www.dch.com.hk ANNUAL REPORT 2018 8/F, DCH Building, 20 Kai Cheung Road, Kowloon Bay, Hong Kong Tel: (852) 2768 3388 Stock Code: 01828 Bringing Quality to Life At Dah Chong Hong, we distribute thousands of products from all over the world as part of our diverse motor and consumer products businesses. We sell the cars that make your heart race and keep your family safe, food that nourishes and brings people together. We offer the household brands you trust and the care when you need it most. For 70 years, we've been a part of the fabric of Hong Kong and today our operations extend across 12 Asian economies. We've built a company of 17,000 employees by always putting our customers first, offering quality, value and reliability. At DCH, we bring brands to market and products to shelves across a wide range of industries. But most importantly, we bring quality to life. Contents 02 Summary of the Year 04 Financial Highlights 06 Chairman’s Letter to Shareholders 10 Business Review 14 Motor Business 20 Consumer Products Business 27 Financial Review 36 Risk Management 40 Five Year Summary 41 Five Year Key Operational Data 42 Directors and Senior Management 46 Report of Directors 64 Corporate Governance Report 88 Human Resources 90 Independent Auditor’s Report 96 Financial Statements Design Story 208 Major Properties Held by the Group 219 Definition of Terms Our business connects people with the products they love and 220 Corporate Information use every day. This year, our Annual Report design creates a mosaic of life’s little moments to highlight how DCH impacts customers across Asia and how our commitment to quality and service contributes to the richness of daily life. 02 Dah Chong Hong Holdings Limited SUMMARY OF THE YEAR GROUP OVERVIEW Revenue Profit attributable to shareholders $50,878 $820 HK$ million HK$ million Basic earnings Total dividend per share per share 44.10 17.43 MOTOR BUSINESS HK cents HK cents 1,000,000+ 20+ Vehicles serviced annually Motor brands 100,000+ 100+ New vehicles sold annually Showrooms and 4S shops CONSUMER PRODUCTS BUSINESS 1,000+ 75,000+ 60+ 40+ Brands distributed Points of sales served Food and electronics shops Logistics centres Annual Report 2018 03 SUMMARY OF THE YEAR (CONTINUED) OUR PEOPLE OUR LOCATIONS Employees 17,596 Management by gender 82% 18% Male Female Workforce by gender 58% 42% 12 Male Female Asian economies Training and development Workforce by geography 48,000+ Participants 65% 26% 9% 120,000+ Training hours 11,484 4,515 1,597 Mainland China Hong Kong and Macao Other locations COMMUNITY INITIATIVES 1,100+ 40+ 12,000+ Volunteers Events Service hours RECOGNITIONS 04 Dah Chong Hong Holdings Limited FINANCIAL HIGHLIGHTS For the year (HK$ million) 2018 2017 Revenue Note (i) 50,878 51,238 Profit from operations 1,542 1,450 Profit attributable to shareholders 820 802 Segment profit / (loss) after taxation Note (ii) Motor Business 1,105 1,178 Consumer Products Business (2) 104 Other Businesses 436 45 At year end (HK$ million) 2018 2017 Total debt 6,971 6,927 Cash and bank deposits 1,093 1,138 Net debt 5,878 5,789 Shareholders’ funds 10,282 10,145 Total capital 16,160 15,934 Capital employed 17,253 17,072 Net gearing ratio 36.4% 36.3% For the year (HK cents) 2018 2017 Earnings per share 44.10 43.71 Dividend per share Interim 5.05 5.05 Final 12.38 11.90 Total 17.43 16.95 Notes: (i) The handling and service charge income and commission income have been classified under “Revenue” and the comparative figures have been adjusted to conform to current year’s presentation (see Note 3 to the financial statements). (ii) For the year ended 31 December 2018, net provision of impairment losses on property, plant and equipment is included under segment results and the comparative figure has been adjusted to conform to current year’s presentation (see Note 4(c) to the financial statements). Annual Report 2018 05 FINANCIAL HIGHLIGHTS (CONTINUED) Revenue Profi t attributable to shareholders (HK$ million) (HK$ million) 51,238 50,878 46,489 44,803 46,462 802 820 750 570 511 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2018 vs. 2017 -0.7% 2018 vs. 2017 +2.2% Revenue by business segment Basic earnings per share (HK$ million) (HK$ cents) 51,238 50,878 46,462 46,489 44,803 43.71 44.10 40.94 31.11 27.89 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Motor Consumer products 2018 vs. 2017 +0.9% Others Revenue by geography Total dividend per share (HK$ million) (HK$ cents) 51,238 50,878 46,489 46,462 44,803 16.95 17.43 15.90 12.50 8.44 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Mainland China Hong Kong and Macao 2018 vs. 2017 Other markets +2.8% 06 Dah Chong Hong Holdings Limited CHAIRMAN’S LETTER TO SHAREHOLDERS Dear Shareholders, It has become a commonplace observation