Hysan Development Co Ltd
Annual Report 2018

Plain-text annual report

Our Company, Our Community 2018 Annual Report stock code 00014 Contents Overview 1 2 Business Performance 3 Corporate Governance 4 Financial Statements, Valuation and Other Information 14 Key Facts 14 Our Portfolio, How We Do Things 15 Value Creation 16 Our Assets 18 2018 Performance at a Glance 22 Growing a community... ... with vibrant content 24 Chairman’s Statement 32 The Marketplace 36 Management’s Discussion and Analysis 36 Strategy and Review of Results 37 Review of Operations 42 Financial Review 45 Treasury Policy 52 Our People 58 Corporate Governance Report 80 Audit and Risk Management Committee Report 85 Remuneration Committee Report 94 Nomination Committee Report 97 Strategy Committee Report 98 Risk Management and Internal Control Report 106 Sustainability Report – Summary 108 Directors’ Report 116 Directors’ Responsibility for the Financial Statements 117 Independent Auditor’s Report 121 Financial Statements 175 Financial Risk Management 185 Five-Year Financial Summary 187 Report of the Valuer 188 Schedule of Principal Properties 189 Shareholding Analysis 190 Shareholder Information 192 Corporate Information In an effort to reduce consumption of resources due to printing and distributing hard copies, the Hysan Sustainability Report has been prepared for electronic distribution and is available for public viewing on Hysan Development’s website (www.hysan.com.hk). Limited copies are printed and distributed, primarily to our shareholders. A summary of the Sustainability Report is provided on pages 106 and 107 of this Annual Report. Scan QR code to read the 2018 Sustainability Report Hysan Development’s roots can be traced back to the purchase of a hill along the north coast of Hong Kong Island by the founding Lee family in 1923. The ensuing 95 years have seen the transformation of Lee Gardens from genteel parklands to a vibrant lifestyle destination. The theme of this report, Our Company, Our Community, is based on stories highlighted in our popular social media campaign, Hysan95. We celebrated our first 95 years with 95 stories which vividly showcased life in Causeway Bay. Lee Gardens is inextricably linked to Causeway Bay. We are determined to grow our home base into Hong Kong’s destination of distinction. www.hysan95.com Scan QR code to read the Hysan95 stories 1 Hysan in 2018 - Officially opened in November 2018 - A catalyst to further enhance our commitment to lifestyle - Brand new retail and food and beverage concepts add excitement to Lee Gardens - Add strong office tenancies to Lee Gardens portfolio Lee Garden Three 2 Hysan Annual Report 2018Retail - An enhanced tenant mix with the emphasis on lifestyle and children’s offerings - Strong tenant and third party partnerships through townhall meetings and glamorous events - Unique experiences ranging from shopping mall activities to street festivals - Key brand programmes supported by popular promotional campaigns - Significant increase in loyalty programmes’ membership and sales - Roll out digital transformation with video- speed Wi-Fi, paperless e-coupons, interactive signage and e-directories Reinforce connection between office and retail tenants Office - Diverse portfolio offering a range of space sizes at different price points - Rich offerings of year-round and after- hours lifestyle and social facilities - Banking and finance tenants now claim more than 20% of our office portfolio’s floor space - Range of co-working operators to complement existing tenant space requirements and attract a dynamic flow of new office users 3 Office buildings with cutting edge technology and green credentials accompanying colourful retail offerings; a tight community fabric; a convenient transport network: all these make Lee Gardens a perfect office destination, where work and life are truly in harmony with each other.” Mark Tung Director, Lee Gardens Association WO We help run Hysan Place’s Urban Farm. The office workers really enjoy doing this farm work. You can see it in their faces – at the beginning they are a little stressed, but when harvest time comes, their expressions reflect deep satisfaction.” Jessica Lau Program Manager, SEED 4 Hysan Annual Report 2018RK WO For companies expecting rapid growth over the next few years, or international companies looking to instantly establish a footprint in Hong Kong, co-working is their perfect option. Causeway Bay and Lee Gardens’ vibrancy make the area a great place for co-working.” Nancy Yip Area Director, IWG 5 People live all over Hong Kong and there are only a few areas where it just makes sense for people to meet up. Causeway Bay is one of them, and Lee Gardens is right in the middle of it all.” James Robertson Founder of El Grande Concepts VE It’s noisy and busy, fun and yummy, charming and diverse. Causeway Bay and Lee Gardens is a go-to destination for anything and everything. If you want something, you can pretty much find it here.” L I Grace Lam Fashion Director/Stylist/Creative Consultant 6 Hysan Annual Report 2018VE It’s by far the most energetic spot on Hong Kong Island. It is, and always has been, a hotbed for youth culture, eclectic dining experiences and the best shopping finds. Causeway Bay is also where it all began for us – it’s where we met as teenagers. We got married in 2014.” Paul and Jocelyn Lovebirds of Causeway Bay My roots are in this neighbourhood. I have hairy crab customers who have come here for three generations.” Sandy Ki Owner, Old San Yang Member of Lee Gardens Association 7 The Sevens has been around for 43 years now and it has become ingrained in Hong Kong’s culture in a way that hasn’t happened elsewhere. Over the last few years we’ve focused on growing the event outside the stadium. We want to create a whole Hong Kong Sevens festival, and the carnival at Lee Gardens plays a big part.” P L Sam Pinder General Manager, Hong Kong Sevens The people who train here are really interesting. There are Lee Gardens area office workers, of course, but we also have a lot of local residents from here or Happy Valley. It’s a great mix of people, which helps create that feeling of being part of a family.” Jimmy Leung Martial artist and Founder, THE FIGHTERS CLUB 8 Hysan Annual Report 2018The Arts in the Park Night Parade is a magical experience as all the puppets and costumes are illuminated. I remember the first time, tears streamed down my face as we walked, it was very emotional. We had squillions of people outside Lee Gardens and the surrounding areas all eager to share in our creativity.” Lindsey McAlister Founder, Hong Kong Youth Arts Foundation AY L People come here wanting to experience the atmosphere, or to initiate children into the world of reading. We want to offer respite for people, so that their mind and body can relax.” Lynn Chang Company Director, eslite 9 THE COMMUNITY The area’s people are its greatest assets. Hysan has an important role to play, too. We will continue to inject more elements into this community to stimulate stakeholders’ interactions, 10 Hysan Annual Report 2018and to knit the new and the old into a community tapestry of rich contrast and diversity. 11 1 Overview 14 Key Facts 14 Our Portfolio, How We Do Things 15 Value Creation 16 Our Assets 18 22 2018 Performance at a Glance Growing a community... ... with vibrant content 24 Chairman’s Statement 13 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceKey Facts Our Portfolio How We Do Things Hysan’s investment portfolio is set predominantly in Lee Gardens, a unique part of Hong Kong’s renowned commercial heart in Causeway Bay. Our ownership concentration makes us stand out, as it magnifies our ability to create synergies from different tenants within our remarkable community. Within our approximately 4.5 million square feet of retail, office and residential tenant space, including the recently opened Lee Garden Three, we strive to become close partners with our tenants. By understanding and connecting our tenants’ and our customers’ needs, we create a sustainable community. Overall Investment Properties (by Gross Floor Area) Investment Properties (by Turnover Contribution) Total Gross Floor Area 4.5 million sq. ft. (approx.) Turnover HK$3,890 million 15% 55% 30% Residential Office Retail 7% 43% 50% Residential Office Retail VISION To be the PREMIER property company in its market of choice. MISSION Provide our stakeholders with sustainable and outstanding returns from a property portfolio which is strategically planned and managed by passionate, responsible and forward- looking professionals. VALUES L E A D E R S H I P E X C E L L E N C E E M P O W E R M E N T A C C O U N T A B I L I T Y G O O D C I T I Z E N S H I P R E S P E C T N E T W O R K I N G S U S T A I N A B I L I T Y D R I V I N G / D R I V E N E N T R E P R E N E U R S H I P 14 Hysan Annual Report 2018 Value Creation Financial Achievements: • Steady and progressive total return • Strong Balance Sheet Increase Yields through active management including tenant mix improvement Turnover 2013-2018 (HK$ million) 3,890 5-year CAGR 4.9% 3,535 3,548 3,430 3,224 3,063 Financial Achievements increase earnings Recurring Underlying Profit 2013-2018 (HK$ million) Dividends per Share provide steady growth 2013-2018 (HK cents) 5-year CAGR 4.4% 2,536 135 137 132 144 5-year CAGR 4.2% 123 117 2,369 2,349 2,283 2,163 2,043 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Asset Enhancement balance longer-term projects with those that produce more immediate returns Supported by Strong Underlying Non-Financial Achievements: Environment Employees Community Governance Minimise our impact on the environment, and achieve higher efficiency at the same time Create working environment for talent to thrive Make positive contributions to communities where we operate Strong governance is the heart of long-term sustainable performance 15 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceBAMBOO GROVE Mid-Levels HYSAN PLACE Lee Theatre Retail Hub LEE THEATRE PLAZA LEIGHTON CENTRE ONE HYSAN AVENUE Our Assets Retail and Office Retail only Residential LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE LEE GARDEN SIX LEE GARDEN ONE BAMBOO GROVE Mid-Levels HYSAN PLACE HYSAN PLACE LEE THEATRE PLAZA ONE HYSAN AVENUE LEIGHTON CENTRE LEE GARDEN ONE LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE GARDEN LEE SIX Bamboo Grove 74–86 Kennedy Road, Mid-Levels Completed 1985 / Renovated 2002 Approx. Gross Floor Area 691,000 ft2 Units 345 Parking Number of Spaces 436 Quality international living in Mid-Levels Lee Theatre Retail Hub LEE GARDEN ONE LEE THEATRE PLAZA LEIGHTON CENTRE ONE HYSAN AVENUE LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE LEE GARDEN SIX Lee Theatre Plaza 99 Percival Street, Causeway Bay Completed 1994 / Lower zone renovated 2013 Approx. Gross Floor Area 314,000 ft2 Number of Floors 26 Retail and Office Retail only Residential Leighton Centre 77 Leighton Road, Causeway Bay Completed 1977 / Renovated 2011 Approx. Gross Floor Area 430,000 ft2 Floors 28 Parking Number of Spaces 321 Popular office complex amongst sports and lifestyle shops One of Hong Kong’s best-loved shopping and dining complexes Lee Garden Two 28 Yun Ping Road, Causeway Bay Completed 1992 / Retail podium renovated 2003 Approx. Gross Floor Area 621,000 ft2 * Floors 34 Parking Number of Spaces 167 Spacious offices and home to children’s concept floors One Hysan Avenue 1 Hysan Avenue, Causeway Bay Completed 1976 / Renovated 2011 Approx. Gross Floor Area 169,000 ft2 Number of Floors 26 Efficient office and retail building in prime site Lee Garden Five 18 Hysan Avenue, Causeway Bay Completed 1989 / Renovated 2009 Approx. Gross Floor Area 132,000 ft2 Number of Floors 25 An office and retail complex at one of Hong Kong’s most prestigious commercial areas 16 HYSAN PLACE LEE THEATRE PLAZA ONE HYSAN AVENUE LEIGHTON CENTRE LEE GARDEN ONE LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE GARDEN LEE SIX Hysan Annual Report 2018HennessyRoadCrossHarbourTunnelLee Garden RoadHysan AvenueLan Fong RoadPak Sha RoadLeighton RoadSharp Street EastPercival StreetAberdeenTunnelYun Ping RoadHennessyRoadCrossHarbourTunnelLee Garden RoadHysan AvenueLan Fong RoadPak Sha RoadLeighton RoadSharp Street EastPercival StreetAberdeenTunnelYun Ping RoadHysan Place 500 Hennessy Road, Causeway Bay Completed 2012 Approx. Gross Floor Area 716,000 ft2 Floors 40 Parking Number of Spaces 66 Greenest commercial building and trendiest shopping centre in town Lee Garden One 33 Hysan Avenue, Causeway Bay Completed 1997 Approx. Gross Floor Area 903,000 ft2 Floors 53 Parking Number of Spaces 200 Home to international corporations and premium brands Lee Garden Three 1 Sunning Road, Causeway Bay Completed 2017 Approx. Gross Floor Area 467,000 ft2 Number of Parking Floors 32 Spaces 201 Brand new commercial address in Lee Gardens Lee Garden Six 111 Leighton Road, Causeway Bay Completed 1988 / Renovated 2004 Approx. Gross Floor Area 80,000 ft2 Number of Floors 24 Convenient office and retail location * The approximate Gross Floor Area of Lee Garden Two is revised upon the completion of asset enhancement works. 17 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance2018 Performance at a Glance Financial Performance Turnover HK$3,890m 9.6% Recurring Underlying Profit HK$2,536m 8.0% Recurring Underlying Earnings per Share HK242.40cents 7.9% Retail Sector HK$1,923m – 2 0 9 1 , 9 6 9 1 , 5 2 9 1 , 3 2 9 1 , 1 0 8 1 , 2014 2015 2016 2017 2018 Office Sector HK$1,688m 24.2% 9 6 3 2 , 9 4 3 2 , 6 3 5 2 , 3 8 2 2 , 3 6 1 2 , . 9 2 6 2 2 . 8 6 4 2 2 . 0 4 2 4 2 . 3 8 4 1 2 . 4 3 3 0 2 2 0 . 3 6 8 4 . 4 6 6 5 . 4 6 2 1 . 1 7 9 8 . 6 6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 8 8 6 1 , Dividends per Share HK144cents 5.1% Property Value HK$77,442m 6.9% 3 4 2 1 , 2 9 2 1 , 9 5 3 1 , 6 3 1 1 , 2 3 1 5 3 1 7 3 1 4 4 1 3 2 1 5 3 7 8 6 , 0 1 8 9 6 , 3 3 6 9 6 , 2 4 4 7 7 , 0 7 4 2 7 , 0 4 0 , 7 6 2 7 1 , 8 6 0 9 4 , 7 6 1 3 4 , 4 7 3 5 9 , 9 6 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Cost Valuation Surplus 2014 2015 2016 2017 2018 Residential Sector HK$279m 5.7% 7 8 2 5 8 2 4 7 2 4 6 2 9 7 2 2014 2015 2016 2017 2018 18 Hysan Annual Report 20182 0 9 , 1 9 6 9 , 1 5 2 9 , 1 3 2 9 , 1 1 0 8 , 1 9 6 3 , 2 9 4 3 , 2 6 3 5 , 2 3 8 2 , 2 3 6 1 , 2 9 2 . 6 2 2 8 6 . 4 2 2 0 4 . 2 4 2 3 8 . 4 1 2 4 3 . 3 0 2 Net Asset Value per Share HK$71.12 6.3% 2 0 3 6 . 8 4 4 6 . 6 5 4 6 . 2 1 1 7 . 9 8 6 6 . 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Shareholders’ Funds HK$74,431m 6.4% 2 3 1 5 3 1 7 3 1 4 4 1 3 2 1 5 3 7 , 8 6 0 1 8 , 9 6 3 3 6 , 9 6 2 4 4 , 7 7 0 7 4 , 2 7 0 4 0 7 6 , 2 7 1 8 6 , 0 9 4 7 6 , 1 3 4 4 7 , 3 5 9 9 6 , 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Cost Valuation Surplus 2014 2015 2016 2017 2018 8 8 6 , 1 3 4 2 , 1 2 9 2 , 1 9 5 3 , 1 6 3 1 , 1 2014 2015 2016 2017 2018 7 8 2 5 8 2 4 7 2 4 6 2 9 7 2 2014 2015 2016 2017 2018 FINANCIAL PRUDENCE Net Interest Coverage (Note 1) 18.1 times (2017: 17.1 times) Net Debt to Equity (Note 2) 4.7% (As at 31 Dec 2017: 5.0%) Average Finance Cost 3.6% (2017: 3.4%) Average Debt Maturity 3.9 years (As at 31 Dec 2017: 4.3 years) Fixed Rate Debt 75.5% (As at 31 Dec 2017: 74.9%) Capital Market Issuances 75.5% (As at 31 Dec 2017: 74.9%) Credit Ratings Moody’s: A3 Standard and Poor’s: BBB+ Fitch: A- Notes: 1 Net Interest Coverage is defined as gross profit less administrative expenses before depreciation divided by net interest expenses 2 Net Debt to Equity is defined as borrowings less time deposits, cash and cash equivalents divided by shareholders’ funds 19 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance2018 Performance at a Glance Non-Financial Performance ENVIRONMENT “AA” • MSCI Global Sustainability Indexes: “AA” Rating “AA” • Hang Seng Corporate Sustainability Index: “AA” Rating • Hysan Place attains Final Platinum rating under the BEAM Plus (Existing Buildings) certification scheme d r o f h c t e L f f o e G y b d e h p a r g o t o h P © • Lee Garden Three achieves China Green Building Label 2 Stars Rating • Hysan develops its Green Finance Framework and places green bond The inclusion of Hysan Development Company Limited in any MSCI index, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement or promotion of Hysan Development Company Limited by MSCI or any of its affiliates. The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names and logos are trademarks or service marks of MSCI or its affiliates. 20 Hysan Annual Report 2018 SOCIAL • 2018 Constituent member of FTSE4GOOD Index • Silver Award for Volunteer Service (Organisation) (in 2018) under the Steering Committee on Promotion of Volunteer Service of Social Welfare Department GOVERNANCE • Gold Award (Non-Hang Seng Index – Large Market Capitalisation Category) in the Hong Kong Institute of Certified Public Accountants’ Best Corporate Governance Awards 2018 • Honourable Mention in The Hong Kong Management Association’s 2018 HKMA Best Annual Reports Awards d r o f h c t e L f f o e G y b d e h p a r g o t o h P © d r o f h c t e L f f o e G y b d e h p a r g o t o h P © 21 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance Growing a community... HYSAN PLACE Multifaceted Retail - Classic top-end brands alongside dynamically-curated trendy labels - “New Classic” products and services for Millennials: lifestyle, health and wellness - Wide choice of food and beverage - Office tenants create new consumer demographics, which in turn influence our retail tenant mix LEE THEATRE PLAZA LEIGHTON CENTRE ONE HYSAN AVENUE The composition of our retail portfolio’s visitors is balanced between approximately 1/3 tourists 1/3 1/3 long-time locals “New Hong Kong residents” (who have settled here over the past decade or so) - Preferred retail destination for Multigenerational shoppers - Popular loyalty programmes create customer “stickiness” Heritage and Modern - Traditional businesses in surrounding areas mingle with trendy street shops - Walk-up buildings revitalised in collaboration with local business association and neighbourhood owners 22 LEE GARDEN ONE LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE GARDEN LEE SIX Hysan Annual Report 2018...with vibrant content Easy Access 57,000+ people per hour from MTR’s Island Line 20+ bus routes stop at Hysan Place 900+ parking spaces HYSAN PLACE LEE THEATRE PLAZA LEIGHTON CENTRE ONE HYSAN AVENUE Quality Office Space - Over 2.5m sq. ft. of quality office; 20,000 + workers with spending power - Banking and Finance the largest tenant sector - Co-working and flex space a growing trend LEE GARDEN ONE LEE GARDEN TWO LEE GARDEN FIVE LEE GARDEN THREE LEE GARDEN SIX Digital Transformation - Video-speed Wi-Fi - Paperless e-coupons - Enhanced digital signage and interactive directories - Better use of IoT and analytics 23 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceChairman’s Statement Lee Gardens is a community where people come to work, live and play, now and for generations to come. The local economy experienced healthy expansion in 2018 with a year-on-year growth of 3.0%. Labour market conditions remained tight, but the residential property market and stock market were less bullish during the second half of the year. Visitor arrivals figures, meanwhile, continued their upward trend, with 11.4% growth in 2018, as compared to the year before (Mainland China visitors increased by 14.8%). Hong Kong’s retail sales saw robust growth of 13.4% in the first half of 2018, while the second half growth of just 4.3% mirrored the slow-down in overall economic growth. Full year 2018 Hong Kong retail sales grew 8.8%. All categories rose when compared to 2017, with Jewellery and Watches, as well as Medicines and Cosmetics among the best performers. 2018 was a productive year for Hysan. Footfall in our portfolio saw improvement and our estimated tenant sales growth outperformed Hong Kong’s general retail sales growth. Office rental reversion was robust and occupancy improved. Nevertheless, market challenges persist, from macroeconomic issues to structural changes in tenants’ and consumers’ demands. The Lee Gardens portfolio has many natural advantages: we have a rich and dynamically-curated retail and commercial portfolio set in a unique neighbourhood, which combines the latest high-rise with Hong Kong heritage buildings, enhanced by strong physical, visual and virtual connectivity. These natural attributes, together with our public events, have enabled us to create a strong sense of community. 25 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceChairman’s Statement Hysan’s Progress in 2018 The market challenges we faced in 2018 were not dissimilar to the year before. There were added factors including the macro issues of interest rate hikes, as well as Mainland China’s economic slowdown and Renminbi (RMB) depreciation. These were compounded by the China-U.S. trade tensions. Retail consumers demand experiential and digital offers. Demographic shifts saw “New Hong Kong residents” (those who have settled in Hong Kong in the past decade or so) become a strong and growing spending force. Moreover, generational changes have meant millennials and younger shoppers now seek “new classic” products and services that are personalised, sophisticated and aspirational. Health and wellness as well as lifestyle offerings are high on their agenda. For parents, quality children’s items and experiences are highly coveted. Unique, new and relevant retail offerings are key to attracting top quality office tenants. The demand for “flex” space by companies propelled an increased commitment to forge partnerships with some of the best-known co-working brands. We have constructed a balanced portfolio of co-work tenants to cater to different organisational requirements from multinational institutions to small startups. Lee Gardens portfolio is now home to co-working operators like Spaces, theDesk and Compass. They will soon be joined by another major operator, WeWork. Apart from co-working, traditional Banking and Finance institutions have chosen Lee Gardens for its quality hardware as well as amenities, convenience and vibrant community, all of which are key to staff engagement. Lee Garden Three is now home to a number of top international financial institutions, including Goldman Sachs and Maybank. Lee Garden Three, which officially opened in November 2018, is the perfect catalyst to extend our commitment to lifestyle. The building houses some very unique food and beverage destinations, along with a range of wellness and children’s products that are priority items for this generation of consumers. Our new office tenants in Lee Garden Three, together with a more fluid and diverse office user population from our co-work office tenants located throughout our portfolio, have created a new consumer demographic. This in turn has influenced our retail tenant recruitment strategy and mix. We analyse and curate our portfolio as a holistic offering that feeds on and influences footfall, spending power and the staying power of our consumers within the Lee Gardens neighbourhood. We have introduced new destination restaurants and more drinking elements, all of which have proven popular with our new office tenants. These newcomers are growing into loyal customers of our portfolio’s offerings. Our loyalty clubs, too, help enhance the spending and staying power of those who visit the portfolio. Lee Gardens Plus for general shoppers and Club Avenue for VIPs, are gaining considerable traction. Lee Gardens Plus saw its membership more than doubled over the year. Through multiple channels, including a powerful but simple to use app, we have created a platform to appeal to a wider audience. In the meantime, we have also enhanced our offerings and level of service to our VIPs through Club Avenue. In regard to tenant partnership enhancement, the introduction of our regular town-hall meetings and our tenant engagement team have contributed significantly to further strengthen our relationships through tenant-centric win-win events and campaigns. During the year, we held a number of special exclusive events in partnership with tenants to attract high spenders. A close relationship also enabled the successful roll-out of Hysan’s much anticipated paperless e-coupon project. 26 Hysan Annual Report 2018Technology Driving Change at Increasing Pace China-U.S. Trade War Demographic Shift Retail New Hong Kong – New Classic – Fast and determined pivot to experiential offers with strong digital journey Fast and determined pivot to Flex – Office Retail Need to power and empower Office Generational Shift RMB Depreciation Interest Rate Hike Still Ample Liquidity Hysan has implemented a range of measures to weather the uncertainties in the macro- environment, as well as to tackle the structural changes in the retail and office sectors. The Lee Gardens area has always had an eclectic mix of different characteristics. In recent times, and especially in 2018, we have been knitting these elements together into a community tapestry of rich contrast and diversity. Cutting edge buildings stand alongside heritage low-rise; premium luxury brands rub shoulders with traditional businesses; multinational financial institutions share buildings with co-working spaces. We leverage and enhance our existing strength in children, health and wellness offerings. In addition, Hysan’s role is to continuously inject new elements into this community to stimulate stakeholder interactions. The earthy scent of our Urban Farm harvest; the glittering giant puppets of the Night Parade; the stream of pop-up stores which surprise and delight shoppers; the heart- warming Hysan95 social media stories about Causeway Bay’s past, present and the future: all these are woven together with our ever-strengthening digital offerings. Our area-wide high-speed Wi-Fi that beams from all our buildings across our entire portfolio; the easy-to- use and environmentally-friendly e-coupons and the forthcoming improved loyalty apps: these too are helping to enrich our community with the very latest technology. 27 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceChairman’s Statement rich community elements dynamic curation of tenant mix targeted marketing efforts burgeoning loyalty clubs tight partnerships with tenants concentrated in the most vibrant and recognised retail destination Improvement of business environment for retail tenants The combined power of our diverse office tenant mix, improved retail offerings, robust marketing efforts, burgeoning loyalty clubs, ever-tightening partnerships with tenants, and rich community elements, is contributing to the improvement of the business environment for our retail tenants. The success of our tenants is reflected in satisfactory positive rental reversions in most cases, which in turn has given us the opportunity to take proactive and bold steps to continue to innovate and reposition our portfolio. The founder of our Group, Mr. Lee Hysan bought East Point Hill 95 years ago and renamed it Lee Gardens. From the very beginning his vision was to build a place of entertainment and relaxation, so that families from all walks of life could come to spend the whole day and enjoy the offerings. We have not really deviated from his far-sighted ideals. We would like Lee Gardens to remain a unique and sustainable destination, a community where people would choose to work, live and play, now and for generations to come. Business Performance The Group’s 2018 turnover was HK$3,890 million, up 9.6% from HK$3,548 million in 2017. Occupancies of our retail and office portfolio were 98% and 97% respectively at year-end 2018. Meanwhile, the occupancy of our residential portfolio improved to 88%. 28 Hysan Annual Report 2018Recurring Underlying Profit, the key measurement of our core leasing business performance, was up 8.0% to HK$2,536 million (2017: HK$2,349 million). Our Underlying Profit in 2018, was also HK$2,536 million, up by 8% from 2017 on a normalised basis after excluding the one-off compensation received from a retail tenant in 2017. Basic earnings per share based on Recurring Underlying Profit and Underlying Profit correspondingly rose to HK242.40 cents (2017: HK224.68 cents and HK238.26 cents respectively), up 7.9% and 1.7% respectively. The Group’s Reported Profit for 2018 was HK$6,033 million (2017: HK$3,636 million). This mainly reflected a fair value gain of HK$3,532 million (2017: HK$853 million) on the Group’s investment properties’ valuation. As at year-end 2018, the valuation of the Group’s investment property portfolio increased by 6.9% to HK$77,442 million (2017: HK$72,470 million). This reflected a combination of factors: a generally positive rental outlook for our core portfolio, and a number of asset enhancement works completed. The capitalisation rates used in valuing each portfolio remained unchanged from those used as at 31 December 2017. Shareholders’ Funds increased by 6.4% to HK$74,431 million (2017: HK$69,953 million), principally reflecting the valuation change of the investment properties. Our financial position remained strong, with net interest coverage of 18.1 times (2017: 17.1 times) and net debt to equity ratio of 4.7% (2017: 5.0%). Dividends The Board of Directors (the “Board”) is pleased to declare a second interim dividend of HK117 cents per share (2017: HK111 cents). Together with the first interim dividend of HK27 cents per share (2017: HK26 cents), the total distribution is HK144 cents per share (2017: HK137 cents), representing a year-on-year increase of 5.1%. The dividend will be payable in cash. Appreciation and Outlook I would like to use this opportunity to welcome our new Independent Non-Executive Director Wong Ching Ying Belinda. Belinda is the Chief Executive Officer of Starbucks China and has extensive experience leading different organisations in the Asia Pacific region. I trust Belinda will bring her strong professional expertise to further strengthen the Board. I would like to thank the management team for all their hard work in 2018, and also to offer a big thank you to my fellow directors for their support and advice throughout the year. Hong Kong’s economic growth slowed considerably in the second half of 2018. Waning confidence in both the property and equity markets will be further affected by anticipated headwinds from macro issues in 2019. These include the structural slowdown in China and the trade war between China and the United States. Hysan has implemented a range of measures to weather the uncertainties in the macro- environment, as well as to tackle the structural changes in the retail and office sectors. Lee Garden Three’s completion has added greater impetus to the changes in both sectors of our commercial portfolio. We have a comprehensive plan to continue to curate the Lee Gardens community with the support of our neighbourhood stakeholders. We look forward to another successful year ahead. Lee Irene Yun-Lien Chairman Hong Kong, 21 February 2019 29 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance2 Business Performance 32 The Marketplace 36 Management’s Discussion and Analysis 36 Strategy and Review of Results 37 Review of Operations 42 Financial Review 45 Treasury Policy 31 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceThe Marketplace Hong Kong Economy The Hong Kong economy grew 3.0% in 2018. With 4.1% growth recorded in the first half of the year, growth slowed to 2.8% and 1.3% in the third and fourth quarter of the year respectively. This was mainly due to the deteriorating global environment stimulated by the China-US trade war during the latter half of the year, which also impacted other key economic statistics. Imports and exports of goods both showed a marginal drop during the fourth quarter following positive growth in previous quarters, with a full year increase of 4.9% and 3.5% respectively. Exports of services grew by 4.9%, which was mainly due to the increase in visitor arrivals. Investment expenditure grew moderately by 2.2%, slowed by dampened sentiment during the last quarter of the year. Private consumption expenditure increased by 5.6%, which was supported by a favourable employment market. Real Gross Domestic Product Growth* Year-on-year % change 5 4 3 2 1 0 3.8% 3.0% 2.8% 2.4% 2.2% 2014 2015 2016 2017 2018 * In chained (2016) dollars Source: Census and Statistics Department (data as of February 2019) Retail Following the rebound in the Hong Kong retail market in 2017, consumer sentiment continued to be positive. This benefitted the retail sales market in the first half of 2018, with growth of 13.4% being recorded in Hong Kong retail sales versus the same period in 2017. However, due to various adverse factors such as the China-US trade war, RMB depreciation as well as the interest rate hike, growth in Hong Kong retail sales during the second half of 2018 slowed to 4.3% when compared to the same period in 2017. The overall growth in Hong Kong retail sales was 8.8%. During the year, the number of visitor arrivals grew by 11.4%. Since the new infrastructure linking Hong Kong to Mainland China became operational, the number of visitors from the Mainland soared by 14.8%. These visitors were one of the core factors in the overall retail sales growth. Local consumers also contributed to the retail market upturn, as is shown by the increase in private consumption expenditure. The growth in Hong Kong retail sales extended to most trade categories. However, some categories recorded better year-on-year growth than others; for example, jewellery, watches and clocks and valuable gifts (up 13.7%), commodities in department stores (up 9.6%), and medicines and cosmetics (up 14.3%). 32 Hysan Annual Report 2018Hong Kong Total Retail Sales Total Number of Visitors HK$ billion Year-on-year % change Million 493 475 437 446 -0.2% 2.2% -3.7% -8.1% 600 500 400 300 200 100 0 485 8.8% 32 24 16 8 0 -8 -16 70 60 50 40 30 20 10 0 2014 2015 2016 Total Retail Sales 2017 Year-on-year % change 2018 Source: Census and Statistics Department (data as of January 2019) 61 22% 78% 59 22% 78% 57 24% 76% 58 24% 76% 65 22% 78% 2014 2015 2016 2017 2018 Number of Other Visitors Number of Mainland China Visitors Source: Hong Kong Tourism Board (data as of January 2019) According to Jones Lang LaSalle, rents for retail premises in premium shopping centres increased by 2.0% overall. Premium Prime Shopping Centre Rental Index (2009 Q4=100) Index 170 160 150 140 130 120 110 100 90 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2018 2017 2014 2015 Source: Jones Lang LaSalle (data as of January 2019) d r o f h c t e L f f o e G y b d e h p a r g o t o h P © 33 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance The Marketplace Office Grade “A” office rents in general continued to increase during 2018, being primarily driven by the demand from Mainland Chinese firms as well as the growing number of co-working operators. Spot rents in Central and Causeway Bay in 2018 showed a solid increase of 8.0% and 8.6% respectively over 2017. During 2018, Mainland China companies took up about 29% of new lettings in Central. Analysed by locations, both the traditional and new commercial areas saw a decrease or on par in vacancy rates at the end of 2018 when compared to 2017. The exception was Wong Chuk Hang, which showed an increase mainly due to new supplies. Strong demand for office space in Central was maintained. With limited supply and ongoing rental increases, the decentralisation trend continued as banks and professional firms as well as multinational corporations moved to other areas like Causeway Bay, Hong Kong East and Kowloon East. Co-working operators expanded into Grade “A” offices to provide premium services, a trend that resulted in the occupancy of a considerable amount of office space. Grade “A” Office Vacancy Rate in 2017 and 2018 % 25 20 15 10 5 0 20.3% 12.5% 12.2% 9.6% 3.0% 1.7% 1.8% 3.9% 1.7% 2.2% 1.5% 1.7% Central Causeway Bay/ Wanchai Tsim Sha Tsui Hong Kong East Kowloon East Wong Chuk Hang 2017 year-end 2018 year-end Source: Jones Lang LaSalle (data as of January 2019) Grade “A” Office Monthly Net Effective Rental Value HK$ per sq. ft., Net Floor Area 140 120 100 80 60 40 20 0 34 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2014 2015 2018 Central Causeway Bay/Wanchai Source: Jones Lang LaSalle (data as of January 2019) Hysan Annual Report 2018Luxury Residential Luxury residential rents began to pick up in 2017 and the trend continued in 2018. However, the traditional luxury market is facing headwinds due to unfavourable economic outlook and tight housing budgets in multinational corporations. According to Jones Lang LaSalle, luxury residential rents increased 2.9% as compared to 2017. Luxury Residential Rental Index (2009 Q4=100) Index 120 115 110 105 100 95 90 85 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2015 2014 Source: Jones Lang LaSalle (data as of January 2019) d r o f h c t e L f f o e G y b d e h p a r g o t o h P © 35 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance Management’s Discussion and Analysis Strategy The Group is committed to providing our shareholders with sustainable returns from our property portfolio, which is predominantly located in Hong Kong’s prime commercial area of Causeway Bay. This district will remain the core of our investment and operational focus. The Group also continues to seek investment opportunities beyond our core geographical area. We continuously strive to enhance the value of our properties through asset enhancement, repositioning and redevelopment. We also focus on curating the contents of the Lee Gardens community for our tenants and other stakeholders. We are proud of our team of passionate, responsible and forward-looking professionals who strategically plan and manage our portfolio while ensuring everything we do is underpinned by sound financial management. Review of Results Turnover Recurring Underlying Profit Underlying Profit Reported Profit 2018 HK$ million 2017 HK$ million 3,890 2,536 2,536 6,033 3,548 2,349 2,491 3,636 Change % +9.6 +8.0 +1.8 +65.9 The Group’s turnover in 2018 was HK$3,890 million, an increase of 9.6% from HK$3,548 million in 2017, mainly attributable to the meaningful contribution from Lee Garden Three and the strong performance of the office sector. Recurring Underlying Profit, the key measurement of our core leasing business performance, was up 8.0% to HK$2,536 million (2017: HK$2,349 million). Our Underlying Profit in 2018, was also HK$2,536 million, up by 8.0% from 2017 on a normalised basis after excluding the one-off compensation received from a retail tenant in 2017. Basic earnings per share based on Recurring Underlying Profit and Underlying Profit correspondingly rose to HK242.40 cents (2017: HK224.68 cents and HK238.26 cents respectively), up 7.9% and 1.7% respectively. The Group’s Reported Profit for 2018 was HK$6,033 million (2017: HK$3,636 million). A fair value gain of HK$3,532 million (2017: HK$853 million) on the Group’s investment properties’ valuation was the key contributor. As at year-end 2018, the external valuation of the Group’s investment property portfolio increased by 6.9% to HK$77,442 million (2017: HK$72,470 million). This reflected a combination of factors: a generally positive rental outlook for our core portfolio, and a number of asset enhancement works completed. The capitalisation rates used in valuing each portfolio remained unchanged from those used as at 31 December 2017. 36 Hysan Annual Report 2018Review of Operations Hysan’s portfolio of retail, office and residential investment properties has a total gross floor area of approximately 4.5 million square feet. As at 31 December 2018, about 85% of the Group’s investment properties by gross floor area were retail and office properties in Causeway Bay. The remaining 15% was represented by residential properties mainly in the Mid-Levels. The turnover of each sector is shown as below: Retail sector Office sector Residential sector 2018 HK$ million 2017 HK$ million 1,923 1,688 279 3,890 1,925 1,359 264 3,548 Change % – +24.2 +5.7 +9.6 Contribution to Turnover 2018 % 49.4 43.4 7.2 2017 % 54.3 38.3 7.4 100.0 100.0 The increased weight from the Office sector towards turnover was mainly due to the new Lee Garden Three, which provided predominantly office space, together with higher positive rental reversion achieved by other office buildings in our portfolio. Key Performance Indicators The Group’s turnover growth and occupancy rate are the key measurements used for assessment of our core leasing business performance. Cost effectiveness is assessed by the Group’s management using the property expenses ratio (as a percentage of turnover). Business Performance Key Performance Indicators Definition Turnover Growth Rental revenue in current year vs that in last year Portfolio Retail Office Residential Occupancy Rate Percentage of total lettable area leased / total lettable area of each portfolio at year end Retail* Office* Residential 2018 – +24.2% +5.7% 98% 97% 88% 2017 -2.2% +5.2% -3.6% 97% 96% 75% Property Expenses Ratio Property expenses divided by turnover N/A 13.4% 12.7% * 2017 percentages did not include Lee Garden Three, the redevelopment of which was completed in December 2017. Note: Except for the occupancy rate mentioned above, no changes have been made to the source data or calculation methods used when compared to 2017. Retail Portfolio The Group’s retail portfolio turnover was on par with last year at HK$1,923 million (2017: HK$1,925 million). There was good contribution from turnover rent of HK$81 million (2017: HK$48 million). The overall rental reversion in renewals, rent review and new lettings was largely neutral reflecting satisfactory positive reversions mixed with the impact from targeted tenant repositioning. The portfolio’s occupancy, including the new Lee Garden Three’s retail portion, was 98%, as at 31 December 2018 (31 December 2017: 97%, excluding Lee Garden Three). 37 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Foot traffic in Hysan’s retail portfolio saw an increase of around 11% in 2018, as compared to full year 2017. There was also a general improvement in the estimated overall tenant sales within the portfolio. Estimated tenant sales increased by around 16.2% as compared to 2017, outperforming Hong Kong’s year-on-year retail sales growth of 8.8%. Lee Garden Three held its official opening in November 2018. The event was attended by hundreds of well-wishers as well as members of the media, and was Hysan’s stand-out event of the year. Lee Garden Three is well known for its lifestyle shops such as HOMELESS, Tavolo Kids Living, BoConcept, KitchenAid and Stressless, plus hair stylist M Plus. The building’s food and beverage outlets have also become some of the most popular dining destinations in town, with Belgos, John Anthony, Starbucks flagship store, Next Door Café and Bar, NOC Coffee, Reserva Ibérica Tapas Bar & Café, Sweet Fashion House and Zentro East offering a wide variety of food and drinks. A Happy Pancake, renowned for its long lines of customers, rounds off the list. The new building’s opening was a good opportunity for us to further energise the rest of the portfolio. 2018 saw a significant improvement in our “content” provision. Initiatives included an enhanced tenant mix, strong tenant and third-party partnerships, unique experiences and events, key branding programmes, improved and expanded loyalty programmes, and the start of a digital transformation. New tenants included the family members’ club Maggie & Rose, a strong addition to our children-focused Lee Garden Two. The Spa by Valmont and Sake Diamond added new lifestyle experiences to the portfolio, while Hysan Place welcomed a number of new or expanded sportswear tenants. In addition to our new food venues in Lee Garden Three, we also welcomed destination restaurants like 10 Shanghai and Ta-ke in Lee Garden Two, the popular experiential Haidilao in Lee Theatre Plaza, and a number of more casual eateries in Hysan Place. We believe in maintaining strong relationships with our tenants after they move in. In 2018, almost a dozen partnership events were held with tenants and third parties, thereby bringing more attention to the area, generating business for tenants, and providing unique experiences to high-end shoppers. Brunello Cucinelli, BVLGARI, CHANEL BEAUTÉ, Dior, Lancôme, Louis Vuitton, Roger Vivier, rue Madame, The Spa by Valmont and TORY BURCH were among the tenants that hosted exclusive and glamorous events in partnership with Hysan. We also generated considerable excitement for our general shoppers in the malls. Chinese New Year, Valentine’s Day, Mother’s Day and a Go Green restaurant campaign saw us hosting popular activities backed by strong promotions. The second half of the year also saw further campaigns for Mid-Autumn Festival with Maxim’s, and Christmas and New Year with eslite bookstore. These campaigns combined great shopping or dining opportunities with special experiences. We are building Lee Gardens’ reputation as a venue for quality children’s entertainment to attract more family traffic. Absolutely Fabulous Children’s Theatre’s monthly performances, the Hong Kong International Young Readers’ Festival, and the reading of Gruffalo by Kidsfest were among the highlights of the year. There was also a Royal Kids Etiquette series of classes for younger children. More activities for children are planned for 2019. 