the agreed repayment terms. 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 are 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 end of the reporting period. For cash flows denominated in currency other than Hong Kong dollars (“HKD”), the prevailing foreign exchange rates at the end of the reporting period are used to convert the cash flows into HKD. Total contractual Carrying undiscounted cash flow amount Within 1 year or on demand More than 5 years HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million More than 1 year but not exceeding 2 years More than 2 years but not exceeding 5 years The Group As at 31 December 2011 Non-derivative financial liabilities Accounts payable and accruals Rental deposits from tenants Amounts due to non-controlling interests Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes As at 31 December 2010 Non-derivative financial liabilities Accounts payable and accruals Rental deposits from tenants Amounts due to non-controlling interests Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes (532) (600) (327) (2,840) (200) (3,309) (314) (532) (600) (327) (2,956) (208) (4,040) (430) (532) (170) (327) (190) (3) (1,482) – – (167) – (739) (3) (83) – – (230) – (2,027) (202) (623) – – (33) – – – (1,852) (430) (8,122) (9,093) (2,704) (992) (3,082) (2,315) (433) (451) (327) (1,349) (200) (2,750) (288) (433) (451) (327) (1,374) (210) (3,405) (430) (433) (175) (327) (658) (3) (155) – – (100) – (8) (2) (1,460) – – (150) – (708) (205) (577) – – (26) – – – (1,213) (430) (5,798) (6,630) (1,751) (1,570) (1,640) (1,669) 161 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (b) Liquidity risk continued Total contractual Carrying undiscounted cash flow amount Within 1 year or on demand More than 5 years HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million More than 1 year but not exceeding 2 years More than 2 years but not exceeding 5 years The Company As at 31 December 2011 Non-derivative financial liabilities Other payable and accruals Amounts due to subsidiaries As at 31 December 2010 Non-derivative financial liabilities Other payable and accruals Amounts due to subsidiaries (36) (480) (516) (36) (480) (516) (36) (480) (516) (38) (175) (213) (38) (175) (213) (38) (175) (213) – – – – – – – – – – – – – – – – – – 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 financial 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 end of the reporting period. For cash flows denominated in currency other than HKD, the prevailing foreign exchange rates at the end of the reporting period are used to convert the cash flows into HKD. Total contractual Carrying undiscounted cash flow amount Within 1 year or on demand More than 5 years HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million More than 1 year but not exceeding 2 years More than 2 years but not exceeding 5 years The Group As at 31 December 2011 Derivative settled net Interest rate swaps, basis swaps and asset swap Derivative settled gross Forward foreign exchange contracts Outflow Inflow Cross currency and net basis swaps Outflow Inflow 11 (1) (12) 98 (13) 6 48 57 (646) 646 (359) 357 (1,883) 1,923 (1,375) 1,404 (210) 212 (205) 217 (77) 77 (303) 302 – – – – 162 Hysan Annual Report 2011Financial Risk Management continuedFor the year ended 31 December 2011 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (b) Liquidity risk continued Total contractual Carrying undiscounted cash flow amount Within 1 year or on demand More than 5 years HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million More than 1 year but not exceeding 2 years More than 2 years but not exceeding 5 years As at 31 December 2010 Derivative settled net Interest rate swaps and basis swaps Derivative settled gross Forward foreign exchange contracts Outflow Inflow Cross currency and net basis swaps Outflow Inflow 3 1 36 114 3 (3) 41 73 (171) 171 (156) 156 (15) 15 – – (1,805) 1,866 (28) 70 (1,374) 1,391 (403) 405 – – – – At the end of the reporting period, the Company has no derivative financial instruments. (c) Interest rate risk The Group manages its interest rate exposure by assessing the potential impact on the Group’s financial position arising from any interest rate movements based on interest rate level and outlook. The management will review the proportion of borrowings in fixed rates and floating rates and ensure that they are within an appropriate range. Accordingly, the Group used (i) interest rate swaps to hedge the interest rate risk of the Group’s floating rate bank loans; 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 the end of the reporting period and until the hedging instrument expires or is terminated or the hedge no longer meets the criteria for hedge accounting. The Group mainly used comparison of change in fair value of the hedging instruments and the hedged items attributable to the hedged risk for assessing the hedging effectiveness. As at 31 December 2011, about 54.8% (2010: 53.6%) of the Group’s gross debts was effectively on a floating rate basis. The ratio could be adjusted according to views about changes in 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 fixed-rate debt securities. Other than the concentration of interest