The Wharf (Holdings) Limited Annual Report 2009 Stock Code: 4 On the Cover: Wheelock Square, 1717 Nanjing Xi Road, Shanghai Designed by Kohn Pedersen Fox, Wheelock Square features simple yet refined symmetrical lines combined with subtle elegance. It is among the tallest in Puxi upon completion in June 2010. Offering premium Grade A office of 1.2 million square feet GFA, the tower will feature top modern office specification and facilities rarely matched in the current market. Strategically situated in the heart of Jing’an District and overlooking Jing’an Park, Wheelock Square is located directly opposite Jing’an Temple Station for Metro lines 2 & 7, as well as within 5 minutes’ walk to Changshu Road Station for Metro line 1. Contents 40 002 Corporate Profile 003 Corporate Information 10 004 Group Business Structure 006 Chairman’s Statement 008 Financial Highlights 18 009 Managing Director’s Report Business Review 010 Harbour City 018 Times Square 024 China Properties 036 Modern Terminals 040 Other Businesses 044 Corporate Social Responsibility 052 Financial Review 36 059 Corporate Governance Report 065 Report of the Directors 076 Financial Information 077 Report of the Independent Auditor 078 Consolidated Income Statement 079 Consolidated Statement of Comprehensive Income 24 080 Consolidated Statement of Financial Position 082 Company Statement of Financial Position 083 Consolidated Statement of Changes in Equity 084 Consolidated Statement of Cash Flows 087 Notes to the Financial Statements 44 128 Principal Accounting Policies 144 Principal Subsidiaries, Associates and Jointly Controlled Entities 148 Schedule of Principal Properties 154 Ten-year Financial Summary The Wharf (Holdings) Limited Annual1 Report 2009 Corporate Profile For over a century since 1886, The Wharf (Holdings) Limited has enjoyed a distinguished history of Building for Tomorrow. Prime real estate is Wharf’s primary strategic focus. Site acquisition, financing, development planning, design, construction and marketing are its core competencies. Mall management is its strategic differentiation. With a combined valuation of HK$87 billion, landmarks Harbour City and Times Square account for an exceptional 8% share of total retail sales throughout Hong Kong. The two assets together represent 51% of the Group’s total business assets and 62% of operating profit. Property Development is an additional cylinder for growth. From a land bank in Mainland China of over 100 million square feet, only 3.7 million square feet were recognised in 2009 but operating profit surpassed HK$1 billion for the first time, at an attractive margin of 33%. Wharf has been Building for Tomorrow in the property sector and achieved a few firsts. That includes the first all-weather mall in Hong Kong (Ocean Terminal), the first vertical mall in Hong Kong with nearly HK$1 billion of annual rental income (Times Square) and the first 40-storey industrial building in Hong Kong (Cable TV Tower). Wharf has also been Building for Tomorrow in other sectors. That includes the first and only cruise terminal in Hong Kong (Ocean Terminal), the first container terminal in Hong Kong (Modern Terminals), the first cross-harbour tunnel in Hong Kong (Hunghom Tunnel), the first electronic toll collection system in Hong Kong (Autopass), the first multi-channel Pay TV service in Hong Kong (CABLE TV), the first 24-hour news channel in Cantonese and the first 24-hour entertainment news channel in Cantonese in the world (i-CABLE News and i-CABLE Entertainment News). Wharf’s strategic thrust into the Mainland started in 2007. Off a very humble base, a medium term target weighting of 50% for Mainland assets was set, and communicated to investors. Currently at 32%, we are making reasonable progress. In addition to the land bank, included are key port assets along the China coast, the most dynamic coast line in the world for cargo movement in the coming decades. The Group remains enthusiastic about the fundamentals for the Mainland real estate market. Continuation of urbanization at a break neck pace will stimulate demand not only quantitatively but also qualitatively. We will be seeking to increase our land bank. China West and China East account for about 46% and 50% of the current land bank respectively. Alongside the Times Squares, a series of IFCs (International Finance Centres) will be developed in Chengdu, Chongqing, Suzhou and Wuxi. The first two will be comparable in scale and significance to Harbour City in Hong Kong. Wharf’s commitment to Building for Tomorrow extends to corporate social responsibility and organizational development. The Group is firmly committed to the sustainability of the community. The Wharf2 (Holdings) Limited Annual Report 2009 Corporate Information Board of Directors Mr Peter K C Woo, GBS, JP, Chairman Mr Stephen T H Ng, Deputy Chairman & Managing Director Ms Doreen Y F Lee, Executive Director Mr T Y Ng, Executive Director Mr Paul Y C Tsui, Executive Director & Group Chief Financial Officer Independent Non-executive Directors Hon Paul M