38 Hysan Annual Report 2018During 2018, we also took our events outdoors. In the first half of the year, the popular Cathay Pacific/HSBC Rugby Sevens Festival at Lee Gardens and its partner Lee Gardens Egglette Festival attracted the most attention. The remaining months began with Hong Kong Ballet’s Alice (in Wonderland) street performances, as well as the November Standard Chartered Art Fun in Causeway Bay Night Parade. LOVE is NEARBY Christmas Community Festival, where top band Supper Moment and other singers performed at a popular street fair outside Lee Garden One, rounded off the year. Running alongside more than a hundred of these events and activities were signature key branding programmes, supported by shopper promotion campaigns. Leeisure, Shopaholic, DeLeecious, and Athleeisure were all launched to attract more footfall and spending for different retail segments. In addition, strong efforts were made in both media and social media to drive awareness of Lee Gardens among Mainland Chinese and other tourists. A new and comprehensive tourist booklet was launched, while a VIP membership card for tourists, the Purple Card, was unveiled during the year. Moreover, we reinforced our partnerships with Hong Kong Tourism Board and leading local hotels to further promote our messages. In regard to our loyalty programmes, Club Avenue for VIPs and Lee Gardens Plus for general shoppers, saw a substantial growth in their membership in 2018, as compared to 2017. Sales attributable to Club Avenue members experienced double-digit percentage growth. We are encouraged by the growth of these and will further invest in the hardware and software of our programmes to benefit all members. On the technology front, the area-wide high-speed Wi-Fi system was successfully launched. The paperless e-coupon system was also unveiled and was well supported from the outset by a majority of shop tenants. We made substantial inroads into the enhancement of data collection from all touchpoints, with enhanced data privacy protection. In addition, an integrated customer relationship management system is about to be launched. More than 100 digital signs are now under a central control point, while more interactive e-directories have been added. The use of big data, analytics, prediction and artificial intelligence will be key to the future of the retail sector. Hysan is committed to making the best use of available technology to gain better insight and to add value to all our retail tenants. Retail Lease Expiry Profile by Area Occupied (As at 31 December 2018) 32% 28% 21% 17% 2019 2020 2021 2022 and beyond 39 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Growing a community and curating its content require committed buy-in from those who do business in the neighbourhood. Lee Gardens Association has taken on the role of enlivening the area through street events, activities and social media promotions. Many of the area’s main events, like the Rugby Sevens Festival, Egglette Festival and Night Parade were spearheaded by the Association. New Association members include several traditional businesses that have operated in the area for decades, and which have taken part in a number of the Association’s social media drives. We are heartened that many of the neighbourhood’s property owners have expressed interest in the creative business concepts introduced by the Association. Hysan looks forward to more cooperation with the Association to further enhance the area as a popular destination for all. Office Portfolio The Group’s office portfolio turnover increased by 24.2% to HK$1,688 million (2017: HK$1,359 million). This performance reflected contributions from the newly completed Lee Garden Three, as well as overall robust positive rental reversion on renewals, rent review and new lettings. The office portfolio occupancy was 97%, as at 31 December 2018, including occupancy of the new Lee Garden Three (31 December 2017: 96%, excluding Lee Garden Three). Tenants demand the highest standards of both building hardware and building service software. Lee Garden Three offers many green and wellness features, including a Hong Kong-first commercial building running track, together with a popular retail podium of restaurants and lifestyle shops. All these amenities are further supplemented by the area’s eclectic mix of commercial and social offerings plus ample convenient parking facilities. Lee Gardens has become an established and viable choice for multinational and local firms. We have maintained a diverse tenant mix over the years. With the completion of Lee Garden Three, which has attracted a number of Banking and Finance tenants, this sector has increased to about 24% and has now overtaken Professional and Consulting as the largest sector area-wise in our office portfolio. Banking and Finance, together with the next three top sectors, including Professional and Consulting, Insurance and Semi-Retail, take up around 59% of our office lettable floor area (2017: 54%). Office Tenant Profile by Area Occupied as at Year-end 15.1% 24.1% 17.8% 14.3% Banking and Finance Professional and Consulting Insurance Semi-retail 15.7% Information Technology Marketing High-end Retailers Consumer Products Co-Work Others 2017 (Excluding Lee Garden Three) 14.2% 8.0% 9.6% 6.4% 2.1% 4.7% 5.9% 2018 16.5% 6.9% 7.4% 10.9% 3.5% 1.7% 8.0% 7.2% 40 Hysan Annual Report 2018Office Lease Expiry Profile by Area Occupied (As at 31 December 2018) 26% 26% 22% 23% 2019 2020 2021 2022 and beyond Residential Portfolio Hysan’s residential portfolio, comprising mainly the units in Kennedy Road’s Bamboo Grove, recorded a 5.7% growth in turnover to HK$279 million (2017: HK$264 million). The residential sector’s occupancy improved to 88% (31 December 2017: 75%). The units previously under renovation are now available and have proven to be popular. We continue to make improvements to Bamboo Grove to attract prospective tenants. A small urban farm, for example, is being planned for Bamboo Grove to enhance the community spirit. The rental reversion was overall positive in renewals, rent review and new lettings. Tai Po Luxury Residential Project The design development of our low-density residential development project at Tai Po is making good progress. Various statutory submissions are ongoing. Site work has also commenced. “My great, great grandfather worked as a chef for an American trading company where he learned how to cook western cuisine. Eventually, he branched out to open his own restaurants and moved across the border to Hong Kong. The design and interiors, much like certain items on the menu, have not changed since the restaurant first opened. If we change anything, it will no longer be ‘Tai Ping Koon’ for our customers. Some of them, including plenty of celebrities, have been coming here for generations.” Andrew Chui Managing Director of Tai Ping Koon 41 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Financial Review A review of the Group’s results and operations is featured in the preceding sections. This section deals with other significant financial matters. Operating Costs The Group’s operating costs are generally classified as property expenses (direct costs and front-line staff wages and benefits) and administrative expenses (indirect costs largely representing payroll related costs of management and head office staff). Property expenses increased by 16.5% to HK$523 million (2017: HK$449 million), reflecting the commencement of operation of Lee Garden Three during the year. The property expenses to turnover ratio thus increased slightly from 12.7% to 13.4% as compared to 2017. Administrative expenses decreased by 8.1% to HK$227 million (2017: HK$247 million). Finance Costs Finance costs amounted to HK$222 million in 2018, an increase of 40.5% from HK$158 million in 2017, mainly due to (i) cessation of interest expense capitalisation of HK$51 million upon Lee Garden Three’s completion in 2017; and (ii) interest rate increases in 2018, which impacted interest cost of our floating rate debts. If the capitalised interest expenses and related borrowing costs were expensed last year, the Group’s finance costs in 2017 would have been HK$209 million. The finance costs of 2018 would then have increased by HK$13 million or 6.2%. The Group’s average cost of finance in 2018 was 3.6%, a slight increase from 3.4% reported for 2017. Further discussion of the Group’s treasury policy, including debt and interest rate management, is set out in the “Treasury Policy” section. Revaluation of Investment Properties As at 31 December 2018, the Group’s investment real estate portfolio was valued at HK$77,442 million, an increase of 6.9% from HK$72,470 million as at 31 December 2017. This valuation was carried out by Knight Frank, an independent professional valuer, on the basis of open market value. The capitalisation rates used in valuing each portfolio remained unchanged from those used as at 31 December 2017. 42 Hysan Annual Report 2018Fair value gain on investment properties (excluding capital expenditure spent on the Group’s investment properties) of HK$3,532 million (2017: HK$853 million) was recognised in the Group’s consolidated statement of profit or loss for the year. This figure reflected a combination of factors: a generally positive rental outlook across our portfolio and the completion of a number of asset enhancement works. The following shows the property valuation of each portfolio at year-end. Retail Office Residential 2018 HK$ million 2017 HK$ million Change % 35,102 34,159 8,181 77,442 33,188 31,325 7,957 72,470 +5.8 +9.0 +2.8 +6.9 Investment in Associates and a Joint Venture The Group’s investment in associates mainly represents interests in Shanghai Grand Gateway in Shanghai, China. The share of results of associates increased to HK$288 million (2017: HK$220 million). As at 31 December 2018, 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, amounted to HK$96 million (2017: HK$11 million). The Group’s investment in a joint venture represents interests in a Tai Po residential project. The increase in carrying value represents costs incurred by the project. Other Investments In addition to placing surplus funds as time deposits in banks with strong credit ratings, the Group also invested in investment grade debt securities. Excluding recognition of imputed interest income on interest-free loan to a joint venture company for a residential site development in Tai Po of HK$29 million (2017: HK$28 million), like-for-like interest income increased by 19.5% to HK$49 million (2017: HK$41 million). This figure mainly reflected higher interest rates from deposits. During 2018, the Group invested in a real estate fund covering certain properties in Hong Kong and other major cities in Asia, with a view to expanding our reach in collaboration with professional property managers and to generate a new source of income and capital. 43 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Cash Flow Cash flow of the Group during the year is summarised below. Cash include liquid cash and bank deposits with less than 3 months’ tenor. Cash generated from operations Net (advance to) repayment from a joint venture company Net borrowing (repayment) Interest and taxation Dividends paid and proceeds on exercise of options Capital expenditure Other investments Net cash inflow n/m: not meaningful 2018 HK$ million 2017 HK$ million 3,224 2,900 Change % +11.2 (56) 46 (636) (1,551) (1,203) 211 35 935 (130) (587) (1,524) (1,947) 1,020 667 n/m n/m +8.3 +1.8 -38.2 -79.3 -94.8 The Group’s net cash generated from operations was HK$3,224 million (2017: HK$2,900 million), HK$324 million higher than in 2017, reflecting the growth of our core leasing business. Net advance to a joint venture company of HK$56 million was for a residential site development in Tai Po. In 2017, net repayment from a joint venture company was HK$935 million after the completion of project financing on land acquisition costs. Net borrowing was HK$46 million, reflecting net borrowing of fixed rate notes of HK$150 million, and repayment to non-controlling interest of a subsidiary during the year. In 2017, net repayment was HK$151 million during the year. Cash from other investments was HK$211 million (2017: HK$1,020 million), mainly attributable to reduction in deposits with longer tenor. The Group paid dividends of HK$1,444 million (2017: HK$1,411 million), being the 2017 second interim dividend of HK111 cents per share (2017: HK109 cents) and the 2018 first interim dividend of HK27 cents per share (2017: HK26 cents). Capital Expenditure and Management The Group is committed to enhancing the asset value of our investment property portfolio through selective asset enhancement and redevelopment. The Group has also established a portfolio-wide whole-life cycle maintenance programme as part of our ongoing strategy to pro-actively implement preventive maintenance activities. Total cash outlay of capital expenditure during the year was HK$1,203 million (2017: HK$1,947 million), including the payment of the construction costs of Lee Garden Three. 44 Hysan Annual Report 2018Treasury Policy Market Highlights The global economy performed strongly at the beginning of 2018. However, as sentiment soured amid growing China-U.S. trade tensions, the Hong Kong stock market tumbled more than 20% from its peak in January and global financial markets became more volatile. In view of the 10-year lowest unemployment rate and relatively low inflation rate, the U.S. Federal Reserve raised the federal fund rate by four hikes, amounting to a total of 100 basis points in 2018. With the expectation of market volatility and slowing global economic growth, the Federal Reserve lowered its forecast for interest rate hikes in 2019. Under the currency board system, Hong Kong Monetary Authority also raised its base rate in line with the federal funds rate by 100 basis points during 2018. The Hong Kong dollar (HKD) HIBOR rate also rose sharply during 2018, narrowing the differential with the U.S. dollar LIBOR rate. The 3-month HKD HIBOR increased from around 1.3% at the end of 2017 to around 2.3% at the end of 2018. Despite the increase in HIBOR, the Hong Kong bank loans market continued to be liquid. The credit margin of bank loans for companies with investment grade credit ratings saw a modest decline. Despite the slow-down in the global economy and uncertainties in the macro environment, the Hong Kong economy is fundamentally in good shape and the unemployment rate at 2.8% is the lowest since 1998. The completion of two mega infrastructure projects, namely the Hong Kong-Zhuhai-Macau Bridge and the Express Rail Link, is set to further increase the number of inbound tourist arrivals from Mainland China. A rise in domestic household spending may further benefit Hong Kong’s economy. However, the Hong Kong economy also saw some signs of slowing down when GDP growth in Q3 and Q4 retreated to 2.8% and 1.3% respectively, when compared to 4.1% in the first half of the year. Uncertainties in global political issues and financial markets may worsen our operating environment as well as dampen expansion. It is therefore important for the Group to continue with our prudent financial management policy. Capital Structure Management To ensure a healthy financial position and a suitable capital structure servicing the Group’s finance needs and sustainable growth, the Group always strives to diversify its funding sources, maintain a suitable debt maturity profile relative to the overall use of funds, maintain adequate liquidity, keep a low borrowing margin relative to market conditions, and adopt suitable hedging and forex management strategies. 45 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Funding Source During the year, the Group issued and repaid medium-term notes of HK$300 million and HK$150 million respectively. The Group’s outstanding gross debt1 was HK$6,326 million (2017: HK$6,176 million) at year-end 2018. All the outstanding borrowings are on an unsecured basis. At the end of 2018, the proportion of debts sourced from the capital market increased slightly to 75.5% (2017: 74.9%). The Group continued to maintain long-term relationships with a number of local and overseas banks to diversify its funding sources. At year-end of 2018, eight local and overseas banks provided bilateral banking facilities to the Group as funding alternatives. The following graph shows the percentages of total outstanding gross debts sourced from banks and the debt capital markets over the past five years. Sources of Financing at Year-end (HK$ milion) 6,457 17.0% 6,305 26.6% 6,176 25.1% 6,326 24.5% 4,875 5.1% 83.0% 94.9% 73.4% 74.9% 75.5% 2014 Capital Market Issuances 2015 2016 Bilateral Bank Loans 2017 2018 The Group also strives to maintain an appropriate debt maturity profile to match with the nature of our assets and operations. As at 31 December 2018, the average maturity of the debt portfolio was about 3.9 years (2017: 4.3 years), of which about HK$300 million or 4.7% of the outstanding gross debt will be due in 2019. Given our strong cash balance, debt repayment will not cast much immediate refinancing pressure. To further diversify our source of funding into investors who highly regard businesses with green initiatives, the Group has established its Green Finance Framework in late 2018, leveraging our sustainable building development and operations with green initiatives. The framework supports both green bonds and green loans enabling a choice of flexibility in the Group’s future financing. After the reporting period, the Group has raised its first green bond of HK$300 million at a coupon rate of 3.33% due in 2026. 1 The gross debt represented the contractual principal payment obligations as at 31 December 2018. However, in accordance with the Group’s accounting policies, the debt was measured at amortised costs, using the effective interest method. As disclosed in the consolidated statement of financial position as at 31 December 2018, the book value of the outstanding debt of the Group was HK$6,322 million (31 December 2017: HK$6,185 million). 46 Hysan Annual Report 2018Maturity Profile The graph below shows the debt maturity profile of the Group at year-end 2018 and 2017. Debt Maturity Profile at 2018 and 2017 Year-end 2018 300 565 250 1,331 3,230 650 6,326 2017 150 800 565 250 1,331 3,080 6,176 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Gross Debt Amount (HK$ million) Maturing: Not exceeding 1 year Between 1 – 2 years Between 2 – 3 years Between 3 – 4 years Between 4 – 5 years More than 5 years Gearing Ratio and Net Interest Coverage The Group’s gearing ratio, as measured by Net Debt to Equity ratio1, decreased slightly from 5.0% at year-end of 2017 to 4.7% at year-end of 2018, because of the increase in equity from HK$70 billion at year-end of 2017 to HK$74 billion at year-end of 2018 driven by the increase in fair value of investment properties. The Group’s Net Interest Coverage2 increased to 18.1 times for 2018 (2017: 17.1 times) due to the improved operating results. The low gearing and strong ability to meet interest payments reflected the Group’s resilience and capability to raise further debt for new investments and projects, if necessary. The graph below shows the level of leverage and our ability to meet interest payment obligations over the past five years. Net Debt to Equity and Net Interest Coverage at Year-end 17.1x 4.2% 2014 19.5x 20.5x 17.1x 18.1x 3.0% 2015 5.4% 5.0% 4.7% 2016 2017 2018 Net Debt to Equity (%) Net Interest Coverage (times) 1 Net Debt to Equity is defined as borrowings less time deposits, cash and cash equivalents divided by shareholders’ funds. 2 Net Interest Coverage is defined as gross profit less administrative expense before depreciation divided by net interest expenses. 47 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceManagement’s Discussion and Analysis Credit Rating The Group aims at maintaining investment-grade credit ratings to ensure a stable and lower cost of financing, and reflect our prudent financial management strategy. During the year, Fitch upgraded the Group’s credit rating from BBB+ to A-, reflecting the Group’s strong financial position. Moody’s Standard and Poor’s Fitch Liquidity Management 2018 A3 BBB+ A- 2017 A3 BBB+ BBB+ As at 31 December 2018, the Group had cash and bank deposits totalling about HK$2,817 million (2017: HK$2,662 million). In order to preserve liquidity and enhance interest yields, the Group invested HK$227 million (2017: HK$737 million) in debt securities. Further liquidity, if needed, is available from the undrawn committed facilities offered by the Group’s relationship banks. These facilities, amounted to HK$950 million at year-end 2018 (2017: HK$950 million), essentially allowing the Group to obtain additional liquidity as the need arises. Interest Rate Management The fixed rate debt ratio increased slightly to 75.5% at year-end 2018 from 74.9% at year-end 2017. 2018 saw the start of interest rate normalisation cycle and it is expected that interest rate will continue to rise in 2019, although in a slower pace when compared to 2018. We believe we are in a good position to manage our finance costs given our fixed rate debt ratio. The diagram below analyses the Group’s debt level in term of gross and net debt, fixed and floating rates, together with average cost of finance over the past five years. Debt Levels (HK$ million) and Average Cost of Finance (%) 3.2% 6,457 23.7% 2,817 76.3% 3.5% 4,875 5.1% 3.8% 6,305 26.6% 3.4% 6,176 25.1% 3.6% 6,326 24.5% 3,675 3,514 3,510 94.9% 2,071 73.4% 74.9% 75.5% 2014 2015 2016 2017 2018 Fixed rate debt Year-end Gross Debt Year-end Net Debt (Gross debt less time deposits, cash and cash equivalents) Average Cost of Finance (Total finance costs before capitalisation divided by average gross debt) 48 Hysan Annual Report 2018Foreign Exchange Management The Group aims to achieve minimal currency exposure and does not speculate in currency movements for asset and liability management. Except for US$300 million fixed rate notes, which have been hedged by an appropriate hedging instrument, all of the Group’s borrowings were denominated in Hong Kong dollar. For the US$300 million fixed rate notes issued in January 2013, a hedge was entered effectively to convert the borrowing into Hong Kong dollar. On the investment side, as at 31 December 2018, the Group’s outstanding foreign currency balances in cash, time deposits, debt securities and a real estate fund amounted to US$88 million (2017: US$131 million), of which US$28 million (2017: US$70 million) was hedged by foreign exchange forward contracts. Other foreign exchange exposure mainly relates to investments in the Shanghai project. These unhedged foreign exchange exposures amounted to the equivalent of HK$3,715 million (2017: HK$3,779 million) or 4.3% (2017: 4.6%) of total assets. Use of Derivatives As at 31 December 2018, outstanding derivatives were mainly related to the hedging of foreign exchange exposures. Strict internal guidelines have been established to ensure derivatives are used to manage volatilities or to adjust the appropriate risk profile of the Group’s treasury assets and liabilities. Counterparty Credit Risk All the deposits are placed with banks with strong credit ratings and the counterparty risk is controlled via prescribed limits and is monitored on a regular basis. 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 basically reflects the credit quality of the counterparty. “We opened our shop first on Lan Fong Road in 1986, and then we moved to Lee Garden One in 2005, so we’ve had this shop for 32 years. We have seen Causeway Bay change over these years, and we have built up so many memories here. Our customers are used to us being here, so we’ve never left. We designed the shop ourselves, and we’ve kept it simple and minimalistic instead of following trends. We do everything from our heart. It’s important to us that when our customers wear our clothes, they feel happy.” Rosanna Ma & Ben Leung Zeta store owners 49 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceCorporate Governance 3 52 Our People 58 Corporate Governance Report 80 Audit and Risk Management Committee Report 85 Remuneration Committee Report 94 Nomination Committee Report 97 Strategy Committee Report 98 Risk Management and Internal Control Report 106 Sustainability Report – Summary 108 Directors’ Report 51 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewOur People Executive Director Board of Directors The Board is responsible for the stewardship of the Company, overseeing its conducts and affairs to create sustainable value for the benefit of its shareholders. Lee Irene Yun-Lien Chairman of the Board N S Board appointment Ms. Lee was appointed a Non-Executive Director in March 2011, Non-Executive Chairman in May 2011, and executive Chairman in March 2012. She also serves as a director of certain subsidiaries of the Group. She is aged 65. Competencies and experience Ms. Lee leads the Group in her executive Chairman role. Ms. Lee is an independent non-executive director of Cathay Pacific Airways Limited, HSBC Holdings plc, The Hongkong and Shanghai Banking Corporation Limited and Hang Seng Bank Limited. She is a Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority. She has held senior positions in investment banking and fund management in a number of renowned international financial institutions. Previously, Ms. Lee was an executive director of Citicorp Investment Bank Limited in New York, London and Sydney, and head of corporate finance at Commonwealth Bank of Australia and chief executive officer of Sealcorp Holdings Limited, both based in Sydney. She was also the non-executive chairman of Keybridge Capital Limited (listed on the Australian Stock Exchange), a non-executive director of ING Bank (Australia) Limited, QBE Insurance Group Limited and The Myer Family Company Pty Limited, an independent non-executive director of Noble Group Limited (listed on Singapore Exchange Limited) and CLP Holdings Limited, and a member of the Advisory Council of JP Morgan Australia. Ms. Lee was formerly a member of the Australian Government Takeovers Panel. She is a member of the founding Lee family, sister of Mr. Lee Anthony Hsien Pin (Non-Executive Director) and his alternate on the Board. Qualifications 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. Committees Ms. Lee is the Chairman of the Nomination Committee and was the Chairman of the Strategy Committee. 52 Hysan Annual Report 2018Non-Executive Directors Churchouse Frederick Peter Independent Non-Executive Director A Fan Yan Hok Philip Independent Non-Executive Director A R N S Board appointment Mr. Churchouse was appointed an Independent Non-Executive Director in December 2012 and is aged 69. Board appointment Mr. Fan was appointed an Independent Non-Executive Director in January 2010. He is aged 69. Competencies and experience Mr. Churchouse has been involved in Asian securities and property investment markets for more than 30 years. Currently, he is a private investor including having his own private family office company, Portwood Company Ltd. He is an independent non-executive director of Longfor Group Holdings Limited (formerly known as Longfor Properties Co. Ltd). He is also the publisher and author of The Churchouse Letter. In 2004, Mr. Churchouse set up an Asian investment fund under LIM Advisors. He acted as a director of LIM Advisors and as Responsible Officer until the end of 2009. Prior to this, Mr. Churchouse worked at Morgan Stanley as a managing director and advisory director from early 1988. He acted in a variety of roles including head of regional research, regional strategist and head of regional property research. He was also a board member of Macquarie Retail Management (Asia) Limited. Qualifications Mr. Churchouse gained a Bachelor of Arts degree and a Master of Social Sciences degree from the University of Waikato in New Zealand. Committee Mr. Churchouse is a member of the Audit and Risk Management Committee. Competencies and experience Mr. Fan is an independent non-executive director of China Everbright International Limited, First Pacific Company Limited, China Aircraft Leasing Group Holdings Limited and PFC Device Inc. He was previously an independent non- executive director of Guolian Securities Co., Ltd. and an independent director of Goodman Group. Qualifications 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 the Massachusetts Institute of Technology. Committees Mr. Fan is the Chairman of the Remuneration Committee, a member of the Audit and Risk Management Committee and the Nomination Committee, and was a member of the Strategy Committee. A Audit and Risk Management Committee R Remuneration Committee N Nomination Committee S Strategy Committee 53 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverview Our People Non-Executive Directors (continued) Lau Lawrence Juen-Yee Independent Non-Executive Director N Poon Chung Yin Joseph Independent Non-Executive Director A R N S Board appointment Professor Lau was appointed an Independent Non-Executive Director in December 2014. He is aged 74. Board appointment Mr. Poon was appointed an Independent Non-Executive Director in January 2010. He is aged 64. Competencies and experience Mr. Poon is an independent non-executive director of AAC Technologies Holdings Inc. He was formerly the group managing director and deputy chief executive officer of Tai Chong Cheang Group, 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 was the former chairman of Hang Seng Index Advisory Committee, Hang Seng Indexes Company Limited, a former member of the Board of Inland Revenue of Hong Kong Special Administrative Region and the Environment and Conservation Fund Investment Committee, and a former committee member of the Chinese General Chamber of Commerce. Qualifications Mr. Poon holds a Bachelor of Commerce degree from the University of Western Australia, is a member of Chartered Accountants Australia and New Zealand, and the Hong Kong Institute of Certified Public Accountants. Mr. Poon is also a Fellow of the Hong Kong Institute of Directors. Committees Mr. Poon is the Chairman of the Audit and Risk Management Committee, a member of the Remuneration Committee and the Nomination Committee, and was a member of the Strategy Committee. Competencies and experience Professor Lau is currently Ralph and Claire Landau Professor of Economics at The Chinese University of Hong Kong. He serves as Chairman of the Board of Directors for The Chinese University of Hong Kong (Shenzhen) Finance Institute, aka Shenzhen Finance Institute. He is also an independent non-executive director of AIA Group Limited, CNOOC Limited, Semiconductor Manufacturing International Corporation (“SMIC”) and Far EasTone Telecommunications Co., Ltd. (listed on the Taiwan Stock Exchange). Professor Lau joined the faculty of the Department of Economics at Stanford University in 1966, and had a long and distinguished career there. Upon his retirement in 2006, he became Kwoh-Ting Li Professor in Economic Development, Emeritus, at Stanford University. From 2004 to 2010, Professor Lau served as Vice- Chancellor (President) of The Chinese University of Hong Kong. From September 2010 to September 2014, he served as Chairman of CIC International (Hong Kong) Co., Limited, a subsidiary of China Investment Corporation. From June 2011 to December 2014, Professor Lau was a non-executive director of SMIC. Professor Lau is a member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority, Chairman of its Governance Sub-committee and member of its Currency Board Sub-committee and Investment Sub-committee, Vice- Chairman of Our Hong Kong Foundation, a member and Chairman of the Prize Recommendation Committee, LUI Che Woo Prize Company and a member of the Hong Kong Trade Development Council (HKTDC) Belt and Road Committee. He was appointed a Justice of the Peace in July 2007, awarded the Gold Bauhinia Star in 2011 by the Government of the Hong Kong Special Administrative Region and served as a member of the 11th and 12th National Committee of the Chinese People’s Political Consultative Conference and a Vice-Chairman of its Economics Sub-committee. Qualifications Professor Lau received his B.S. degree (with Great Distinction) in Physics from Stanford University and his M.A. and Ph.D. degrees in Economics from the University of California at Berkeley. Committee Professor Lau is a member of the Nomination Committee. 54 Hysan Annual Report 2018 Wong Ching Ying Belinda Independent Non-Executive Director Jebsen Hans Michael B.B.S. Non-Executive Director S Board appointment Ms. Wong was appointed an Independent Non-Executive Director in December 2018 and is aged 47. Competencies and experience Ms. Wong is currently the chief executive officer of Starbucks China. Ms. Wong joined Starbucks Coffee Company in 2000 and held leadership positions across a variety of business units and geographies, including marketing director for the Asia Pacific region of Starbucks Coffee, managing director of Starbucks Singapore and general manager of Starbucks Hong Kong. Prior to joining Starbucks group in 2000, Ms. Wong was the marketing manager of McDonald’s China Development Company. She has extensive experience in retail, food and beverage, people, brand development and growth strategy across the Greater China and Asia Pacific regions. She serves as a member on the Faculty Advisory Board for the University of British Columbia’s Sauder School of Business. Qualifications Ms. Wong holds a Bachelor of Commerce degree with a major in finance from the University of British Columbia in Canada. Board appointment Mr. Jebsen was appointed a Non- Executive Director in 1994 and is aged 62. Competencies and experience 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. Mr. Jebsen currently holds a number of public offices, namely, chairman of the Asian Cultural Council Hong Kong, chairman of the Advisory Council of the Business School of The Hong Kong University of Science and Technology, a trustee of World Wide Fund for Nature Hong Kong and a member of Board of Trustees of Asia Society Hong Kong Center, Hong Kong-Europe Business Council of the Hong Kong Trade Development Council as well as Advisory Board of the Hong Kong Red Cross. Since 2015, he has also been a member of the Operations Review Committee of the Independent Commission Against Corruption. Mr. Jebsen was awarded the Bronze Bauhinia Star by the Government of the Hong Kong Special Administrative Region in 2001, made a Knight of the Dannebrog by receiving the Silver Cross of the Order of Dannebrog by H. M. The Queen of Denmark in 2006, was awarded the Merit Cross of the Order of the Merit of the Federal Republic of Germany in 2009, received the title “Hofjægermester” by H. M. The Queen of Denmark in January 2011 and was awarded the Knight of 1st Class of the Order of Dannebrog, Denmark in 2014. Qualifications Mr. Jebsen was awarded Doctor of Business Administration honoris causa of The Hong Kong University of Science and Technology. Committee Mr. Jebsen was a member of the Strategy Committee. A Audit and Risk Management Committee R Remuneration Committee N Nomination Committee S Strategy Committee 55 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverview Our People Non-Executive Directors (continued) Lee Anthony Hsien Pin Non-Executive Director A Lee Tze Hau Michael Non-Executive Director R Board appointment Mr. Lee joined the Board in January 2010, having previously served as a Director from 1990 to 2007. He is aged 57. Competencies and experience Mr. Lee is currently a director of Oxer Limited, a private investment company. He is also an independent non-executive director of Chen Hsong Holdings Limited, Trinity Limited; and a Steward of The Hong Kong Jockey Club. He was previously an independent non-executive director of Hong Kong Exchanges and Clearing Limited and an independent non-executive director and chairman of OTC Clearing Hong Kong Limited. Mr. Lee was also 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 Company Limited, a substantial shareholder of the Company. Qualifications Mr. Lee received his Bachelor of Arts Degree from Bowdoin College and his Master of Business Administration Degree from Boston University. Committee Mr. Lee is a member of the Remuneration Committee. Board appointment Mr. Lee was appointed a Non-Executive Director in 1994 and is aged 61. Competencies and experience 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. Mr. Lee is a member of the founding Lee family and a director of Lee Hysan Company Limited, a substantial shareholder of the Company. He is the brother of Ms. Lee Irene Yun-Lien, Chairman. Qualifications Mr. Lee received a Bachelor of Arts Degree from Princeton University and a Master of Business Administration Degree from The Chinese University of Hong Kong. Committee Mr. Lee is a member of the Audit and Risk Management Committee. Lee Chien Non-Executive Director N S Board appointment Mr. Lee was appointed a Non-Executive Director in 1988 and is aged 65. Competencies and experience Mr. Lee is a private investor and a non-executive director of Swire Pacific Limited and a number of private companies. He is a member of the founding Lee family and a director of Lee Hysan Company Limited, a substantial shareholder of the Company. Mr. Lee is a Council member of The Chinese University of Hong Kong and St. Paul’s Co-educational College and a Trustee Emeritus of Stanford University. He is also a director of Stanford Health Care and CUHK Medical Centre. Qualifications 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. Committees Mr. Lee is a member of the Nomination Committee and was a member of the Strategy Committee. 56 A Audit and Risk Management Committee R Remuneration Committee N Nomination Committee S Strategy Committee Hysan Annual Report 2018Senior Management Lui Kon Wai Ricky MBA, MCIOB Chief Operating Officer Mr. Lui joined Hysan as the Group’s Chief Operating Officer in December 2016. He assists the Chairman in translating and executing the Group’s strategy and vision into operational and financial attainment. Mr. Lui also drives the Group’s business growth, development and investment and serves as a director of certain Hysan subsidiaries. Mr. Lui has over 25 years of experience as a senior executive in the property industry globally, covering acquisitions, development and asset management for residential, office, retail and large scale mixed use developments in Hong Kong, mainland China and overseas. He is aged 53. Hao Shu Yan Roger BBA (Hons), CPA, ACA, ACCA Chief Financial Officer Mr. Hao is responsible for the Group’s financial control, treasury and information technology functions, and serves as a director of certain Hysan subsidiaries. He joined the Group in 2008. Mr. Hao accumulated extensive experience in auditing, financial management and control while holding senior positions in multinational corporations. He is aged 53. Choy Man Wai Kitty BEcon, MSc, MBA Director, Retail Ms. Choy is responsible for the Group’s retail portfolio and asset management strategies, and serves as a director of certain Hysan subsidiaries. She joined the Group in 2000 and prior to joining Hysan, Ms. Choy held a supervisory position at a major property development company. She is aged 46. Lam Tze Pon Tiffany B.Soc.Sc. (Information Management) Director, Marketing and Customer Experience Ms. Lam is responsible for formulation of the Group’s marketing strategies and leads marketing and customer experience operations, and serves as a director of certain Hysan subsidiaries. She joined the Group in January 2018. Prior to joining the Group, Ms. Lam accumulated extensive experience in retail and brand management in the premium luxury sector and the hospitality industry while holding senior positions in international retail corporations. She is aged 47. Yip Mo Ching Jessica BSc (Surveying), MBA, MRICS, MHKIS, RPS Director, Office and Residential Ms. Yip is responsible for managing the office and residential portfolio of the Group, and serves as a director of certain Hysan subsidiaries. Prior to joining the Group in 2012, Ms. Yip fulfilled various roles in international consultancies, occupiers and developers. She has extensive experience in the real estate industry. She is aged 42. Audit and Risk Management Committee Remuneration Committee Nomination Committee Strategy Committee 57 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Governance Overview Leadership BOARD GOVERNANCE BOARD COMPOSITION CORPORATE STRATEGY • Governance structure (see “Governance Framework” section on page 62) • Board of Directors Mandate • All Directors are appointed with a specific term of 3 years and are subject to rotation • 5 INEDs and 4 NEDs • Set strategy • Oversee overall governance, financial performance and sustainable development of the Group (see this “Governance Overview” section on pages 64 to 65) • List of Matters Reserved for • Diverse skills, knowledge and the Board Decisions experience • Roles and Responsibilities of Non-Executive Directors Effectiveness EVALUATION • Formal board evaluation process via an electronic platform. The Board discusses the findings in detail at its meetings (see “Board Evaluation 2018” section on page 69) INFORMATION & SUPPORT • Good information flow between the Board and the management • Access to independent professional advice and the company secretary DIVERSITY COMMITMENT • Diversity Policy • All Directors are • Diversity of skills and expertise (see “Balance, Diversity and Skills” section on page 69) committed to devote sufficient time and attention to the Company’s affairs (see “Board Size, Composition and Appointments” on page 65) INDEPENDENCE • Meetings of Non- Executive Directors without the Executive Director(s) or Board members related to the founding Lee family CONTINUOUS PROFESSIONAL DEVELOPMENT • Directors receive various trainings and development programmes to refresh their skills and knowledge and to keep up to date with current developments THE ROLE OF THE COMPANY SECRETARY • Review and implement corporate governance practices • Provide advice and support to Directors • Keep Directors updated on legislative, regulatory and governance matters 58 Hysan Annual Report 2018Accountability BOARD COMMITTEES • 3 governance-related Board Committees have been established • Board Committees report to the Board (see “Audit and Risk Management Committee Report” on pages 80 to 84, “Remuneration Committee Report” on pages 85 to 93 and “Nomination Committee Report” on pages 94 to 96) MANAGEMENT PROCESS • Day-to-day management by Executive Committee • Governance framework includes a number of executive and advisory groups (see this “Governance Overview” section on pages 64 to 65) RISK MANAGEMENT AND INTERNAL CONTROL • Review and monitor risk management process FINANCIAL REPORT AND AUDITORS • Independent Auditor’s Report (see pages 117 to 120) • Internal Audit function • Assess effectiveness of internal controls • External Auditor appointment • Risk Management and Internal Control Report (see pages 98 to 105) Engagement CONSTRUCTIVE USE OF GENERAL MEETINGS DIALOGUE WITH SHAREHOLDERS • Accessible AGM • Enhance shareholder COMMUNICATION CHANNELS WITH STAKEHOLDERS • Committee Chairmen available at AGM to answer questions (in person or via dial-in) • Notice is sent out more than 20 business days before each meeting (this exceeds the requirement under the Corporate Governance Code) communication by electronic channels • Teleconferences and webcasts for analysts and media briefing • Organise shareholders’ visits for understanding the Group, its portfolio, history and sustainability activities and other business areas • Investment community communications including roadshow • Publication of financial reports, announcements, circulars and press releases • Company’s website 59 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Beyond Corporate Governance Compliance Hysan embraces strong governance as the foundation for delivering its strategic objective of achieving consistent and sustainable performance. During the year of 2018, Hysan continued to comply fully with the requirements of the provisions contained in the Corporate Governance Code (the “Corporate Governance Code”) set out in Appendix 14 to the Rules Governing the Listing of Securities (the “Listing Rules”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Furthermore, Hysan remained committed to the Environmental, Social and Governance Reporting Guide as set out in Appendix 27 of the Listing Rules. The following are among the major areas in which Hysan’s system of corporate governance practices exceed the Corporate Governance Code. Exceed Corporate Governance Code Provisions ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Best Practices in Corporate Governance at Hysan Formal Corporate Governance Guidelines* since 2004 and further enhanced in 2018 Formal Board of Directors Mandate* and a detailed List of Matters reserved for the Board Decisions* provide a clear division of roles established between the Board and management Formal criteria and requirements* established for Non-Executive Director appointments with expected time commitment. We issue formal appointment letter for Non-Executive Directors Board evaluation of its own performance and that of its committees by completion of questionnaires through an electronic platform. Directors’ feedback was analysed and discussed in meetings Code of Ethics* applicable to all staff and Directors since 2005 A separate Whistleblowing Policy* since 2016; an independent third party is engaged as the whistleblowing channel, which directly reports to the Audit and Risk Management Committee Corporate Disclosure Policy* since 2013 and further enhanced in 2019. A Disclosure Committee conducts regular assessment of inside information, guides and promotes timely and accurately disseminated disclosure of inside information and stakeholder communications Auditor Services Policy* for the engagement of auditors and further enhanced in 2018 and 2019 Fraud handling policy and procedures to control and aid in the detection and prevention of fraud 60 Hysan Annual Report 2018Exceed Corporate Governance Code Provisions Best Practices in Corporate Governance at Hysan ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Publication of separate Corporate Governance Report, Audit and Risk Management Committee Report, Remuneration Committee Report, Nomination Committee Report, Strategy Committee Report and Risk Management and Internal Control Report More than 20 clear business days’ notice for the AGMs, which include a detailed business review All voting at AGMs conducted by poll since 2004 Early announcement of audited financial results within 2 months and publication of Annual Report within 3 months after the financial year-end Continuous enhancement of shareholder communications, including introduction of shareholder visits since 2016 Adopted 10% limit of and a discount of not more than 10% on the share issue price to issue additional shares under general mandate in 2018 AGM Arrangements have been made since December 2015 to ascertain shareholders’ preferences as to the means of receiving corporate communications, with the aim of protecting the environment and enhancing the use of the Group’s corporate website as a means of shareholder communications Proactive invitation to major nominee companies by Hysan to forward communication materials to the ultimate beneficial shareholders at the Group’s expense Confirmation from senior management to the Audit and Risk Management Committee as verification compliance Additional assurance from Internal Audit on the review of continuing connected transactions * Detailed policies/terms of reference are available on the Company’s website: www.hysan.com.hk/governance. In an effort to reduce consumption of resources from printing and distributing hard copies, the Hysan Sustainability Report has been prepared for electronic distribution and is made available for public viewing on Hysan’s website: www.hysan.com.hk. Limited copies are printed and distributed, primarily to our shareholders. A summary of the Sustainability Report is provided on pages 106 to 107 of this Annual Report. 61 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Governance Framework Hysan operates within a clear and effective governance structure. The Board regularly assesses and enhances its governance framework, practices and principles according to developments in regulatory regimes and international best practices, as well as the Company’s needs. The following are Hysan’s key governance-related guidelines: • Corporate Governance Guidelines • Board of Directors Mandate • Roles and Responsibilities of Non-Executive Directors • List of Matters Reserved for the Board Decisions • Terms of Reference of the various corporate governance-related Board Committees • Diversity Policy • Nomination Policy • Auditor Services Policy • Code of Ethics for Directors and Employees • Corporate Disclosure Policy • Whistleblowing Policy • Procedures for Shareholders to Convene General Meetings/Put Forward Proposals • Shareholders Communications Policy Detailed policies/terms of reference are available on the Company’s website: www.hysan.com.hk/governance. 