rate risk related to the movements in Hong Kong Interbank Offered Rate, 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 end of the reporting period 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 +100 and -5 basis points (“bps”) (2010: +100 and -5 bps) was applied to the HKD and US dollars (“USD”) yield curves at the end of the reporting period. For the Australian dollars (“AUD”) yield curve, a change of +100 and -100 bps (2010: nil) was applied. The applied change of bps represented management’s assessment of the reasonably possible change in interest rates based on the current market conditions. For the HKD and USD yield curve, the increase in positive change reflected potential interest rate increase in 2012 and the decrease in negative change is due to the low level of prevailing market interest rates at the end of the reporting period. For the AUD yield curve, the change reflected potential interest rate increase or decrease in 2012. 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. 163 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (c) Interest rate risk continued As at 31 December 2011 As at 31 December 2010 The Group Increase (decrease) in profit or loss Increase (decrease) in equity bps increase HK$ million bps decrease HK$ million bps increase HK$ million bps decrease HK$ million (6) (13) – 1 18 21 – (1) (d) Currency risk The Group aims to minimise its currency risk and does not speculate in currency movements. The majority of the Group’s assets are located and all rental income are derived in Hong Kong, and denominated in HKD. At the end of the reporting period, the Group has the following monetary assets and monetary liabilities denominated in AUD, Renminbi (“RMB”) and USD. Assets Time deposits Principal-protected investments Term notes Liabilities Unsecured bank loans Fixed rate notes 2011 2010 The Group AUD million RMB million US$ million Total equivalent to HK$ million Total equivalent to HK$ million US$ million – – – – 37 – 37 167 – 150 317 – – – – 39 21 60 26 174 200 204 300 347 851 490 1,357 1,847 – 30 34 64 51 174 225 – 233 263 496 399 1,356 1,755 At the end of the reporting period, all of the Company’s assets and liabilities were denominated in HKD. Other than concentration of currency risk of the above items denominated in AUD, RMB and USD, the Group and the Company have no other significant currency risk. The Group has entered into appropriate hedging instruments, mentioned in note 23 of the Notes to the Financial Statements section, to hedge against part of the potential currency risk of the above items. The Group reviews the continuing effectiveness of hedging instruments at least at the end of the reporting period and until the hedging instrument expires or is terminated or the hedge no longer meets the criteria for hedge accounting. Sensitivity analysis The sensitivity analysis below has been determined assuming that a change in exchange rate had occurred at the end of the reporting period 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 500 percentage in points (“pips”) (2010: 500 pips) was applied to the HKD:RMB and HKD:USD spot and forward rates while a change of 5,000 pips (2010: nil) was applied to the HKD:AUD spot and forward rates at the end of the reporting period. The applied change of pips represented management’s assessment of the reasonably possible change in foreign exchange rates. 164 Hysan Annual Report 2011Financial Risk Management continuedFor the year ended 31 December 2011 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (d) Currency risk continued As at 31 December 2011 – AUD – RMB – USD As at 31 December 2010 – USD The Group Increase (decrease) in profit or loss Increase (decrease) in equity pips increase HK$ million pips decrease HK$ million pips increase HK$ million pips decrease HK$ million – 8 (2) 3 – (8) 2 (3) – – 1 – – – (1) – (e) Equity price risk The Group is exposed to equity price risks in relation to its equity investments and available-for-sale investments in listed securities which are measured at fair value at the end of the reporting period with reference to the listed share price. The management will monitor the price movements and takes appropriate actions when it is required. Sensitivity analysis The sensitivity analysis below has been determined assuming that a change in the corresponding equity prices had occurred at the end of the reporting period and had been applied to the investments that would have affected the equity. A change of 25% (2010: 25%) in stock prices was applied at the end of the reporting period. The applied change of percentage represented management’s assessment of the reasonably possible change in stock prices. As at 31 December 2011 As at 31 December 2010 The Group Increase (decrease) in equity 25% increase HK$ million 25% decrease HK$ million 247 287 (247) (287) 165 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 2. CATEGORIES OF FINANCIAL INSTRUMENTS Financial assets Fair value through profit or loss (“FVTPL”) – financial assets measured at FVTPL – designated as at FVTPL – held for trading Derivative instruments under hedge accounting Fair value through other comprehensive income (“FVTOCI”) Held-to-maturity