ANNUAL REPORT 2017 AN IMPERIAL REBIRTH Stock Code: 00045 The Hongkong and Shanghai Hotels, Limited In this year’s Annual Report we have moved further towards integrated reporting as envisaged by the International Integrated Reporting Council (IIRC – www. theiirc.org). In the IIRC’s words “Integrated Reporting brings together material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates and sustains value”. The objective of our approach is to provide a connected view of the different aspects of our performance by publishing this Annual Report and a separate Corporate Responsibility and Sustainability Report to highlight our vision, strategy and our achievements in 2017. Together with our company’s website, the two reports enable our stakeholders to have a more informed assessment of our company. Our integrated approach encapsulates a number of different reference guidelines, including the International Integrated Reporting Framework published by the International Integrated Reporting Council, The Stock Exchange of Hong Kong Limited’s (HKEx) Environmental, Social and Governance Reporting Guide, the Hong Kong Institute of Certified Public Accountants’ (HKICPA) approach on corporate governance disclosure, and the Global Reporting Initiative G4 Sustainability Reporting Guidelines. Our financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards, the requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on HKEx. We welcome your feedback. Please share your views with us by post or email. CONTENTS 10 22 106 175 84 47 Accomplishments and Results 2017 Governance 06 Company at a Glance 114 Chairman’s Governance Overview 10 2017 Milestones 116 Our Leadership - Board Members 16 Financial Highlights 122 Our Leadership - Senior Management and 17 Non-Financial Highlights Key Functions 18 Financial Review Summary 124 Corporate Governance Report 20 Ten Year Operating Statistics 144 Group Risk Committee Report 21 Ten Year Financial Summary 152 Group Corporate Responsibility Committee 22 Letter from the Chairman Report 26 CEO’s Strategic Review 154 Audit Committee Report 56 Financial Review 156 Nomination Committee Report 158 Remuneration Committee Report Our Business 162 Directors’ Report 72 HSH Business Model and Investment Strategy Financial and Sustainability Data 80 External Environment and Industry Trends Statements 84 Sustainable Luxury Vision 2020 170 Independent Auditor’s Report Creating Shareholder Value 175 Financial Statements 234 Independent Assurance Report 88 The Peninsula Beijing – An Imperial Rebirth 236 Sustainability Data Statements 93 Engaging Our People, Our Future 99 Innovation Additional Information 102 Art with A Purpose 106 A Culinary Ambassador 238 Glossary 110 Awards in 2017 240 Shareholder Information 241 Reservations and Contact Addresses Accomplishments and Results 2017 06 Company at a Glance 10 2017 Milestones 16 Financial Highlights 17 Non-Financial Highlights 18 Financial Review Summary 20 Ten Year Operating Statistics 21 Ten Year Financial Summary 22 Letter from the Chairman 26 CEO’s Strategic Review 56 Financial Review Two five-metre-high paintings by Xinjiang-born painter Qin Feng depict the sun and moon – referencing Beijing’s iconic Temples of the Sun and Moon – on a deep cobalt background, which symbolises peace and spirituality in Chinese culture. Accomplishments and Results 2017 6 COMPANY AT A GLANCE Paris Chicago Beijing New York Tokyo Beverly Hills Shanghai Hong Kong Bangkok Manila Ho Chi Minh City HOTELS The Hongkong and Shanghai Hotels, Limited (HSH) was incorporated in 1866 and is listed on the Hong Kong Stock Exchange (00045). HSH is the holding company of a Group which is engaged in the ownership, development and management of prestigious hotels and commercial and residential properties in key locations in Asia, the United States and Europe, as well as the provision of tourism and leisure, club management and other services. HSH businesses are grouped under three divisions: hotels, commercial properties and clubs and services. The Peninsula Hong Kong Established: 1928 Rooms: 300 Ownership: 100% The Hongkong and Shanghai Hotels, Limited | Annual Report 2017 7 The Peninsula Shanghai The Peninsula Beijing The Peninsula Tokyo Established: 2009 Established: 1989 Established: 2007 Rooms: 235 Ownership: 50% Rooms: 230 Ownership: 76.6%* Rooms: 314 Ownership: 100% The Peninsula Bangkok The Peninsula Manila The Peninsula New York Established: 1998 Established: 1976 Established: 1988 Rooms: 370 Ownership: 50%** Rooms: 469 Ownership: 77.4% Rooms: 235 Ownership: 100% The Peninsula Chicago The Peninsula