62 Hysan’s senior management and other department heads attending Lee Garden Three grand opening Hysan Annual Report 2018Leadership Governance and Management Structure The Board is collectively responsible for the long-term success of the Group and for its leadership, strategy planning, control and risk management, culture, values, corporate governance and financial performance. It is governed by a formal Board of Directors Mandate (see the Company’s website at www.hysan.com.hk/governance for details). The Board has an Audit and Risk Management Committee, Remuneration Committee and Nomination Committee. The Committees enable the Board to operate effectively and ensure a strong governance framework for decision-making. The Audit Committee was renamed as Audit and Risk Management Committee with effect from 21 February 2019 to reflect and emphasise its important role of assessing and making recommendations on the Group’s risk appetite, profile and tolerance. The Board had also resolved to assume the role of the Strategy Committee and incorporate the Company’s strategy discussions as an integral part of the Board meetings. Accordingly, the Strategy Committee was discontinued and assumed by the Board with effect from 1 January 2019. This further facilitates and enables the full Board to actively involve and participate in setting and reviewing longer- term directional strategy for the growth of the Group. Day-to-day management of the Group is delegated to the Executive Committee. The Board retains control of the key decisions and has identified certain “reserved matters” that only it can approve. The List of Matters Reserved for the Board Decisions is reviewed annually. Executive Committee members include the Executive Director(s), the Chief Operating Officer, Chief Financial Officer, and other members as may be appointed by the Board from time to time. “I worked at the Lee Gardens Hotel group after graduating from university. When the hotel was about to close, I started to gather things here and there. People call me the Lee Gardens historian because I have all this memorabilia. This love and appreciation of artefacts and preserving the past were inherited from my father, who founded the Bei Shan Tang Foundation, and was an ardent supporter of Chinese culture, heritage and the arts. The Foundation is named after The Bei Shan Poets Society, a group of literary and art scholars who were invited by my grandfather, Lee Hysan to host their intellectual gatherings at Lee Gardens in the 1920s. The view from Lee Gardens offered sweeping views of the harbour, which was often a source of inspiration for the poets.” Chien Lee Non-Executive Director of Hysan and Chairman of Bei Shan Tang Foundation 63 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Hysan’s strong management governance framework includes a number of executive and advisory groups, amongst others, 3 governance-related management level committees, namely the Risk Management Committee, the Sustainability Committee and the Disclosure Committee. To refresh the Group’s strategy and overall capabilities to address the business trends and next generational shifts, the Board has appointed Li Xinzhe Jennifer as an Advisor to the Board and a Next Generation Innovation Panel to advise the Board accordingly. Collectively responsible for long-term success of the Group Oversees overall governance, financial performance and sustainable development of the Group THE BOARD Leadership Strategy Planning Provides leadership and direction for the business of the Group Sets strategy and oversees its implementation Risk Management and Internal Control Ensures only acceptable risks are taken Culture and Values Focuses on the long-term sustainability of business BOARD COMMITTEES AUDIT AND RISK MANAGEMENT COMMITTEE REMUNERATION COMMITTEE NOMINATION COMMITTEE • Reviews risk management and internal control systems • Sets remuneration policy for Executive Director(s) and senior management • Monitors internal and external auditors • Oversees financial reporting • Assesses and makes recommendations on the Group’s risk appetite, profile and tolerance • Determines Executive Director(s)’ and senior management’s remuneration and incentives • Recommends Board appointments • Reviews Board structure, composition and diversity • Assesses independence of Independent Non-Executive Director • Oversees succession planning EXECUTIVE COMMITTEE • Operates daily business of the Group under the Board’s delegation. It comprises Executive Director(s), Chief Operating Officer, Chief Financial Officer and other senior management of the Group as delegated from time to time • Assists the Board and the Company in managing the business, operational and financial performance of the Group RISK MANAGEMENT COMMITTEE SUSTAINABILITY COMMITTEE DISCLOSURE COMMITTEE MANAGEMENT COMMITTEES • Senior management’s forum for reviewing and discussion of risks, controls, and mitigating measures • Reports and co-ordinates the • Considers issues relating to disclosure environmental, community and charitable activities • Assists the Company in overseeing the sustainability and governance of the Group • Sets targets and objectives and monitors progress of inside information • Ensures disclosure requirements are met • Ensures appropriate records are maintained 64 Hysan Annual Report 2018ADVISOR TO THE BOARD NEXT GENERATION INNOVATION PANEL • Invited to advise the Board since 2018 • Provides advice and guidance on the Group’s overall capabilities and strategic directions • Helps the Company to capitalise on opportunities arising from fast- changing customer/tenant behavior • Invited to advise the Board in 2019 • Informs and refreshes the Group’s overall capabilities to address, incorporate and/or manage the trends, key innovations, revolutions and generational shifts that may influence and disrupt the Company’s operations and development • Members of the Panel will be young international entrepreneurs and accomplished next generation leaders in the fields of retail, mainland China business, media, technology, etc Board Size, Composition and Appointments The Board reviews its structure, size, composition and diversity from time to time; the last review was conducted in November 2018. Through the annual evaluation process in which the Board reviews the performance of the Directors to ensure they are contributing to the Board in a manner that allows them to perform their responsibilities to the Company and that they are spending sufficient time doing so, the Board was satisfied that the Directors had a strong commitment to the Company and positively contributed to the Board through their participation in the Company’s affairs and the Board’s discussions and decisions, as reflected in their high attendance record on the Board and Committee meetings during the year. To ensure that our Directors have spent sufficient time on the affairs of the Company, the Directors disclose to the Company once a year the details of the offices held in Hong Kong or overseas listed public companies and other significant commitments, as well as an indication of the time involved. As at 31 December 2018, there were 10 Directors on the Board: the Chairman and 9 Non-Executive Directors (including 5 Independent Non-Executive Directors). Lee Irene Yun-Lien is currently the executive Chairman. In addition to her role in leading the Board, she advises, supports and coaches the management team, particularly regarding the long-term strategic development of the Group and management matters that drive shareholder value. Wong Ching Ying Belinda was added as an Independent Non-Executive Director, effective from 18 December 2018 in accordance with the Company’s Diversity Policy and Nomination Policy. Wong Ching Ying Belinda is the chief executive officer of Starbucks China and has extensive experience leading different organisations across the Greater China and the Asia Pacific regions. The appointment will further strengthen the Board. Non-Executive Directors are engaged by formal letters of appointment with a specific term of 3 years, and they commit to Hysan that they will be able to give sufficient time and attention to meeting the high expectations placed upon them. They are subject to re-election at the first AGM following their appointment. Every Director will be subject to retirement by rotation at least once every 3 years under the Company’s Articles of Association. Retiring Directors are eligible for re-election at the AGM at which they retire. There is no cumulative voting in Director elections. The election of each candidate is executed through a separate resolution. Churchouse Frederick Peter, Jebsen Hans Michael, Lee Anthony Hsien Pin, Lee Chien and Wong Ching Ying Belinda will retire at the forthcoming AGM to be held on 16 May 2019. All of them being eligible, they would offer themselves for re-election. Details with respect to the candidates standing for re- election as Directors are set out in the AGM circular to shareholders. None of these Directors 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). 65 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Board Activities during 2018 Key activities STRATEGY • Discussed the Group’s strategies and emphasised the continuity of the Company’s vision and mission, focusing on the impact of global and Hong Kong changes and developments, and how the Group’s business model may be affected • Reviewed the Group’s position and all the challenges the Group will be facing, the Company’s culture, the impact of technology, changes in consumer behaviours as well as the resources and skills the business may require in future • Discussed business plans, as well as longer-term directional strategy for the growth of the Group RISK MANAGEMENT AND INTERNAL CONTROL • Reviewed the Group’s risk registers and assessed the risks with action plans • Reviewed the effectiveness of Hysan’s risk management and internal control framework • Reviewed an enhanced company-wide regulatory compliance and governance framework and policy • Reviewed the Group’s performance versus budgets • Reviewed group-wide privacy compliance • Considered and approved the Group’s investment and • Considered and evaluated the enterprise-wide funding strategy ACCOUNTABILITY • Considered and evaluated the enterprise-wide cyber security assessment carried out by Deloitte cyber security assessment carried out by Deloitte GOVERNANCE AND IMPROVEMENTS • Discussed the outcome of the Board evaluation and • Reviewed and approved an enhanced “Corporate effectiveness review, and agreed improvement opportunities Governance Guidelines” • Reviewed and approved an enhanced “Diversity • Reviewed key corporate governance related reports Policy” • Received and considered regular meeting reports • Reviewed and approved an enhanced “Auditor from Chairmen of the Audit and Risk Management Committee, Remuneration Committee, Nomination Committee and Strategy Committee Services Policy” • Reviewed and approved an enhanced “Nomination Policy” • Reviewed the recent developments in corporate governance and received and considered key legal and regulatory updates • Reviewed and evaluated the fees for Directors with an independent external consultant • Reviewed the List of Matters Reserved for the Board Decisions 66 Hysan Annual Report 2018PEOPLE AND LEADERSHIP • Added a new Independent Non-Executive Director, Wong Ching Ying Belinda, which was strong addition to the Board • Reviewed the Board structure, size, composition and diversity, as well as the “independence” of Directors • Enhanced Terms of Reference of Nomination Committee, Remuneration Committee and Audit and Risk Management Committee • Reviewed the development of people and compensation for the senior management and other department heads • Considered the set up and composition of the Next Generation Innovation Panel, which was established to refresh capabilities and support the strategic directions of the Board • Sought to record, more formally, the Sustainability Committee at management level, which was set up to support the Company’s sustainability matters FINANCIAL AND OPERATIONAL PERFORMANCE • Considered the financial performance of the business and approved the annual budget • Reviewed the interim and annual results, approved the interim and annual reports • Reviewed and approved the funding and treasury investment plan • Reviewed and discussed financial forecasts and analyst feedback • Declared dividends • Reviewed operating results and regular updates for the Group’s core business (Office, Retail, Residential and Property Development segments) • Formalised the “Dividend Policy” 67 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Meetings The Board meets regularly and there is an annual cycle of topics to be considered, including business and financial updates. Each Committee provides a summary of business discussed to the Board. Employees below Board level are invited to present to the Board on operational topics during the year. Non-Executive Directors have direct and open access to employees below Board level. BOARD AND COMMITTEE MEETINGS IN 2018 B A R January February March April B AGM May June Board B A Audit and Risk Management Committee R Remuneration Committee B A B A N S July N August September October November December Nomination Committee S Strategy Committee AGM Annual General Meeting ATTENDANCE AT MEETINGS The following table shows Directors’ attendance at the meetings: Attended Attended by tele-conference Attended by alternate Attended the meetings (or part of meetings) as invitee Meetings Held / Attended Board Audit and Risk Management Committee Remuneration Committee Nomination Committee Annual General Meeting (Total: 4) (Note 1) (Total: 3) (Note 4) (Total: 1) (Total: 1) (Annually) (Note 4) Directors Executive Director Lee Irene Yun-Lien Independent Non-Executive Directors Churchouse Frederick Peter Fan Yan Hok Philip Lau Lawrence Juen-Yee Poon Chung Yin Joseph Wong Ching Ying Belinda (Note 2) N/A Non-Executive Directors Jebsen Hans Michael Lee Anthony Hsien Pin Lee Chien Lee Tze Hau Michael (Note 3) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Notes: 1 In November 2018, a Board and Strategy Committee meeting was held to discuss the Group’s business plan and long-term directional strategy. 2 Wong Ching Ying Belinda was appointed as a new Independent Non-Executive Director with effect from 18 December 2018. 3 Excused from the session to discuss the Executive Director’s own compensation package. 4 Representatives of the external auditor participated in every Audit and Risk Management Committee meeting and the AGM. 68 Hysan Annual Report 2018 Effectiveness Board Evaluation 2018 This year’s review of the Board’s effectiveness was conducted internally and was led by the Chairman with the support of the Company Secretary. The evaluation required each Director to complete anonymously an online questionnaire that focused on matters such as Board’s performance, the nature and content of Board meetings. The survey encouraged the Directors to provide comments or enabled them to raise any concerns. The Chairman, supported by the Company Secretary, collated the output of the questionnaires and formulated a detailed report. The report was prepared based on the collective comments from all the Directors, and reports from the Audit and Risk Management Committee, Remuneration Committee, Nomination Committee and the then Strategy Committee. These reports were considered and discussed by the Board. The conclusion from this year’s evaluation was that the Board and its Committees continued to operate to a high standard, and worked effectively. The results overall ranged from positive to very positive, and there were no specific concerns raised by any of the Directors to the Chairman or anonymously through the online questionnaires. This year, the evaluation also addressed the level of strategic debates and oversight of the Group’s performance and its management, and was also highly rated. Other areas that were assessed as being particularly strong included the Board dynamics, culture and integrity in the Board room, the Board’s collective judgement and overall performance, Board information and the involvement of Directors in the discussions. As with every high performing Board, the Directors continue to look for areas of improvement. The Board will ensure that its meeting agendas are forward-looking in terms of investment opportunities and strategic development. The Chairman will continue to lead the process of building on current strengths of the Board and innovating further to build on the points outlined above, with the support from the Directors. Independent Advice When occasions arise where Directors feel that they require independent professional advice in order to fulfil their obligations as Board members, this advice may be obtained at the Company’s expense as stated in our Corporate Governance Guidelines. Balance, Diversity and Skills Hysan recognises the importance of diversity among its Board members, which not only contributes to the effectiveness of the Board but also to the success of the Group’s business. Our Non-Executive Directors (including 5 Independent Non-Executive Directors) have diverse backgrounds in areas such as economics, finance, business management, professional practices, and property investment. Biographies of the Directors can be found on pages 52 to 56 as well as on the Company’s website at www.hysan.com.hk/about-us. 69 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Recognising the vitality of diversity of the Company, the Board has adopted a separate Board Diversity Policy in 2016, which was strengthened and enhanced as the Diversity Policy applying to the Group in 2018. The Board remains committed to ensure that the selection of candidates for Board appointments is based on a range of diverse perspectives, including gender, age, cultural/ educational and professional background, skills, knowledge and experience. Decisions with regard to Board appointments are based on merit balanced against the contributions that a prospective candidate will bring to the Board. During the year, the Board adopted a separate Nomination Policy to emphasise our commitment on transparent nomination process. The Board is also committed to strengthening diversity across the Group. Similar considerations are used when recruiting and selecting key management and other personnel across the Group’s operations. For details on our hiring practices, please refer to our Sustainability Report. Our 9 Non-Executive Directors are from diverse and complementary backgrounds. The valuable experience and expertise they bring to our business are critical for the long-term growth of the Group: Skills/ Experience Strategy Summary Combined Experience in defining strategic objectives, assessing business plans and driving execution in large and complex organisations. Risk Management Experience in anticipating and identifying key risks to the organisation and monitoring the effectiveness of risk management frameworks and controls. Financial Services and Investment Experience in the financial services industry or experience in overseeing financial transactions and investment management. Financial Acumen Understand financial drivers of the business, and experience in implementing or overseeing financial accounting, reporting and internal controls. Property Investment Experience as a senior executive in another major company in property investment, development or facilities management, or related industry. Customer and Retail Experience as a senior executive in a major retail, customer products, services or distribution company. Governance Experience in and commitment to adhere to exceptional corporate governance standards. People and Culture Experience in monitoring a company’s culture, overseeing people management and succession planning, and setting remuneration frameworks. International and China Experience in international and mainland China economics and relations. Legend ● Extensive ● Moderate 70 Hysan Annual Report 2018The Board 10 Gender Category Woman Man Executive Non-Executive Independent Non-Executive Age Board Tenure (Years) 40–49 50–59 60+ 0–3 4–6 7+ (Directors’ full biographies, including relationships among members of the Board, are set out in pages 52 to 56 and are also available on the Company’s website: www.hysan.com.hk/about-us) The Board 10 Key Operational Management 12 Board Diversity by Gender Gender Diversity of Key Operational Management* Woman Woman Man Man Woman Man * Key operational management is defined as the 12 heads of departments/units of the Group, but does not include the Executive Director who also maintains a management/supervisory role for operations. 71 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Independence of Directors Hysan is a listed company with a major shareholder family. The Board remains committed to maintaining independence. • The Board has policies and processes in place to avoid conflicts of interest or perception of conflicts of interest in compliance with the Hong Kong Companies Ordinance. Board members are reminded every half year of this requirement through an explanatory note from the Company Secretary. • Non-Executive Directors hold separate discussion sessions every year, without the presence of Executive Director(s) or Board members related to the founding Lee family. There were 2 separate discussions in 2018. • Any dealings with persons and entities regarded as “connected transactions” with the Group under the Listing Rules are subject to the approval of the full Board, as described in the List of Matters Reserved for the Board Decisions. “Exempted transactions” as defined by the Listing Rules’ disclosure requirements must also be reported to the full Board after management approval. • The Company has clear Corporate Governance Guidelines, Directors are considered to be independent only if they are free from any business or other relationship that may interfere with the exercise of their independent judgment. During the reporting year, the Nomination Committee carried out a detailed review of the directors’ independence and was satisfied that each of the 5 Independent Non-Executive Directors was independent at the time of review. Checks and Balances “Connected Transactions” with related persons subject to full Board decision 5 Independent Non-Executive Directors have been drawn from diverse backgrounds, including economics, finance, business management, professional practices and property investment. This is covered in our List of Matters Reserved for the Board Decisions. The relevant requirements are more stringent than those under the Listing Rules. Appointment of 5 Independent Non-Executive Directors with diverse backgrounds Clear “independence” standards for individual Directors The Nomination Committee carries out a detailed review of Director’s independence annually. These are laid down in our Corporate Governance Guidelines. Detailed annual review of independence of individual Directors 72 Hysan Annual Report 2018Independence Status Name Management Independent Not Independent November 2018 Review – Reason for Independence Status Churchouse Frederick Peter Fan Yan Hok Philip Jebsen Hans Michael Lau Lawrence Juen-Yee Lee Anthony Hsien Pin Lee Chien Lee Irene Yun-Lien ✓ Lee Tze Hau Michael Poon Chung Yin Joseph Wong Ching Ying Belinda ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ No business or other relationships with the Group or management that will affect independence No business or other relationships with the Group or management that will affect independence No business or other relationships with the Group or management that will affect independence (Notes 1 & 3) No business or other relationships with the Group or management that will affect independence No business or other relationships with the Group or management that will affect independence (Notes 2 & 3) Notes: 1 Lau Lawrence Juen-Yee’s spouse is a partner with KPMG China and the Managing Partner in Hong Kong. KPMG is a tenant of the Group and provides taxation services principally as tax representative of the Company and certain subsidiaries, which are routine services in nature. Mrs. Lau has not been involved in any business negotiations with the Group, or in the provision of any services, and will refrain from doing so. 2 Wong Ching Ying Belinda was appointed an Independent Non-Executive Director, effective 18 December 2018. Ms. Wong is also a director of certain entities of Starbucks Coffee Company. Starbucks Hong Kong is a tenant of the Group. Starbucks China is also a tenant of a commercial complex located in Shanghai, the People’s Republic of China owned by an associate of the Company. The revenue or profit derived from those leases, either directly as retail sector revenue or indirectly as share of results of an associate, are immaterial to the Group. During her term as Independent Non-Executive Director of the Company, Ms. Wong will abstain from voting on any Board resolution in relation to any business dealings with Starbucks group. 3 The Board and its Nomination Committee had assessed the independence of Professor Lau and Ms. Wong in light of the circumstances, including (i) their respective backgrounds, experiences, achievements, as well as characters; (ii) the nature of the Company’s relationship with KPMG and Starbucks group and Mrs. Lau’s and Ms. Wong’s roles as described above; and concluded that their independence would not be affected. Professional Development, Support and Training The Board held several specific knowledge development sessions during the year, including a sharing session on the integration of commercial properties and the internet in China (presented by Li Xinzhe Jennifer, the Advisor to the Board), an interactive workshop on social media marketing and applications presented by a senior executive of a reputable pay- television and entertainment conglomerate, and a portfolio tour of our new Lee Garden Three led by senior management. One of the Board meetings was held off site at a co-working space for a lively exchange of ideas. Directors continued to receive regular reports facilitating greater awareness and understanding of the Group’s business and the compliance regulatory updates. 73 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Directors have expressed the view that the past year’s trainings have been stimulating and very relevant. Directors have also indicated that there were adequate training opportunities. When newly-appointed Directors join the Group, they would receive an induction briefing that would give them an understanding of the Group, its businesses and operations (including the major risks it faces). The induction briefing would include individual meetings with the Board Chairman, the Company Secretary and senior management, portfolio visits, and meetings with the Company’s external advisers. Individual briefings would be arranged on topics such as Directors’ responsibilities and overview of the Group’s business. The Company has provided the new director Wong Ching Ying Belinda with a full and comprehensive induction on her appointment. Directors’ continuous professional development in 2018 Directors Executive Director Lee Irene Yun-Lien Independent Non-Executive Directors Churchouse Frederick Peter Fan Yan Hok Philip Lau Lawrence Juen-Yee Poon Chung Yin Joseph Wong Ching Ying Belinda (Note) Non-Executive Directors Jebsen Hans Michael Lee Anthony Hsien Pin Lee Chien Lee Tze Hau Michael Attending trainings organised by Hysan Attending expert briefings / seminars / conferences organised by third parties relating to the business or directors’ duties Perusing legal, regulatory and industry related updates prepared by Hysan quarterly ✓ ✓ ✓ ✓ ✓ N/A ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ N/A ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ N/A ✓ ✓ ✓ ✓ Note: Wong Ching Ying Belinda was appointed an Independent Non-Executive Director, effective from 18 December 2018. Ongoing development sessions were also arranged for the senior management and subsidiaries’ directors to update their skills and knowledge as appropriate. Throughout the year, various seminars on regulatory obligations, compliance requirements and best practices and procedures were provided to the senior management and subsidiaries’ directors. During the year, the Company Secretary also undertook appropriate professional training to update relevant skills and knowledge. Hysan has a management trainee programme launched since 2017 to cultivate our future leaders, with the aim of developing our talent pipelines to meet our long-term business needs. More management trainees were recruited in 2018 to continue the pipeline. 74 Hysan Annual Report 2018Accountability Board Committees in 2018 The Board has 3 governance-related Board Committees that provide effective oversight and leadership in accordance with the Group’s Corporate Governance Guidelines, namely the Audit and Risk Management Committee, the Remuneration Committee and the Nomination Committee. Each Committee has access to independent professional advice and counsel as required, and each is supported by the Company Secretary. These committees report to the Board. The terms of reference of the Audit and Risk Management Committee, the Remuneration Committee and the Nomination Committee have been updated, the highlights are set out in the respective reports of the Committees. Terms of reference and membership of all Board Committees are disclosed in full on the websites of the Company and the Stock Exchange. They are also available upon request to the Company Secretary. Full details of the Committees’ activities during the year are set out in their respective reports: Audit and Risk Management Committee Report Remuneration Committee Report Nomination Committee Report on pages 80 to 84 on pages 85 to 93 on pages 94 to 96 Strategy Committee Report on page 97 Bjorn: “We’ve lived in Causeway Bay just across from the Lee Gardens for about 10 years, it’s easy to get anywhere from here. There are shops, restaurants and people all the time – it feels like real Hong Kong. Everything for us revolves around the district. My kids go to the Football Club, Hong Kong Stadium, South China Athletic Club and it’s all within walking distance.” Neena: “Causeway Bay is home.” Bjorn and Neena Causeway Bay’s residents 75 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Engagement Hysan is committed to maintaining an open dialogue with shareholders and providing them with the information they require to make sound investment decisions. Accountability to Shareholders and Corporate Reporting • Annual Report, Interim Report, press releases and announcements are disclosed in a timely manner. • Shareholder enquiries can be made via the Investor Relations function by email to investor@hysan.com.hk. Electronic Communication • Since December 2015, shareholders can receive corporate communications via electronic means. • Greater use of the Group’s website is being made for our corporate communications. Information online • Key corporate governance policies, terms of reference of Board Committees, Group’s financial reports, press releases and announcements are available on the Company’s website. • Shareholders have the option to receive corporate communications by electronic means. Hard copies of the Hysan website information are also available free of charge upon request to the Company Secretary. Shareholders’ Communication • The Shareholders’ Communication Policy recognises our commitment to provide our shareholders and the investment community with ready, equal and timely access to balanced and understandable information about the Company. Dynamic engagement with Shareholders • Ongoing dialogue and meetings between Chief Operating Officer, Chief Financial Officer, and institutional investors, fund managers and analysts. • Regular presentations or conference calls are made to analysts and investors. • Results announcement presentations to analysts are also disseminated by webcasts. Provision of Sufficient and Timely Information • The AGM notice, Annual Report, and financial statements are dispatched to shareholders more than 30 days prior to the AGM, exceeding the statutory requirement of 21 days. • Comprehensive information is sent on each resolution to be proposed. Voting • Since 2004, we have conducted all voting at AGMs by poll. • The poll is conducted by the Company’s Registrar and scrutinised by the Group’s auditors. • Procedures for conducting the poll are explained at the general meeting prior to the taking of the poll. • Poll results are announced and posted on the websites of both the Stock Exchange and the Company. 76 Hysan Annual Report 2018Shareholders’ Visits • The shareholders’ visits are opportunities every year for the management to communicate with the shareholders, who gain insights into the Company’s history, sustainable activities and other business areas. Corporate Disclosure Policy • The Group’s Corporate Disclosure Policy provides guidance on the disclosure of material information to investors, analysts and media. • This policy identifies the spokespersons and clearly outlines the responsibilities for communication with each stakeholder group. • Details are available at the Company’s website: www.hysan.com.hk/governance. Constructive Use of AGM • AGMs act as a means of conducting a dialogue with private shareholders. • Individual shareholders can put questions to the Chairman at the AGM. • Board Committees Chairmen attend AGMs to respond to shareholders’ questions. • Since 2004, a business review session has been included in our AGMs. Topics at the last AGM included: the business environment in 2017, a review of business activities, and the Company’s outlook for 2018. Shareholder Communication via Nominee Companies • Since 2005, we have been inviting major nominee companies to forward communication materials to shareholders at our expense. Dividend Policy • Hysan’s longstanding policy is to provide stable ordinary dividends to shareholders. • The ultimate pay out decision will be based on the Group’s financial performance, future capital requirements, general economic and business conditions, etc. Shareholders’ Rights under Articles of Association and Hong Kong Law • A general meeting of shareholders can be convened by the Board or with a written request signed by shareholders holding at least 5% of the total voting rights of all the shareholders (“5% Shareholder”). • A 5% Shareholder may request to have resolutions passed by way of written resolution. • Shareholders may put forward proposals for consideration at a general meeting. • All requests shall state the general nature of the business to be dealt with at the meeting and deposited at the Company’s registered office (49/F, Lee Garden One, 33 Hysan Avenue, Hong Kong. Attention: The Company Secretary). • There are no limitations imposed on the right of non-residents or foreign persons to hold or vote on the Company’s shares, other than those that would generally apply to all shareholders. • Details of Procedures for Shareholders to Convene General Meetings/Put Forward Proposals are available on the Company’s website. • No changes have been made to our Articles of Association during the year. 77 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewCorporate Governance Report Directors’ Interests in Shares As at 31 December 2018, the interests and short positions of the Directors in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)) as recorded in the register required to be kept under section 352 of the SFO; or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”), are set out below: Aggregate long positions in shares and underlying shares of the Company Number of ordinary shares held Name Personal interests Family interests Corporate interests Other interests Total % of the total no. of issued shares (Note a) Jebsen Hans Michael 60,984 Lee Chien Lee Irene Yun-Lien 800,000 304,000 – – – 2,473,316 (Note b) – – – – – 2,534,300 0.242 800,000 304,000 0.076 0.029 Notes: (a) This percentage was compiled based on the total number of issued shares of the Company (i.e. 1,046,501,891 ordinary shares) as at 31 December 2018. (b) Such shares were held through a corporation in which Jebsen Hans Michael was a member entitled to exercise no less than one-third of the voting power at general meeting. Executive Director(s) of the Company have been granted share options under the Company’s share option schemes adopted on 10 May 2005 (the “2005 Scheme”) and 15 May 2015 (the “New Scheme”) (details are set out in the section headed “Long-term incentives: Share Option Schemes” below). These constitute interests in underlying shares of equity derivatives of the Company under the SFO. Aggregate long positions in shares of associated corporations Listed below is a Director’s interest in the shares of Barrowgate Limited (“Barrowgate”), a 65.36% subsidiary of the Company: Name Jebsen Hans Michael Number of ordinary shares held Corporate interests 1,000 Other interests – Total 1,000 % of the total no. of issued shares 10 (Note) Note: Jebsen and Company Limited (“Jebsen and Company”) held a 10% interest in the total number of issued shares in Barrowgate through a wholly-owned subsidiary. Jebsen Hans Michael was deemed to be interested in the shares of Barrowgate by virtue of being a controlling shareholder of Jebsen and Company. Apart from the above, no other interest or short position in the shares, underlying shares or debentures of the Company or any associated corporations as at 31 December 2018 were recorded in the register required to be kept under Section 352 of the SFO, or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code. 78 Hysan Annual Report 2018Compliance with the Model Code for Securities Transactions by Directors of Listed Issuers The Company has adopted the Model Code set out in Appendix 10 to the Listing Rules as its own code of conduct regarding Director’s securities transactions. All Directors have confirmed, following specific enquiry by the Company, that they have complied with the required standards set out in the Model Code throughout the year. Directors’ Interests in Contracts During the year, certain Directors had interests, directly or indirectly, in contracts with the Group. These contracts constituted Related Party Transactions, Connected Transactions or Contracts of Significance under applicable accounting or regulatory rules (details are disclosed in the “Directors’ Report”). Directors’ Interests in Competing Business The Group is engaged principally in the property investment, development and management of high quality investment properties in Hong Kong. The following Directors (excluding Independent Non- Executive Directors, in accordance with Listing Rules disclosure requirements) are considered to have interests in other activities (the “Deemed Competing Business”) that compete or are likely to compete with the said core business of the Group, all within the meaning of the Listing Rules: (i) Lee Irene Yun-Lien, Lee Anthony Hsien Pin, Lee Chien and Lee Tze Hau Michael are members of the founding Lee family whose range of general investment activities include property investments in Hong Kong and overseas. In light of the size and dominance of the portfolio of the Group, such disclosed Deemed Competing Business is considered immaterial. (ii) Jebsen Hans Michael and his alternate, Yang Chi Hsin Trevor, hold the offices of directors in Jebsen and Company. Business activities of some of its subsidiaries include, inter alia, investment holding and property investment in both the People’s Republic of China and Hong Kong. Mr. Jebsen is also a substantial shareholder of the companies. Mr. Jebsen is an independent non-executive director of The Wharf (Holdings) Limited whose business includes, inter alia, property investment, development and management in both the People’s Republic of China and Hong Kong. (iii) Lee Chien is an independent non-executive director of Swire Pacific Limited whose business includes, inter alia, property investment and trading in Hong Kong, the People’s Republic of China and the United States of America. The Company’s management team is separate and independent from that of the companies identified above. In addition, save and except Lee Irene Yun-Lien, the relevant Directors have non- executive roles and are not involved in the Company’s day-to-day operations and management. For the reasons stated above, and coupled with the diligence of the Group’s Independent Non-Executive Directors and the Audit and Risk Management Committee, the Group is capable of carrying on its business independent of and at arm’s length from the Deemed Competing Business. The Board also has a process in place to regularly review and resolve situations where a Director may have a conflict of interest. By Order of the Board Lee Irene Yun-Lien Chairman Hong Kong, 21 February 2019 79 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewAudit and Risk Management Committee Report Composition Dear shareholder, Majority are Independent Non-Executive Directors Committee Members Poon Chung Yin Joseph* (Chairman) Churchouse Frederick Peter* Fan Yan Hok Philip* Lee Anthony Hsien Pin *Independent Non-Executive Director The primary roles of the Audit and Risk Management Committee are to assist the Board in reviewing the risk management and internal control systems, monitoring internal and external auditors and overseeing the financial reporting process, as part of the overall strategy-setting of the Group. The Committee was renamed the “Audit and Risk Management Committee” instead of the “Audit Committee” in 2019 to reflect and emphasise its ongoing role of evaluating, overseeing and monitoring the Group’s risk appetite, profile and tolerance. Highlights Key responsibilities • Reviewed the adequacy and • Overseeing the integrity of the effectiveness of the Company’s risk management and internal control systems • Reviewed the Group’s enterprise-wide cyber security assessment report and enhanced the Group’s enterprise-wide cyber security compliance, policies and practices • Assisted the Board in its oversight of the Group’s risk management framework, through its functional implementation of the “three lines of defence” model • Reviewed the Terms of Reference of the Audit and Risk Management Committee and Auditor Services Policy Group’s financial management and reporting processes • Reviewing the major risks identified and ensuring that effective risk management and internal control systems are in place • Reviewing the risk management and internal control framework • Reviewing the relationship with the external auditor Meetings Schedule The Audit and Risk Management Committee held 3 meetings during the year. At the invitation of the Audit and Risk Management Committee, these meetings were also attended by the Board Chairman and members of management (including the Chief Operating Officer and the Chief Financial Officer). Pre-meeting sessions with external and internal auditors were held without management’s presence. In 2019, the Audit and Risk Management Committee will hold an additional meeting (making a total of 4 meetings) to address the dynamic risks and enhance the risk management oversight function. 80 Hysan Annual Report 2018Roles and Authorities • Oversee the Company’s financial management and reporting processes and monitor the works carried out by the external auditor. In this process, management is responsible for the preparation of the Group’s financial statements including the selection of suitable accounting policies. The external auditor is responsible for auditing and attesting to the Group’s financial statements and evaluating the Group’s system of internal controls in such regard. Formal statements of Directors’ Responsibility for the Financial Statements are contained in “Financial Statements, Valuation and Other Information” of this Annual Report. • Review the Company’s risk management and internal control systems. • Review reports on major risks the Group is facing. • Review the adequacy of resources, qualifications and experience of staff of the Group’s internal audit, accounting and financial reporting functions, as well as their training programmes and budget. • Review the Group’s Whistleblowing Policy. Under this policy, employees and related third parties who deal with the Group (e.g. consultants, contractors and suppliers) can raise concerns, in confidence or anonymously, about misconduct, malpractice or irregularities in any matters related to the Group. The Audit and Risk Management Committee ensures that the concerns raised are investigated and followed up as appropriate. • Review the effectiveness of the Company’s internal audit function. • Review the Company’s relationship with the external auditor. • Report to the Board on its findings after each Audit and Risk Management Committee meeting. Activities Details on the meeting held in February 2018 were set out in the 2017 Annual Report. From March 2018 to February 2019, the Audit and Risk Management Committee held 3 meetings to: Financial Reporting • Review and discuss with management and the external auditor, and recommend to the Board to approve, the unaudited financial statements for the first 6 months ended 30 June 2018; the audited financial statements for the year ended 31 December 2018 and the Independent Auditor’s Report for the year ended 31 December 2018, prior to their publication based on the external auditor’s review work and the following: – Discuss with the external auditor and internal auditor the scope of their respective review and findings. – Discuss with management significant parameters and judgments affecting the Group’s financial statements, including valuation of investment properties as at 30 June 2018 and 31 December 2018 with the independent professional valuer, Knight Frank Petty Limited. – Review with both management and the external auditor the Key Audit Matters included in the Independent Auditor’s Report for the year ended 31 December 2018. 