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COMMERCIAL PROPERTY | Tony Chua, Hong Kong
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Swire Pacific profit soars to $14bln

Group confident that investments in its core businesses during economic downturn instrumental weathering future economic uncertainties.

The profit attributable to shareholders for the first half of 2010 was HK$13,947 million, HK$10,716 million higher than in the same period in 2009. Underlying profit attributable to shareholders, which principally adjusts for changes in the valuation of investment properties and the associated deferred tax, increased by HK$5,111 million to HK$8,909 million. This increase in underlying profit reflects both strong results from the Property Division and the Cathay Pacific Airways (“Cathay Pacific”) group and the inclusion of certain substantial non-recurring items. The largest of these was a HK$2,547 million gain on remeasurement of part of the Group’s interest in the Hong Kong Aircraft Engineering (“HAECO”) group. The gain on remeasurement arose when HAECO became a subsidiary of the Company on the Company acquiring an additional 15% shareholding in HAECO from Cathay Pacific. Excluding the remeasurement gain, underlying profit attributable to shareholders was HK$6,362 million. Excluding the effect of all non-recurring items, underlying profit attributable to shareholders was HK$4,920 million, representing an increase of HK$1,157 million over the corresponding period, according to a Swire Pacific report.

Dividends
The Directors have today declared interim dividends of HK¢100 (2009: HK¢60) per ‘A’ share and HK¢20 (2009: HK¢12) per ‘B’ share payable on 4th October 2010 to shareholders registered at the close of business on 21st September 2010. The share registers will be closed from 16th to 21st September 2010, both dates inclusive.

Half-year operating results
Underlying profit in the Property Division was HK$2,463 million, HK$614 million higher than in the same period in 2009. Gross rental income rose by 9% to HK$3,902 million, reflecting strong demand in Hong Kong as the office market continued to recover. Both office and retail rental reversions remained generally positive.

The hotel business benefited from the improvement in economic conditions, with Swire Properties’ two new hotels in Hong Kong recording very encouraging results. An operating profit of HK$545 million was recorded on the sale of six houses at Peel Rise on the Peak, some agricultural land in the northern New Territories and a small number of office units in Quarry Bay.

The Cathay Pacific group experienced a continuing and significant recovery in its core business following the extremely challenging conditions experienced for much of the previous year. It contributed a profit of HK$2,082 million compared to HK$277 million in the first half of 2009. The turnround in business that began in the last quarter of 2009 continued into 2010 and gained momentum.

Both the passenger and cargo businesses of Cathay Pacific and Dragonair performed well, with revenues continuing to increase despite uncertainty over the stability of the global economy.

Following the recovery in the aviation market that began in the last quarter of 2009, demand for HAECO's services in Hong Kong strengthened. However, performance at Taikoo (Xiamen) Aircraft Engineering Company Limited ("TAECO") in Xiamen continues to be adversely affected by weak demand for passenger to freighter conversions of Boeing aircraft and reduced demand for airframe heavy maintenance. Results from Hong Kong Aero Engine Services Limited ("HAESL"), HAECO's joint venture engine overhaul facility in Hong Kong, fell slightly due to reduced work scope per engine. The group's new joint ventures in Mainland China continued to sustain start-up losses.

The Beverages Division recorded a reduction in attributable profit of 28% to HK$266 million. Cooler than normal weather and increased competition in Mainland China were reflected in overall sales volume remaining at the same level as in the first half of 2009. Margins fell in all markets, reflecting competitive pressure on pricing, a less favourable sales mix and a significant increase in sugar costs in Mainland China.

The Marine Services Division recorded a 52% deduction in attributable profit to HK$449 million. The offshore sector continued to be adversely affected by the combined effect of the deferral of project spending by oil companies and the large influx of newly built vessels, which has resulted in surplus capacity. This has had an adverse impact on vessel charter rates and utilisation for the Swire Pacific Offshore group (“SPO”).

Attributable profit in the Trading & Industrial Division increased by 53% to HK$197 million. Improved customer sentiment in Hong Kong and Taiwan was reflected in increased sales by the Swire Resources group and the Taikoo Motors group respectively. Higher profits from these groups, together with a modest increase in profit from the CROWN Beverage Cans group, more than offset reduced profits from the other industrial interests.