investments Available-for-sale financial assets Amortised cost (including cash and cash equivalents) Loans and receivables (including cash and cash equivalents) Financial liabilities FVTPL – held for trading Derivative instruments under hedge accounting Amortised cost The Group The Company 2011 HK$ million 2010 HK$ million 2011 HK$ million 2010 HK$ million 702 – – 67 989 – – 3,447 – 5,205 12 57 7,522 7,591 – 462 38 54 – 216 1,152 – 2,356 4,278 4 48 5,347 5,399 2 – – – – – – – – – – – – – 2 – 11,710 11,712 13,256 13,258 – – 516 516 – – 213 213 3. FAIR VALUE The fair value of financial assets and financial liabilities are determined as follows: • • • the fair value of listed investments traded in active liquid markets are determined with reference to the published price quotations; the fair value of financial assets and financial liabilities (excluding derivative instruments) are based on quoted prices from independent financial institutions or 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 based on quoted prices from independent financial institutions or calculated using discounted cash flow analysis based on the applicable yield curve derived from quoted interest rates and based on the quoted spot and forward foreign exchange rates or calculated using an option pricing model based on quoted share prices, time to maturity, volatility and interest rates. The Directors consider that the carrying amounts of financial assets and financial liabilities measured at amortised costs in the consolidated and the Company’s financial statements approximate their fair values, except for the carrying amount of HK$3,309 million (2010: HK$2,750 million) fixed rate notes as stated in note 30 of the Notes to the Financial Statements section with fair value of HK$3,484 million (2010: HK$2,787 million). 166 Hysan Annual Report 2011Financial Risk Management continuedFor the year ended 31 December 2011 3. FAIR VALUE continued The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. • • Level 1: fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets. Level 2: fair value measurements are those derived from inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Level 1 HK$ million Level 2 HK$ million Level 3 HK$ million Total HK$ million 2011 Financial assets Derivatives under hedge accounting Forward foreign exchange contracts Interest rate swaps Financial assets at FVTPL Principal-protected investments Unlisted club debentures Zero coupon convertible note Financial assets at FVTOCI Listed equity securities Unlisted equity securities (Note a) Total Financial liabilities Derivatives under hedge accounting Forward foreign exchange contracts Cross currency swaps Interest rate swaps Other derivatives classified as held for trading (not under hedge accounting) Net basis swaps Asset swap (Note b) Total Notes: – – – – 70 988 – 1,058 – – – – – – 1 66 630 2 – – – 699 2 10 45 2 – 59 – – – – – – 1 1 – – – – 10 10 1 66 630 2 70 988 1 1,758 2 10 45 2 10 69 (a) The carrying amounts of the unlisted equity securities approximated their fair values of HK$3 million as at 1 January 2011. During the year ended 31 December 2011, net fair value losses of HK$2 million, which would have been recognised as impairment losses in profit or loss under Hong Kong Accounting Standard 39, have been recognised as other comprehensive expense. The fair value measurements of the Group’s unlisted equity securities are grouped into Level 3, which are derived from valuation techniques that include inputs for the assets that are not based on observable market data (unobservable inputs). (b) The Group newly entered an asset swap with notional amount of HK$60 million. During the year ended 31 December 2011, the unrealised fair value loss of HK$10 million is included in other gains and losses. There were no transfers between Levels 1 and 2 for both years. 167 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview 3. FAIR VALUE continued Financial assets Derivatives under hedge accounting Forward foreign exchange contracts Cross currency swaps Interest rate swaps Basis swaps Other derivatives classified as held for trading (not under hedge accounting) Cross currency swaps Financial assets designated as at FVTPL Principal-protected investments Available-for-sale financial assets Listed equity securities Unlisted club debentures Total Financial liabilities Derivatives under hedge accounting Interest rate swaps Other derivatives classified as held for trading (not under hedge accounting) Net basis swaps Total There were no transfers between Levels 1 and 2 for both years. Level 1 HK$ million 2010 Level 2 HK$ million Total HK$ million – – – – – – 1,147 – 1,147 – – – 1 2 50 1 38 1 2 50 1 38 462 462 – 2 556 48 4 52 1,147 2 1,703 48 4 52 168 Hysan Annual Report 2011Financial Risk Management continuedFor the year ended 31 December 2011 4. 