81 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewAudit and Risk Management Committee Report Relationship with the External Auditor • Review and consider the terms of engagement of the external auditor in respect of the 2018 final results (including 2018 annual audit, the related results announcement, and annual review of continuing connected transactions) and the annual update of the Group’s MTN Programme. • Review the audit progress report of the external auditor. • Annually assess and declare satisfaction with the auditor’s qualifications, expertise and services, including independence. In particular, it was satisfied that the auditor’s independence and objectivity have not been impaired by reason of the provision of non-audit services. All services were pre-approved by the Audit and Risk Management Committee. Appropriate policies and procedures have been established to identify audit and non-audit services as well as prohibited non-audit services that impair the independence of the auditor. A rotation arrangement for the lead audit partner was also established and implemented by the auditor. The lead audit partner is required to comply with professional ethics and independence policies and requirements applicable to the work performed, as well as to issue an annual confirmation on the auditor’s independence. EXTERNAL AUDITOR’S SERVICES AND FEES Audit Services Non-audit Services (Note) Total 2018 HK$ million 2017 HK$ million 2.85 1.54 4.39 2.66 0.99 3.65 Note: “Non-audit services” include agreed-upon-procedures reports, statutory compliance, regulatory or government procedures required to comply with financial, accounting or regulatory report matters. Specifically, these include reviews of interim financial statements, issue of assurance reports for continuing connected transactions, and reviews of financial information in connection with the annual updates of the Group’s MTN Programmes, etc in 2017 and 2018. In 2018, the non-audit services also include the enterprise-wide cyber security assessment. • Review and consider the 2019 audit service plan of the external auditor, and the terms of its engagement in respect of the 2019 interim results review. • Recommend to the Board that the shareholders be asked to re-appoint Deloitte Touche Tohmatsu as the Group’s external auditor for 2019. Review of Risk Management and Internal Control Systems • Assist the Board in its oversight of the Group’s risk management framework through its functional implementation of the “second line of defence” and “third line of defence”, protecting against and mitigating risks identified in the “first line of defence”. 82 Hysan Annual Report 2018• Discuss with management the major risks the Group is facing. • Review the Group’s enterprise-wide cyber security assessment carried out by the independent team of Deloitte Touche Tohmatsu providing IT related assurance and risk management services. The assessment covered network architecture, cyber threat discovery exercise, cloud security management assessment, outsourcing management review, data management review and IT governance review, etc. This engagement assessed and evaluated the Group’s enterprise IT security management, in order to identify the improvement areas and to provide recommendations. • Review the treasury process. • Review the special management reports on the Lee Garden Three constructions, property management incident management, and compliance of investment projects. • Review the adequacy of resources, qualifications and experience of staff of the internal audit, accounting and financial reporting functions, and their training programmes and budget. • Review the whistleblowing reports. No material issues were raised during the year. • Review the inside information compliance framework and the enhanced Corporate Disclosure Policy. • Review the legal and regulatory updates/trends that may affect the Group and their implications. • Review 2018 annual risk management and internal control systems based on: – reports of the Internal Audit on the review of the Company’s continuing connected transactions for the year ended 31 December 2018, as well as the adequacy and effectiveness of the related internal control procedures – regular reports by management of major risks, and special reports on selected major risk items detailed above – regular reports of the Internal Audit, including status of implementation of its recommendations – certification and confirmation of controls effectiveness by management, covering financial, operational, compliance controls, risk management and internal controls, noting the adoption of a control self-assessment questionnaire across the operating departments – confirmation from the external auditor that it had not identified any control weaknesses in respect of the Group’s financial reporting cycle during the course of its audit. The Audit and Risk Management Committee was satisfied as to the adequacy and effectiveness of the Company’s risk management and internal control systems (including the adequacy of resources, qualifications and experience of staff of the Group’s accounting, financial reporting and internal audit functions, and their training programmes and budget). No significant areas of concern that might affect financial, operational, compliance controls, internal audit, risk management and internal controls functions were identified. 83 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewAudit and Risk Management Committee Report Internal Audit • Review the internal audit plan, any matters identified as a result of internal audits, and management responses to audit reports issued during the year; and the progress made in implementing improvement actions. • During 2018, the internal audit plan included reviews of business functions of retail, marketing, treasury, accounting and financial reporting, human resources management and administration and projects. No significant issues were raised during the review. • Consider and approve the scope of work to be undertaken by the Internal Audit function in 2019. During 2019, it is expected that the internal audit plan will include reviews of leasing business, property management practice, etc. Review of Terms of Reference and Policy • Review the terms of reference of the Audit and Risk Management Committee and the Auditor Services Policy, including to extend the cooling off period for a former audit partner to become an Audit and Risk Management Committee member in accordance with the requirements of the Listing Rules. In February 2019, the terms of reference were further revised to better address the Audit and Risk Management Committee’s key objectives and emphasis on risk management. Members’ attendance records are disclosed in the table on page 68. Evaluation The Board and Committee evaluation process, which took place during the year, concluded that the Audit and Risk Management Committee was effective in fulfilling its roles in 2018. For details, please refer to Corporate Governance Report – “Board Evaluation 2018” (page 69). Audit and Risk Management Committee activities and agenda time during the year 15% 11% 29% 45% Financial Reporting Risk Management and Internal Control Systems External Audit Others (including compliance, corporate governance and deep dive topics) Members of the Audit and Risk Management Committee Poon Chung Yin Joseph (Chairman) Churchouse Frederick Peter Fan Yan Hok Philip Lee Anthony Hsien Pin Hong Kong, 21 February 2019 84 Hysan Annual Report 2018Remuneration Committee Report Composition Majority are Independent Non-Executive Directors Committee Members Fan Yan Hok Philip* (Chairman) Lee Tze Hau Michael Poon Chung Yin Joseph* *Independent Non-Executive Director Dear shareholder, The primary roles of the Remuneration Committee are advising the Board on formulating the remuneration policy for Directors and senior management, determining remuneration and incentives packages for Directors and senior management, and ensuring that they are commensurate with their qualifications and competencies. Highlights Key responsibilities • Considered remuneration for • Reviewing Hysan’s framework and Directors and senior management • Considered the long-term incentive scheme general policies for the remuneration of Executive Director(s) and senior management • Reviewing the remuneration packages of Executive Director(s), Non-Executive Director(s) and senior management • Reviewing share incentive plans Meeting Schedule The Remuneration Committee generally meets at least once every year. On matters other than those directly concerning them, the Executive Director(s) and management may be invited to the Remuneration Committee meetings. No Director is involved in deciding his/her own remuneration. Roles and Authorities • Review Hysan’s framework and general policies for the remuneration of Executive Director(s) and members of senior management, as recommended by management, and make recommendations to the Board. • Review the remuneration of Executive Director(s) and senior management. • Review the fees payable to Non-Executive Directors and Board Committee members prior to shareholders’ approval at the AGM. • Review new share option plans, changes to key terms of pension plans, and key terms of new compensation and benefits plans that have material financial, reputational, and strategic impact. 85 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRemuneration Committee Report Activities During the year of 2018, the Remuneration Committee held a meeting to: • Approve the 2018 Executive Director’s compensation package (including annual fixed base salary and annual special fee in recognition of the extra responsibilities she had assumed), and the 2017 performance-based bonus. • Review the fees for Non-Executive Directors and Board Committee members. • Review compensation of senior management and other department heads. • Review and consider the long-term incentive scheme. In January 2019, the Remuneration Committee also held a meeting to: • Propose refinement to the remuneration and compensation package of the Executive Director, Non-Executive Directors and Board Committee members based on the recommendations of an independent global consultancy company specialising in human resources and compensation. • Approve the 2019 Executive Director’s compensation package, and the 2018 performance-based bonus. • Review compensation of senior management and other department heads. • Review and consider the long-term incentive scheme. • Review the terms of reference of the Remuneration Committee. Members’ attendance records are disclosed in the table on page 68. Executive Director(s)’ and Senior Management’s Remuneration Policy The Group’s remuneration policy aims to provide a fair market remuneration to attract, retain and motivate high quality Executive Director(s), senior management and employees. At the same time, awards must be aligned with shareholders’ interests. In December 2018, the Group engaged an independent global consultancy company specialising in human resources and compensation to conduct an overall review of the Group’s compensation structure for Executive Director(s), Non-Executive Directors and Board Committee members, with the objective of introducing refinements to better support the Group’s strategic objectives (“Independent Compensation Review”). The Remuneration Committee thoroughly considered the Independent Compensation Review at the meeting held in January 2019. The following principles have been established: • Remuneration packages and structure to reflect a fair system of reward for all participants, with the emphasis on performance: Fixed Variable Short-term Long-term base salary, benefits and pension benefits performance-based component (bonus) long-term incentives (executive share options) 86 Hysan Annual Report 2018• Remuneration packages to be set at levels to ensure comparability and competitiveness with Hong Kong-based companies competing for a similar talent pool, with special emphasis on the real estate industry. Independent professional advice is to be sought where appropriate. • The Remuneration Committee to determine the overall amount of each component of remuneration, taking into account both quantitative and qualitative assessment of performance and achievement of financial and operational key performance that align with the Group’s long-term strategy. • Remuneration policy and practice to be as transparent as possible. • Participants to develop significant personal shareholdings pursuant to the executive share options in order to align their interests with those of shareholders. • Pay and employment conditions elsewhere in the Group are to be taken into account. • The remuneration policy for Executive Director(s) and senior management is to be reviewed regularly, independent of executive management. • The Remuneration Committee considered the annual base salary of Lee Irene Yun-Lien, which had remained unchanged since 2016 although she was paid a special fee in 2017 and 2018. The Committee also considered the recommendations from the Independent Compensation Review. In view of the significant in-year achievements, the Remuneration Committee concluded that her 2019 annual fixed base salary should be HK$8,000,000. Details of Directors’ (including individual Executive Director(s)) and senior management’s emoluments for the year of 2018 and option movements for Executive Director(s) during the year are set out in notes 11, 12 and 37, respectively, to the consolidated financial statements. Non-Executive Directors’ Remuneration Policy The Independent Compensation Review also included consideration and review of the Group’s compensation structure for Non-Executive Directors and Board Committee members. Key elements of our Non-Executive Directors’ remuneration policy include the following: • Remuneration to be set at an appropriate level to attract and retain first class non-executive talent. • Remuneration of Non-Executive Directors is (subject to shareholders’ approval) to be set by the Board and should be proportional to their commitment and contribution towards the Company. • Remuneration practice to be consistent with recognised best practice standards for Non-Executive Directors’ remuneration. • Remuneration to be in the form of cash fees, payable semi-annually. • Non-Executive Directors not to receive share options from the Company. Non-Executive Directors had received no other compensation from the Group except for the fees disclosed below. None of the Non-Executive Directors had received any pension benefits from the Company, nor did they participate in any bonus or incentive schemes. Non-Executive Directors (including Independent Non-Executive Directors) received fees totalling HK$2,615,000 for the year of 2018. 87 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRemuneration Committee Report Director Fee Levels Director fees are subject to shareholders’ approval at general meetings. The Remuneration Committee considered the recommendations from Independent Compensation Review, and that the full Board has assumed the role of the Strategy Committee to participate and contribute in setting and reviewing long term strategy; the Audit and Risk Management Committee has increasingly important role to support the Board in monitoring the Group’s risks; as well as the level of responsibility, experience and abilities required of the Directors, level of care and amount of time required, as well as fees offered for similar positions in companies requiring the same talent, it is proposed for shareholders’ consideration and approval that Director fees for Non-Executive Directors and Board Committee members be revised. The current fees for Non-Executive Directors and Board Committee members and the proposed fees are set out below. Executive Director(s) will not receive any director fee(s). Board of Directors Non-Executive Director Audit and Risk Management Committee (Note 1) Chairman Member Remuneration Committee Chairman Member Nomination Committee Chairman Member Strategy Committee (Note 2) Chairman Member Current Fee Per annum HK$ Proposed Fee Per annum HK$ 250,000 (Note 6) 280,000 135,000 (Note 5) 70,000 (Note 5) 180,000 108,000 60,000 (Note 4) 40,000 (Note 3) 30,000 20,000 N/A N/A 75,000 45,000 50,000 30,000 N/A N/A Notes: 1. Audit Committee was renamed as the Audit and Risk Management Committee, effective from 21 February 2019. 2. Strategy Committee was discontinued and assumed by the Board with effect from 1 January 2019. The full Board is involved in setting and reviewing longer-term directional strategy for the growth of the Group. The then fee of Strategy Committee in 2018 for both Chairman and Member is HK$30,000. 3. Approved by shareholders in the 2011 AGM. 4. Approved by shareholders in the 2014 AGM. 5. Approved by shareholders in the 2016 AGM 6. Approved by shareholders in the 2018 AGM. Human Resources Practices The Group aims to attract, retain and develop high calibre individuals committed to attaining our objectives. The total number of employees as at 31 December 2018 was 485. The Group’s human resources practices are aligned with our corporate objectives so as to maximise shareholder value and achieve growth. Details on our human resources programmes, training and development are set out in the “2018 Sustainability Report”. 88 Hysan Annual Report 2018Long-term incentives: Share Option Schemes The Company may grant options under executive share option schemes as adopted from time to time. The purpose of the schemes is to strengthen the connection between individual staff and shareholders’ interests. The power to grant options to Executive Director(s) is vested in the Remuneration Committee and endorsement by all Independent Non-Executive Directors is required under the Listing Rules. The Chairman or the Chief Executive Officer may make grants to management staff below the Executive Director level. The 2005 Share Option Scheme (the “2005 Scheme”) The Company adopted the 2005 Scheme at its AGM held on 10 May 2005 (the “2005 AGM”), which had a term of 10 years and expired on 9 May 2015. All outstanding options granted under the 2005 Scheme will continue to be valid and exercisable in accordance with the provisions of the 2005 Scheme. No further option will be granted under the 2005 Scheme. Under the 2005 Scheme, options to subscribe ordinary shares of the Company may be granted to employees of the Company or any wholly-owned subsidiaries (including Executive Director(s)) and such other persons as the Board may consider appropriate from time to time, on the basis of their contribution to the development and growth of the Company and its subsidiaries. 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 the maximum number of shares permissible under the Listing Rules, being 10% of the total number of shares in issue as at the date of the 2005 AGM (being 104,996,365 shares). The maximum entitlement of each participant under the 2005 Scheme must not, during any 12-month period, exceed the maximum number of shares permissible under the Listing Rules (which is 1% of the total number of shares in issue as at the date of the 2005 AGM, 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; and (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. Consideration for each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of options, with full payment for the exercise price to be made on exercise of the relevant options. The 2015 Share Option Scheme (the “New Scheme”) The Company adopted the New Scheme (together with the 2005 Scheme, both are referred to as the “Schemes”) at its AGM held on 15 May 2015 (the “2015 AGM”), which has a term of 10 years and will expire on 14 May 2025. Terms of the New Scheme are substantially the same as those under the 2005 Scheme. Under the New Scheme, options to subscribe ordinary shares of the Company may be granted to employees of the Company or any subsidiaries (including Executive Director(s)) and such other persons as the Board may consider appropriate from time to time, on the basis of their contribution to the development and growth of the Company and its subsidiaries. 89 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRemuneration Committee Report The maximum number of shares in respect of which options may be granted under the New Scheme and any other share option schemes of the Company shall not in aggregate exceed the maximum number of shares permissible under the Listing Rules, currently being 10% of the total number of shares in issue as at the date of the 2015 AGM (being 106,389,669 shares). Under the Listing Rules, a listed issuer may seek approval by its shareholders in a general meeting for “refreshing” the 10% limit under the New Scheme. The limit on the total number of shares that may be issued upon exercise of all outstanding options granted and yet to be exercised under the New Scheme and any other share option schemes of the Company must not exceed 30% of the shares in issue from time to time (or the maximum number of shares permissible under the Listing Rules). No options may be granted if such a grant would result in such 30% limit or maximum permissible limit being exceeded. The maximum entitlement of each participant under the New Scheme must not, during any 12-month period, exceed the maximum number of shares permissible under the Listing Rules (which is 1% of the total number of shares in issue as at the date of the 2015 AGM, being 10,638,966 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; and (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. Consideration for each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of options, with full payment for the exercise price to be made on exercise of the relevant options. Grant and vesting structures Under the Company’s current policy, grants are to be made on a periodic basis. The exercise period is 10 years. The vesting period is 3 years in equal proportions starting from the 1st anniversary and shares will become fully vested on the 3rd anniversary of the grant. The size of the grant will be determined with reference to a base salary multiple and job performance grades. The Board reviews the grant and vesting structures from time to time. Movement of share options During the year, a total of 956,200 shares options were granted under the New Scheme. The 2005 Scheme had expired on 9 May 2015 and no further option will be granted under the 2005 Scheme. As at the date of this Annual Report: (i) 1,322,667 share options granted and fully-vested under the 2005 Scheme remained outstanding, representing approximately 0.13% of the total number of issued shares of the Company; (ii) 1,983,867 share options granted (including 468,995 fully-vested share options) under the New Scheme remained outstanding, representing approximately 0.19% of the total number of issued shares of the Company; and (iii) 104,088,205 shares are issuable under the New Scheme, representing approximately 9.95% of the total number of issued shares of the Company. 90 Hysan Annual Report 2018Details of options granted, exercised, cancelled/lapsed and outstanding under the Schemes during the year are as follows: 2005 Scheme Name Executive Director Date of grant Exercise price HK$ Exercise period (Note a) Balance as at 1.1.2018 Granted Exercised Cancelled/ lapsed (Note b) Balance as at 31.12.2018 Changes during the year Lee Irene Yun-Lien 14.5.2012 33.50 14.5.2013 – 13.5.2022 87,000 7.3.2013 10.3.2014 39.92 32.84 7.3.2014 – 6.3.2023 265,000 10.3.2015 – 9.3.2024 325,000 12.3.2015 36.27 12.3.2016 – 11.3.2025 300,000 31.3.2009 13.30 31.3.2010 – 30.3.2019 59,000 31.3.2010 22.45 31.3.2011 – 30.3.2020 70,334 31.3.2011 32.00 31.3.2012 – 30.3.2021 54,000 30.3.2012 31.61 30.3.2013 – 29.3.2022 105,334 28.3.2013 39.20 28.3.2014 – 27.3.2023 153,000 31.3.2014 33.75 31.3.2015 – 30.3.2024 154,000 31.3.2015 34.00 31.3.2016 – 30.3.2025 204,667 1,777,335 – – – – – – – – – – – – – – – – (59,000) (Note d) (20,334) (Note e) (22,000) (Note f) (35,334) (Note g) (51,000) (Note h) (108,000) (Note i) (138,333) (Note j) – – – – – – – – 87,000 265,000 325,000 300,000 – 50,000 32,000 70,000 (17,000) 85,000 – 46,000 (3,667) 62,667 (434,001) (20,667) 1,322,667 Eligible employees (Note c) New Scheme Name Executive Director Date of grant Exercise price HK$ Exercise period (Note a) Balance as at 1.1.2018 Granted Exercised Cancelled/ lapsed (Note b) Balance as at 31.12.2018 Changes during the year Lee Irene Yun-Lien 9.3.2016 33.15 9.3.2017 – 8.3.2026 375,000 23.2.2017 36.25 23.2.2018 – 22.2.2027 300,000 – – 1.3.2018 44.60 (Note k) 1.3.2019 – 29.2.2028 – 373,200 – – – – – – 375,000 300,000 373,200 Eligible employees (Note c) 31.3.2016 33.05 31.3.2017 – 30.3.2026 377,668 31.3.2017 35.33 31.3.2018 – 30.3.2027 409,000 – – (158,333) (Note l) (84,666) (Note m) (45,335) 174,000 (75,667) 248,667 29.3.2018 41.50 (Note n) 29.3.2019 – 28.3.2028 – 583,000 – (70,000) 513,000 1,461,668 956,200 (242,999) (191,002) 1,983,867 91 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRemuneration Committee Report Notes: (a) All options granted have a vesting period of 3 years in equal proportions starting from the 1st anniversary and become fully vested on the 3rd anniversary of the grant. In this table, “exercise period” begins with the 1st anniversary of the grant date. (b) The options lapsed during the year upon the resignation of certain eligible employees. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (d) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$39.25. (e) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$45.36. (f) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$44.55. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$43.56. (h) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$43.88. (i) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$43.99. (j) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.85. (k) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 28 February 2018) was HK$45.35. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.52. (m) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.33 (n) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 28 March 2018) was HK$40.75. Apart from the above, the Company has not granted any share option under the Schemes to any other persons during the year that is required to be disclosed under Rule 17.07 of the Listing Rules. Particulars of the Schemes are set out in note 37 to the consolidated financial statements. 92 Hysan Annual Report 2018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 statement of profit or loss over the three- year vesting period of the options. The fair values of share options granted by the Company were determined by using the 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 management’s best estimate. The value of an option varies with different variables based on a number of subjective assumptions. Any change in the variables 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 29.3.2018 1.3.2018 HK$41.500 HK$43.700 HK$41.500 HK$44.600 1.802% 5 years 1.741% 5 years 17.923% 17.534% HK$1.288 HK$1.288 HK$4.900 HK$4.760 Notes: (a) Risk free rate: being the approximate yields of 5-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 5 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 over the past 5 years immediately before the date of grant. (d) Expected dividend per annum: being the approximate average annual cash dividend over the past 5 financial years. Remuneration Committee activities and agenda time during the year 33% 22% 11% 34% Determination of Compensation for the Executive Director Review of Remuneration of Non-Executive Directors and Board Committee Members Review of Compensation of Senior Management and other department heads Review of Compensation Structure and long-term incentive scheme Members of the Remuneration Committee Fan Yan Hok Philip (Chairman) Lee Tze Hau Michael Poon Chung Yin Joseph Hong Kong, 21 February 2019 93 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverview Nomination Committee Report Composition Majority are Independent Non-Executive Directors Committee Members Lee Irene Yun-Lien (Chairman) Fan Yan Hok Philip* Lau Lawrence Juen-Yee* Lee Chien Poon Chung Yin Joseph* *Independent Non-Executive Director Dear shareholder, The primary roles of the Nomination Committee are to review Board structure, composition and diversity, and to recommend Board appointments. The roles of Non- Executive Directors continue to evolve in line with the growing demands and fast-changing business environment. The Board is constantly looking ahead to ensure that our Non- Executive Directors have the required skills and experience to drive the highest performance. During the year, we were pleased to welcome Wong Ching Ying Belinda, our new Independent Non-Executive Director, to the Board. Highlights Key responsibilities • Nominated Wong Ching Ying Belinda as • Reviewing the structure, size, a new Independent Non-Executive Director • Considered the re-appointment and independence of Directors • Reviewed the Nomination Policy, Diversity Policy and Terms of Reference of Nomination Committee composition and diversity of the Board and making recommendations to the Board • Assessing independence of the Independent Non-Executive Directors Meeting Schedule The Nomination Committee generally meets at least once every year. Roles and Authorities • Review and make recommendations on the structure, size, composition and diversity of the Board to complement the Company’s corporate strategies. • Review the Diversity Policy. • Nominate candidates to fill Board vacancies after careful consideration of the attributes and values required to support the effective functioning of the Board based on a combination of skills, knowledge and experience. • Review the independence of Directors pursuant to the Listing Rules’ requirements. • Generally oversee the succession planning of the Board. • Review the time commitment and the efforts required from Directors to discharge their responsibilities. • Review the training and continuous professional development of the Directors. 94 Hysan Annual Report 2018Activities During the year of 2018, the Nomination Committee held a meeting to: Board Changes and Composition • Consider and nominate Wong Ching Ying Belinda as an Independent Non-Executive Director to the Board in accordance with the Company’s Nomination Policy and Diversity Policy. The appointment introduces in a new spectrum of expertise and experience in retail, food and beverage, people, brand development and growth strategy across the Greater China and Asia Pacific regions. Director Recruitment Process A wide and diverse range of candidates with different skills and business backgrounds that would be attributes to the business needs is identified Nomination Committee Chairman meets with shortlisted candidates Nomination Committee assesses the suitability of the candidates based on a range of criteria All Directors are given the opportunity to meet with the preferred candidate Nomination Committee makes a recommendation to the Board • Review the Board’s structure, size, composition and diversity, and monitor the progress made towards enriching the skills and experience of Board members and improving diversity within the Board. The Nomination Committee was satisfied that, with the appointment made during the year and the discontinuation of the Strategy Committee, the current composition and size of the Board remained appropriate for the time being. However, these matters continue to be kept under regular review. • Continue with the appointment of Li Xinzhe Jennifer as an advisor to the Board, to continue to enrich the Board’s skills and diversity. • The recent Board performance evaluation concluded that the Board has operated very well. The Nomination Committee was satisfied that all Directors were strongly committed to the Company and had contributed to the Board through their participation in the Company’s affairs and discussions at the Board and Board Committees’ meetings during the year, as reflected in their high attendance records in the table on page 68. • Review the contribution of Directors who are due to retire and subject to re-appointment at the forthcoming Annual General Meeting with the support of the Board. • Review the training of Directors and senior management. 95 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewNomination Committee Report Independence of Non-Executive Directors • Assess the independence, effectiveness and commitment of each of the Company’s Independent Non-Executive Directors. The Nomination Committee was satisfied that notwithstanding the length of service of such Directors, as well as their number and nature of office held in other public companies and their other commitments, they remained highly committed to the Company, remaining independent and impartial, and continuing to be in a position to discharge their duties and responsibilities in the coming year. Review of Policy and Terms of Reference • Enhance our Diversity Policy to emphasise the importance of a diverse Board and senior management team. • Adopt a separate Nomination Policy to emphasise our commitment to a rigorous and transparent nomination process. • Review its terms of reference taking into account the corporate governance roles of the Nomination Committee. In February 2019, the terms of reference were further reviewed to address the key objectives. Next Generation Innovation Panel and Sustainability Committee • Consider the nature and composition of the Next Generation Innovation Panel, which refreshes capabilities and supports the strategic direction-making of the Board. • Seek to reflect, in a more formally manner, the Sustainability Committee at management level, thereby which supporting the Board in the Company’s drive to comply with environmental, social and governance requirements and directions. Nomination Committee activities and agenda time during the year 10% 20% 20% 50% Review of Board and Board Committees’ Structure, Size, Composition and Diversity Nomination of Directors Assessment of Independence of Directors Corporate Governance Members of the Nomination Committee Lee Irene Yun-Lien (Chairman) Fan Yan Hok Philip Lau Lawrence Juen-Yee Lee Chien Poon Chung Yin Joseph Hong Kong, 21 February 2019 96 Hysan Annual Report 2018Strategy Committee Report Composition Highlights Key responsibilities Lee Irene Yun-Lien (Chairman) Fan Yan Hok Philip* Jebsen Hans Michael Lee Chien Poon Chung Yin Joseph* *Independent Non-Executive Director • Discussed business plans, as • Reviewing and well as longer-term directional strategy for the growth of the Group recommending to the Board actions on the Group’s strategic matters • Aligning corporate responsibility and sustainability initiatives with the Group’s strategy Change of Board Committee The Board has recognised the importance of formulating the Group’s strategies and long-term objectives for the future. The Board had therefore resolved to assume the role of the Strategy Committee and incorporate the Company’s strategy discussions as an integral part of Board meetings. Accordingly, the Strategy Committee was discontinued and assumed by the Board with effect from 1 January 2019. This further facilitates and enables the full Board to actively involve and participate in setting and reviewing longer-term directional strategy for the growth of the Group. Meeting Schedule The Strategy Committee met once in November 2018. Full Board members were also invited and attended. Roles and Authorities The Strategy Committee was responsible for reviewing and making recommendations to the Board on the Group’s strategic matters. Activities During the year of 2018, the Strategy Committee held a meeting (in which full Board members and senior management joined and actively participated) to discuss business plans, as well as longer-term directional strategy for the growth of the Group. The Board recognised the importance of formulating the Group’s strategic and long-term objectives for the future. The Board fully supported the strategy of strengthening our core and non-core operations both for today and for the next generations, and to position and transform the Lee Gardens to achieve an even higher level of attainment. This commitment is to provide our stakeholders with sustainable and outstanding returns from a property portfolio that is strategically planned and managed by passionate, responsible and forward-looking professionals. Members’ attendance records are disclosed in the table on page 68. Members of the then Strategy Committee Lee Irene Yun-Lien (Chairman) Fan Yan Hok Philip Jebsen Hans Michael Lee Chien Poon Chung Yin Joseph Hong Kong, 21 February 2019 97 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRisk Management and Internal Control Report Responsibility Responsibility for risk management is shared among the Board of Directors and the management of the Group. The Board has the overall responsibility of reviewing and maintaining sound and effective risk management and internal control systems. Management’s role is to design and implement these systems, and report to the Board and the Audit and Risk Management Committee on the risks identified and how they are managed, which is a process that is essential for the Group to achieve its business objectives. Our Risk Management and Internal Control Framework The Audit and Risk Management Committee supports the Board in monitoring our risk exposures, the design and operating effectiveness of the underlying risk management and internal control systems. Acting on behalf of the Board, the Committee oversees the following processes on a regular basis: (i) Reviewing the principal business risks and control measures in order to mitigate, transfer or avoid such risks; the strengths and weaknesses of the overall risk management and internal control systems; and action plans to address the weaknesses or improve the assessment process; (ii) Reviewing the business process and operations reported by Internal Audit, including action plans to address the identified control weaknesses, as well as status updates and monitoring the implementation of audit recommendations; and (iii) Reporting by the external and internal auditors of any control issues identified in the course of their work, and discussing with the external and internal auditors the scope of their respective review and findings. The Audit and Risk Management Committee would report its findings to the Board, which would then consider these findings in order to form its own view on the effectiveness of the Group’s risk management and internal control systems. Please also see the “Audit and Risk Management Committee Report” from pages 80 to 84 regarding the Audit and Risk Management Committee’s detailed review work, including the forms of assurance received from management, the external auditor and internal auditor. 98 Hysan Annual Report 2018Hysan’s Top-Down/Bottom-Up Risk Management Framework THE BOARD • Has overall responsibility for the Group’s risk management and internal control systems • Sets strategic objectives • Reviews the effectiveness of our risk management and internal control systems • Monitors the nature and extent of risk exposure for our major risks • Provides direction on the importance of risk management and risk management culture AUDIT AND RISK MANAGEMENT COMMITTEE • Supports the Board in monitoring risk exposure, design and operational effectiveness of the underlying risk management and internal control systems Overseeing, identifying, assessing, and mitigating risk at corporate level “Top-down” “Bottom-up” Overseeing, identifying, assessing, and mitigating risk at business unit level and across functional areas MANAGEMENT LEVEL – RISK MANAGEMENT COMMITTEE • Designs, implements, and monitors risk management and internal control systems • Assesses our risks and mitigating measures Company-wide INTERNAL AUDIT • Provides the Audit and Risk Management Committee with independent assurance over the effectiveness of our risk management and internal control systems OPERATIONAL LEVEL • Identifies, assesses and mitigates risk across the business • Implements risk management and internal control practices across business operations and functional areas 2018 Review of Risk Management and Internal Control Effectiveness In respect of the year ended 31 December 2018, the Board, with confirmation from the Chief Operating Officer, Chief Financial Officer, Head of Internal Audit and General Counsel and Company Secretary, considered the risk management and internal control systems to be effective and adequate. No significant areas of concern that may affect the financial, operational, compliance controls, internal audit, risk management and internal controls functions of the Group were identified. The risk management and internal control systems are designed to manage rather than to eliminate the risk of failure to achieve business objectives, and can only provide reasonable, not absolute, assurance against material misstatement or loss. During the review, the Board also considered the resources, qualifications/experience of staff of the Group’s internal audit, accounting and financial reporting functions and their training and budgets were considered adequate. 99 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRisk Management and Internal Control Report Our Risk Management and Internal Control Model Our risk management and internal control model is based on that of the Committee of Sponsoring Organisations of the U.S. Treadway Commission (“COSO”) for internal control, but with due consideration given to our organisational structure and business nature. The COSO model has five components and how the model fits into our operational and control environment is described as follows: • Control Environment – this sets the tone for risk management and internal control. As Hysan is a tightly-knit organisation, the actions of management and its commitment to effective governance are transparent to all. We have a strong tradition of good corporate governance and a corporate culture based on sound business ethics and accountability. We have in place a formal Code of Ethics that is communicated to all staff (including new recruits). We have maintained a separate Whistleblowing Policy since 2016, under which whistle blowers can raise concerns to a designated independent third party who then reports to the Audit and Risk Management Committee. Our overall aim is to build risk awareness and control responsibility into our culture, becoming thereby the foundation of our risk management and internal control systems. • Risk Assessment – we continue to improve our risk management process and the quality of information generated, while maintaining a simple and practical approach. Instead of setting up a separate risk management department, we seek to embed risk management into our operations (retail, office, residential, property management & technical services, projects, marketing and investment & development) and functional areas (including finance, human resources, IT, legal, secretarial and corporate communications). On an annual basis, department heads review and update their risk registers, providing assurances that controls are appropriately embedded and operating effectively. At management level, the risk management committee, comprising of Executive Director(s), Chief Operating Officer, Chief Financial Officer, Financial Controller, General Counsel and Company Secretary, and Head of Internal Audit, sets relevant policies and monitors potential weaknesses and action items regularly. This committee is also responsible for identifying and assessing risks of a more macro and strategic nature, including emerging risks. This bottom-up approach in which operating unit heads identify operational risks, together with the top-down approach, determine the Group’s major risks. Discussion sessions with all department heads further enhance the participatory and interactive aspect of the overall risk assessment and risk challenge process. • Control Activities and Information and Communicating – 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. These control policies have been formalised as written policies and procedures, with defined limits of delegated authority and segregated duties and controls. A greater use of automation (information processing and analytics) is also being implemented. 100 Hysan Annual Report 2018The annual budgeting and planning process, one of our key control activities, takes into consideration all risk factors. All operating units, in preparing their respective plans, are required to identify material risks that may have an impact on the achievement of their business objectives. Action items to mitigate identified risks are required to be developed for implementation. Variance analyses are regularly performed and reported to management and the Board, which help to identify deficiencies for timely remedial actions to be taken. Another significant control activity is the monitoring of major project expenditures, as they are a particularly capital-intensive aspect of our property business. For each project, a detailed analysis of expected risks and returns is submitted to the operating unit heads, Chief Operating Officer, Chief Financial Officer, Executive Director(s) and the Board for approval. Criteria used to assess business and financial feasibility are generally based on net present value, payback period, and internal rate of return from projected cash flow as well as sensitivity analysis. Management also conducts an internal control self-assessment annually. All department/ unit heads must complete a relevant control self-assessment questionnaire and confirm with management that appropriate internal control policies and procedures have been established and properly complied with. • Monitoring Activities – the Board and the Audit and Risk Management Committee oversee the control process, with the assistance from our Internal Audit team. Management provides update reports to the Audit and Risk Management Committee on major risks and appropriate mitigating measures. During the three Audit and Risk Management Committee meetings held annually, a session in each meeting is largely dedicated to discussions regarding risk management and internal control systems. In 2019, the Audit and Risk Management Committee will hold an additional meeting (making a total of 4 meetings) to address the dynamic risks and enhance the risk management oversight function. Strengthening our Underlying Systems Since 2012, we have been progressively making improvements to our risk management and internal control systems. The initial phase focused on adopting a more risk-based, rather than process-based, approach to risk identification and assessment. This approach strengthens our ability to analyse risks and respond to opportunities as we pursue our strategic objectives. Management reporting to the Audit and Risk Management Committee has also been enhanced, including the presentation of special reports on selected risk topics. Our goal is to further integrate risk management and internal control into our business processes, including annual budgeting and planning as well as major project management. In December 2013, we revised the COSO framework to adopt a holistic approach to risk management, taking into consideration the Company’s circumstances, including its ongoing risk management and internal control improvement plan as well as strategic initiatives such as sustainability. Ultimately, our objective is to make risk management a “living” process that is practised on a day-to-day basis by operating units, incorporating up-to-date and fit for purpose market best practice. 