Key developments
In May, Swire Aviation Limited, a 66.7%-owned subsidiary of Swire Pacific, sold its 30% interest in Hactl for a consideration of HK$1,341 million. The sale generated a profit of HK$1,238 million, of which HK$825 million is attributable to the Group. At the same time, Cathay Pacific disposed of its 10% interest in Hactl. The sale of these interests followed an undertaking given by Cathay Pacific to the Airport Authority of Hong Kong in 2008 that it would dispose of its entire interest in Hactl following the award to it of a franchise to operate a new air cargo terminal at Hong Kong International Airport. In June, Swire Pacific acquired the remaining 15% interest which Cathay Pacific held in HAECO for a consideration of HK$2,620 million.

As a result, Swire Pacific’s interest in HAECO increased from 45.96% to 60.96%, giving it majority control and permitting it to consolidate HAECO’s financial results. Under Hong Kong Financial Reporting Standards, the Group recognised a gain of HK$2,547 million on the remeasurement of its existing 45.96% interest in HAECO to fair value. In accordance with the Hong Kong Code on Takeovers and Mergers, Swire Pacific subsequently made a mandatory unconditional general offer for the shares in HAECO which it did not own, at the same price per share (HK$105) as that at which Cathay Pacific’s remaining interest in HAECO had been acquired. Shareholders holding 14.89% of the issued share capital of HAECO accepted the general offer. Swire Pacific now holds in total 75.85% of the issued share capital of HAECO. The Company has reached agreement with a single investor to sell to that investor sufficient shares in HAECO to restore the percentage of HAECO shares in public hands to the minimum 25% required under the Hong Kong Stock Exchange Listing Rules.

During the first half of 2010, the Group was preparing to spin-off and separately list Swire Properties Limited (“Swire Properties”), the company which owns the Group’s principal property interests, through a proposed global offering of shares in Swire Properties. Following a deterioration in market conditions, it was decided not to proceed with the spin-off and separate listing. While disappointed with this outcome, the Group remains committed to the development of Swire Properties’ property portfolio in Hong Kong and Mainland China.

Finance
Net debt at 30th June 2010 was HK$37,348 million, an increase of HK$5,667 million since 31st December 2009. The increase principally reflects the acquisition of the additional interest in HAECO and investments in property projects and new vessels. HK$16,182 million of financing was arranged during the period (of which a HK$9,437 million facility was arranged specifically to finance the acquisition of additional shares in HAECO) and gearing rose by 1.3 percentage points to 22.0%. Cash and undrawn committed facilities totaled HK$26,053 million at 30th June 2010, compared with HK$14,916 million at 31st December 2009.

Prospects
The Hong Kong office and retail markets are expected to remain strong in the second half of 2010. The contribution to the Property Division’s results from Sanlitun Village in Beijing is expected to increase, reflecting additional improvement works and higher occupancy levels. Pre-letting of the TaiKoo Hui mixed-use development in Guangzhou is going well and the retail portion is expected to be completed towards the end of the year. Work is progressing at the INDIGO and Dazhongli developments in Beijing and Shanghai respectively. However, work at the latter has been temporarily suspended due to the citywide suspension of works in Shanghai because of the 2010 Expo.

If present trends continue, the Cathay Pacific group expects its financial results to continue to be strong in the second half of 2010. That said, conditions can change very rapidly in the airline industry. The Cathay Pacific group’s results would be adversely affected, and very quickly so, by a significant further increase in fuel prices or any return to the recessionary economic conditions of 2008 and much of 2009.

Demand for HAECO's services in Hong Kong is expected to remain firm in the second-half as long as the current aviation market recovery continues. However, TAECO's business in Xiamen is likely to continue to be weak, with substantial unsold capacity. Start-up losses at the new joint ventures in Mainland China are expected to continue in the second-half while HAESL's results are expected to be satisfactory.

Overall, 2010 will be, as expected, a challenging year. Despite a difficult first half of the year, the Beverages Division is positive about the second-half. Strong promotional activity, new product launches and packaging innovations in several markets are expected to improve volumes. Commodity prices have fallen from their recent peaks and this should contribute to improved margins in the second-half, although sugar and sweetener costs in Mainland China remain high and competitive pressure on pricing is expected to remain intense. The outlook for the second half of 2010 for SPO remains difficult as the offshore market continues to digest the surplus capacity brought about by the large influx of newly built vessels. Nevertheless, recovery in the medium term is expected, with the consistently firm oil price encouraging further exploration by the oil majors. The Trading & Industrial Division expects positive conditions for the Swire Resources and Taikoo Motors groups in the second half of the year. A steady performance is expected from the industrial interests.

Overall, the Group is relatively optimistic about its prospects in the second half of the year. Having continued to invest in its core businesses during the economic downturn, the Group is confident that this approach will deliver value to shareholders over the medium to longer term.

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