P Chan, JP* Professor Edward K Y Chen, GBS, CBE, JP Dr Raymond K F Ch’ien, GBS, CBE, JP Hon Vincent K Fang, SBS, JP* Mr Hans Michael Jebsen, BBS* Mr James E Thompson, GBS* * Members of the Audit Committee Secretary Mr Wilson W S Chan, FCIS Auditors KPMG Principal Banker The Hongkong and Shanghai Banking Corporation Limited Registrars Tricor Tengis Limited 26th Floor, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong Registered Office 16th Floor, Ocean Centre, Harbour City Canton Road, Kowloon, Hong Kong Tel: (852) 2118 8118 Fax: (852) 2118 8018 Website: www.wharfholdings.com The Wharf (Holdings) Limited Annual3 Report 2009 Group Business Structure Peter Woo Chairman Development Investment Properties Properties (China) Andrew Chow Doreen Lee Vice Chairman Senior Managing Director T Y Ng Senior Managing Director Wharf Wharf China China Estates Development The Wharf4 (Holdings) Limited AnnualAnnual ReportReport 20092009 Logistics, Communications, Media & Entertainment Stephen Ng Chairman The Wharf (Holdings) Limited AnnualAnnual55 ReportReport 20092009 Chairman’s A new milestone for profitability Statement The China property segment, while still at a relatively early stage of development, outpaced all other segments in profit growth. The Hong Kong economy contracted by 2.7% in 2009 in the midst of a severe worldwide recession. The Group’s overall performance well exceeded our budgets, Group Profit achieved primarily on the unexpected strength of the property segments in both Hong Kong and the Mainland. Group profit rose by 180% to HK$17.5 billion. Profit before Investment Property revaluation rose by 86% to HK$7.8 billion. HK$17.5 billion Property Investment accounted for over 70% of Group operating profit. Strong structural growth in this segment more than compensated for the cyclical weakness 180% in the other segments including Logistics. The “Heart” of the Group, Harbour City and Times Square, comfortably outperformed the market and accounted for 8% of Profit before Investment total retail sales in all of Hong Kong. Property Revaluation Surplus Three other key factors drove the Group’s earnings growth in 2009 in roughly equal importance: Property Development, favourable financing costs and disposal HK$ billion 7.8 of Beijing Capital Times Square. In particular, operating profit from Property Development exceeded HK$1 billion (from a 33% margin) to rise to 12% of Group 86% operating profit. It is well poised as a reliable new source of income for the Group in the coming years. “Heart of the Group” – Harbour City and Times Square The two core assets in the Property Investment segment, Harbour City and Times Square, continued to deliver with a 10% - increase in recurring profit to HK$5,313 million. Under the Group’s leadership in retail management, the two properties once again comfortably exceeded the Hong Kong average for retail sales growth over 2008. Distinguished by their premier location, sustained quality for the most exhilarating and rewarding shopping experience, diversified trade-mix and powerful retail marketing, Harbour City and Times Square combined accounted for around 8% of total Hong Kong retail sales in 2009. Both core assets held up well in office occupancy and rent for their ideal locations, served by excellent transportation networks and well-rounded ancillary services. China Properties The Group’s strategy to increase its Mainland assets to 50% of Group assets is progressing well. Our land bank in the Mainland has already exceeded the interim target of 100 million square feet of gross floor area. To sustain development in the Mainland, the Group has taken deliberate steps to localise its management teams. The China East team has been fully localised, while the China West team, established in Chengdu, continues to be led by Hong Kong executives until it is fully localised. The Wharf6 (Holdings) Limited Annual Report 2009 The China property segment, while still at a relatively early stage of of 4~5% in 2010. Local consumption, having regained momentum development, outpaced all other segments in profit growth. Sales in the second half of 2009, is poised to rise further in 2010, along for 3.7 million square feet of properties recognised in 2009 helped with an improving employment market in tandem with the economic increase operating profit by elevenfold to exceed HK$1 billion. upturn. According to the Hong Kong Tourism Board, tourist arrivals Including sales not yet recognised, a total of 4.7 million square are expected to grow by 5% to 31 million this year on the back of a feet of properties were sold in 2009 for RMB4.6 billion to exceed strong growth in visitors from the Mainland and emerging markets. target. They spanned across six cities (Chengdu, Chongqing, A further revival in consumer sentiment and inbound tourism will Dalian, Shanghai, Wuhan and Wuxi) and reflected soaring housing add impetus to the Hong Kong retail market in 2010. demand across urban China, the properties’ excellent location and quality, as well as Wharf’s reputable brand strength.