101 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewRisk Management and Internal Control Report Hysan’s “Three Lines of Defence” Model Clear responsibilities and robust controls are vital to help manage risks. Since 2017, we have reinforced our risk governance structure by adopting a “Three Lines of Defence” model to address how specific duties related to risk and control could be assigned and coordinated within the Group. This reinforced Hysan’s risk management capabilities and compliance culture across all divisions and functions. Management/management-level Risk Management Committee Board/Audit and Risk Management Committee 1st 2nd 3rd LINE OF DEFENCE LINE OF DEFENCE LINE OF DEFENCE Management Controls Financial Control Internal Control Measures System of Internal Control & Risk Management Internal Audit HR Capability Public Communication Compliance Information Security Sustainability RISK OWNERS/ MANAGERS RISK CONTROL AND COMPLIANCE RISK ASSURANCE Business divisions & supporting units Control functions Internal Audit The model aims to reinforce Hysan’s risk management capabilities and compliance culture throughout the Group. The responsibilities of each of the defence lines are as follows: Relevant units Responsibilities First LINE Business and supporting units Ultimately accountable for all risks and controls in all business processes Second LINE Corporate oversight and control functions Responsible for the Group’s policy framework and independent risk assessment Third LINE Group internal audit Responsible for providing independent and objective assurance on the effectiveness of risk management, internal controls and governance processes E x t e r n a l a u d i t R e g u a t o r l 102 Hysan Annual Report 2018 Hysan’s Regulatory Compliance and Governance Framework The Board, supported by the Audit and Risk Management Committee, shall have overall regulatory compliance authority in all matters. We have a regulatory compliance and governance framework in place, which is fundamental to our commitment of achieving a high standard of internal control and governance. Monitor • Semi-annual compliance reported to the Audit and Risk Management Committee and the Board. • Quarterly legal and regulatory update to the Board. • Corporate governance policies regularly reviewed by the Board. Board Identify • Each Business Unit and supporting unit confirms compliance semi-annually (including compliance with laws affecting its operation). • Compliance/Non-compliance is properly identified and recorded. Business a n U d n it S u s p Respond • Advise Business Units and supporting units on appropriate legal steps/ actions. • Assist the Units to initiate and follow up on the required action. • Report to the management-level Risk Management Committee. p o r t i n g e e t mit REGULATORY COMPLIANCE AND GOVERNANCE FRAMEWORK R i s k M a n A u a g e dit a m e nd M a nt Committee R i s k M a n a n el g e m ent-lev g e m ent Com a Prioritise • Prioritise for immediate action, corporate governance/policy planning, comprehensive reporting and follow up. Assess • Review and assess the impact. Seek external legal advice, where necessary. • Report to the management- level Risk Management Committee. 103 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverview Risk Management and Internal Control Report Our Past Efforts in Enhancing the Internal Control Environment and Activities In addition, the following are examples of the improvements we have made over the past few years to strengthen our risk management and internal control system: Control Environment – policy of compliance • Updated the Group’s competition law compliance policy and templates. Training on Competition Law was organised in June 2018 for our Business Units, covered practical application to our business practices, consequences of breach, etc. Risk Assessment – enhanced monitoring of “emerging risks” • Strengthened the monitoring of material risks and “emerging risks”, i.e. new or evolving risks with potential significant impact, such as socio-political, economic or cyber security risks. The management-level Risk Management Committee plays a key role in identifying and tracking these risks, with top management leading discussions with all department heads. Control Activities – e-compliance system Ongoing review/ refinement of processes and structures to enhance compliance. In the context of a fast-changing global and local environment, the monitoring of “emerging risks” will be a focus. • The half-yearly compliance reporting was digitalised and transformed into an electronic reporting system in July 2018. The legal compliance and connected transactions reporting systems were combined into one. This facilitates timely reporting, good record tracking and improves efficiency. Continual review and refinement of internal risk management and reporting procedures to ensure prompt and timely response and escalation. Control Activities – internal controls and policies • Enhanced the group-wide privacy compliance framework and reviewed the procedures for various key business units. Subsequent training was delivered to reinforce improvements. • Regular trainings and education provided across the Group during the year by Legal Department and external professional advisors, including how to handle down raids, connected transactions, privacy compliance, lease negotiation, intellectual properties, etc. Continual review and refinement of policies and procedures, risk management and internal controls in line with the fast-changing external and internal business environments are essential. Monitoring Activities – enhanced “management assurance” to the Audit and Risk Management Committee and the Board • Enhanced management update reports to the Audit and Risk Management Committee and the Board on major risks, including deep-dive reports on topics such as enterprise-wide cyber security assessment, treasury process and Lee Garden Three project. To strengthen management’s “assurance” to the Audit and Risk Management Committee and the Board, self-assessment questionnaires were rolled out across all departments. Department heads were required to review and certify the effectiveness of their departmental controls, including the identification of any control issues. This backs up management’s certification to the Audit and Risk Management Committee and the Board. Facilitate and enhance the work of the Audit and Risk Management Committee and the Board in monitoring our risk exposure. 104 Hysan Annual Report 2018Our Risk Profile Our approach for managing risk is underpinned by our understanding of our current risk exposures, and how our risks are changing over time. The following illustrates the nature of our major risks. Further analysis of our strategies is set out in other sections of the Annual Report as indicated below: Risk level changes during 2018 Risk area Overall business environment Office sector Description of risk change Our mitigating measures • High uncertainties in global political and economic • Better curated portfolio as well as environment. • Signs of economic slow down in mainland China and Hong Kong economies cause head winds to impede our growth. • Continued decentralisation from Central benefits Hysan in Causeway Bay as well as other areas like Hong Kong Island East, Wong Chuk Hang and Kowloon Bay. Rent conscious tenants may aim for lower cost non-traditional business areas. • Rental reversion for Grade A office in Wan Chai and Causeway Bay shows slower growth in 2018. • Non-grade A office in Causeway Bay faces greater pressure due to lower demand and rent levels. • Co-working is a disruptor to traditional office leasing business. Expected consolidation may disturb the market. prudent and sound financial management enable Hysan to become more resilient. • Diverse and flexible leasing efforts as well as maintaining a diversified tenant mix ensure a more resilient tenant portfolio. • Offer tailored solutions to increase marketability of office units. • Embrace co-working trend by collaborating with leading and strong co-working brands. Retail sector • Retail market recovery momentum may not be • Diverse and flexible leasing effort as sustainable as when growth in Q3 and Q4 2018 was much lower than that experienced in Q1 and Q2 2018. • Brands are cautious when opening new shops. • Peers are catching up with their offerings and narrowing our advantages. • Regional malls divert shoppers from traditional shopping areas. well as active curation of tenant mix to ensure a more resilient and sustainable tenant portfolio. • Use business technology to drive loyalty programme as well as shopping experiences to distinguish ourselves. • Focus on marketing efforts to target relevant existing and potential new shoppers. • Uncertainties in economy affect demand for luxury residential units from expatriates as well as affordable rent level due to their tighter budget. • With more well decorated units offered, both rental reversion and occupancies have improved in 2018. • Continue efforts in renovating units as well as the public area to enhance appeal to potential new tenants and to drive demand as well as postering higher rentals. • Lee Garden Three was completed in December 2017 and – has been operating well. • The low-rise residential development project in Tai Po, which is jointly invested with HKR International Limited (“HKRI”), is making good progress. Various statutory submissions are ongoing. Site work has also commenced. This project is managed together with HKRI and will be executed professionally. Recent signs of the cooling of the property market, as well as the new “vacancy tax” levied by the Government, may affect developers’ profits in the future. • With continual low unemployment rate and structural changes in the workforce in Hong Kong, the service industry continues to face widespread labour shortages. • We are facing competition for skilled personnel for our frontline operations as well as management to support our growth strategy. • With fast developments in business technology, Hysan continues to leverage technology to improve our offering to shoppers and tenants, as well as to enhance our operations and management. • Disturbance to business due to cyber security risks can be significant and costly to rectify. • Ensure the sites are carefully and professionally designed to fit the target market. • Approach the market at the appropriate moment. • Sensible tender price mitigates pressure on profit. • Improve working environment, benefits and an emphasis on well- being would help recruit new blood and retain talented people more effectively. • Regular cyber security review with capable management in place to mitigate the risks. Residential sector Lee Garden Three Project Tai Po Residential Development Project Human Resources Cyber Security Notes: where “inherent risks” (i.e. before taking into consideration mitigating activities) have increased where “inherent risks” have decreased where “inherent risks” have remained broadly the same 105 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewSustainability Report – Summary This section provides a summary of Hysan’s sustainability/corporate responsibility strategy overview and accomplishments. The reporting period is from 1 January 2018 to 31 December 2018, unless otherwise specified. Hysan continued to comply fully with the requirements of the provisions contained in the Environmental, Social and Governance Reporting Guide, Appendix 27 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. As a “Business of Life”, Hysan creates positive and visible changes of influence for our stakeholders and the communities we serve. With much stronger emphasis on sustainability in all walks of life in recent years and the Board’s strong support and commitment to sustainability, we decided to embed further sustainable development principles and practices into our operations and to provide a better structure within our corporate setup to strategize and report on sustainability issues. In 2018, a Sustainability Committee at management level was formalised to formulate sustainability strategies and oversee their implementation in an efficient and effective manner, with clear terms of reference and delegated powers. This Committee is chaired by the Chief Operating Officer and reports to the Chairman of the Board and the Executive Committee. The Executive Committee then shares sustainability plans with the Board and helps cascade the Directors’ views on each topic to the Sustainability Committee. A sustainability task force, with employees selected for their expertise as members, will execute the initiatives developed by this Committee. Together with the formalisation of the Committee, a new Sustainability Policy for the Group was implemented in early 2019. Our new Sustainability Policy enhances the framework for the way we manage our corporate responsibilities. Maintaining high ethical standards, respecting our staff, providing and maintaining a safe and healthy environment, minimising the adverse impact of our operations on the environment, contributing to combatting climate change and improving resilience as a business, as well as encouraging partners to commit to high sustainability standards: these are our main sustainability themes. Hysan has long assessed the materiality of sustainability issues it faces based on industry norms and what we learnt from participating in sustainability reporting with renowned international and local indexes, like FTSE4Good, MSCI Sustainability Indexes and Hang Seng Sustainability Index. For details about Hysan’s sustainability initiatives, please refer to the 2018 Sustainability Report on the Company’s website: www.hysan.com.hk Under the sustainability umbrella, Hysan’s Environmental Policy focuses on measuring and reporting our carbon reduction efforts, promoting waste reduction at source, enhancing green purchasing and improving stakeholder engagement. Environmental Achievements of 2018 • Benchmarking exercises: Hysan Place achieved Final Platinum rating under BEAM Plus Existing Buildings; Lee Garden Three was given the China Green Building Label 2 Stars rating; the new Tai Po residential development began based on the requirements of BEAM Plus New Buildings Version 1.2. • Partnership synergy: Collaborated with Green Monday and over 20 restaurants in Lee Gardens area during the summer to promote healthy and sustainable eating lifestyle through the @GoGreenCWB campaign; provided a LEED and BEAM information kit for Lee Garden Three tenants and encouraged tenants to aim for high interior sustainability standards. • Public awareness: Installed the second Well#, a smart water refill station, at the kid’s floor of Lee Garden Two. During the summer of 2018, we also launched a one-month “Hydrating Causeway Bay” campaign with an additional pop-up Well# installed at Hysan Place to promote reduced usage of disposable plastic bottles. 106 Hysan Annual Report 2018• Stakeholder engagement: Launched “GreenFest by Hysan” at Hysan Place to engage and inspire our new generations to take positive action towards a more sustainable future. The first edition of this event included many innovative workshops on the theme of “Rethink our Food”. • Waste management: Actively engaged our Food and Beverages tenants to deliver their food waste at Hysan’s cost to the Organic Waste Treatment Facilities (OWTF) operated by the Environmental Protection Department. • Energy saving initiatives: Installed energy-efficient variable voltage variable frequency (VVVF) type power system for the lift modernization project at One Hysan Avenue office tower and Lee Garden Two retail podium; continued to adopt more LED lights under Hysan’s portfolio. • Green finance: Developed our own Green Finance Framework as reviewed by Sustainalytics. This framework aims to guide the future funding of sustainable building development and enhancements through green bonds or loans. In the area of workplace quality, our Code of Ethics and Employment and Staff Policy are well observed. The mobile learning system, introduced in 2017, was enhanced in 2018. It now has eight categories of curriculum encompassing 72 courses and 100 modules, encouraging employees to learn new skills and industry knowledge anytime anywhere. To continue to feed the talent pipeline, Hysan recruited more high potential young talents through its 2018 Management Trainee Programme. The Management Trainees go through a 24-month structured rotation plan leading them to different business functions to receive an in-depth understanding of Hysan’s business operations. Hysan’s Health and Safety Policy focuses on the provision and maintenance of a safe and healthy environment within Hysan’s portfolio for all staff, tenants, and members of the general public. In 2018, more than 1,800 hours of safety and health training were recorded by our staff members. Through our own demand for high levels of health and safety within our operations, we send a clear message to our partners and contractors to follow suit. In 2018, Hysan continued its close ties with Lee Gardens Association (LGA), the area association that strives to create a unified community of businesses to promote the Lee Gardens area to the public. Many of LGA’s new members are renowned traditional businesses along Lan Fong Road and Pak Sha Road, which helped bring more attention to the association and its activities. LGA has also developed its own popular social media platforms to promote the area and its events. Hysan Place’s Urban Farm and Sky Wetland remained the best-loved environmental attractions within our portfolio. In the past year, more than 25 local and international organizations visited these two green features at Hysan Place. Together with the GreenFest event, over 300 urban farmers enjoyed sessions growing organic produce at Hysan Urban Farm, while around 100 children and parents participated in our Green Wonders programme to learn about green building and urban farming. Family and children’s events became a strong focus for Hysan’s community events in 2018. Apart from those co-sponsored with LGA, the company launched a monthly children’s theatre performance at Lee Garden Two with the help of Absolutely Fabulous Theatre Connection. Each performance weekend would attract close to 400 participants. On the artistic front, among other events, Hysan sponsored a special installation art piece by renowned Swiss artist Dimitri de Perrot, which was hosted at Hysan Place’s popular atrium. Hysan’s volunteer team contributed 493 hours of their time to services for the community in 2018. Another 111 hours were recorded as contributions by team members’ friends and families, who also took part in Hysan activities. Hysan was the winner of a Silver Award for Volunteer Service. 107 Corporate GovernanceFinancial Statements and ValuationBusiness PerformanceOverviewThe Directors submit their report together with the audited consolidated financial statements for the year ended 31 December 2018, which were approved by the Board of Directors on 21 February 2019. PRINCIPAL ACTIVITIES The principal activities of the Group continued throughout 2018 to be property investment, management, and development. Details of the Group’s principal subsidiaries, associates and a joint venture as at 31 December 2018 are set out in notes 17 to 19 respectively to the consolidated financial statements. The turnover and results of the Group are principally derived from the leasing of investment properties located in Hong Kong. The Group’s turnover and results by operating segment are set out in note 5 to the consolidated financial statements. RESULTS AND APPROPRIATIONS The results of the Group for the year ended 31 December 2018 are set out in the consolidated statement of profit or loss on page 121. The first interim dividend of HK27 cents per share, amounting to approximately HK$283 million, was paid to shareholders during the year. The Board declared a second interim dividend of HK117 cents per share to the shareholders on the register of members on 8 March 2019, absorbing approximately HK$1,224 million. The dividends declared and paid for ordinary shares in respect of the full year 2018 will absorb approximately HK$1,507 million, and the balance of the profit will be retained. BUSINESS REVIEW AND PERFORMANCE A fair review of the business of the Company and a discussion and analysis of the Group’s performance during the year, the material factors underlying its results and financial position and material attributable factors of the development and likely future developments of the Group’s business, are provided throughout this Annual Report, particularly in the following separate sections: (a) Review of the Company’s business – “Management’s Discussion and Analysis”; (b) The Company’s risk management framework, the principal risks the Company is facing and the controls in place – “Risk Management and Internal Control Report”; (c) Future development of the Company’s business – “Key Facts” and “Chairman’s Statement”; (d) Analysis using financial key performance indicators – “Management’s Discussion and Analysis”; (e) Discussion of the Company’s environmental policies and performance – “Sustainability Report – Summary”; (f) Discussion of the Company’s compliance with the relevant laws and regulations that have a significant impact on the Company – “Corporate Governance Report”, “Sustainability Report – Summary” and “Independent Auditor’s Report”; and (g) An account of the Company’s key relationships with its employees, customers, suppliers and others that have a significant impact on the Company and on which the Company’s success depends – “Directors’ Report” and “Sustainability Report – Summary”. A detailed discussion of the Company’s environmental policies and performance, its compliance with the relevant laws and regulations that have a significant impact on the Company, and its key relationships with stakeholders, is contained in the separate 2018 Sustainability Report, which is available on the Company’s website: www.hysan.com.hk. These discussions form part of this Directors’ Report. 108 Hysan Annual Report 2018Directors’ Report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 124 and 125 and note 30 to the consolidated financial statements respectively. INVESTMENT PROPERTIES All of the Group’s investment properties were revalued by an independent professional valuer as at 31 December 2018 using the fair value model. Details of movements during the year in the investment properties of the Group are set out in note 15 to the consolidated financial statements. Details of the major investment properties of the Group as at 31 December 2018 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 are set out in note 16 to the consolidated financial statements. SHARE CAPITAL Details of movements in the share capital of the Company during the year are set out in note 29 to the consolidated financial statements. CORPORATE GOVERNANCE The Company is committed to maintaining a high standard of corporate governance and meets the requirements of the code provisions of the Corporate Governance Code as set out in Appendix 14 to the Listing Rules. Further information on the Company’s corporate governance practices is set out in the following separate reports: (a) “Corporate Governance Report” (pages 58 to 79) – this gives detailed information on the Company’s compliance with the Corporate Governance Code and the relevant laws and regulations, its adoption of local and international best practices, Director’s service contracts, and Directors’ interests in shares, contracts and competing business; (b) “Audit and Risk Management Committee Report” (pages 80 to 84) – this sets out the terms of reference, work performed and findings of the Audit and Risk Management Committee for the year; (c) “Remuneration Committee Report” (pages 85 to 93) – this gives detailed information on Directors’ remuneration and interests (including information on Directors’ compensation); (d) “Nomination Committee Report” (pages 94 to 96) – this sets out the terms of reference, work performed and findings of the Nomination Committee for the year; (e) “Strategy Committee Report” (page 97) – this sets out the terms of reference, work performed and findings of the Strategy Committee for the year; and (f) “Risk Management and Internal Control Report” (pages 98 to 105) – this sets out the Company’s framework for risk assessment and internal control (including control environment, control activities and work completed during the year). Further information on the Company’s sustainability policies and practices is contained in the separate 2018 Sustainability Report, which is available on the Company’s website: www.hysan.com.hk. 109 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceTHE BOARD The Board is currently chaired by Lee Irene Yun-Lien, Chairman. There are 9 other Non-Executive Directors. Wong Ching Ying Belinda was appointed as an Independent Non-Executive Director, effective from 18 December 2018. Lee Irene Yun-Lien and Yang Chi Hsin Trevor served as alternate Directors to Lee Anthony Hsien Pin and Jebsen Hans Michael, respectively, throughout the year. Save as otherwise mentioned above, other Directors whose names and biographies appear on pages 52 to 56 have been Directors of the Company throughout the year and up to the date of this report. According to Article 97 of the Company’s current Articles of Association (“Articles”), 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 (“AGM”). Under Article 114 of the Company’s Articles, 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 at each AGM. A retiring Director is eligible for re-election. Particulars of Directors seeking re-election at the forthcoming AGM are set out in the related circular to shareholders. The Company received from each Independent Non-Executive Director an annual confirmation of his or her independence with regard to 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. The Nomination Committee also reviewed Director independence in a meeting held in November 2018. (See “Corporate Governance Report” and “Nomination Committee Report”.) The names of Directors who have served on the boards of the subsidiaries of the Company during the year and up to the date of this report are available on the Company’s website: www.hysan.com.hk. 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 “Corporate Governance Report” on pages 58 to 79. SUBSTANTIAL SHAREHOLDERS’ AND OTHER PERSONS’ INTERESTS IN SHARES As at 31 December 2018, 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 SFO, or as otherwise notified to the Company, were as follows: Aggregate long positions in shares and underlying shares of the Company Name Capacity Number of ordinary shares held Lee Hysan Company Limited Beneficial owner 433,130,735 Silchester International Investors LLP Investment manager 83,489,000 First Eagle Investment Management, LLC Investment manager 52,460,214 % of the total no. of issued shares (Note) 41.39 7.98 5.01 Note: The percentage was compiled based on the total number of issued shares of the Company as at 31 December 2018 (i.e. 1,046,501,891 ordinary shares). Apart from the above, no other interest or short position in the shares or underlying shares of the Company were recorded in the register that is required to be kept under section 336 of the SFO as at 31 December 2018. 110 Hysan Annual Report 2018Directors’ Report continued 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 and that were negotiated on normal commercial terms and on an arm’s length basis. Further details are set out in note 35 to the consolidated financial statements. Some of these transactions also constituted “Continuing Connected Transactions” under the Listing Rules, as identified below. CONTINUING CONNECTED TRANSACTIONS Certain transactions entered into by the Group constituted continuing connected transactions that were subject to the notification and announcement requirements but exempt from the circular and shareholders’ approval requirements under Rule 14A.76(2) of the Listing Rules during the year (the “Transactions”). Details of the Transactions required to be disclosed are set out as follows: I. Leases granted by the Group Lee Garden Two, 28 Yun Ping Road, Hong Kong (“Lee Garden Two”) The following lease arrangements were entered into by Barrowgate Limited (“Barrowgate”), a 65.36% subsidiary of the Company and the property owner of Lee Garden Two, as landlord, with the following connected persons: Connected person Date of agreement Term Premises (i) Jebsen and Company Limited (Note b) (ii) Treasure Matrix Limited (Notes g & h) (1) (2) (1) (2) (3) (4) 28 March 2013 (Existing Lease and Carpark Licence Agreements) (as amended – Notes c & f) 22 June 2018 (Lease, Carpark Licence Agreements and Licence Agreements to renew, among others, item (1)) (Notes e & f) 28 March 2014 (Lease and Licence Agreements) (as amended – Notes i & k) 27 March 2017 (Licence Agreement) (Notes j & k) 27 March 2017 (Licence Agreement) (Notes j & k) 28 June 2018 (Surrender Agreement) (Note l) Annual consideration (Note a) 2018: HK$37,949,209 2019: HK$38,723,268 2020: HK$38,723,268 2021: HK$25,815,512 (on pro-rata basis) (Note m) 5 years commencing from 1 September 2013 (Note d) Office units on the 28th, 30th and 31st Floors and 3 carparking spaces Renewed for further 3 years commencing from 1 September 2018 Office units on the 28th, 30th and 31st Floors, 4 carparking spaces and 2 portions of spaces near the carparking spaces 5 years commencing from 28 March 2014 (Note d) Shop Nos. 308 & 311 on the 3rd Floor (connected to an outdoor garden) 2018: HK$3,590,119 (on pro-rata basis) (Note n) 1 year, 3 months and 27 days commencing from 1 December 2017 1 year, 4 months and 27 days commencing from 1 November 2017 Portion 1 on the 3rd Floor Various storerooms and advertising spaces Early termination with effect from 15 July 2018 All premises set out in items (1) to (3) 111 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness Performance CONTINUING CONNECTED TRANSACTIONS continued II. Provision of leasing and property management services to a non wholly-owned subsidiary regarding Lee Garden 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 in respect of Lee Garden Two: Connected person Date of agreement Term Premises Barrowgate Limited 22 March 2016 3 years commencing from 1 April 2016 Whole premises of Lee Garden Two Consideration received during the year HK$27,941,068 (Note o) (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 Garden Two: Connected person Date of agreement Term Premises Barrowgate Limited 22 March 2016 3 years commencing from 1 April 2016 Whole premises of Lee Garden Two Notes: Consideration received during the year HK$4,234,637 (Note o) (a) The annual considerations were based on current rates of rental (including estimated turnover rent, where applicable), operating charges, (for retail premises) promotion levies and licence fees for each of the relevant financial years as provided in the relevant agreements. The rental, operating charges, promotion levies and licence fees (as the case may be) are payable monthly in advance. (b) Jebsen and Company Limited (“Jebsen and Company”) is a beneficial substantial shareholder of Barrowgate and has an equity interest of 10% in Barrowgate. Jebsen Hans Michael, Non-Executive Director of the Company, is a controlling shareholder of Jebsen and Company. (c) On 16 August 2016, a memorandum was entered into, pursuant to which the rent for the period from 1 September 2016 to 31 August 2018 was reviewed and revised to the then prevailing market rent. (d) The terms of the agreements mentioned under I (i)(1) and I (ii)(1) above exceed 3 years. According to the Listing Rules requirement, an independent financial adviser to the Board was engaged in each case. The advisor formed the view, in each case, that a term with a duration period longer than 3 years was required and it was normal business practice for leases of this type to be of such duration. (e) The Hysan Group has also been leasing to Jebsen and Company a carparking space and 2 portions of spaces at Lee Garden Two. These transactions on their own constituted continuing connected transactions of the Company, and as such were fully exempted from Chapter 14A requirements since the annual consideration under the agreements fall below the applicable de minimis threshold under the Listing Rules. For the purposes of renewing these existing lease and licence agreements, on 22 June 2018, new lease and licence agreements were entered into to renew the leasing of office units on 28th, 30th and 31st Floors, and the licensing of 4 car parking spaces and 2 portions of spaces near the car parking spaces, at Lee Garden Two. (f) As the aggregated annual consideration under the lease and various licence agreements entered into with Jebsen and Company exceeds the applicable de minimis threshold under the Listing Rules, they constituted continuing connected transactions of the Company, being subject to announcement requirements but exempted from independent shareholders’ approval requirements. (g) Treasure Matrix Limited (“Treasure Matrix”) is a wholly-owned subsidiary of the Company. (h) Under these transactions, Barrowgate was considered a connected person of the Company under the Listing Rules by virtue of it being a non wholly-owned subsidiary of the Company and also by having a substantial shareholder which is an associate of Jebsen Hans Michael, Non- Executive Director of the Company. (i) On 27 March 2017, a memorandum was entered into, pursuant to which the rent for the period from 28 March 2017 to 27 March 2019 was reviewed and revised to the then prevailing market rent. (j) The licence agreements on their own constituted continuing connected transactions of the Company. These were fully exempted from Chapter 14A requirements as the annual consideration under the licence agreements fall below the applicable de minimis threshold under the Listing Rules. (k) As the aggregated annual consideration under the lease and various licence agreements entered into with Treasure Matrix exceeds the applicable de minimis threshold under the Listing Rules, they constituted continuing connected transactions of the Company, being subject to announcement requirements but exempted from independent shareholders’ approval requirements. (l) On 28 June 2018, a surrender agreement was entered into to terminate the lease and various licence agreements with effect from the surrender date (i.e. 15 July 2018). (m) Office monthly operating charges for Lee Garden Two were revised with effect from 1 January 2018 and 1 January 2019. (n) Retail monthly operating charges and promotion levies for Lee Garden Two were revised with effect from 1 January 2018. (o) These represent the actual consideration received for the year ended 31 December 2018, calculated on the basis of the fee schedules as prescribed in the respective management agreements. 112 Hysan Annual Report 2018Directors’ Report continued CONTINUING CONNECTED TRANSACTIONS continued All the Transactions were entered in the ordinary and usual course of business of the respective companies within the Group, 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 insofar as they are applicable. Pursuant to Rule 14A.56 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 (Revised) “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 its unqualified letter containing its findings and conclusions in respect of the continuing connected transactions disclosed by the Group on pages 111 to 112 of the Annual Report in accordance with Rule 14A.56 of the Listing Rules. A copy of the auditor’s letter has been provided by the Company to the Stock Exchange. The Company’s Internal Audit has reviewed the Transactions and the related internal control procedures, and concluded that the internal control procedures are adequate and effective. 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 Group; 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 interests of the Company’s shareholders as a whole. INTEREST IN CONTRACTS OF SIGNIFICANCE The lease, carpark licence agreements and licence agreements between Jebsen and Company and Barrowgate is considered a contract of significance under paragraph 15 of Appendix 16 to the Listing Rules due to its annual consideration having a percentage ratio of 0.98% from the calculation of the revenue test (the percentage ratios for assets ratio and consideration ratio are 0.04% and 0.10% respectively). Details of the transaction are set out under I(i) of “Continuing Connected Transactions”. MAJOR CUSTOMERS AND SUPPLIERS During the year, 23.99% of the aggregate amount of purchases was attributable to the Group’s 5 largest suppliers, with the largest supplier accounting for 8.46% to the Group’s total purchases. The aggregate amount of turnover attributable to the Group’s 5 largest customers was less than 30% (being the Listing Rule disclosure threshold) of total turnover of the Group. None of the Directors, their close associates or any shareholder (which to the knowledge of the Directors owns more than 5% of the Company’s issued shares) had any interest in the Group’s 5 largest suppliers. PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES During the year ended 31 December 2018, neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities. ISSUANCE OF SECURITIES During the year ended 31 December 2018, 677,000 shares were issued by the Company as a result of the exercise of share options granted under the share option schemes of the Company. For further details, please refer to the paragraphs headed “Movement of share options” in the Remuneration Committee Report. During the year, HK$300 million 3.66% Fixed Rate Note which will be due in November 2025 has been issued for general corporate purposes under the US$1.5 billion Medium Term Note Programme (“MTN Programme”), and is unconditionally and irrevocably guaranteed by the Company. The issuer under the MTN Programme is Hysan (MTN) Limited, a company incorporated in the British Virgin Islands and a direct wholly-owned subsidiary of the Company. For further details of the above mentioned Fixed Rate Note, please refer to note 27 to the consolidated financial statements. Save as disclosed above, the Group has not issued any debentures during the year. 113 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformancePUBLIC FLOAT Based on the information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the prescribed amount of public float during the year and up to the date of this report as required under the Listing Rules. DONATIONS During the year, the Group made donations of approximately HK$0.3 million to charitable and non-profit-making organisations. PERMITTED INDEMNITY PROVISION Pursuant to the Articles, every Director shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities incurred by him or her in the execution of the duties of his or her office or in relation thereto. The Directors and Officers Liability Insurance (“D&O Insurance”) taken out by the Company throughout the year provides adequate cover for such indemnities to all the Directors of the Company and its subsidiaries. The relevant provisions in the Articles and the D&O Insurance were in force during the financial year ended 31 December 2018 and as of the date of this report. AUDITOR A resolution for the re-appointment of Deloitte Touche Tohmatsu as auditor of the Company is to be proposed at the 2019 AGM. By Order of the Board Lee Irene Yun-Lien Chairman Hong Kong, 21 February 2019 114 Hysan Annual Report 2018Directors’ Report continued4 Financial Statements, Valuation and Other Information 116 Directors’ Responsibility for the 127 Significant Accounting Policies Financial Statements 117 Independent Auditor’s Report 137 Notes to the Consolidated Financial Statements 121 Consolidated Statement of 175 Financial Risk Management Profit or Loss 122 Consolidated Statement of Comprehensive Income 123 Consolidated Statement of Financial Position 124 Consolidated Statement of Changes in Equity 126 Consolidated Statement of Cash Flows 185 Five-Year Financial Summary 187 Report of the Valuer 188 Schedule of Principal Properties 189 Shareholding Analysis 190 Shareholder Information 192 Corporate Information 115 OverviewCorporate GovernanceFinancial Statements and ValuationBusiness PerformanceThe Hong Kong 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. 116 Hysan Annual Report 2018Directors’ Responsibility for the Financial StatementsINDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF HYSAN DEVELOPMENT COMPANY LIMITED (incorporated in Hong Kong with limited liability) Opinion 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 121 to 184, which comprise the consolidated statement of financial position as at 31 December 2018, and the consolidated statement of profit or loss and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including significant accounting policies and financial risk management. In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2018, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance. Basis for Opinion We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (the “Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 117 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationIndependent Auditor’s Report Key Audit Matters continued Valuation of investment properties We identified the valuation of investment properties as a key audit matter due to the inherent level of subjective judgements and estimates required in determining the fair values. The Group’s investment property portfolio comprises retail, office and residential properties mainly located in Causeway Bay, Hong Kong and is stated at fair value of HK$77,442 million, accounting for approximately 89% of the Group’s total assets as at 31 December 2018 with a fair value gain of HK$3,532 million recognised in the consolidated statement of profit or loss for the year then ended. All of the Group’s investment properties are measured using the fair value model based on a valuation performed by an independent qualified professional valuer (the “Valuer”). As disclosed in note 3 of the Notes to the Consolidated Financial Statements section of the consolidated financial statements, in determining the fair values of the Group’s investment properties, the Valuer has applied a market value basis which involves, inter-alia, certain estimates, including appropriate capitalisation rates and reversionary income potential of the investment properties in determining the fair values. How our audit addressed the key audit matter Our procedures in relation to the valuation of investment properties included: • • • Evaluating the competence, capabilities, and objectivity of the Valuer and obtaining an understanding of the Valuer’s scope of work and their terms of engagement; Evaluating the appropriateness of the Valuer’s valuation approaches to assess if they meet the requirements of the HKFRSs and industry norms; Challenging the reasonableness of the key assumptions applied based on available market data and our knowledge of the property industry in Hong Kong; and • Obtaining the detailed work of the Valuer on selected investment properties to evaluate the accuracy and relevance of key data inputs underpinning the valuation, such as rental income, term of existing leases by comparing them to the existing leases summary of the Group or reversionary income potential by comparing fair market rents estimated by the Valuer against recent lease renewals and evaluating whether capitalisation rates adopted are comparable to the market. Other Information The Directors of the Company are responsible for the other information. The other information comprises the information included in the annual report, but does not include the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 118 Hysan Annual Report 2018Independent Auditor’s Report continued Responsibilities of Directors and Those Charged with Governance for the Consolidated Financial Statements The Directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with HKFRSs issued by the HKICPA 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. In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion solely to you, as a body, in accordance with section 405 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. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 119 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationAuditor’s Responsibilities for the Audit of the Consolidated Financial Statements continued From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in the independent auditor’s report is Lee Wing Cheong, Wilfred. Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 21 February 2019 120 Hysan Annual Report 2018Independent Auditor’s Report continued Turnover Property expenses Gross profit Other income 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 2018 HK$ million 2017 HK$ million 4 9 6 7 8 9 14 3,890 (523) 3,367 – 78 (16) (227) (222) 3,532 288 6,800 (481) 6,319 6,033 286 6,319 3,548 (449) 3,099 261 69 – (247) (158) 853 220 4,097 (484) 3,613 3,636 (23) 3,613 576.66 576.39 347.78 347.68 121 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationConsolidated Statement of Profit or LossFor the year ended 31 December 2018 Profit for the year Other comprehensive (expenses) income Item that will not be reclassified subsequently to profit or loss: Gains on revaluation of properties held for own use Items that may be reclassified subsequently to profit or loss: Net adjustments to hedging reserve Share of translation reserve of an associate Other comprehensive (expenses) 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 2018 HK$ million 6,319 2017 HK$ million 3,613 Note 10 47 (5) (172) (177) (130) 6,189 5,903 286 6,189 38 (55) 240 185 223 3,836 3,859 (23) 3,836 122 Hysan Annual Report 2018Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2018 Non-current assets Investment properties Property, plant and equipment Investments in associates Loans to associates Investment in a joint venture Loans to a joint venture Fund investment Term notes Other financial assets Other receivables Current assets Accounts and other receivables Term notes Other financial assets Time deposits Cash and cash equivalents Current liabilities Accounts payable and accruals Other financial liabilities Deposits from tenants Amounts due to non-controlling interests Borrowings Taxation payable Net current assets Total assets less current liabilities Non-current liabilities Borrowings Other financial liabilities 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 2018 HK$ million 2017 HK$ million 15 16 18 18 19 19 20 21 22 23 23 21 22 24 24 25 22 26 27 27 22 28 29 77,442 747 3,708 11 145 1,062 294 – 1 386 83,796 203 227 – 748 2,069 3,247 873 – 331 223 300 108 1,835 1,412 85,208 6,022 26 669 854 7,571 72,470 751 3,779 10 147 982 21 228 2 332 78,722 226 509 1 628 2,034 3,398 736 1 389 327 150 158 1,761 1,637 80,359 6,035 30 506 787 7,358 77,637 73,001 7,718 66,713 74,431 3,206 77,637 7,692 62,261 69,953 3,048 73,001 The consolidated financial statements on pages 121 to 184 were approved and authorised for issue by the Board of Directors on 21 February 2019 and are signed on its behalf by: Lee Irene Y.L. Director Lee T.H. Michael Director 123 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationConsolidated Statement of Financial PositionAs at 31 December 2018 As at 1 January 2017 Profit for the year Net losses arising from hedging instruments Reclassification adjustments for net losses included in profit or loss Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use (note 28) Share of translation reserve of an associate Total comprehensive (expenses) income for the year Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share options Dividends paid during the year (note 13) Deemed acquisition of additional equity interest in a subsidiary As at 31 December 2017 Opening adjustment on HKFRS 9 (note 2) As at 1 January 2018 (restated) Profit for the year Net losses arising from hedging instruments Reclassification adjustments for net losses included in profit or loss Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use (note 28) Share of translation reserve of an associate Total comprehensive (expenses) income for the year Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share options Dividends paid during the year (note 13) As at 31 December 2018 Attributable to owners of the Company Share capital HK$ million 7,673 Share options reserve HK$ million 24 General reserve HK$ million 100 – – – – – – – 19 – – – – 7,692 – 7,692 – – – – – – – 26 – – – 7,718 – – – – – – – (4) 4 (3) – – 21 – 21 – – – – – – – (5) 4 (1) – 19 – – – – – – – – – – – (4) 96 – 96 – – – – – – – – – – – 96 Attributable to owners of the Company Investments revaluation reserve HK$ million Hedging reserve HK$ million Properties revaluation reserve HK$ million Translation reserve HK$ million 38 Retained profits HK$ million 59,271 3,636 Total HK$ million 67,490 3,636 Non- controlling interests HK$ million 3,195 (23) Total HK$ million 70,685 3,613 1 – – – – – – – – – – – – 1 – 1 – – – – – – – – – – – 1 12 – (49) (6) (55) (43) (43) (7) (5) – – – – – – – – – – 2 – – – – – – – 371 – – – 46 (8) – 38 – – – – – – – – – – – – – 409 409 56 (9) – 47 240 240 – – – – – – – – – – – – – – – – – – – – 3,636 3,859 (23) 3,836 (1,411) (128) (1,539) 278 61,499 3,048 73,001 278 (6) 61,493 6,033 3,048 286 72,995 6,319 – – – – – – – 3 – – – – – – – – 1 (49) (6) 46 (8) 240 15 4 – (1,411) (4) 69,953 (6) 69,947 6,033 2 (7) 56 (9) (172) 5,903 21 4 – – – – – – – – – 4 – – – – – – – – – (49) (6) 46 (8) 240 15 4 – – (6) 2 (7) 56 (9) (172) 6,189 21 4 – (1,572) 77,637 (172) (172) 6,033 286 (48) 456 106 (1,444) 66,083 (1,444) 74,431 (128) 3,206 124 Hysan Annual Report 2018Consolidated Statement of Changes in EquityFor the year ended 31 December 2018 As at 1 January 2017 Profit for the year Net losses arising from hedging instruments Reclassification adjustments for net losses included in profit or loss Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use (note 28) Share of translation reserve of an associate Total comprehensive (expenses) income for the year Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share options Dividends paid during the year (note 13) Deemed acquisition of additional equity interest in a subsidiary As at 31 December 2017 Opening adjustment on HKFRS 9 (note 2) As at 1 January 2018 (restated) Profit for the year Net losses arising from hedging instruments Reclassification adjustments for net losses included in profit or loss Gain on revaluation of properties held for own use Deferred taxation arising on revaluation of properties held for own use (note 28) Share of translation reserve of an associate Total comprehensive (expenses) income for the year Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share options Dividends paid during the year (note 13) As at 31 December 2018 Attributable to owners of the Company Share capital 7,673 Share options reserve General reserve 24 100 HK$ million HK$ million HK$ million 19 7,692 7,692 – – – – – – – – – – – – – – – – – – – – – – 26 – – – – – – – – – – – – – – – – – (4) 4 (3) 21 21 (5) (1) 4 – 19 (4) 96 96 – – – – – – – – – – – – – – – – – – – – – – – 7,718 96 Attributable to owners of the Company Investments revaluation reserve HK$ million Hedging reserve HK$ million Properties revaluation reserve HK$ million Translation reserve HK$ million 12 – (49) (6) – – – (55) – – – – – (43) – (43) – 2 (7) – – – (5) – – – – 371 – – – 46 (8) – 38 – – – – – 409 – 409 – – – 56 (9) – 47 – – – – 38 – – – – – 240 240 – – – – – 278 – 278 – – – – – (172) (172) – – – – Retained profits HK$ million 59,271 Total HK$ million 67,490 Non- controlling interests HK$ million 3,195 Total HK$ million 70,685 3,636 – – – – – 3,636 – – 3 (1,411) – 3,636 (49) (6) 46 (8) 240 3,859 15 4 – (1,411) (4) (23) – – – – – (23) – – – (128) 4 3,613 (49) (6) 46 (8) 240 3,836 15 4 – (1,539) – 61,499 69,953 3,048 73,001 (6) 61,493 6,033 – – – – – 6,033 – – 1 (1,444) (6) 69,947 6,033 2 (7) 56 (9) (172) 5,903 21 4 – (1,444) – 3,048 286 – – – – – 286 – – – (128) (6) 72,995 6,319 2 (7) 56 (9) (172) 6,189 21 4 – (1,572) 1 – – – – – – – – – – – – 1 – 1 – – – – – – – – – – – 1 (48) 456 106 66,083 74,431 3,206 77,637 125 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation Operating activities Profit before taxation Adjustments for: Other income Net interest income Other gains and losses Loss on disposal of property, plant and equipment Depreciation of property, plant and equipment Share-based payment expenses Finance costs Change in fair value of investment properties Share of results of associates Operating cash flows before movements in working capital Increase in accounts and other receivables Increase in accounts payable and accruals Increase (decrease) in deposits from tenants Cash generated from operations Hong Kong Profits Tax paid Hong Kong Profits Tax refunded Net cash from operating activities Investing activities Payments in respect of investment properties Purchases of property, plant and equipment Advance to associates Dividends received from an associate Advance to a joint venture Repayment from a joint venture Payment in respect of fund investment Proceeds upon maturity of term notes Interest received Additions to time deposits with original maturity over three months Proceeds upon maturity of time deposits with original maturity over three months Net cash (used in) from investing activities Financing activities Payment of finance costs New bank loans Repayment of bank loans Issuance of fixed rate note Repayment of fixed rate note Repayment to non-controlling interest of a subsidiary Proceeds on exercise of share options Dividends paid Dividends paid to non-controlling interests of a subsidiary Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents as at 1 January Cash and cash equivalents as at 31 December 126 Notes 2018 HK$ million 2017 HK$ million 6,800 4,097 – (78) 16 – 17 4 222 (3,532) (288) 3,161 (102) 60 105 3,224 (475) 2 2,751 (1,239) (26) (1) 184 (56) – (290) 500 58 (1,722) 1,602 (990) (221) – – 300 (150) (104) 21 (1,444) (128) (1,726) 35 2,034 2,069 (261) (69) – 7 22 4 158 (853) (220) 2,885 (12) 49 (22) 2,900 (416) 6 2,490 (2,126) (14) (10) 178 (63) 998 (21) 431 38 (2,647) 3,282 46 (215) 1,410 (1,540) – – – 15 (1,411) (128) (1,869) 667 1,367 2,034 31 31 31 31 24 Hysan Annual Report 2018Consolidated Statement of Cash FlowsFor the year ended 31 December 2018 These consolidated 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. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. These consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Hong Kong Companies Ordinance (“CO”). In addition, the consolidated financial statements include applicable disclosures required by the Rules Governing the Listing of Securities (“Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). 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 and its subsidiaries. Control is achieved when the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss from the date the Group gains control until the date when the Group ceases to control the subsidiary. 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 attributable to owners of the Company therein. Total comprehensive income and expenses of a subsidiary are attributed to the owners of the Company and to the non- controlling interests even if this results in the non-controlling interests having a deficit balance. INVESTMENTS IN ASSOCIATES AND A JOINT VENTURE 2. An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of parties sharing control. The results, assets and liabilities of associate or joint venture are incorporated in the consolidated financial statements using the equity method of accounting. The financial statements of associate or joint venture used for equity accounting purposes are prepared using uniform accounting policies as those of the Group for like transactions and events in similar circumstances. Under the equity method, investments in associate or joint venture are initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or joint venture equals or exceeds its interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate or joint venture. 127 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationSignificant Accounting PoliciesFor the year ended 31 December 2018INVESTMENTS IN ASSOCIATES AND A JOINT VENTURE continued 2. The Group assesses whether there is an objective evidence that the interest in an associate or a joint venture may be impaired. When an objective evidence exists, the entire carrying amount of the investment is tested for impairment in accordance with HKAS 36 “Impairment of Assets” as a single asset by comparing its recoverable amount (higher of value in use and fair value less cost of disposal) with its carrying amount, any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with HKAS 36 to the extent that the recoverable amount of the investment subsequently increases. Where a group entity transacts with its associate or joint venture, profits or losses resulting from the transactions with the associate or joint venture are recognised in the Group’s consolidated financial statements only to the extent of the interests in the associate or joint venture that are not related to the Group. INVESTMENT PROPERTIES 3. Investment properties are properties held to earn rental and/or for capital appreciation including properties under redevelopment for such proposes. Investment properties are initially measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are measured at their fair values using the fair value model. Gains or losses arising from changes in the fair value of investment properties are included in profit or loss for the period in which they arise. Construction costs incurred for investment properties under redevelopment are capitalised as part of the carrying amount of the investment properties under redevelopment. Investment properties under redevelopment are measured at fair value at the end of the reporting period. Any difference between the fair value of the investment properties under redevelopment and their carrying amount is recognised in profit or loss in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use or no future economic benefits are expected from its disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit or loss in the period in which the item is derecognised. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment including land and buildings held for use in the production or supply of goods or services, or for administrative purposes are stated at cost or fair value less subsequent accumulated depreciation and accumulated impairment losses. Any revaluation increase arising on revaluation of land and buildings is recognised in other comprehensive income and accumulated in the properties revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously charged. A decrease in carrying amount arising on revaluation of an asset is recognised in profit or loss to the extent that it exceeds the balance, if any, on the properties revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the corresponding revaluation surplus is transferred to retained profits. If an item of property, plant and equipment becomes an investment property because its use has changed as evidenced by end of owner-occupation, any difference between the carrying amount and the fair value of that item (including the relevant prepaid lease payments) at the date of transfer is recognised in other comprehensive income and accumulated in property revaluation reserve. On the subsequent sale or retirement of the asset, the relevant revaluation reserve will be transferred directly to retained profits. Depreciation is recognised so as to write off the cost or fair value of items of property, plant and equipment less their estimated residual values over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of the reporting period, with the effect of any changes in estimate accounted for on a prospective basis. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. 128 Hysan Annual Report 2018Significant Accounting Policies continuedFor the year ended 31 December 2018IMPAIRMENT OF NON-FINANCIAL ASSETS 5. At the end of the reporting period, the Group 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. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, except for certain properties which are carried at revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 6. FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised in the consolidated 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 except for accounts receivables arising from contract with customers which are initially measured in accordance with HKFRS 15 “Revenue from Contracts with Customers” since 1 January 2018. 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 (“FVTPL”)) 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 FVTPL are recognised immediately in profit or loss. Financial assets 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. (a) 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 FVTPL 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. (i) 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 from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest income is recognised on an effective interest basis for debt instruments measured subsequently at amortised cost and is included in the investment income as disclosed in note 6 of the Notes to the Consolidated Financial Statements section. 129 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation6. FINANCIAL INSTRUMENTS continued Financial assets continued (a) Classification of financial assets continued (ii) Financial assets at FVTPL Financial assets at FVTPL include derivatives that are not designated and effective as hedging instruments, club debentures and fund investment. Investments in equity instruments are classified as 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. Debt instruments that do not meet the amortised cost criteria (see (a) above) are measured at FVTPL. In addition, debt instruments that meet the amortised cost criteria may be designated as 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. 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 the 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. Fair value is determined in the manner described in note 4 of the Financial Risk Management section. The Group has not designated any debt instrument as at FVTPL or reclassified any debt instruments to or from FVTPL since the application of the 2010 version of the Hong Kong Financial Reporting Standard (“HKFRS”) 9 “Financial Instruments”. Interest income on debt instruments at FVTPL is included in the other gains or losses described above. (b) Impairment of financial assets Impairment under HKAS 39 prior to 1 January 2018 Financial assets subsequently measured at amortised cost are assessed for indicators of impairment at the end of the reporting period. These financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after their initial recognition, the estimated future cash flows have been affected. Objective evidence of impairment could include: • • • 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. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, observable changes in national or local economic conditions that correlate with default on receivables. 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. The carrying amount of the financial asset is reduced by the impairment loss directly for all categories with the exception of accounts receivable, 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 is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss. 130 Hysan Annual Report 2018Significant Accounting Policies continuedFor the year ended 31 December 20186. FINANCIAL INSTRUMENTS continued Financial assets continued (b) Impairment of financial assets continued Impairment under HKAS 39 prior to 1 January 2018 continued 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 loss was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date of impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Impairment under Expected Credit Losses (“ECL”) model at and after 1 January 2018 The Group recognises a loss allowance for ECL on financial assets which are subject to impairment under HKFRS 9. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition. Lifetime ECL represents the ECL that will result from default events over the expected life of the relevant instrument. In contrast, 12-month ECL (“12m ECL”) represents the portion of lifetime ECL that is expected to result from default events that are possible within 12 months after the reporting date. Assessment are done based on both quantitative and qualitative information combined with current conditions and forward-looking analysis. The Group evaluates the financial instruments on a collective basis, taking into account the instrument type, maturity date, and other relevant information with reference to the default rates of the counter parties of the instruments. The Group recognises lifetime ECL for accounts receivables. The ECL on these assets are assessed individually for debtors with significant balances. For financial assets at amortised cost, the Group measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since initial recognition, the Group recognises lifetime ECL. The assessment of whether lifetime ECL should be recognised is based on significant increases in the likelihood or risk of a default occurring since initial recognition. Measurement and recognition of ECL The measurement of ECL is a function of probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information. Generally, the ECL is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the discount rate determined at initial recognition. For a lease receivable, the cash flows used for determining the ECL is consistent with the cash flows used in measuring the lease receivable in accordance with HKAS 17. For a financial guarantee contract, the Group is required to make payments only in the event of a default by the debtor in accordance with the terms of the instrument that is guaranteed. Accordingly, the expected loss is the present value of the expected payment to reimburse the holder for a credit loss that it incurs less any amounts that the Group expects to receive from the holder, the debtor or any other party. Interest income is calculated based on the gross carrying amount of the financial assets unless the financial asset is credit impaired, in which case interest income is calculated based on amortised cost of the financial asset. The Group recognises an impairment gain or loss in profit or loss for all financial instruments by adjusting their carrying amounts, with the exception of account receivables, term notes and loans to a joint venture where the corresponding adjustment is recognised through a loss allowance account. For financial guarantee contracts, the loss allowances are recognised at the higher of the amount of the loss allowance determined in accordance with HKFRS 9; and the amount initially recognised less, where appropriate, cumulative amount of income recognised over the guarantee period. 131 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation6. FINANCIAL INSTRUMENTS continued Financial assets continued (c) 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 has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, except for a financial asset that is classified as FVTOCI, the difference between the asset’s carrying amount and the sum of the consideration received and receivable 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 instruments (a) Classification and measurement Financial liabilities and equity instruments issued by a group entity are classified as financial liabilities or equity instruments 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 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 accounting policies adopted in respect of financial liabilities and equity instruments are set out below. (i) 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 (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 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 or losses. (ii) 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. (iii) Financial liabilities at amortised cost Financial liabilities (including accounts payable and accruals, 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 7 of the Notes to the Consolidated Financial Statements section. (iv) 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. (v) Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee contract is measured initially at their fair values. It is subsequently measured at the higher of: • the amount of the loss allowance determined in accordance with HKFRS 9 (since 1 January 2018)/the amount of obligation determined in accordance with HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets” (before application of HKFRS 9 on 1 January 2018); and • the amount initially recognised less, where appropriate, cumulative amortisation recognised over the guarantee period. 132 Hysan Annual Report 2018Significant Accounting Policies continuedFor the year ended 31 December 20186. FINANCIAL INSTRUMENTS continued Financial liabilities and equity instruments continued (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 foreign exchange rate risks, including foreign exchange forward contracts. Further details of derivative financial instruments are disclosed in note 22 of the Notes to the Consolidated Financial Statements section. Derivatives are initially recognised at fair value at the date a derivative contract is entered 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. Hedge accounting The Group designates certain derivatives as hedging instruments for 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 effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again. Note 22 of the Notes to the Consolidated Financial Statements section sets out details of the fair values of the derivative instruments used for hedging purposes. (a) 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 or losses. 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 statement of profit or loss as the recognised hedged item. Upon discontinuation of the hedging relationship of a cash flow hedge, 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. (b) Discontinuation of hedges The Group discontinues hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a part of it (in which case hedge accounting continues for the remainder of the hedging relationship). 133 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation7. REVENUE RECOGNITION The Group recognises revenue from the following major sources: • • Leasing of investment properties Provision of property management services The Group’s accounting policies for rental income are included under “Leases” and accounting policies for revenue from property management services are as below: Prior to 1 January 2018 Revenue is measured at the fair value of the consideration received or receivable. Management fee income is recognised when services are rendered. Upon application of HKFRS 15 at 1 January 2018 and after Revenue is measured at the fair value of the consideration received or receivable. HKFRS 15 introduces a 5-step approach when recognising revenue: • • • • • Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the Group satisfies a performance obligation Under HKFRS 15, the Group recognises revenue when (or as) a performance obligation is satisfied i.e. when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. A performance obligation represents goods and services (or a bundle of goods or services) that are distinct or a series of distinct goods or services that are substantially the same. Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met: • • • the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs; the Group’s performance creates and enhances an asset that the customer controls as the Group performs; or the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct goods or service. Revenue from provision of property management services is recognised over time. 8. 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. Contingent rent is recognised when earned. For early termination of leases, surrender compensation from tenant is recognised in profit or loss only upon fulfilment of all conditions set out in the surrender agreement. 134 Hysan Annual Report 2018Significant Accounting Policies continuedFor the year ended 31 December 20189. 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. 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. 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. 10. 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. 11. 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. 12. TAXATION Income tax expense represents the sum of the tax currently payable and deferred tax. (a) Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxation as reported in the consolidated statement of profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. (b) Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated 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 the initial recognition of 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 an associate, and interests in a joint venture, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets 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. 135 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation12. TAXATION continued (b) Deferred tax continued 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 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 for investment properties that are measured using the fair value model in accordance with HKAS 40 “Investment Property”, such properties’ value is 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 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 for such investment properties are measured in accordance with the above general principles set out in HKAS 12 “Income Taxes” (i.e. based on the expected manner as to how the properties will be recovered). Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. 13. EQUITY-SETTLED SHARE-BASED PAYMENTS 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 revises its 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 capital. 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. 14. FAIR VALUE MEASUREMENT Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of HKFRS 2 “Share-based Payment”, leasing transactions that are within the scope of HKAS 17 “Leases”, and measurements that have some similarities to fair value but are not fair value, such as value in use in HKAS 36 “Impairment of Assets”. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. 136 Hysan Annual Report 2018Significant Accounting Policies continuedFor the year ended 31 December 2018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 consolidated 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”) New and amendments to HKFRSs that are mandatorily effective for the current year In the current year, the Group has applied all of the new and amendments to HKFRSs issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) that are relevant to its operations and effective for the Group’s financial year beginning on 1 January 2018. Except as described below, the application of these new and amendments to HKFRSs had no material effect on the results and financial position of the Group for the current and/or prior accounting years. HKFRS 15 “Revenue from Contracts with Customers” In the current year, the Group has applied HKFRS 15 on limited retrospective basis. HKFRS 15 superseded HKAS 18 “Revenue”, HKAS 11 “Construction Contracts” and the related interpretations with no material effect on timing and amount of revenues recognised in these consolidated financial statements and balances related to contracts with customers as at 1 January 2018. Additional disclosure required under HKFRS 15 is included in the Notes to the Consolidated Financial Statements section. HKFRS 9 “Financial Instruments” Except for the 2010 versions of HKFRS 9 and the new requirements for hedge accounting issued in 2013 that were early applied by the Group in previous years, the Group has applied the remaining sections of HKFRS 9 and the related consequential amendments to other HKFRSs in the current year, whereas the introduction of new requirements for expected credit losses (“ECL”) for financial assets is relevant to the Group. The Group has applied HKFRS 9 in accordance with the transition provisions set out in HKFRS 9, i.e. applied the requirements for ECL retrospectively to instruments that have not been derecognised as at 1 January 2018 (date of initial application) and has not applied the requirements to instruments that have already been derecognised as at 1 January 2018. The difference between carrying amounts as at 31 December 2017 and the carrying amounts as at 1 January 2018 are recognised in the opening retained profits, without restating comparative information. Accordingly, certain comparative information may not be comparable as comparative information was prepared under HKAS 39 “Financial Instruments: Recognition and Measurement”. Accounting policies resulting from application of HKFRS 9 are disclosed in the “Significant Accounting Policies” section. Summary of financial impact arising from initial application of ECL model under HKFRS 9 As at 1 January 2018, the Directors of the Company reviewed and assessed the Group’s existing financial assets at amortised cost for impairment using reasonable and supportable information that is available without undue cost or effort in accordance with HKFRS 9. The results of the assessment and the impact thereof are detailed below. The table below illustrates the effect of ECL model under HKFRS 9 and HKAS 39 at the date of initial application, 1 January 2018. Closing balance at 31 December 2017 – HKAS 39 Remeasurement Impairment under ECL model Opening balance at 1 January 2018 – HKFRS 9 Loans to a joint venture HK$ million Term notes HK$ million Retained profits HK$ million 982 (5) 977 737 (1) 736 61,499 (6) 61,493 Loss allowance for financial assets at amortised cost mainly comprise of loans to a joint venture and term notes, which is assessed on 12-month ECL basis and there had been no significant increase in credit risk since initial recognition. 137 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationNotes to the Consolidated Financial StatementsFor the year ended 31 December 2018 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) continued New and amendments to HKFRSs that are mandatorily effective for the current year continued HKFRS 9 “Financial Instruments” continued Summary of financial impact arising from initial application of ECL model under HKFRS 9 continued As at 1 January 2018, the additional credit loss allowance of HK$6 million has been recognised against retained profits. The additional loss allowance is charged against the respective asset. All loss allowances for financial assets including loans to a joint venture and term notes as at 31 December 2017 reconcile to the opening carrying amount as at 1 January 2018 is as follows: As at 31 December 2017 Amount remeasured through opening retained profits As at 1 January 2018 Loss allowance for Loans to a joint venture HK$ million Term notes HK$ million – 5 5 – 1 1 The Group concluded that the probability of default of the time deposits, financial guarantee contracts and counterparty banks are insignificant and accordingly, no allowance for credit losses is provided as at 1 January 2018. New and amendments to HKFRSs in issue but not yet effective The Group has not early applied the following new and amendments to HKFRSs that have been issued but are not yet effective. HKFRS 16 HKFRS 17 HK (IFRIC) – Int 23 Amendments to HKFRS 3 Amendments to HKFRS 9 Amendments to HKFRS 10 and HKAS 28 Amendments to HKAS 28 Amendments to HKFRSs Amendments to HKAS 1 and HKAS 8 Amendments to HKAS 19 Leases1 Insurance Contracts4 Uncertainty over Income Tax Treatments1 Definition of a Business2 Prepayment Features with Negative Compensation1 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture5 Long-term interests in Associates and Joint Ventures1 Annual Improvements to HKFRSs 2015 – 2017 Cycle1 Definition of Material3 Plan Amendment, Curtailment or Settlement1 1 Effective for annual periods beginning on or after 1 January 2019, with earlier application permitted. 2 Effective for business combinations and asset acquisitions for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 January 2020, with earlier application permitted. 3 Effective for annual periods beginning on or after 1 January 2020, with earlier application permitted. 4 Effective for annual periods beginning on or after 1 January 2021, with earlier application permitted. 5 Effective for annual periods beginning on or after a date to be determined. Except for the new HKFRS mentioned below, the Directors of the Company anticipate that the application of these new standards, amendments and interpretations to HKFRSs will have no material impact on the Group’s accounting policies, results and financial position. The Group intends to elect the practical expedient not to reassess whether a contract is or contains a lease as at the date of initial application of HKFRS 16. The Group currently considers refundable deposits received of HK$1,000 million as at 31 December 2018 as obligations under leases to which HKAS 17 applies. Based on the definition of lease payments under HKFRS 16, such deposits are not payments relating to the right to use the underlying assets, accordingly, the carrying amounts of deposits may be adjusted to amortised cost upon application of HKFRS 16. Adjustments to refundable deposits received would be considered as advance lease payments from lessees. The Group expects that application of the HKFRS 16 will have no material impact to the net assets of the Group as at 1 January 2019 (date of initial application of HKFRS 16) for leases in which the Group is the lessor. 138 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 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 Group 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$77,442 million (2017: HK$72,470 million) based on the valuation performed by an independent qualified professional valuer. In determining the fair value, the valuer has applied a market value basis which involves, inter-alia, certain estimates, including appropriate capitalisation rates and reversionary income potential taking into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. In relying on the valuation, management has exercised their judgement and is satisfied that the method of valuation is reflective of the current market conditions. 4. TURNOVER Turnover represents gross rental income from leasing of investment properties and management fee income from provision of property management services 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. As at 31 December 2018, the Group has unsatisfied performance obligations in relation to the management fee income from provision of property management services with aggregate amount of the transaction price allocated approximately to HK$930 million subject to any further revision as set out in the existing contracts. Management expects that the revenue from such services are to be recognised in respective time bands similar to the future minimum lease payments that the Group has contracted with tenants as disclosed under note 34 of the Notes to the Consolidated Financial Statements section. For revenue from provision of property management services recognised over time in Hong Kong, the categories for disaggregation of revenue are consistent with the segment disclosure under note 5 of the Notes to the Consolidated Financial Statements section. 139 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation5. SEGMENT INFORMATION Based on the internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to segments and to assess their performance, the Group’s operating and reportable segments are as follows: Retail segment – leasing of space and related facilities to a variety of retail and leisure operators Office segment – leasing of high quality office space and related facilities Residential segment – leasing of luxury residential properties and related facilities Property development segment – development and sale of properties Segment turnover and results The following is an analysis of the Group’s turnover and results by operating and reportable segment. Retail HK$ million Office HK$ million Residential HK$ million Property development HK$ million Consolidated HK$ million For the year ended 31 December 2018 Turnover Leasing of investment properties Provision of property management services Segment revenue Property expenses Segment 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 For the year ended 31 December 2017 Turnover Leasing of investment properties Provision of property management services Segment revenue Property expenses Segment profit Other income Investment income Administrative expenses Finance costs Change in fair value of investment properties Share of results of associates Profit before taxation 1,764 159 1,923 (275) 1,648 1,492 196 1,688 (190) 1,498 251 28 279 (58) 221 1,781 144 1,925 (253) 1,672 1,210 149 1,359 (142) 1,217 236 28 264 (54) 210 – – – – – – – – – – 3,507 383 3,890 (523) 3,367 78 (16) (227) (222) 3,532 288 6,800 3,227 321 3,548 (449) 3,099 261 69 (247) (158) 853 220 4,097 140 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 5. SEGMENT INFORMATION continued All of the segment turnover reported above is from external customers. The accounting policies of the operating and reportable segments are the same as the Group’s accounting policies described in the “Significant Accounting Policies” section. Segment profit represents the profit earned by each segment without allocation of other income, investment income, other gains and losses, administrative expenses (including central administrative costs and directors’ emoluments), finance costs, change in fair value of investment properties and share of results of associates. This is the measure reported to the chief operating decision maker of the Group for the purpose of resource allocation and performance assessment. Segment assets The following is an analysis of the Group’s assets by operating and reportable segment. Retail HK$ million Office HK$ million Residential HK$ million Property development HK$ million Consolidated HK$ million As at 31 December 2018 Segment assets Investments in and loans to associates Fund investment Other assets Consolidated assets As at 31 December 2017 Segment assets Investments in and loans to associates Fund investment Other assets Consolidated assets 35,112 34,160 8,185 1,207 33,195 31,325 7,961 1,129 78,664 3,719 294 4,366 87,043 73,610 3,789 21 4,700 82,120 Segment assets represented the investment properties and accounts receivable of each segment and investment in and loans to a joint venture under property development segment without allocation of property, plant and equipment, investments in and loans to associates, fund investment, term notes, other financial assets, other receivables, time deposits and cash and cash equivalents. This is the measure reported to the chief operating decision maker of the Group for the purpose of monitoring segment performances and allocating resources between segments. The investment properties are included in segment assets at their fair values whilst the change in fair value of investment properties is not included in segment profit. No segment liabilities analysis is presented as the Group’s liabilities are monitored on a group basis. Other than the investment in an associate, which operates in the People’s Republic of China (the “PRC”) with carrying amounts of HK$3,715 million (2017: HK$3,779 million), all the Group’s assets are located in Hong Kong. 141 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 5. SEGMENT INFORMATION continued Other segment information For the year ended 31 December 2018 Retail HK$ million Office HK$ million Residential HK$ million Property development HK$ million Consolidated HK$ million Additions to non-current assets 1,133 202 28 For the year ended 31 December 2017 Additions to non-current assets Additions to investment properties under redevelopment (Note) 826 22 7 – – 1,363 855 1,129 1,984 Note: The investment properties under redevelopment were completed during the year ended 31 December 2017. INVESTMENT INCOME 6. The following is an analysis of investment income: Interest income Imputed interest income on interest-free loan to a joint venture Reclassification of net losses (gain) from hedging reserve on financial instruments designated as cash flow hedges 7. FINANCE COSTS Finance costs comprise: Interest on unsecured bank loans Interest on unsecured fixed rate notes Total interest expenses Other finance costs Less: amounts capitalised (Note) Net exchange losses on borrowings Reclassification of net losses from hedging reserve on financial instruments designated as cash flow hedges Medium Term Note Programme expenses 2018 HK$ million 2017 HK$ million 44 29 5 78 51 28 (10) 69 2018 HK$ million 2017 HK$ million 33 173 206 11 – 217 4 (2) 3 222 22 175 197 7 (51) 153 19 (16) 2 158 Note: During the year ended 31 December 2017, interest expenses have been capitalised to investment properties under redevelopment at an average interest rate of 3.41% per annum. 142 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 8. TAXATION Current tax Hong Kong Profits Tax – current year – overprovision in prior years Deferred tax (note 28) 2018 HK$ million 2017 HK$ million 425 (2) 423 58 481 458 (2) 456 28 484 Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit for both years. The taxation for the year can be reconciled to the profit before taxation per the consolidated statement of profit or loss 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 Recognition of previously unrecognised tax losses Overprovision in prior years Taxation for the year 2018 HK$ million 6,800 2017 HK$ million 4,097 1,122 (48) 40 (634) 11 (8) (2) 481 676 (36) 245 (393) 18 (24) (2) 484 In addition to the amount charged to the consolidated statement of profit or loss, 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 28 of the Notes to the Consolidated Financial Statements section). 9. PROFIT FOR THE YEAR Profit for the year has been arrived at after charging (crediting): Other income (Note) Auditor’s remuneration Depreciation of property, plant and equipment Gross rental income from investment properties including contingent rentals of HK$81 million (2017: HK$48 million) Less: – Direct operating expenses arising from properties that generated rental income – Direct operating expenses arising from properties that did not generate rental income Staff costs (including directors’ emoluments) Share of income tax of associates (included in share of results of associates) 2018 HK$ million 2017 HK$ million – 3 17 (261) 3 22 (3,507) (3,227) 498 25 400 49 (2,984) (2,778) 245 122 271 94 Note: The amount represented a one-off early surrender compensation received from a tenant which has been recognised as compensation income under other income during the year ended 31 December 2017 at the date of fulfilment of all conditions set out in the surrender agreement. 