in recent years that the world and our operating environments have been changing faster than ever before. In 2018, this trend persisted with increasingly unpredictable geopolitics, sometimes turbulent markets, and trade tensions that have escalated above any peak in recent memory. Uncertainty has been, and continues to be, the name of the game. Against this backdrop, DCH has been responding systematically to the growing disruption and structural changes that have upended many of the long-held ways of doing business in the sectors and markets where we operate. We continued our ongoing transformation and refreshed both managerial and operational norms. Nevertheless, 2018 was a challenging year amidst an overall softening of the Chinese economy and headwinds gathering pace over the second half. Our focus remains on increasing our resilience, and as our business continues to evolve, positioning DCH for sector leadership that will last for generations to come. OPERATING RESULTS Profit attributable to ordinary shareholders for 2018 was HK$820 million, representing a 2% increase over 2017. Our board has recommended a final dividend of 12.38 HK cents per share to shareholders, giving a total dividend of 17.43 HK cents per share for the year 2018 up from 16.95 HK cents in 2017. While the bottom line grew slightly, supported by gains on the disposal of assets, our operating results decreased against 2017 due mainly to a widened loss in our mainland China food and FMCG business. I will address this later. Our focus remains on The motor segment registered a profit of HK$1,105 million, the largest contributor to our overall profit increasing our resilience, and but 6% lower compared with 2017. The reduction in as our business continues to profit was due to the increased margin pressure that further accelerated in the second half of 2018, as the evolve, positioning DCH for mainland Chinese automotive market experienced sector leadership that will last its first contraction in decades. In addition, profit was also affected by costs associated with new 4S for generations to come. shop openings as we continued working to grow this business in mainland China through new brands and services, particularly in the premium segment. Annual Report 2018 07 CHAIRMAN’S LETTER TO SHAREHOLDERS (CONTINUED) Meanwhile, in the more mature Hong Kong market, performance was stable, resulting mainly from the rebound of passenger vehicle sales and the contribution of our aviation and yacht businesses. The consumer products segment recorded a loss of HK$2 million, dragged down by the loss incurred in the mainland China business, while performance in Hong Kong was buoyed by the increased margin in food trading as well as cost savings from our facilities consolidation. The continued loss incurred in our mainland food and FMCG operation is inexcusable. So we have had to confront a fundamental question: Do (or can) we have the expertise and capacity to succeed? Clearly, the issues run deeper than we had anticipated. We need to accelerate the evolution of our business model. E-commerce has upended traditional distribution, and the pace of change is increasing. To stay relevant, we must explore new channels and expand our partnerships with leaders in this space. That is a structural shift we have to continue addressing. Our immediate priority has been leadership. So a new management team for this business was installed at the end of 2018. We also engaged a leading consultancy to put in place a roadmap to reorder every level of the operation and reshape team workflows. Our business foundation is solid, and we have brand relationships and the wider resources of CITIC. The goal I have set for this management team in 2019 is this: Stop the bleeding. I look forward to the results that this group will drive as we bring the operation toward its potential. CORPORATE DEVELOPMENTS The cornerstone of DCH’s commitment since our founding 70 years ago was to think always from the customer’s perspective. We deliver the products customers want through the channels most relevant to their current preferences. This has always been the core of our offer to brand partners from around the world. But success with this model demands constant evolution. That is why we work tirelessly to build relevance into everything, from our distribution infrastructure to consumer offerings and channels. In each of these areas, we realised critical gains in 2018. Consolidating distribution operations Our ongoing work to integrate systems and infrastructure across markets in the consumer products business is approaching a turning point. Much of the consolidation initiated since the acquisition of LF Asia has been completed, and costs are going down as new efficiencies emerge.