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 equity ratio. For this purpose, the Group defines net debt as borrowings as shown in the consolidated statement of financial position less time deposits and cash and bank balances. The management reviews the Group’s net debt to equity 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 equity ratio at the year end was as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes Borrowings Less: Time deposits Cash and bank balances Net debt Equity attributable to owners of the Company Net debt to equity The Group 2011 HK$ million 2010 HK$ million 2,840 200 3,309 314 6,663 (2,899) (62) 3,702 1,349 200 2,750 288 4,587 (1,930) (63) 2,594 48,753 40,677 7.6% 6.4% Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 169 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview For the year ended 31 December 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 Profit before taxation Taxation Profit for the year Non-controlling interests Profit attributable to owners 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$), based on: Profit for the year – basic – diluted Underlying profit for the year – basic Recurring underlying profit for the year – basic Performance indicators Net debt to equity Net interest coverage (times) Net assets value per share (HK$) Net debt per share (HK$) Year end share price (HK$) 2011 HK$ million 2010 HK$ million As restated 2009 HK$ million (Note) As restated 2008 HK$ million (Note) As restated 2007 HK$ million (Note) 1,922 (262) 1,660 90 (34) (173) (122) 7,532 254 9,207 (217) 8,990 (445) 8,545 1,310 1,310 791 678 79.00 8.08 8.08 1.24 1.24 7.6% 12.3x 46.00 3.49 25.50 1,764 (250) 1,514 49 (42) (140) (117) 2,594 394 4,252 (201) 4,051 (207) 3,844 1,148 1,148 714 632 74.00 3.65 3.65 1.09 1.09 6.4% 14.0x 38.61 2.46 36.60 1,680 (235) 1,445 38 (3) (133) (131) 1,249 768 3,233 (189) 3,044 (130) 2,914 1,113 1,110 709 567 68.00 2.79 2.79 1.06 1.06 5.1% 11.7x 35.42 1.82 22.05 1,638 (217) 1,421 63 146 (134) (155) (212) 590 1,719 (237) 1,482 (118) 1,364 1,201 1,066 644 562 68.00 1.31 1.31 1.16 1.03 5.9% 10.2x 33.44 1.96 12.52 1,368 (208) 1,160 98 302 (106) (175) 3,131 452 4,862 (205) 4,657 (190) 4,467 1,158 950 549 498 60.00 4.24 4.24 1.10 0.90 6.8% 7.8x 33.94 2.29 22.25 170 At 31 December Assets and liabilities Investment properties Interests in associates Equity investments Available-for-sale investments Time deposits, cash and bank balances Other assets Total assets Borrowings Taxation Other liabilities Total liabilities Net assets Non-controlling interests Shareholders’ funds Note: 2011 HK$ million 2010 HK$ million As restated 2009 HK$ million (Note) As restated 2008 HK$ million (Note) As restated 2007 HK$ million (Note) 49,969 3,423 989 – 2,961 2,026 40,833 3,153 – 1,152 1,993 1,423 37,363 2,886 – 1,002 1,984 807 35,850 2,340 – 1,022 1,015 1,493 35,711 1,601 – 2,479 484 789 59,368 48,554 44,042 41,720 41,064 (6,663) (433) (1,528) (4,587) (387) (1,263) (3,891) (342) (1,077) (3,751) (620) (1,076) (2,861) (565) (1,001) (8,624) (6,237) (5,310) (5,447) (4,427) 50,744 (1,991) 42,317 (1,640) 38,732 (1,516) 36,273 (1,462) 36,637 (1,423) 48,753 40,677 37,216 34,811 35,214 The figures for the years 2007 to 2009 have been restated to reflect the prior year adjustments arising from (i) reclassification of leasehold land that qualifies for finance lease from prepaid lease payments to property, plant and equipment in accordance with the amendments to HKAS 17 “Leases”; and (ii) recognition of deferred taxation in respect of revalued investment properties that have been presumed to be recovered through sale in accordance with the amendments to HKAS 12 “Income Taxes”. Definitions: (1) Underlying profit for the year: profit adjusted for group’s share of unrealised fair value changes on investment properties (2) Recurring underlying profit for the year: underlying profit adjusted for items that are non-recurring in nature (such as gains or losses on disposal of long-term assets; impairment or its reversal; and tax provision for prior years) (3) Net debt to equity: borrowings less short-term investments, time deposits, cash and bank balances divided by shareholders’ funds (4) Net interest coverage: gross profit less administrative expenses before depreciation divided by net interest expenses (5) Net assets value per share: shareholders’ funds divided by number of issued shares at year end (6) Net debt per share: borrowings less short-term investments, time deposits and cash and bank balances divided by number of issued shares at year end 171 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverview To the Board of Directors Hysan Development Company Limited Dear Sirs, Annual Revaluation of Investment Properties as at 31 December 2011 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 2011 was in the approximate sum of Hong Kong Dollars Forty Nine Billion Nine Hundred and Sixty Nine Million Only (i.e. HK$49,969 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. For the investment properties under redevelopment, residual method of valuation was adopted. The valuation was mainly arrived at by reference to sales or rental evidences as available on the market to determine the value of the proposed development as if it were completed as at the date of valuation. All the costs of the development, namely the cost of construction, cost of finance, professional fees, marketing costs and an allowance of the profit required for the development were then deducted from the completion value of the proposed development to derive the market value of the property as at the date of valuation. Yours faithfully, Knight Frank Petty Limited Hong Kong, 13 February 2012 172 Hysan Annual Report 2011Report of the Valuer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 9. 