Beverly Hills The Peninsula Paris Established: 2001 Established: 1991 Established: 2014 Rooms: 339 Ownership: 100% Rooms: 195 Ownership: 20% Rooms: 200 Ownership: 20% * The Group owns 100% economic interest of The Peninsula Beijing with a reversionary interest to the PRC partner at the end of the co-operating joint venture period ** Changed from 75% in August 2017 Accomplishments and Results 2017 8 Company at a Glance COMMERCIAL PROPERTIES The Repulse Bay, The Peninsula Office Tower, The Peak Tower, Hong Kong (residential and arcade) Hong Kong Hong Kong (retail) Established: 1976 &1989 Established: 1994 Established: 1996 GFA:1,058,455 sq. ft. Ownership: 100% GFA: 75,082 sq. ft. Ownership: 100% GFA: 116,768 sq. ft. Ownership: 100% The Landmark, 21 avenue Kléber St. John’s Building, Ho Chi Minh City, Vietnam Paris, France (office and retail) Hong Kong (office) (office and residential) Acquired: 2013 Established: 1983 Established: 1994 GFA: 44,218 sq. ft. Ownership: 100% GFA: 71,400 sq. ft. Ownership: 100% GFA: 175,903 sq. ft. Ownership: 70%** ** The Group owns 50% economic interest of The Landmark with a reversionary interest to the Vietnamese partner at the end of the joint venture period The Hongkong and Shanghai Hotels, Limited | Annual Report 2017 9 CLUBS AND SERVICES The Peak Tram, Thai Country Club, Quail Lodge & Golf Club, Hong Kong Bangkok, Thailand Carmel, USA Established: 1888 Established: 1996 Acquired: 1997 Ownership: 100% Ownership: 50%** Ownership: 100% Peninsula Clubs and Tai Pan Laundry, Consultancy Services Peninsula Merchandising Hong Kong Established: 1977 Established: 2003 Established: 1980 Ownership: 100% Ownership: 100% Ownership: 100% PROJECTS The Peninsula London The Peninsula Istanbul The Peninsula Yangon Ownership : 100% Ownership : 50% Ownership : 70% ** Changed from 75% in August 2017 Accomplishments and Results 2017 10 2017 MILESTONES The Peninsula Beijing completed a spectacular transformation in August 2017, becoming the first all-suite hotel in China. Taking inspiration from traditional Imperial Chinese architectural design and art, the hotel’s new design shows the best of Chinese culture, artwork and artisanship – from sculptures and prints to hand-carved marble columns. The Hongkong and Shanghai Hotels, Limited | Annual Report 2017 11 The Peninsula London groundbreaking ceremony was held on 2 November 2017, with the Duke of Westminster attending as Guest of Honour. Accomplishments and Results 2017 12 2017 Milestones Significant progress was made in construction at The Peninsula Istanbul, which is located on the Bosphorus within walking distance of Istanbul’s main visitor attractions, and has spectacular views over the Topkapi Palace. The Peninsula Yangon held its groundbreaking ceremony on 16 February 2017. We are excited to move forward with this development as Myanmar develops as an important emerging market. The Hongkong and Shanghai Hotels, Limited | Annual Report 2017 13 The Peninsula Tokyo celebrated its tenth anniversary with a dazzling gala party on 26 October 2017, attended by more than 1,000 guests. The Peninsula Tokyo Rally Nippon 2017 held during the same week was the first event of its kind to be sponsored by a luxury hotel company in Japan, highlighting The Peninsula Hotels’ long association with classic cars. Accomplishments and Results 2017 14 2017 Milestones A spectacular renovation of 21 avenue Kléber, Paris was completed and leases were signed with major office and retail tenants. Our Chairman The Hon. Sir Michael Kadoorie was bestowed a Lifetime Achievement Award by Hong Kong Polytechnic University in September 2017. The Hongkong and Shanghai Hotels, Limited | Annual Report 2017 15 The “Digital Transformation with a Human Touch” strategy was launched by the Technology Steering Committee and shared with the entire group. From 1 April 2017, No.1 Waitanyuan was fully managed and operated by The Peninsula Shanghai, diversifying its portfolio of services, facilities and event spaces in one of Shanghai’s most iconic period buildings. Accomplishments and Results 2017 16 FINANCIAL HIGHLIGHTS Increase/ 2017 2016 (Decrease) Consolidated Statement of Profit or Loss (HK$m) Revenue 5,782 5,631 3% EBITDA 1,422 1,288 10% Operating profit 919 824 12% Profit attributable to shareholders 1,155 675 71% Earnings per share (HK$) 0.73 0.43 70% Underlying profit* 801 646 24% Dividends 318 297 7% Dividends per share (HK cents) 20 19 5% Dividend cover (times)** 2.5x 2.2x 14% Interest cover (times)Δ 10.6x 8.6x 23% Cash interest cover (times)ΔΔ 11.9x 13.8x (14%) Weighted average gross interest rate 2.2% 2.1%