143 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 10. OTHER COMPREHENSIVE (EXPENSES) INCOME Other comprehensive (expenses) income comprises: Items that will not be reclassified subsequently to profit or loss: Revaluation of properties held for own use: Gains on revaluation of properties held for own use Deferred taxation arising on revaluation Items that may be reclassified subsequently to profit or loss: Derivatives designated as cash flow hedges: Net gains (losses) arising during the year Reclassification adjustments for net losses included in profit or loss Share of translation reserve of an associate Other comprehensive (expenses) income for the year (net of tax) Tax effect relating to other comprehensive (expenses) income: 2018 HK$ million 2017 HK$ million 56 (9) 47 2 (7) (5) (172) (177) (130) 46 (8) 38 (49) (6) (55) 240 185 223 Gains on revaluation of properties held for own use Net adjustments to hedging reserve Share of translation reserve of an associate 11. DIRECTORS’ EMOLUMENTS Directors’ fees Other emoluments Basic salaries, housing and other allowances Bonus (Notes d & f) Share-based payments 2018 Before-tax amount HK$ million Tax expense HK$ million Net-of-tax amount HK$ million Before-tax amount HK$ million 2017 Tax expense HK$ million Net-of-tax amount HK$ million 56 (5) (172) (121) (9) – – (9) 47 (5) (172) (130) 46 (55) 240 231 (8) – – (8) 38 (55) 240 223 2018 HK$ million 2017 HK$ million 3 8 14 2 27 3 7 13 2 25 144 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 11. DIRECTORS’ EMOLUMENTS continued The emoluments paid or payable to each of the Directors of the Company for the two years ended 31 December 2018 and 2017, calculated with reference to their employment as Directors of the Company or for provision of other services to the Company and the Group, are set out below: For the year ended 31 December 2018 Executive Director (Note a) Lee Irene Yun-Lien Non-Executive Directors (Note b) Jebsen Hans Michael Lee Anthony Hsien Pin Lee Chien Lee Tze Hau Michael Independent Non-Executive Directors (Note c) Churchouse Frederick Peter Fan Yan Hok Philip Lau Lawrence Juen-Yee Poon Chung Yin Joseph Wong Ching Ying Belinda (Note h) For the year ended 31 December 2017 Executive Director (Note a) Lee Irene Yun-Lien Non-Executive Directors (Note b) Jebsen Hans Michael Lee Anthony Hsien Pin Lee Chien Lee Tze Hau Michael Lau Siu Chuen (Note i) Independent Non-Executive Directors (Note c) Churchouse Frederick Peter Fan Yan Hok Philip Lau Lawrence Juen-Yee Poon Chung Yin Joseph (Note j) Basic salaries, housing and other allowances HK$’000 (Note d) Directors’ fees HK$’000 (Note e) Share-based Retirement benefits scheme payments contributions HK$’000 HK$’000 (Note g) Bonus HK$’000 (Note d) Total HK$’000 – 7,694 14,616 1,762 18 24,090 270 310 290 280 310 420 260 465 10 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 270 310 290 280 310 420 260 465 10 2,615 7,694 14,616 1,762 18 26,705 Basic salaries, housing and other allowances HK$’000 (Note f) Directors’ fees HK$’000 (Note e) Bonus HK$’000 (Note f) Share-based payments HK$’000 (Note g) Retirement benefits scheme contributions HK$’000 Total HK$’000 – 7,103 13,150 1,872 18 22,143 255 295 275 265 83 295 405 245 446 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 255 295 275 265 83 295 405 245 446 2,564 7,103 13,150 1,872 18 24,707 145 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 11. DIRECTORS’ EMOLUMENTS continued Notes: (a) The Executive Director’s emoluments shown above were for the services in connection with the management of the affairs of the Company and the Group. (b) The Non-Executive Directors’ emoluments shown above were for the services as Directors of the Company. (c) The Independent Non-Executive Directors’ emoluments shown above were for the services as Directors of the Company. (d) Year 2018: The Remuneration Committee met in February 2018 to approve the 2018 annual fixed base salary and the annual special fee and determine the 2017 performance-based bonus of the Company’s Executive Director. The annual cash compensations of Lee Irene Yun-Lien, Chairman, remained at HK$15,386,000 based on market benchmark, and the jobholder’s experience, qualification, and performance. Annual base salary of Lee Irene Yun-Lien remained unchanged at HK$5,130,000 and annual special fee in recognition of extra responsibilities she assumed was HK$2,564,000 (making up 50% of the total package). For the year ended 31 December 2018, the bonus of HK$14,616,000 represented the 2018 bonus approved by the Committee in January 2019. (e) Last revision of annual Directors’ fees for serving on the Board (effective 1 June 2018) were approved by shareholders at the 2018 AGM. Details are set out in Remuneration Committee Report. Directors’ fees are calculated on annual basis and paid semi-annually. For Directors not having served the full year on a position, the fees will be calculated and paid on pro rata basis. Breakdown of Directors’ fees of each of the Directors of the Company for the year ended 31 December 2018 is set out below: Executive Director Lee Irene Yun-Lien Non-Executive Directors Jebsen Hans Michael Lee Anthony Hsien Pin Lee Chien Lee Tze Hau Michael Lau Siu Chuen (Note i) Independent Non-Executive Directors Churchouse Frederick Peter Fan Yan Hok Philip Lau Lawrence Juen-Yee Poon Chung Yin Joseph (Note j) Wong Ching Ying Belinda (Note h) Audit and Risk Management Committee (Note k) HK$’000 Board HK$’000 Remuneration Committee HK$’000 Strategy Committee (Note l) HK$’000 Nomination Committee 2018 Total 2017 Total HK$’000 HK$’000 HK$’000 – 240 240 240 240 – 240 240 240 240 10 1,930 – – 70 – – – 70 70 – 135 – 345 – – – – 40 – – 60 – 40 – – 30 – 30 – – – 30 – 30 – 140 120 – – – 20 – – – 20 20 20 – 80 – 270 310 290 280 – 310 420 260 465 10 – 255 295 275 265 83 295 405 245 446 – 2,615 2,564 (f) Year 2017: The Remuneration Committee met in February 2017 to approve the 2017 annual fixed base salary and the annual special fee and determine the 2016 performance-based bonus of the Company’s Executive Director. The annual cash compensations of Lee Irene Yun-Lien, Chairman, was revised to HK$15,386,000 based on market benchmark, and the jobholder’s experience, qualification, and performance. Annual base salary of Lee Irene Yun-Lien was at HK$5,130,000 and annual special fee in recognition of extra responsibilities she assumed was HK$2,564,000 (making up 50% of the total package). For the year ended 31 December 2017, the bonus of HK$13,150,000 represented the 2017 bonus of HK$12,693,000 approved by the Committee in February 2018, and adjustments for 2016 bonus accrued in 2016. The performance-based bonus for 2016 approved by the Committee and paid to Executive Director in March 2017 was amounted to HK$10,257,000. (g) Share-based payments are the fair values of share options granted to Executive Director, which are determined at the date of grant and expensed over the vesting period (except where options are forfeited before vesting), regardless of whether the Executive Director exercises the share options or not during the year. Details of the share option schemes are set out in note 37 of the Notes to the Consolidated Financial Statements section. (h) Wong Ching Ying Belinda was appointed as an Independent Non-Executive Director with effect from 18 December 2018. (i) (j) Lau Siu Chuen ceased as a Non-Executive Director with effect from the conclusion of the 2017 AGM. Poon Chung Yin Joseph was appointed as a member of the Strategy Committee with effect from 22 February 2017. (k) The Audit Committee was renamed as “Audit and Risk Management Committee” with effect from 21 February 2019. (l) The Strategy Committee was discontinued and assumed by the Board with effect from 1 January 2019. 146 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 11. DIRECTORS’ EMOLUMENTS continued There was no arrangement under which a Director waived or agreed to waive any remuneration during both years. There was no payment to a Director as inducement for Director to join the Group or compensation for the loss of office as a Director in connection with the management of the affairs of any member of the Group during both years. Details of material interests of the Directors of the Company in transactions, arrangements or contracts entered into by subsidiaries of the Company are disclosed in the Directors’ Report. 12. EMPLOYEES’ EMOLUMENTS Of the five individuals with the highest emoluments in the Group, one (2017: one) was Director of the Company, details of whose emoluments are included in note 11 of the Notes to the Consolidated Financial Statements section. The emoluments of all of the five individuals with the highest emoluments for the years ended 31 December 2018 and 2017 were as follows: Basic salaries, housing and other allowances Bonus Share-based payments (Note) 2018 HK$ million 2017 HK$ million 21 20 3 44 20 17 3 40 Note: Share-based payments are the fair values of share options granted to Executive Director and eligible employees, which are determined at the date of grant and expensed over the vesting period (except where options are forfeited before vesting), regardless of whether the Executive Director or eligible employees exercise the share options or not during the year. Their emoluments are within the following bands: HK$4,000,001 to HK$4,500,000 HK$4,500,001 to HK$5,000,000 HK$6,500,001 to HK$7,000,000 HK$22,000,001 to HK$22,500,000 HK$24,000,001 to HK$24,500,000 Number of individuals 2018 2017 1 2 1 – 1 5 3 1 – 1 – 5 Senior management (for the purpose of the Rules Governing the Listing of Securities on the Stock Exchange (“the Listing Rules”)) during the year are Executive Director and other members of senior management of the Group. Their emoluments are within the following bands. HK$2,000,001 to HK$3,000,000 HK$3,000,001 to HK$4,000,000 HK$4,000,001 to HK$5,000,000 HK$6,000,001 to HK$7,000,000 HK$22,000,001 to HK$23,000,000 HK$24,000,001 to HK$25,000,000 Number of individuals 2018 2017 1 1 3 1 – 1 7 – – 5 – 1 – 6 147 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 13. DIVIDENDS (a) Dividends recognised as distribution during the year: 2018 first interim dividend paid – HK27 cents per share 2017 first interim dividend paid – HK26 cents per share 2017 second interim dividend paid – HK111 cents per share 2016 second interim dividend paid – HK109 cents per share (b) Dividends declared after the end of the reporting period: Second interim dividend (in lieu of a final dividend) – HK117 cents per share (2017: HK111 cents per share) 2018 HK$ million 2017 HK$ million 283 – 1,161 – 1,444 – 272 – 1,139 1,411 2018 HK$ million 2017 HK$ million 1,224 1,161 The second interim dividend is not recognised as a liability as at 31 December 2018 because it has been declared after the end of the reporting period. It will be payable in cash. 14. 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 2018 HK$ million 2017 HK$ million 6,033 3,636 Number of shares 2018 2017 1,046,189,778 1,045,495,841 501,942 283,181 1,046,691,720 1,045,779,022 In both years, 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. 148 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 14. EARNINGS PER SHARE continued (b) Adjusted basic and diluted earnings per share For the purpose of assessing the performance of the Group’s principal activities, 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 and diluted earnings per share as follows: For the year ended 31 December 2018 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 associates Imputed interest income on interest-free loan to a joint venture Other gains and losses Underlying Profit Recurring Underlying Profit For the year ended 31 December 2017 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 associates Imputed interest income on interest-free loan to a joint venture Underlying Profit One-off early surrender Compensation income (net of effect of taxation and non-controlling interests’ shares) Recurring Underlying Profit Notes: Profit HK$ million 6,033 (3,532) 144 (96) (29) 16 2,536 2,536 Profit HK$ million 3,636 (853) (253) (11) (28) 2,491 (142) 2,349 Basic earnings per share HK cents 576.66 (337.60) 13.76 (9.18) (2.77) 1.53 242.40 242.40 Basic earnings per share HK cents 347.78 (81.59) (24.20) (1.05) (2.68) 238.26 (13.58) 224.68 Diluted earnings per share HK cents 576.39 (337.44) 13.76 (9.18) (2.77) 1.53 242.29 242.29 Diluted earnings per share HK cents 347.68 (81.56) (24.19) (1.05) (2.68) 238.20 (13.58) 224.62 (a) Recurring Underlying Profit is arrived at by excluding from Underlying Profit items that are non-recurring in nature. As there were no such adjustments in 2018, the Recurring Underlying Profit was the same as the Underlying Profit. (b) The denominators used in calculating the adjusted earnings per share are the same as those detailed above for basic and diluted earnings per share. 149 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 15. INVESTMENT PROPERTIES Fair Value As at 1 January Additions Transfer from property, plant and equipment Change in fair value recognised in profit or loss – unrealised As at 31 December 2018 HK$ million 2017 HK$ million 72,470 1,363 77 3,532 77,442 69,633 1,984 – 853 72,470 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. Fair value measurements and valuation processes The fair value of the Group’s investment properties as at 31 December 2018 and 2017 and the date of transfer from property, plant and equipment to investment properties has been arrived at on the basis of a valuation carried out on those dates 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 The Hong Kong Institute of Surveyors Valuation Standards. In estimating the fair value of the investment properties, the management of the Group has considered the highest and best use of the investment properties. The value of the completed investment properties is derived from the basis of capitalisation of net income with due allowance for the reversionary income potential but without allowances for any expenses or taxation which may be incurred in effecting a sale, and where appropriate, cross reference by sale comparables. There has been no change to the valuation technique during the year for completed properties. All of the fair value measurements of the Group’s investment properties were categorised into Level 3 of the fair value hierarchy. Details of fair value hierarchy are set out as below. There were no transfers into or out of Level 3 during the year. At the end of the reporting period, the management of the Group works with Knight Frank Petty Limited to establish and determine the appropriate valuation techniques and inputs for Level 3 fair value measurements. Where there is a material change in the fair value of the assets, the causes of the fluctuations will be reported to the Directors of the Company. Fair value measurements using significant unobservable inputs (Level 3) The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements of the Group’s investment properties by operating and reportable segment. As at 1 January 2017 Additions Change in fair value recognised in profit or loss – unrealised Transfer upon completion As at 31 December 2017 Additions Transfer from property, plant and equipment Change in fair value recognised in profit or loss – unrealised As at 31 December 2018 Retail HK$ million Office HK$ million Residential HK$ million 33,082 826 (1,994) 1,274 33,188 1,133 77 704 35,102 23,832 22 1,773 5,698 31,325 202 – 2,632 34,159 7,859 7 91 – 7,957 28 – 196 8,181 Investment properties under redevelopment HK$ million 4,860 1,129 983 (6,972) – – – – – Total HK$ million 69,633 1,984 853 – 72,470 1,363 77 3,532 77,442 150 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 15. INVESTMENT PROPERTIES continued Information about fair value measurements using significant unobservable inputs (Level 3) The following table shows the valuation techniques used in the determination of fair values for investment properties by operating and reportable segment and unobservable inputs used in the valuation models. Description Retail Fair value as at 31 December 2018 HK$ million 2017 HK$ million 35,102 33,188 Office 34,159 31,325 Valuation techniques Unobservable inputs Range/ weighted average of unobservable inputs Relationship of unobservable inputs to fair value Income capitalisation approach (i) Capitalisation rate 5.00% – 5.25% (2017: 5.00% – 5.25%) The higher the capitalisation rate, the lower the fair value. (ii) Market rent per month HK$134 per square foot (2017: HK$132 per square foot) The higher the market rent, the higher the fair value. Income capitalisation approach (i) Capitalisation rate 4.25% – 5.00% (2017: 4.25% – 5.00%) The higher the capitalisation rate, the lower the fair value. (ii) Market rent per month HK$58 per square foot (2017: HK$54 per square foot) The higher the market rent, the higher the fair value. Residential 8,181 7,957 Income capitalisation approach (i) Capitalisation rate 3.75% (2017: 3.75%) (ii) Market rent per month HK$37 per square foot (2017: HK$36 per square foot) The higher the capitalisation rate, the lower the fair value. The higher the market rent, the higher the fair value. 151 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 16. PROPERTY, PLANT AND EQUIPMENT Leasehold land and buildings in Hong Kong HK$ million (Note) Furniture, fixtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million COST OR VALUATION As at 1 January 2017 Additions Disposals Surplus on revaluation As at 31 December 2017 Additions Disposals Transfer to investment properties Surplus on revaluation As at 31 December 2018 Comprising: At cost At valuation 2018 ACCUMULATED DEPRECIATION As at 1 January 2017 Provided for the year Eliminated on disposals Eliminated on revaluation As at 31 December 2017 Provided for the year Eliminated on disposals Eliminated on revaluation As at 31 December 2018 CARRYING AMOUNTS As at 31 December 2018 As at 31 December 2017 682 – – 40 722 – – (77) 51 696 – 696 696 – 6 – (6) – 5 – (5) – 696 722 116 3 (20) – 99 17 – – – 116 116 – 116 95 10 (13) – 92 5 – – 97 19 7 60 11 (1) – 70 16 – – – 86 86 – 86 44 6 (1) – 49 7 – – 56 30 21 2 – – – 2 1 (1) – – 2 2 – 2 1 – – – 1 – (1) – – 2 1 860 14 (21) 40 893 34 (1) (77) 51 900 204 696 900 140 22 (14) (6) 142 17 (1) (5) 153 747 751 152 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 16. PROPERTY, PLANT AND EQUIPMENT continued The above items of property, plant and equipment are depreciated on a straight-line basis over the following terms or at the following rates per annum: Leasehold land and buildings Furniture, fixtures and equipment Computers Motor vehicles Over the shorter of the term of the lease or 40 years 20% 20% 25% Note: Fair value measurements and valuation processes The fair value of the Group’s leasehold land and buildings in Hong Kong as at 31 December 2018 and 2017 has been arrived at on the basis of a valuation carried out on those dates by Knight Frank Petty Limited, an independent qualified professional valuer not connected with the Group. The Group’s leasehold land and buildings in Hong Kong have been valued individually, on market value basis, which conforms to The Hong Kong Institute of Surveyors Valuation Standards. In estimating the fair value of the properties, the management of the Group has considered the highest and best use of the properties. The value was derived from the basis of capitalisation of net income with due allowance for the reversionary income potential but without allowance of any expenses or taxation which may be incurred in effecting a sale, and where appropriate, cross reference by sale comparables. There has been no change to the valuation technique during the year. All of the fair value measurements of the Group’s leasehold land and buildings in Hong Kong were categorised into Level 3 of the fair value hierarchy. Details of fair value hierarchy are set out as below. There were no transfers into or out of Level 3 during the year. At the end of the reporting period, the management of the Group works with Knight Frank Petty Limited to establish and determine the appropriate valuation techniques and inputs for Level 3 fair value measurements. Where there is a material change in the fair value of the assets, the causes of the fluctuations will be reported to the Directors of the Company. Information about fair value measurements using significant unobservable inputs (Level 3) The following table shows the valuation techniques used in the determination of fair values for the Group’s leasehold land and buildings in Hong Kong and unobservable inputs used in the valuation models. Fair value as at 31 December 2018 HK$ million 2017 HK$ million 696 722 Description Leasehold land and buildings in Hong Kong Valuation techniques Unobservable inputs Income capitalisation approach (i) Capitalisation rate (ii) Market rent per month Range/ weighted average of unobservable inputs 4.25% – 5.25% (2017: 4.25% – 5.25%) HK$68 per square foot (2017: HK$62 per square foot) Relationship of unobservable inputs to fair value The higher the capitalisation rate, the lower the fair value. The higher the market rent, the higher the fair value. The gains of HK$56 million (2017: HK$46 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 at historical cost less subsequent accumulated depreciation, their carrying amounts would have been HK$161 million (2017: HK$243 million) at the end of the reporting period. Furniture, fixtures and equipment of the Group include assets carried at cost of HK$47 million (2017: HK$34 million) and accumulated depreciation of HK$32 million (2017: HK$29 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$3 million (2017: HK$2 million). 153 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 17. PARTICULARS OF PRINCIPAL SUBSIDIARIES OF THE COMPANY The table below lists the principal subsidiaries of the Company as at 31 December 2018 and 2017: Name of subsidiary Admore Investments Limited Alpha Ace Limited Bamboo Grove Recreational Services Limited Barrowgate Limited Earn Extra Investments Limited HD Investment Limited HD Treasury Limited Hysan China Holdings Limited Hysan Corporate Services Limited Hysan Leasing Company Limited Hysan (MTN) Limited Hysan Property Management Limited Hysan Treasury Limited Kwong Hup Holding Limited Kwong Wan Realty Limited Lee Theatre Realty Limited Leighton Property Company Limited Minsal Limited Main Rise Development Limited Mariner Bay Limited Mondsee Limited OHA Property Company Limited Perfect Win Properties Limited Silver Nicety Company Limited Place of incorporation/ operation Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong British Virgin Islands Hong Kong Hong Kong British Virgin Islands/ Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands/ Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Issued share capital HK$2 HK$1 HK$2 HK$10,000 HK$1 HK$1 HK$2 HK$1 HK$2 HK$2 US$1 HK$2 HK$2 HK$1 HK$1,000 HK$10 HK$2 HK$2 HK$2 US$1 HK$2 HK$2 HK$2 HK$20 Proportion of ownership interests/ voting rights held by the Company directly 100% – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% – – 100% – – 100% – – – indirectly – 100% 100% 65.36% 100% 100% – – – – – – – – – 100% 100% – 100% 100% – 100% 100% 100% Principal activities Investment holding Property development Resident club management Property investment Property investment Investment holding Treasury operation Investment holding Provision of corporate services Leasing administration Treasury operation Property management Treasury operation Investment holding Property investment Property investment Property investment Property investment Investment holding Investment holding Property investment Property investment Property investment Property investment The Directors of the Company 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 Company. Other than unsecured fixed rate notes issued by Hysan (MTN) Limited (“Hysan MTN”) as disclosed in note 27 of the Notes to the Consolidated Financial Statements section, none of the subsidiaries had issued any debt securities at the end of the reporting period. 154 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 17. PARTICULARS OF PRINCIPAL SUBSIDIARIES OF THE COMPANY continued The summarised financial information in respect of the Group’s subsidiary that has material non-controlling interests is set out below. The summarised financial information below represents amounts before intragroup eliminations. Barrowgate Limited Current assets Non-current assets Current liabilities Non-current liabilities Equity attributable to owners of the Company Non-controlling interests Turnover Profit (loss) and total comprehensive income (expenses) for the year Profit (loss) and total comprehensive income (expenses) attributable to owner of the Company Profit (loss) and total comprehensive income (expenses) attributable to the non-controlling interests Dividends paid to non-controlling interests Net cash inflows from operating activities Net cash inflows (outflows) from investing activities Cash outflows from financing activities Net cash inflows (outflows) 18. INVESTMENTS IN ASSOCIATES AND LOANS TO ASSOCIATES Cost of unlisted investments Share of post-acquisition profits and other comprehensive income, net of dividends received Loans to associates classified as: Non-current assets 2018 HK$ million 2017 HK$ million 347 9,886 (785) (193) 6,049 3,206 584 825 539 286 128 347 380 (670) 57 699 9,427 (1,160) (166) 5,752 3,048 628 (62) (40) (22) 128 400 (571) (370) (541) 2018 HK$ million 2017 HK$ million 2 3,706 3,708 11 2 3,777 3,779 10 The balances of loans to associates are unsecured, interest-free and have no fixed repayment terms. The Directors of the Company are of the opinion that the Group will not demand repayment from the associates within the next twelve months from the end of the reporting period and the loans are therefore classified as non-current assets. 155 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 18. INVESTMENTS IN ASSOCIATES AND LOANS TO ASSOCIATES continued The Directors of the Company are of the opinion that a complete list of all associates will be of excessive length and the Group summarises details of the Group’s material associate as at 31 December 2018 and 2017 as follows: Name of associate Form of business structure Country Link Enterprises Limited (Note) Private limited company Place of incorporation/ establishment and operation Hong Kong Class of share held/ registered capital Ordinary share of HK$5,000,000 Effective interest held by the Group 26.3% Principal activities Investment holding Shanghai Kong Hui Property Development Co., Ltd. (Note) Shanghai Grand Gateway Plaza Property Management Co., Ltd. (Note) # Fully paid-up registered capital Note: Sino-Foreign equity joint venture Sino-Foreign equity joint venture The PRC US$165,000,000# 24.7% Property development and leasing The PRC US$140,000# 23.7% Property management Shanghai Kong Hui Property Development Co., Ltd. and Shanghai Grand Gateway Plaza Property Management Co., Ltd. are non-wholly owned subsidiaries of Country Link Enterprises Limited, together known as “Country Link”. The summarised consolidated financial information in respect of the Group’s material associate is set out below. The summarised consolidated financial information below represents amounts shown in the associate’s consolidated financial statements prepared in accordance with HKFRSs. All of the Group’s associates are accounted for using the equity method in the Group’s consolidated financial statements. Country Link Current assets Non-current assets Current liabilities Non-current liabilities Turnover Profit for the year Other comprehensive (expenses) income for the year Total comprehensive income for the year Group’s share of results of an associate for the year Group’s share of other comprehensive (expense) income of an associate for the year Dividends received from the associate during the year 2018 HK$ million 2017 HK$ million 1,953 18,292 (1,001) (4,214) 1,397 1,195 (699) 496 294 (172) 184 2,179 18,328 (991) (4,234) 1,432 897 974 1,871 220 240 178 156 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 18. INVESTMENTS IN ASSOCIATES AND LOANS TO ASSOCIATES continued Country Link continued Reconciliation of the above summarised consolidated financial information to the carrying amount of the interest in the associate that is material to the Group recognised in the consolidated financial statements: Net assets of the associate Non-controlling interests of the associate Net assets of the associate after deducting non-controlling interests of the associate Proportion of the Group’s ownership interest in the associate Group’s share of net assets of the associate Others Carrying amount of the Group’s interest in the associate 19. INVESTMENT IN A JOINT VENTURE AND LOANS TO A JOINT VENTURE Details of the Group’s investment in and loans to a joint venture are as follow: Investment in a joint venture Unlisted shares, at cost Deemed capital contribution in a joint venture (Note a) Loans to a joint venture classified as: Non-current assets (Note b) Notes: 2018 HK$ million 15,030 (887) 14,143 26.3% 3,720 (5) 3,715 2017 HK$ million 15,282 (901) 14,381 26.3% 3,784 (5) 3,779 2018 HK$ million 2017 HK$ million – 145 145 1,062 – 147 147 982 (a) The deemed capital contribution in a joint venture represents the fair value adjustments in relation to the loan to a joint venture at initial recognition based on the estimated timing on future cash flows. (b) The loans to a joint venture are unsecured and have no fixed repayment terms. As at 31 December 2018, except for the loans to a joint venture with aggregate carrying amounts of HK$120 million (2017: HK$63 million) which are carrying variable rates ranging from 2.73% to 4.24% (2017: 2.36% to 3.00%) per annum, the remaining loan to a joint venture of the Group is interest-free. The Directors of the Company are of the opinion that the Group will not demand repayment of the loans from the joint venture within the next twelve months from the end of the reporting period and the loans are therefore classified as non-current assets. The effective interest rate for imputed interest income on the interest-free portion is determined based on the cost of fund of the borrower per annum. 157 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 19. INVESTMENT IN A JOINT VENTURE AND LOANS TO A JOINT VENTURE continued Details of the Group’s joint venture as at 31 December 2018 and 2017 are as follows: Name of joint venture Place of incorporation and operation Strongbod Limited (Note a) British Virgin Islands Effective ownership interest and voting rights held by the Group 60% (Note b) Class of share held Ordinary shares of US$10 Principal activities Investment holding Gainwick Limited (Note a) Hong Kong Ordinary share of HK$1 60% (Note b) Property development and investment Notes: (a) Gainwick Limited is a wholly owned subsidiary of Strongbod Limited, together known as “Strongbod”. (b) Pursuant to the shareholder’s agreement dated 5 December 2016, entered into by the Group, the joint venture partner and Strongbod, decisions on all relevant business and operation activities of Strongbod require unanimous board approval from directors of Strongbod appointed by the Group and those appointed by the joint venture partner. Therefore, the Group recognised the investment in Strongbod as a joint venture. The summarised consolidated financial information in respect of the Group’s material joint venture is set out below. The summarised consolidated financial information below represents amounts shown in the joint venture’s consolidated financial statements prepared in accordance with HKFRSs. The joint venture is accounted for using the equity method in the Group’s consolidated financial statements. There was no material share of post-acquisition profits and other comprehensive income in both years. Strongbod Current assets Current liabilities Non-current liabilities 2018 HK$ million 2017 HK$ million 3,618 17 3,601 3,513 11 3,502 Reconciliation of the above summarised consolidated financial information to the carrying amount of the interest in the joint venture that is material to the Group recognised in the consolidated financial statements: Net assets of the joint venture Proportion of the Group’s ownership interest in the joint venture Group’s share of net assets of the joint venture Add: Deemed capital contribution in the joint venture Carrying amount of the Group’s interest in the joint venture 2018 HK$ million 2017 HK$ million – 60% – 145 145 – 60% – 147 147 20. FUND INVESTMENT The balance represents the Group’s interest in a fund investment as limited partner. The fund investment engages in property investment in Hong Kong and overseas projects. The fund investment is classified as fair value through profit or loss (“FVTPL”). 158 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 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 2018 HK$ million 2017 HK$ million 196 31 – 227 227 – 227 604 102 31 737 509 228 737 As at 31 December 2018, the effective yield of the debt securities ranged from 1.81% to 2.09% (2017: 1.81% to 2.60%) per annum, payable quarterly, semi-annually or annually, and the securities will mature from January 2019 to July 2019 (2017: from January 2018 to July 2019). At the end of the reporting period, none of these assets were past due but not impaired. Details of the impairment assessment of term notes for the year ended 31 December 2018 are set out in the Financial Risk Management section. 22. OTHER FINANCIAL ASSETS/LIABILITIES Current Non-current 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million Other financial assets Derivatives under hedge accounting: Cash flow hedges – Forward foreign exchange contracts Financial assets measured at FVTPL: Club debenture Total Other financial liabilities Derivatives under hedge accounting: Cash flow hedges – Forward foreign exchange contracts – Cross currency swap Total – – – – – – 1 – 1 1 – 1 – 1 1 – 26 26 1 1 2 – 30 30 159 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 22. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges Foreign currency risk During the year, the Group used forward foreign exchange contracts and cross currency swap to manage its foreign currency exposure. The principal terms of the forward foreign exchange contracts and cross currency swap 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 swap at the end of the reporting period are as follows: Hedging instruments Forward foreign exchange contracts Sell US dollars (“USD”) (Note a) Within 1 year More than 1 year but not exceeding 5 years Cross currency swap Hedging interest and principal of USD fixed rate notes (Note b) More than 1 year but not exceeding 5 years Total 2018 2017 Average exchange rate* Foreign currency Notional amount million HK$ million Fair value HK$ million Average exchange rate* Foreign currency Notional amount million HK$ million Fair value HK$ million 7.7996 USD – – 7.7996 USD 28 – 28 218 – 218 – – – 7.8021 7.7996 7.8011 USD USD USD 42 28 70 329 218 547 – 1 1 7.7519 USD 300 2,326 2,544 (26) (26) 7.7519 USD 300 2,326 2,873 (30) (29) * Average exchange rate represented the average exchange rate of HKD versus respective currencies weighted by the notional amounts of the contracts or the swap. Notes: (a) The Group used HK$218 million (2017: HK$547 million) forward foreign exchange contracts to hedge the foreign exchange rate risk of part of the principal amount of term notes denominated in USD at their respective maturity dates. (b) The Group used HK$2,326 million (2017: HK$2,326 million) cross currency swap to convert USD interest and principal of US$300 million (2017: US$300 million) fixed rate notes into HKD. 160 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 22. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges continued Foreign currency risk continued Hedged items Carrying amount of the hedged item Cash flow hedge reserves USD term notes USD fixed rate notes Assets Liabilities 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million 218 – 548 – – 2,344 – 2,338 2 (50) 1 (44) The hedging ineffectiveness for the years ended 31 December 2018 and 2017 was insignificant. Change in the value of the hedging instrument recognised in other comprehensive income Amount reclassified from the cash flow hedge reserve to profit or loss 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million Line item affected in profit or loss because of the reclassification Forward foreign exchange contracts Cross currency swap 1 1 (6) (43) (5) (2) 10 (16) Investment income Finance costs The fair values of forward foreign exchange contracts and cross currency swap are measured using quoted forward exchange rates and yield curves from quoted interest rates matching maturities of the contracts and swap. (b) Financial assets measured at FVTPL Club debenture Amount represented investment in unlisted club debenture. The Group’s investment in unlisted club debenture has been classified as financial assets measured at FVTPL. 23. ACCOUNTS AND OTHER RECEIVABLES Accounts receivable Interest receivable Prepayments in respect of investment properties Other receivables and prepayments Total Analysed for reporting purposes as: Current assets Non-current assets 2018 HK$ million 2017 HK$ million 15 46 228 300 589 203 386 589 11 44 283 220 558 226 332 558 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$15 million (2017: HK$11 million) mainly represented rents receipts in arrears, which were aged less than 90 days. At the end of the reporting period, HK$5 million (2017: HK$3 million) of the accounts receivable were past due but not impaired as the accounts receivables are generally fully covered by the deposits from corresponding tenants. 161 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 24. TIME DEPOSITS/CASH AND CASH EQUIVALENTS Time deposits, cash and cash equivalents include bank deposits carrying effective interest rates ranging from 0.20% to 3.40% (2017: 0.15% to 2.56%) per annum. For the year ended 31 December 2018, the Group performed impairment assessment on time deposits and bank balances and concluded that the probability of default of the counterparty banks are insignificant and accordingly, no allowance for credit losses is provided. 25. ACCOUNTS PAYABLE AND ACCRUALS Accounts payable Interest payable Other payables 2018 HK$ million 2017 HK$ million 257 74 542 873 215 74 447 736 At the end of the reporting period, accounts payable of the Group with carrying amount of HK$175 million (2017: HK$157 million) were aged less than 90 days. 26. AMOUNTS DUE TO NON-CONTROLLING INTERESTS The amounts due to non-controlling interests are unsecured, interest-free and repayable on demand. 27. BORROWINGS The analysis of the carrying amounts of borrowings is as follows: Unsecured bank loans Unsecured fixed rate notes Current Non-current 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million – 300 300 – 150 150 1,532 4,490 6,022 1,550 4,485 6,035 In the current year, the average cost of finance of the Group’s total borrowings calculated based on their contracted interest rates was 3.6% (2017: 3.3%) per annum. To manage the foreign exchange risks, the Group used certain derivative to hedge part of the borrowings, which resulted in the Group’s average cost of finance to be 3.6% (2017: 3.4%) per annum. As at 31 December 2018, the floating rate debt ratio relative to gross total debt after considering the hedges was 24.5% (2017: 25.1%). (a) Unsecured bank loans The unsecured bank loans of HK$1,532 million (2017: HK$1,550 million) are guaranteed as to principal and interest by the Company and are repayable, based on the scheduled repayment dates set out in the respective loan agreement, as follows: More than 1 year, but not exceeding 2 years More than 2 years, but not exceeding 5 years 2018 HK$ million 2017 HK$ million – 1,532 1,532 500 1,050 1,550 All the Group’s unsecured bank loans are variable-rate borrowings with effective interest rates (which were also equal to contracted interest rates) at 3.09% (2017: 1.97%) per annum at the end of the reporting period. Interest rates of the loans are normally re-fixed at every one to three months. 162 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 27. BORROWINGS continued (b) Unsecured fixed rate notes Within 1 year More than 1 year, but not exceeding 2 years More than 2 years, but not exceeding 5 years More than 5 years 2018 HK$ million 2017 HK$ million 300 565 3,277 648 4,790 150 300 1,094 3,091 4,635 Details of the Group’s unsecured fixed rate notes as at 31 December 2018 and 2017 are as follows: Principal amount HK$165 million HK$400 million HK$200 million HK$200 million HK$150 million* HK$404 million HK$331 million HK$300 million HK$150 million US$300 million HK$300 million** Contracted interest rate per annum 5.38% 3.78% 4.00% 3.70% 3.86% 4.10% 4.00% 3.90% 4.50% 3.50% 3.66% Coupon payment term annual basis quarterly basis annual basis quarterly basis quarterly basis annual basis quarterly basis quarterly basis annual basis semi-annual basis quarterly basis Issue date Maturity date September 2008 August 2010 September 2010 October 2010 May 2011 December 2011 January 2012 March 2012 March 2012 January 2013 November 2018 September 2020 August 2020 September 2025 October 2022 May 2018 December 2023 January 2022 March 2019 March 2027 January 2023 November 2025 * ** Only applicable to the year ended 31 December 2017. Only applicable to the year ended 31 December 2018. All the unsecured fixed rate notes were issued by Hysan MTN, a wholly-owned subsidiary of the Company. The notes are guaranteed as to principal and interest by the Company and bear an effective interest rate equal to their respective contracted interest rate. As detailed in note 22 of the Notes to the Consolidated Financial Statements section, during the years ended 31 December 2018 and 2017, cross currency swap was used to hedge or manage the foreign exchange rate risks of the Group’s USD fixed rate notes. 28. DEFERRED TAXATION The following are the major deferred tax liabilities (assets) recognised by the Group and movements thereon during the current and prior years: As at 1 January 2017 Charge (credit) to profit or loss (note 8) Charge to other comprehensive income As at 31 December 2017 Charge (credit) to profit or loss (note 8) Charge to other comprehensive income As at 31 December 2018 Accelerated tax depreciation HK$ million Revaluation of properties HK$ million Tax losses HK$ million Total HK$ million 679 125 – 804 97 – 901 72 (1) 8 79 (1) 9 87 – (96) – (96) (38) – (134) 751 28 8 787 58 9 854 At the end of the reporting period, the Group has unused estimated tax losses of HK$1,437 million (2017: HK$1,243 million) available for offset against future profits. A deferred tax asset has been recognised in respect of HK$815 million (2017: HK$580 million) of such losses. No deferred tax asset has been recognised in respect of the remaining HK$622 million (2017: HK$663 million) due to the unpredictability of future profit streams and the tax losses may be carried forward indefinitely. 163 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 29. SHARE CAPITAL Ordinary shares, issued and fully paid: As at 1 January 2017 Issue of shares under share option schemes As at 31 December 2017 Issue of shares under share option schemes As at 31 December 2018 30. STATEMENT OF FINANCIAL POSITION AND RESERVES OF THE COMPANY Non-current assets Property, plant and equipment Investments in subsidiaries Other financial assets Amounts due from subsidiaries Current assets Other receivables Amounts due from subsidiaries Cash and cash equivalents Current liabilities Other payables and accruals Amounts due to subsidiaries Net current assets Net assets Capital and reserves Share capital (note 29) Reserves Total equity Number of shares Share capital HK$ million 1,045,328,359 496,532 1,045,824,891 677,000 1,046,501,891 7,673 19 7,692 26 7,718 2018 HK$ million 2017 HK$ million – 1,696 1 4,152 5,849 4 10,131 1 10,136 64 2,753 2,817 7,319 – 1,318 1 3,735 5,054 3 10,309 11 10,323 60 2,288 2,348 7,975 13,168 13,029 7,718 5,450 13,168 7,692 5,337 13,029 The Company’s statement of financial position was approved and authorised for issue by the Board of Directors on 21 February 2019 and are signed on its behalf by: Lee Irene Y.L. Director Lee T.H. Michael Director 164 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 30. STATEMENT OF FINANCIAL POSITION AND RESERVES OF THE COMPANY continued Movement in the Company’s reserve Share options reserve HK$ million As at 1 January 2017 Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share option Profit and total comprehensive income for the year Dividends paid during the year (note 13) As at 31 December 2017 Issue of shares under share option schemes Recognition of equity-settled share-based payments Forfeiture of share option Profit and total comprehensive income for the year Dividends paid during the year (note 13) As at 31 December 2018 Notes: (a) General reserve was set up from the transfer of retained profits. 24 (4) 4 (3) – – 21 (5) 4 (1) – – 19 General reserve HK$ million (Note a) Retained profits HK$ million Total HK$ million 100 – – – – – 100 – – – – – 100 5,094 – – 3 1,530 (1,411) 5,216 – – 1 1,558 (1,444) 5,331 5,218 (4) 4 – 1,530 (1,411) 5,337 (5) 4 – 1,558 (1,444) 5,450 (b) The Directors of the Company considered that the application of the new and amendments to HKFRSs that are effective for the Company’s financial year beginning on 1 January 2018 have no material impact on the Company’s results and financial position. The Company’s reserves available for distribution to its owners as at 31 December 2018 amounted to HK$5,431 million (2017: HK$5,316 million), being its general reserve and retained profits at that date. 31. RECONCILIATION OF ASSETS/LIABILITIES RELATING TO FINANCING ACTIVITIES Net debt (Note a) Other financial liability (Note b) Interest payable Amounts due to non-controlling interests 2018 HK$ million 2017 HK$ million (3,505) (26) (74) (223) (3,828) (3,523) (30) (74) (327) (3,954) 165 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 31. RECONCILIATION OF ASSETS/LIABILITIES RELATING TO FINANCING ACTIVITIES continued The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows from financing activities. As at 1 January 2017 Cash flows, net Other non-cash changes: Foreign exchange adjustments Fair value adjustments Interest expenses As at 31 December 2017 Cash flows, net Other non-cash changes: Foreign exchange adjustments Fair value adjustments Interest expenses Others Cash and cash equivalent HK$ million 1,367 667 – – – 2,034 35 – – – – Time deposits HK$ million 1,263 (635) – – – 628 120 – – – – Other financial asset/ liability HK$ million Fixed rate notes HK$ million Amounts due to non- controlling interests HK$ million Interest payable HK$ million Bank loans HK$ million Total HK$ million 11 – 19 (57) (3) (30) – 5 1 (2) – (1,680) 130 (4,613) – – – – (19) – (3) (1,550) – (4,635) (148) – – (6) 24 (5) – (2) – (75) 196 – – (195) (74) 212 – – (212) – (74) (327) – (4,054) 358 – – – – (57) (201) (327) 104 (3,954) 323 – – – – – 1 (222) 24 (223) (3,828) As at 31 December 2018 2,069 748 (26) (1,532) (4,790) Notes: (a) Net debt represents borrowings less time deposits, cash and cash equivalent as disclosed under note 5 of the Financial Risk Management section. (b) Other financial asset/liability represents the hedging instrument (cross currency swap) that was used to hedge against the foreign exchange rate risk arising from financing activities. 32. 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$9 million (2017: HK$7 million). 33. COMMITMENTS At the end of the reporting period, the Group had the following capital commitments in respect of its investment properties, property, plant and equipment and subscription to a fund investment as limited partner: (a) Capital commitment: Contracted but not provided for investment properties and property, plant and equipment (b) Other commitment: Subscription to a fund investment as limited partner 2018 HK$ million 2017 HK$ million 655 74 1,233 369 166 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 34. LEASE COMMITMENTS At the end of the reporting period, the Group as lessor had contracted with tenants for the following future minimum lease payments: Within one year In the second to fifth year inclusive Over five years 2018 HK$ million 2017 HK$ million 3,180 4,960 857 8,997 3,065 4,754 53 7,872 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. At the end of the reporting period, the Group as lessee had no commitment under non-cancellable operating lease. 35. RELATED PARTY TRANSACTIONS AND BALANCES (a) Transactions and balances with related parties During the year, the Group has transaction with related party including imputed interest income on interest-free loan to a joint venture as disclosed under note 6 of the Notes to the Consolidated Financial Statements sections. At the end of the reporting period, the Group has several balances with related parties including loans to associates and loans to a joint venture as disclosed under note 18 and note 19 of the Notes to the Consolidated Financial Statements section. The Group has also granted guarantees to banks for facilities granted to a joint venture as disclosed under note 36 of the Notes to the Consolidated Financial Statements section. During the year ended 31 December 2017, the Group acquired 100% equity interests in a company from a related party, a wholly-owned subsidiary of Lee Hysan Company Limited (“LHC”) for aggregate cash consideration of HK$75 million. In addition, the Group has the following transactions with other related parties during the year and has the following balances with them at the end of the reporting period: Related company controlled by a shareholder (Note a) Related companies controlled by the Directors of the Company (Note b (i) & (ii)) Non-controlling shareholder of a subsidiary (Note c (i) & (ii)) Director (Note d) Notes: Gross rental income received from Year ended 31 December Amount due to non-controlling interests As at 31 December 2018 HK$ million 2017 HK$ million 2018 HK$ million 2017 HK$ million – 41 30 – 3 41 29 1 – 64 159 – – 94 233 – (a) The sum of transactions represents the aggregate gross rental income received from Atlas Corporate Management Limited, an indirect wholly- owned subsidiary of LHC. As at 31 December 2017, LHC holds 41.42% beneficial interest and has significant influence over the Company. (b) (i) The sum of transactions represents the aggregate gross rental income received from related companies where the Directors of the Company have controlling interests over these related companies. (ii) The balance represents outstanding loan advanced to a non-wholly owned subsidiary of the Company, Barrowgate by Jebsen Capital Limited, a wholly-owned subsidiary of Jebsen and Company, of which Jebsen Hans Michael is a director and a controlling 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. (c) (i) The transaction represents the gross rental income received from Hang Seng Bank Limited (“Hang Seng”), the intermediate holding company of Imenson Limited (“Imenson”) and The Hongkong and Shanghai Banking Corporation Limited, the holding company of Hang Seng. Imenson is a non-controlling shareholder with significant influence over Barrowgate. (ii) The balance represents outstanding loan advanced to Barrowgate by Imenson, as shareholders’ loan in proportion to its shareholding in Barrowgate for general funding purpose. The amount is unsecured, interest-free and repayable on demand. (d) The transactions represents the gross rental income received from a Director of the Company. 