18 Hysan Avenue 18 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% Sec. N of I.L. 457 and Sec. LL of I.L. 29 Commercial Long lease 100% 173 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewSchedule of Principal PropertiesAt 31 December 2011 INVESTMENT PROPERTIES continued Address Lot No. Use Category of the Lease Percentage held by the Group 10. 111 Leighton Road 111 Leighton Road Causeway Bay Hong Kong 11. Hysan Place* 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. The redevelopment has a projected gross floor area of around 710,000 square feet and is expected to be open in August 2012. 174 Hysan Annual Report 2011Schedule of Principal Properties continuedAt 31 December 2011 SHARE CAPITAL At 31 December 2011 Number of Ordinary Shares HK$ Nominal Value HK$ Authorised share capital Issued and fully paid-up capital 7,250,000,000 1,450,000,000 5,298,772,075 1,059,754,415 5 5 There was one class of ordinary shares of HK$5 each with equal voting rights. DISTRIBUTION OF SHAREHOLDINGS (At 31 December 2011, 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 ordinary shares % of the issued share capital (Note) 2443 933 86 61 4 18 3,545 4,411,652 68.91 14,438,895 26.32 6,600,037 2.43 12,119,908 1.72 0.11 2,350,306 0.51 1,019,833,617 0.42 1.36 0.62 1.14 0.22 96.24 100.00 1,059,754,415 100.00 TYPES OF SHAREHOLDERS (At 31 December 2011, as per register of members of the Company) Type of shareholders Number of ordinary shares held % of the issued share capital (Note) Lee Hysan Company Limited, Lee Hysan Estate Company, Limited and their subsidiaries Other corporate shareholders Individual shareholders 433,130,735 584,214,190 42,409,490 40.87 55.13 4.00 Total 1,059,754,415 100.00 LOCATION OF SHAREHOLDERS (At 31 December 2011, as per register of members of the Company) Location of shareholders Hong Kong United States and Canada United Kingdom Others Total Note: Number of ordinary shares held % of the issued share capital (Note) 1,052,116,459 4,293,261 3,103,966 240,729 99.28 0.41 0.29 0.02 1,059,754,415 100.00 The percentages have been compiled based on the total number of shares of the Company in issue as at 31 December 2011 (i.e. 1,059,754,415 ordinary shares). 175 Hysan Annual Report 2011Strategy in ActionCorporate GovernanceFinancial Statements and ValuationOverviewShareholding Analysis FINANCIAL CALENDAR Full year results announced Closure of register of members for Annual General Meeting Annual General Meeting Ex-dividend date for final dividend Closure of register of members and record date for final dividend Dispatch of scrip dividend circular and election form Dispatch of final dividend warrants/definitive share certificates 2012 interim results to be announced * subject to change 8 March 2012 11 to 14 May 2012 14 May 2012 16 May 2012 18 May 2012 (on or about) 24 May 2012 (on or about) 14 June 2012 7 August 2012* DIVIDEND The Board recommends the payment of a final dividend of HK64 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 Friday, 18 May 2012. 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. The register of members will be closed from Friday, 11 May 2012 to Monday, 14 May 2012, both dates inclusive, for the purpose of determining shareholders’ entitlement to attend and vote at the Annual General Meeting to be held on 14 May 2012, during which period no transfer of shares will be registered. In order to qualify for attending and voting at the Annual General Meeting, 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 Thursday, 10 May 2012. The register of members will also be closed on Friday, 18 May 2012, for the purpose of determining shareholders’ entitlement to the proposed final dividend, during which period no transfer of shares will be registered. In order to qualify for 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 Thursday, 17 May 2012. A circular containing details of the scrip dividend and the form of election will be mailed to shareholders on or about Thursday, 24 May 2012. 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 Friday, 8 June 2012. 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 Thursday, 14 June 2012. 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 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. (Reception: 50/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. g n u e h C l e a h c i M : y h p a r g o t o h p e g a p e m e h t d n a r e v o C 176 Hysan Annual Report 2011Shareholder Information It is not just our quality assets that make Hysan special. It is the team behind. Hysan employees participate in a dragon dance team-building exercise on the Company Day 2012 with the theme “Together We Can Take the Lead”. A strongly committed team gears up for the Hysan Place opening. H y s a n D e v e l o p m e n t C o m p a n y L i m i t e d A n n u a l R e p o r t 2 0 1 1 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 C M Y K A BETTER FUTURE TODAY Annual Report 2011 stock code 00014 

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