167 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 35. RELATED PARTY TRANSACTIONS AND BALANCES continued (b) Compensation of key management personnel The remuneration of Directors and other members of senior management of the Group are as follows: Directors’ fees, salaries and other short-term employee benefits Share-based payments Retirement benefits scheme contributions 2018 HK$ million 2017 HK$ million 48 3 1 52 43 3 – 46 The remuneration of the Directors and key executives is determined by the Remuneration Committee having regard to the performance of individuals and market trends. 36. CONTINGENT LIABILITY At the end of the reporting period, the Group had contingent liabilities as follows: Guarantees given to banks in respect of: Banking facilities of a joint venture attributable to the Group: – Utilised – Unutilised 2018 HK$ million 2017 HK$ million 999 2,001 3,000 999 2,001 3,000 During the year ended 31 December 2017, the Group issued corporate financial guarantees to banks in respect of banking facilities granted to a joint venture. The fair value of the financial guarantee contracts at its initial recognition is insignificant. Other than the financial guarantees as disclosed above, several funding undertakings have also been provided by the Group to the extent not having been financed by drawdown made under the relevant banking facilities of the joint venture in relation to the completion of the underlying project of the joint venture. Details of the impairment assessment of financial guarantees for the year ended 31 December 2018 is set out in the Financial Risk Management section. 37. SHARE-BASED PAYMENT TRANSACTIONS (a) Equity-settled share option scheme The 2005 Scheme The Company adopted the 2005 Scheme at its AGM held on 10 May 2005, which has a term of 10 years and expired on 9 May 2015. All outstanding options granted under the 2005 Scheme will continue to be valid and exercisable in accordance with the provisions of the 2005 Scheme. The purpose of the 2005 Scheme is to provide an incentive for employees of the Company and its wholly-owned subsidiaries to work with commitment towards enhancing the value of the Company and its shares for the benefit of its shareholders. Under the 2005 Scheme, options to subscribe for ordinary shares of the Company may be granted to employees of the Company or any wholly-owned subsidiaries (including Executive Director) and such other persons as the Board may consider appropriate from time to time, on the basis of their contribution to the development and growth of the Company and its subsidiaries. 168 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 37. SHARE-BASED PAYMENT TRANSACTIONS continued (a) Equity-settled share option scheme continued The 2005 Scheme continued 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). 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; and (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. Consideration on each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of options, with full payment for exercise price to be made on exercise of the relevant options. The New Scheme The Company adopted the New Scheme (together with the 2005 Scheme are referred to as the “Schemes”) at its AGM held on 15 May 2015, which has a term of 10 years and will expire on 14 May 2025. Terms of the New Scheme are substantially the same as those under the 2005 Scheme. The purpose of the New Scheme is to provide an incentive for employees of the Company and its subsidiaries to work with commitment towards enhancing the value of the Company and its shares for the benefit of its shareholders. Under the New Scheme, options to subscribe for ordinary shares of the Company may be granted to employees of the Company or any subsidiaries (including Executive Director) and such other persons as the Board may consider appropriate from time to time, on the basis of their contribution to the development and growth of the Company and its subsidiaries. The maximum number of shares in respect of which options may be granted under the New Scheme and any other share option schemes of the Company shall not in aggregate exceed such number of shares as required under the Listing Rules, currently being 10% of the shares in issue as at 15 May 2015, the date of the AGM approving the New Scheme (being 106,389,669 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 New Scheme and any other share option schemes 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 New 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 10,638,966 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; and (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. Consideration on each grant of option is HK$1 and is required to be paid within 30 days from the date of grant of options, with full payment for exercise price to be made on exercise of the relevant options. During the year, a total of 956,200 (2017: 727,000) share options were granted under the New Scheme. The 2005 Scheme expired on 9 May 2015 and no further option will be granted under the 2005 Scheme. (b) Grant and vesting structures Under the Company’s current policy, grants will be made on a periodic basis. For the Schemes, the exercise period is 10 years and vesting period is 3 years in equal proportions starting from the 1st anniversary and become fully vested on the 3rd anniversary of the grant. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. 169 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation37. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options The following table discloses movements of the Company’s share options held by the Director and eligible employees during the current year: Name 2005 Scheme Executive Director Lee Irene Yun-Lien Eligible employees (Note c) Date of grant Exercise price HK$ Exercise period (Note a) 14.5.2012 7.3.2013 10.3.2014 12.3.2015 31.3.2009 31.3.2010 31.3.2011 30.3.2012 28.3.2013 31.3.2014 31.3.2015 33.50 39.92 32.84 36.27 13.30 22.45 32.00 31.61 39.20 33.75 34.00 14.5.2013 – 13.5.2022 7.3.2014 – 6.3.2023 10.3.2015 – 9.3.2024 12.3.2016 – 11.3.2025 31.3.2010 – 30.3.2019 31.3.2011 – 30.3.2020 31.3.2012 – 30.3.2021 30.3.2013 – 29.3.2022 28.3.2014 – 27.3.2023 31.3.2015 – 30.3.2024 31.3.2016 – 30.3.2025 Balance as at 1.1.2018 87,000 265,000 325,000 300,000 59,000 70,334 54,000 105,334 153,000 154,000 204,667 1,777,335 Changes during the year Granted Exercised Balance as at 31.12.2018 Cancelled/ lapsed (Note b) – – – – – – – – – – – – – – – – (59,000) (Note d) (20,334) (Note e) (22,000) (Note f) (35,334) (Note g) (51,000) (Note h) (108,000) (Note i) (138,333) (Note j) – – – – – – – – 87,000 265,000 325,000 300,000 – 50,000 32,000 70,000 (17,000) 85,000 – 46,000 (3,667) 62,667 (434,001) (20,667) 1,322,667 170 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 37. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued Name New Scheme Executive Director Lee Irene Yun-Lien Eligible employees (Note c) Date of grant Exercise price HK$ Exercise period (Note a) 9.3.2016 23.2.2017 1.3.2018 31.3.2016 31.3.2017 29.3.2018 33.15 36.25 44.60 (Note k) 33.05 35.33 41.50 (Note n) 9.3.2017 – 8.3.2026 23.2.2018 – 22.2.2027 1.3.2019 – 29.2.2028 31.3.2017 – 30.3.2026 31.3.2018 – 30.3.2027 29.3.2019 – 28.3.2028 Exercisable at the end of the year Notes: Balance as at 1.1.2018 375,000 300,000 Changes during the year Granted Exercised Balance as at 31.12.2018 Cancelled/ lapsed (Note b) – – – 373,200 – – – – – – 375,000 300,000 373,200 377,668 409,000 – – – 583,000 (158,333) (Note l) (84,666) (Note m) – (45,335) 174,000 (75,667) 248,667 (70,000) 513,000 1,461,668 956,200 (242,999) (191,002) 1,983,867 1,791,662 (a) All options granted have a vesting period of 3 years in equal proportions starting from the 1st anniversary and become fully vested on the 3rd anniversary of the grant. In this table, “exercise period” begins with the 1st anniversary of the grant date. (b) The options lapsed during the year upon resignations of certain eligible employees. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (d) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$39.25. (e) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$45.36. (f) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$44.55. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$43.56. (h) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$43.88. (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$43.99. The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.85. (k) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 28 February 2018) was HK$45.35. (l) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.52. (m) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$42.33. (n) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 28 March 2018) was HK$40.75. In respect of the share options exercised during the year ended 31 December 2018, the weighted average share price at the dates of exercise was HK$42.55. Apart from the above, the Company had not granted any share option under the Schemes to any other person as required to be disclosed under Rule 17.07 of the Listing Rules in 2018. 171 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 37. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued The following table discloses movements of the Company’s share options held by the Director and eligible employees in prior year: Name 2005 Scheme Executive Director Lee Irene Yun-Lien Eligible employees (Note c) Date of grant Exercise price HK$ Exercise period (Note a) 14.5.2012 7.3.2013 10.3.2014 12.3.2015 31.3.2008 31.3.2009 31.3.2010 31.3.2011 30.3.2012 28.3.2013 31.3.2014 31.3.2015 33.50 39.92 32.84 36.27 21.96 13.30 22.45 32.00 31.61 39.20 33.75 34.00 14.5.2013 – 13.5.2022 7.3.2014 – 6.3.2023 10.3.2015 – 9.3.2024 12.3.2016 – 11.3.2025 31.3.2009 – 30.3.2018 31.3.2010 – 30.3.2019 31.3.2011 – 30.3.2020 31.3.2012 – 30.3.2021 30.3.2013 – 29.3.2022 28.3.2014 – 27.3.2023 31.3.2015 – 30.3.2024 31.3.2016 – 30.3.2025 Balance as at 1.1.2017 87,000 265,000 325,000 300,000 11,000 128,000 126,334 125,000 160,001 276,000 338,000 359,000 2,500,335 Changes during the year Granted Exercised Balance as at 31.12.2017 Cancelled/ lapsed (Note b) – – – – – – – – – – – – – – – – – (11,000) (Note d) (69,000) (Note d) (56,000) (Note d) (39,000) (Note e) (47,667) (Note f) – (139,000) (Note g) (60,267) (Note h) – – – – – – – 87,000 265,000 325,000 300,000 – 59,000 70,334 (32,000) 54,000 (7,000) 105,334 (123,000) 153,000 (45,000) 154,000 (94,066) 204,667 (421,934) (301,066) 1,777,335 172 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 37. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued Name New Scheme Executive Director Lee Irene Yun-Lien Eligible employees (Note c) Date of grant Exercise price HK$ Exercise period (Note a) Changes during the year Balance as at 1.1.2017 Granted Exercised Balance as at 31.12.2017 Cancelled/ lapsed (Note b) 9.3.2016 33.15 23.2.2017 36.25 (Note i) 31.3.2016 33.05 31.3.2017 35.33 (Note k) 9.3.2017 – 8.3.2026 23.2.2018 – 22.2.2027 31.3.2017 – 30.3.2026 31.3.2018 – 30.3.2027 375,000 – – 300,000 – – – – 375,000 300,000 610,000 – – 427,000 (74,598) (Note j) – (157,734) 377,668 (18,000) 409,000 985,000 727,000 (74,598) (175,734) 1,461,668 Exercisable at the end of the year Notes: 1,824,992 (a) All options granted have a vesting period of 3 years in equal proportions starting from the 1st anniversary and become fully vested on the 3rd anniversary of the grant. In this table, “exercise period” begins with the 1st anniversary of the grant date. (b) The options lapsed during the year upon resignations of certain eligible employees. (c) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. (d) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$37.25. (e) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$38.95. (f) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$38.99. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$38.86. (h) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$37.79. (i) (j) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 22 February 2017) was HK$36.00. The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$38.69. (k) The closing price of the shares of the Company immediately before the date of grant (i.e. as of 30 March 2017) was HK$35.00. In respect of the share options exercised during the year ended 31 December 2017, the weighted average share price at the dates of exercise was HK$38.68. 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 in 2017. 173 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 37. SHARE-BASED PAYMENT TRANSACTIONS continued (d) Fair values of share options The Group has applied HKFRS 2 to account for its share options granted. In accordance with HKFRS 2, fair value of share options granted to employees determined at the date of grant is expensed over the vesting period, with a corresponding adjustment to the Group’s share options reserve. In the current year, the Group recognised the share option expenses of HK$4 million (2017: HK$4 million) in relation to share options granted by the Company, of which HK$2 million (2017: HK$2 million) related to the Director (see note 11), 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 29.3.2018 1.3.2018 31.3.2017 23.2.2017 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$41.500 HK$41.500 1.802% 5 years 17.923% HK$1.288 HK$4.900 HK$43.700 HK$44.600 1.741% 5 years 17.534% HK$1.288 HK$4.760 HK$35.250 HK$35.330 1.331% 5 years 19.133% HK$1.204 HK$4.374 HK$36.250 HK$36.250 1.488% 5 years 20.238% HK$1.204 HK$4.958 (a) Risk free rate: being the approximate yields of 5-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 5 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 over the past 5 years immediately before the date of grant. (d) Expected dividend per annum: being the approximate average annual cash dividend over the past 5 financial years. 174 Hysan Annual Report 2018Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2018 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s major financial instruments include loans to associates, loans to a joint venture, fund investment, term notes, accounts and other receivables, time deposits, cash and cash equivalents, accounts payable, accruals, amounts due to non- controlling interests, borrowings and derivative financial instruments. Details of these financial instruments are disclosed in respective Notes to the Consolidated Financial Statements sections. 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 and impairment assessment The credit risk of the Group is primarily attributable to loans to associates, loans to a joint venture, accounts and other receivables, derivative financial instruments, term notes, time deposits and bank balances. The Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position. Loans to associates and a joint venture The Group regularly monitors the business performance of the associates and joint venture. The Group’s credit risks in these balances are mitigated through the value of the assets held by these entities and the power to participate or jointly control the relevant activities of these entities. Accounts and other receivables Credit checks on tenants 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 expected credit losses of each individual debt, after taking into consideration the deposits from tenants, at the end of each reporting period. Derivative financial instruments, term notes, time deposits and bank balances The Group only deals 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 external 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 bank balances, time deposits and term notes); (ii) net positive value of derivative financial instruments and; (iii) potential exposures to derivatives which are based on the remaining term and the notional amount of the derivative financial instruments. Other than those financial assets whose carrying amounts best represent the maximum exposure to credit risk, the Group also expose to credit risk arising from the corporate financial guarantees which will cause a financial loss to the Group if the guarantee is called out. Details of the Group’s credit risk maximum exposure are set out in note 36 of the Notes to the Consolidated Financial Statements section. Other than concentration of credit risk on loans to associates and a joint venture, the Group does not have any other significant concentration of credit risk. Since 1 January 2018, the Group reviewed and assessed the Group’s existing financial assets and financial guarantee contract for impairment using reasonable and supportable information that is available without undue cost or effort in accordance with HKFRS 9. For the purpose of internal credit risk management, the Group uses financial information (such as historical settlement records, past due records, deposits held or other credit enhancement) to assess whether credit risk has increased significantly since initial recognition. During the year ended 31 December 2018, there is no past due amount from loans to associates and loans to a joint venture. 175 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationFinancial Risk ManagementFor the year ended 31 December 20181. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (a) Credit risk and impairment assessment continued The Group’s internal credit risk grading assessment comprises the following categories: Internal credit rating Description Performing Non-performing The counterparty has a low credit risk of default and does not have any past-due amounts There have been significant increases in credit risk since initial recognition through information developed internally or external resources Accounts receivables Other financial assets Lifetime Expected 12-month ECL Credit Losses (“ECL”) – not credit-impaired – not credit-impaired Lifetime ECL Lifetime ECL – not credit-impaired – not credit-impaired Write-off There is evidence indicating that the debtor is in severe financial difficulty and the Group has no realistic prospect of recovery Amount is written off Amount is written off The tables below detail the credit risk exposures of the Group’s major financial assets and financial guarantee contracts, which are subject to ECL assessment: As at 31 December 2018 Notes Financial assets at amortised cost Loans to a joint venture Term notes 19 21 External credit rating Internal credit rating 12-month or lifetime ECL N/A Performing 12-month ECL BBB A or above N/A N/A N/A 12-month ECL 12-month ECL 12-month ECL Gross carrying amount HK$ million 1,066 9 218 2,817 Time deposits and bank balances 24 A or above In respect of the financial guarantee contract, the credit risk exposures of the Group is assessed under 12-month ECL and concluded that the loss given default of the counter party, a joint venture, is insignificant and accordingly, no allowance for credit loss is provided. The following table show reconciliation of loss allowances that has been recognised for loans to a joint venture and term notes. As at 1 January 2018 Impairment under ECL model As at 31 December 2018 Loss allowance for Loans to a joint venture HK$ million Term notes HK$ million 5 (1) 4 1 – 1 Loss allowance recognised for loans to a joint venture and term notes are measured at 12-month ECL, there is no transfer from 12-month ECL to Lifetime ECL during the year as there is no significant increase in credit risk for the financial assets at amortised cost. 176 Hysan Annual Report 2018Financial Risk Management continuedFor the year ended 31 December 2018 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (b) Liquidity risk The Group closely monitors 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 for their non-derivative financial liabilities based on the agreed repayment terms. Maturity of the Group’s financial guarantee contract is presented separately. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group is required to pay. The table includes both interest and principal cash flows. The interest payments are computed using contractual rates or, if floating, based on the prevailing market rate at the 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 HK$ million HK$ million Within 1 year or on demand HK$ million More than 1 year but not exceeding 2 years HK$ million More than 2 years but not exceeding 5 years HK$ million More than 5 years HK$ million As at 31 December 2018 Non-derivative financial liabilities Accounts payable and accruals Deposits from tenants Amounts due to non-controlling interests Unsecured bank loans Unsecured fixed rate notes As at 31 December 2017 Non-derivative financial liabilities Accounts payable and accruals Deposits from tenants Amounts due to non-controlling interests Unsecured bank loans Unsecured fixed rate notes Note: (873) (1,000) (223) (1,532) (4,790) (8,418) (873) (1,000) (223) (1,732) (5,569) (9,397) (873) (331) (223) (48) (472) (1,947) (736) (895) (327) (1,550) (4,635) (8,143) (736) (895) (327) (1,655) (5,507) (9,120) (736) (389) (327) (32) (322) (1,806) (1,258) – (216) – (48) (731) (995) – (269) – (528) (461) – (439) – (1,636) (3,651) (5,726) – (14) – – (715) (729) – (227) – (1,095) (1,509) (2,831) – (10) – – (3,215) (3,225) In addition to the items as set out in the above liquidity risk table, the maximum amount the Group could be required to settle under a financial guarantee provided by the Group in respect of banking facilities granted to a joint venture is HK$3,000 million as at 31 December 2018 and 2017, if such amount is claimed by the counterparties to the guarantee at any time within the guaranteed period. Based on expectations at the end of the reporting period, the Directors of the Company consider that it is more likely than not that no amount will be payable by the Group under such financial guarantee arrangement. 177 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (b) Liquidity risk continued The following table details the Group’s remaining contractual maturity for its derivative financial instruments. The table has been drawn up based on the undiscounted gross inflows (outflows) on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the prevailing market rate at the end of the reporting period. For cash flows denominated in currency other than HKD, the prevailing foreign exchange rates at the end of the reporting period are used to convert the cash flows into HKD. Total contractual Carrying undiscounted cash flow amount HK$ million HK$ million Within 1 year or on demand HK$ million More than 1 year but not exceeding 2 years HK$ million More than 2 years but not exceeding 5 years HK$ million More than 5 years HK$ million As at 31 December 2018 Derivative settled gross Forward foreign exchange contracts Outflow Inflow Cross currency swap Outflow Inflow As at 31 December 2017 Derivative settled gross Forward foreign exchange contracts Outflow Inflow Cross currency swap Outflow Inflow – (26) 1 (30) (219) 218 (219) 218 – – – – (2,687) 2,720 (85) 82 (85) 82 (2,517) 2,556 (548) 547 (329) 329 (219) 218 – – – – – – – – (2,772) 2,797 (85) 82 (85) 82 (255) 246 (2,347) 2,387 (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. The Group is exposed to fair value interest rate risk in relation to fixed rate term notes (see note 21 of the Notes to Consolidated Financial Statements section). As at 31 December 2018, about 24.5% (2017: 25.1%) 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 cash flow interest rate risk as the interest income derived from time deposits and bank balances is subject to interest rate changes. 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 all other variables were held constant. Such change has been applied to non-derivative financial instruments that would have affected the profit or loss and equity. A change of +100 and -25 basis points (“bps”) (2017: +100 and - 25 basis points) was applied to the HKD and US dollars (“USD”) yield curves at the end of the reporting period. The applied change of bps represented management’s assessment of the reasonably possible change in interest rates based on the current market conditions. 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. 178 Hysan Annual Report 2018Financial Risk Management continuedFor the year ended 31 December 2018 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES continued (c) Interest rate risk continued Sensitivity analysis continued Increase (decrease) in profit or loss bps increase HK$ million bps decrease HK$ million Increase (decrease) in equity bps increase HK$ million bps decrease HK$ million As at 31 December 2018 As at 31 December 2017 13 11 (3) (3) 7 (2) (2) 4 (d) Currency risk The Group aims to minimise its currency risk and does not speculate in currency movements for debt management. To cover foreign exchange exposures arising from debts, the Group’s foreign currency denominated monetary liabilities must be hedged back to HKD unless the liabilities are naturally hedged by the underlying asset in the same foreign currency. In managing the Group’s monetary assets, the Group limits the aggregate net foreign currency exposures to a certain threshold. Exposures exceeding that threshold will be hedged back to HKD. The majority of the Group’s assets are located and all rental income and management fee 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 USD. The Group’s unsecured fixed rate notes are hedged by cross currency swap. 2018 2017 Assets Cash Time deposits Term notes Fund Investment Liabilities Unsecured fixed rate notes Total equivalent to HK$ million 3 161 227 294 685 US$ million – 21 29 38 88 300 2,344 Total equivalent to HK$ million 12 248 737 21 1,018 2,338 US$ million 2 32 94 3 131 300 Other than concentration of currency risk of the above items denominated in USD (2017: USD), the Group has no other significant currency risk. The Group has entered into appropriate hedging instruments, mentioned in note 22 of the Notes to the Consolidated 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 all other variable were held constant. Such change has been applied to both derivative and non-derivative financial instruments that would have affected the profit or loss and equity. Change of 500 percentage in points (“pips”) (2017: 500 pips) was applied to the HKD: USD (2017: HKD: USD) spot and forward rates at the end of the reporting period. In management’s opinion, the sensitivity analysis is unrepresentative of the currency risk as the year end exposure does not reflect the exposure during the year. As at 31 December 2018 USD As at 31 December 2017 USD 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 3 9 (3) (9) 1 4 (1) (4) 179 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 2. CATEGORIES OF FINANCIAL INSTRUMENTS Financial assets Fair value through profit or loss (“FVTPL”) Derivative instruments under hedge accounting Amortised cost (including cash and cash equivalents) Financial liabilities Derivative instruments under hedge accounting Amortised cost 2018 HK$ million 2017 HK$ million 295 – 4,203 4,498 26 7,418 7,444 22 2 4,448 4,472 31 7,248 7,279 3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO ENFORCEABLE MASTER NETTING ARRANGEMENTS OR SIMILAR AGREEMENTS The Group has entered certain derivative transactions that are covered by the International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) signed with various banks. These derivative instruments are not offset in the consolidated statement of financial position as the ISDA Agreements are in place with a right of set off only in the event of default, insolvency or bankruptcy so that the Group currently has no legally enforceable right to set off the recognised amounts. Other than derivatives transactions mentioned above, the Group has no other financial assets and financial liabilities which are offset in the Group’s consolidated statement of financial statements or are subject to similar netting arrangements. (a) Financial assets subject to enforceable master netting arrangements or similar agreements As at 31 December 2018 Derivatives under hedge accounting As at 31 December 2017 Derivatives under hedge accounting Gross amounts of recognised financial assets HK$ million Gross amounts of recognised financial liabilities set off in the consolidated statement of financial position HK$ million Net amounts of financial assets presented in the consolidated statement of financial position HK$ million – 2 – – – 2 (b) Net financial assets subject to enforceable master netting arrangements or similar agreements, by counterparty Net amounts of financial assets presented in the consolidated statement of financial position HK$ million Financial liabilities not set off in the consolidated statement of financial position HK$ million Net amount HK$ million – – – 1 1 2 – – – – (1) (1) – – – 1 – 1 As at 31 December 2018 Counterparty B Counterparty C Total As at 31 December 2017 Counterparty B Counterparty C Total 180 Hysan Annual Report 2018Financial Risk Management continuedFor the year ended 31 December 2018 3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES SUBJECT TO ENFORCEABLE MASTER NETTING ARRANGEMENTS OR SIMILAR AGREEMENTS continued (c) Financial liabilities subject to enforceable master netting arrangements or similar agreements As at 31 December 2018 Derivatives under hedge accounting As at 31 December 2017 Derivatives under hedge accounting Gross amounts of recognised financial liabilities HK$ million Gross amounts of recognised financial assets set off in the consolidated statement of financial position HK$ million Net amounts of financial liabilities presented in the consolidated statement of financial position HK$ million (26) (31) – – (26) (31) (d) Net financial liabilities subject to enforceable master netting arrangements and similar agreements, by counterparty As at 31 December 2018 Counterparty A As at 31 December 2017 Counterparty A Counterparty C Total Net amounts of financial liabilities presented in the consolidated statement of financial position HK$ million Financial assets not set off in the consolidated statement of financial position HK$ million (26) (30) (1) (31) – – 1 1 Net amount HK$ million (26) (30) – (30) 4. FAIR VALUE MEASUREMENT (a) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required) The fair values of financial assets and financial liabilities measured at amortised cost are determined in accordance with generally accepted pricing models based on discounted cash flow methodology taking into account the market interest rate and credit risk of the counterparties and of the Group as appropriate. The Directors of the Company consider that the carrying amounts of financial assets and financial liabilities measured at amortised cost in the consolidated financial statements approximate their fair values, except for the carrying amount of HK$4,790 million (2017: HK$4,635 million) unsecured fixed rate notes as stated in note 27 of the Notes to the Consolidated Financial Statements section with fair value of HK$4,824 million (2017: HK$4,737 million). The fair value of HK$2,348 million (2017: HK$2,391 million) of the unsecured fixed rate notes is categorised into Level 1 of the fair value hierarchy, in which the fair value was derived from quoted prices in an active market translated at the spot foreign exchange rate of the respective currency at year end. The fair value of HK$2,476 million (2017: HK$2,346 million) of the unsecured fixed rate notes is categorised into Level 2 of the fair value hierarchy, in which the fair value was measured using discounted cash flow methodology based on observable yield curves of the respective currency taking into account the credit margin of the Group as appropriate. 181 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 4. FAIR VALUE MEASUREMENT continued (b) Fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis The following table provides an analysis of financial instruments that are measured at fair value on a recurring basis, grouped into Levels 1 to 3 based on the degree to which the inputs to the fair value measurements are observable. • Level 1: fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets and liabilities. • Level 2: fair value measurements are those derived from inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Level 1 HK$ million Level 2 HK$ million Level 3 HK$ million Total HK$ million 2018 – – – – 1 – 1 – 294 294 1 294 295 26 – 26 Level 1 HK$ million Level 2 HK$ million Level 3 HK$ million Total HK$ million 2017 – – – – – – – 2 1 21 24 1 30 31 – – – – – – – 2 1 21 24 1 30 31 Financial assets Financial assets at FVTPL Unlisted club debenture Fund investment Total Financial liabilities Derivatives under hedge accounting Cross currency swap Financial assets Derivatives under hedge accounting Forward foreign exchange contracts Financial assets at FVTPL Unlisted club debenture Fund investment Total Financial liabilities Derivatives under hedge accounting Forward foreign exchange contracts Cross currency swap Total 182 Hysan Annual Report 2018Financial Risk Management continuedFor the year ended 31 December 2018 4. FAIR VALUE MEASUREMENT continued (c) Reconciliation of Level 3 fair value measurement of financial asset As at 1 January 2018 Transfer into Level 3 Addition Losses recognised in profit or loss As at 31 December 2018 Fund investment HK$ million – 162 149 (17) 294 In current year, fund investment at fair value through profit or loss was transferred from Level 2 to Level 3 upon commencement of property investments by the fund. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation input of the underlying assets and liabilities of the fund investment. The unrealised fair value losses of approximately HK$17 million relating to fund investment at fair value through profits or loss is included in other gains and losses. (d) Valuation techniques and inputs used in fair value measurements Forward foreign exchange contracts and cross currency swap are measured using discounted cash flow methodology based on observable spot and forward exchange rates as well as the yield curves of the respective currencies taking into account the credit risk of the counterparties and of the Group as appropriate. Fund investment is measured with reference to the fair value of underlying assets and liabilities held under the fund as at the end of the reporting period. (e) Valuation process of Level 3 fair value measurements of financial assets At the end of the reporting period, the management of the Group obtains from the fund manager the valuation techniques and inputs for Level 3 fair value measurements in relation to the fund investment and its underlying assets and liabilities. Where there is a material change in the fair value of the fund investment, the causes of the fluctuations will be reported to the Directors of the Company. 183 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and Valuation 5. 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, cash and cash equivalents. The management reviews the Group’s net debt to equity ratio regularly and adjusts 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 Unsecured fixed rate notes Borrowings Less: Time deposits Cash and cash equivalents Net debt Equity attributable to owners of the Company Net debt to equity 2018 HK$ million 2017 HK$ million 1,532 4,790 6,322 (748) (2,069) 3,505 74,431 4.7% 1,550 4,635 6,185 (628) (2,034) 3,523 69,953 5.0% Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 184 Hysan Annual Report 2018Financial Risk Management continuedFor the year ended 31 December 2018 For the year ended 31 December Results Turnover Property expenses Gross profit Other income 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$), based on: Profit for the year – basic – diluted Underlying profit for the year – basic Recurring underlying profit for the year – basic Performance indicators Net debt to equity Net interest coverage (times) Net asset value per share (HK$) Net debt per share (HK$) Year-end share price (HK$) 2018 HK$ million (Note) 2017 HK$ million 2016 HK$ million 2015 HK$ million 2014 HK$ million 3,890 (523) 3,367 – 78 (16) (227) (222) 3,532 288 6,800 (481) 6,319 (286) 6,033 2,536 2,536 3,548 (449) 3,099 261 69 – (247) (158) 853 220 4,097 (484) 3,613 23 3,636 2,491 2,349 3,535 (428) 3,107 – 50 – (219) (178) (1,187) 237 1,810 (463) 1,347 (129) 1,218 2,369 2,369 3,430 (414) 3,016 – 54 – (234) (204) 695 246 3,573 (438) 3,135 (232) 2,903 2,283 2,283 3,224 (404) 2,820 – 68 (2) (214) (228) 2,940 252 5,636 (386) 5,250 (348) 4,902 2,163 2,163 1,444 1,224 144.00 1,411 1,161 137.00 1,394 1,139 135.00 1,330 1,122 132.00 1,255 1,064 123.00 5.77 5.76 2.42 2.42 4.7% 18.1x 71.12 3.35 37.25 3.48 3.48 2.38 2.25 5.0% 17.1x 66.89 3.37 41.45 1.16 1.16 2.26 2.26 5.4% 20.5x 64.56 3.50 32.05 2.73 2.73 2.15 2.15 3.0% 19.5x 64.48 1.94 31.75 4.61 4.61 2.03 2.03 4.2% 17.1x 63.02 2.64 34.65 185 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationFive-Year Financial Summary As at 31 December Assets and liabilities Investment properties Investments in associates Loans to associates Investment in a joint venture Loans to a joint venture Fund investment Time deposits, cash and cash equivalents Other assets Total assets Borrowings Taxation Other liabilities Total liabilities Net assets Non-controlling interests Shareholders’ funds Definitions: 2018 HK$ million (Note) 2017 HK$ million 2016 HK$ million 2015 HK$ million 2014 HK$ million 77,442 3,708 11 145 1,062 294 2,817 1,564 87,043 (6,322) (962) (2,122) (9,406) 77,637 (3,206) 74,431 72,470 3,779 10 147 982 21 2,662 2,049 82,120 (6,185) (945) (1,989) (9,119) 73,001 (3,048) 69,953 69,633 3,497 – 145 1,891 – 2,630 2,225 80,021 (6,293) (863) (2,180) (9,336) 70,685 (3,195) 67,490 69,810 3,683 – – – – 2,804 2,491 78,788 (4,859) (803) (1,758) (7,420) 71,368 (3,196) 68,172 68,735 4,154 – – – – 3,640 2,494 79,023 (6,447) (732) (1,715) (8,894) 70,129 (3,089) 67,040 (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 (3) Net debt to equity: borrowings less time deposits, cash and cash equivalents divided by shareholders’ funds (4) Net interest coverage: gross profit less administrative expenses before depreciation divided by net interest expenses (5) Net asset value per share: shareholders’ funds divided by number of issued shares at year end (6) Net debt per share: borrowings less time deposits, cash and cash equivalents divided by number of issued shares at year end Note: In the current year, the Group has applied the remaining sections of HKFRS 9 (see note 2 of the Notes to the Consolidated Financial Statements section for the summary of the corresponding financial impact). Accordingly, certain comparative information for the years ended 31 December 2014, 2015, 2016 and 2017 may not be comparable to the year ended 31 December 2018 as such comparative information was prepared under HKAS 39. Accounting policies resulting from application of HKFRS 9 are disclosed in the “Significant Accounting Policies” Section. 186 Hysan Annual Report 2018Five-Year Financial Summary continued To the Board of Directors Hysan Development Company Limited Dear Sirs, Annual Revaluation of Investment Properties as at 31 December 2018 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 2018 was in the approximate sum of Hong Kong Dollars Seventy-Seven Billion Four Hundred and Forty Two Million Only (ie HK$77,442 million). The completed investment properties have been valued individually, on market value basis, on the basis of capitalisation of the net income with due allowance for the reversionary income potential but without allowances for any expenses or taxation which may be incurred in effecting a sale, and where appropriate, cross reference by sales comparables. Yours faithfully Knight Frank Petty Limited Hong Kong, 20 February 2019 187 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationReport of the ValuerINVESTMENT PROPERTIES Address Lot No. 1. Lee Garden One 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 Commercial Category of the Lease Long lease Percentage held by the Group 100% 2. Bamboo Grove I. L. 8624 Residential Medium term lease 100% Commercial Long lease 65.36% Sec. G of I.L. 29, Sec. A, O, F and H of I.L. 457, the R.P. of Sec. C, D, E and G of I.L. 457, Subsec. 1 of Sec. C, D, E and G of I.L. 457, Subsec. 2 of Sec. E of I.L. 457 and Subsec. 1, 2, 3 and the R.P. of Sec. C of I.L. 461 Sec. B, C and the R.P. of I.L. 1451 Commercial Long lease 100% I. L. 1452, the R.P. of I.L. 472 and 476 Commercial Long lease 100% The R.P. of Subsec. 1 of Sec. J of I.L. 29, Subsec. 2 of Sec. J of I.L. 29 and the R.P. of Sec. J of I.L. 29 Commercial 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% 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% 74-86 Kennedy Road Mid-Levels Hong Kong Lee Garden Two 28 Yun Ping Road Causeway Bay Hong Kong Leighton Centre 77 Leighton Road Causeway Bay Hong Kong Lee Theatre Plaza 99 Percival Street Causeway Bay Hong Kong Lee Garden Three 1 Sunning Road Causeway Bay Hong Kong 3. 4. 5. 6. 7. One Hysan Avenue 1 Hysan Avenue Causeway Bay Hong Kong 8. 9. Lee Garden Five 18 Hysan Avenue Causeway Bay Hong Kong Lee Garden Six 111 Leighton Road Causeway Bay Hong Kong 10. Hysan Place 500 Hennessy Road Causeway Bay Hong Kong 188 Hysan Annual Report 2018Schedule of Principal PropertiesAt 31 December 2018 SHARE CAPITAL At 31 December 2018 Issued and fully paid-up capital There was one class of ordinary shares with equal voting rights. DISTRIBUTION OF SHAREHOLDINGS (At 31 December 2018, as per register of members of the Company) HK$ Number of Ordinary Shares 7,718,190,846 1,046,501,891 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 total no. of issued shares (Note) 2,267 769 68 44 2 7 3,157 71.81 24.36 2.16 1.39 0.06 0.22 3,606,017 11,924,271 5,138,658 8,902,235 1,131,041 1,015,799,669 100 1,046,501,891 0.34 1.14 0.49 0.85 0.11 97.07 100 TYPES OF SHAREHOLDERS (At 31 December 2018, as per register of members of the Company) Type of shareholders Lee Hysan Company Limited Other corporate shareholders Individual shareholders Total LOCATION OF SHAREHOLDERS (At 31 December 2018, 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 total no. of issued shares (Note) 433,130,735 584,743,134 28,628,022 1,046,501,891 41.39 55.88 2.73 100 Number of ordinary shares held % of the total no. of issued shares (Note) 1,044,371,353 1,898,751 19,085 212,702 1,046,501,891 99.797 0.181 0.002 0.020 100 The percentage was compiled based on the total number of issued shares of the Company as at 31 December 2018 (i.e. 1,046,501,891 ordinary shares). 189 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationShareholding Analysis FINANCIAL CALENDAR Full year results announced Ex-dividend date for second interim dividend Closure of register of members and record date for second interim dividend 21 February 2019 6 March 2019 8 March 2019 Dispatch of second interim dividend warrants (on or about) 22 March 2019 Closure of register of members for Annual General Meeting Annual General Meeting 2019 interim results to be announced * subject to change 10 to 16 May 2019 16 May 2019 13 August 2019* DIVIDEND The Board declares the payment of a second interim dividend of HK117 cents per share. The second interim dividend will be payable in cash to shareholders on the register of members as at Friday, 8 March 2019. The register of members will be closed on Friday, 8 March 2019, for the purpose of determining shareholders’ entitlement to the second interim dividend, on which date no transfer of shares will be registered. In order to qualify for the second interim dividend, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s Registrar not later than 4:00 p.m. on Thursday, 7 March 2019. Dividend warrants will be dispatched to shareholders on or about Friday, 22 March 2019. The register of members will also be closed from Friday, 10 May 2019 to Thursday, 16 May 2019, both dates inclusive, for the purpose of determining shareholders’ entitlement to attend and vote at the Annual General Meeting to be held on 16 May 2019, 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 Registrar not later than 4:00 p.m. on Thursday, 9 May 2019. 190 Hysan Annual Report 2018Shareholder Information SHAREHOLDER SERVICES For enquiries about share transfer and registration, please contact the Company’s Registrar, Tricor Standard Limited: Tricor Standard Limited Level 22, Hopewell Centre 183 Queen’s Road East Hong Kong Telephone: (852) 2980 1333 Facsimile: (852) 2861 1465 Holders of the Company’s ordinary shares should notify the Registrar 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 Registrar 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.), Lee Garden One 33 Hysan Avenue Hong Kong Telephone: (852) 2895 5777 Facsimile: (852) 2577 5153 191 OverviewCorporate GovernanceBusiness PerformanceFinancial Statements and ValuationCOMPANY SECRETARY Cheung Ka Ki Maggie REGISTERED OFFICE 49/F. (Reception: 50/F) Lee Garden One 33 Hysan Avenue Hong Kong OUR WEBSITE Press releases and other information of the Group can be found at our website: www.hysan.com.hk. 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 Ticker Symbol for ADR Code: HYSNY CUSIP reference number: 449162304 AUDITOR Deloitte Touche Tohmatsu BOARD OF DIRECTORS Lee Irene Yun-Lien (Chairman) Churchouse Frederick Peter** Fan Yan Hok Philip** Lau Lawrence Juen-Yee** Poon Chung Yin Joseph** Wong Ching Ying Belinda** Jebsen Hans Michael B.B.S.* (Yang Chi Hsin Trevor as his alternate) Lee Anthony Hsien Pin* (Lee Irene Yun-Lien as his alternate) Lee Chien* Lee Tze Hau Michael * AUDIT AND RISK MANAGEMENT COMMITTEE Poon Chung Yin Joseph** (Chairman) Churchouse Frederick Peter** Fan Yan Hok Philip** Lee Anthony Hsien Pin* REMUNERATION COMMITTEE Fan Yan Hok Philip** (Chairman) Poon Chung Yin Joseph** Lee Tze Hau Michael* NOMINATION COMMITTEE Lee Irene Yun-Lien (Chairman) Fan Yan Hok Philip** Lau Lawrence Juen-Yee** Poon Chung Yin Joseph** Lee Chien* * Non-Executive Director ** Independent Non-Executive Director 192 Hysan Annual Report 2018Corporate Informationp i h s r e n t r a P t h g i E : y c n e g a e v i t a e r c 5 9 n a s y H . k h m o c . t a m r o f . w w w I D E T I M L T A M R O F : N G I S E D 　 　 Our Company, Our Community 20 18 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 8 Hysan Development Company Limited 49/F Lee Garden One, 33 Hysan Avenue, Hong Kong T 852 2895 5777 F 852 2577 5153 www.hysan.com.hk C M Y K C022951 stock code 00014 

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