Management Discussion and Analysis INFRASTRUCTURE

NWS Holdings Limited32

Management Discussion and Analysis

CORPORATE PROFILE MILESTONES FINANCIAL HIGHLIGHTS CHAIRMAN’S STATEMENT BOARD OF DIRECTORS CORPORATE GOVERNANCEREPORT

HUMAN CAPITAL

INFRASTRUCTUREPerformance of Infrastructure division remainedsatisfactory largely due to Mainland China’s continuedstrong economic performance. With the country’s GDPforecast to maintain an average growth between 7.5%and 8.5% during the Eleventh Five-Year Plan period,NWS Holdings will be benefited in much of itsinfrastructure portfolio despite an increasinglycompetitive investment arena.

OPERATIONAL REVIEW & OUTLOOK

Zhujiang Power Plants

Annual Report 2006 33

CORPORATE CITIZENSHIP MANAGEMENT DISCUSSIONAND ANALYSIS

GLOSSARY OF TERMSREPORTS AND FINANCIALSTATEMENTS

FIVE-YEAR FINANCIALSUMMARY

PROJECT KEY FACTSAND FIGURES

CORPORATE INFORMATION

AOP Contribution by Segment

0 1,2001,000800600400200

2006

Energy PortsWaterRoads

2005

HK$’m

AOP Contributionby Segment 2006 2005 Change %For the year ended 30 June HK$’m HK$’m Fav./

(restated) (Unfav.)

Energy 487.8 489.9 –Roads 469.1 372.3 26Water 87.4 80.6 8Ports 71.7 64.8 11

Total 1,116.0 1,007.6 11

The performance of the Group’s Infrastructure division remainedsatisfactory, largely due to Mainland China’s continued strongeconomic performance. As a result, the division’s AOP achieveda healthy growth of 11% to reach HK$1.116 billion during FY2006.


Management Discussion and AnalysisInfrastructure


HUMAN CAPITAL

ENERGY

1

2

3

1 Macau Power

2 Control room of Zhujiang PowerPlants

3 Guangzhou City Northern Ring Road

ZHUJIANG POWERPLANTS’ OVERALLPROFITABILITYSLIGHTLYIMPROVED.

revenue for the year also grew by5%. The latter figure reflectednot only a rise in electricity salesbut also a tariff incrementintroduced in May 2005. InFY2006, the total fuel costs ofZhujiang Power Plants increasedapproximately by 6% which wasdue to the increase in coal priceand was in line with the growthin electricity sales. Increases inboth sales volume and tariffs,together with tight cost control,led to a slight improvement inZhujiang Power Plants’ overallprofitability. Second round of“coal-tariff adjustment” wasmade effective in July 2006

which helped relieve thepressure from the increase incoal price. A joint venture of theGroup which involved inmanufacturing and supplyingaerated concrete for the PearlRiver Delta region alsocontributed profit duringFY2006.

With an 11% increase inelectricity sales, the overallperformance of Macau Powercontinued to be satisfactory butits contribution to the Group’sprofit remained stable as a resultof profit control schemerestrictions.

Performance of the Group’sEnergy segment remained stableduring FY2006, generating anAOP of HK$487.8 million (2005:HK$489.9 million).

Combined electricity sales fromthe Zhujiang Power Plantsrecorded a slight increase of 1%during FY2006. Aggregate sales







ROADS

PERFORMANCE OFPROJECTS WITHINTHE PEARL RIVERDELTA REGION WASOUTSTANDING.AVERAGE DAILYTRAFFIC FLOW OFGUANGZHOU CITYNORTHERN RINGROAD INCREASEDBY 13%.

FY2006 saw the Group’s Roadssegment generate AOP worthHK$469.1 million, an increase of26% when measured against thefigure for FY2005.

Performance of projects withinthe Pearl River Delta region wasoutstanding. Average daily trafficflow of Guangzhou CityNorthern Ring Road increasedby 13%, while toll income grewby RMB44.7 million duringFY2006. Toll income of Beijing-Zhuhai Expressway (Guangzhou-Zhuhai Section) surged byRMB117.7 million or 20% inFY2006 as benefited by thestrong economic development ofthe Pearl River Delta region andthe opening of a connectingexpressway in November 2005.The combined average dailytraffic flow of Shenzhen-Huizhou Roadway andExpressway was up 14%.In December 2005, Beijing-Zhuhai Expressway (Guangzhou-Zhuhai Northern Section)commenced operation and nowcarries approximately 6,450vehicles per day.

Total toll revenue of theGuangxi Roadways Networkincreased 5% or RMB6.6 millionduring FY2006. An increase inrevenue from passenger vehicleshelped to offset the negativeimpact brought by the reductionof toll rate for larger trucks sinceJanuary 2005. Average dailytraffic flow across this networkduring FY2006 remained steadyat their FY2005 levels.

Average daily traffic flow ofTangjin Expressway (TianjinNorth Section) posted a growthof 3% and toll income increasedby 4%. Average daily traffic flowalong the Wuhan AirportExpressway increased by 14%during FY2006.

The average daily traffic flow ofTate’s Cairn Tunnel (“TCT”) wasdown by 8% during FY2006. Thedrop in traffic flow was mainlydue to the increase in toll rate inAugust 2005 but its toll revenueincreased by 7% when comparedto FY2005. The opening of theMa On Shan Rail and theincrease in toll rate of theEastern Harbour Tunnel alsonegatively impacted the trafficflow through TCT.




HUMAN CAPITAL

WATERKEY REASONS BEHIND THE INCREASE INAOP INCLUDED THE COMMENCEMENT OFOPERATIONS OF TANGGU WATER PLANTAND SHANGHAI SCIP WATER TREATMENTPLANTS, AND THE STRONG PERFORMANCEOF CHONGQING WATER PLANT.

AOP of Water segment climbedto HK$87.4 million duringFY2006, an increase of 8% overFY2005. Key reasons behind theincrease in AOP included thecommencement of operations ofTanggu Water Plant andShanghai SCIP Water TreatmentPlants in April 2005, and thestrong performance of

Chongqing Water Plant. TheChongqing Water Plant had asatisfactory growth of 12% inwater sales revenue and also asubstantial increase in incomederived from water connectionworks. Performance of otherwater projects in MainlandChina was satisfactory whilecontribution from Far EastLandfill Technologies Limitedgrew by 4% in FY2006.

Average daily water sales volumeof Macau Water Plant achieved ayear-on-year increase of 6% overFY2005. This result wasnegatively impacted by anaverage increase of 16% in theraw water tariff and increase inoperating costs due to theseasonal salinity problem inearly 2006.







PORTS

3

41 2

1 Laboratory of Macau Water Plant

2 Shanghai SCIP Water TreatmentPlants

3 Operations at Xiamen New WorldXiangyu Terminals

4 Tianjin Five Continents InternationalContainer Terminal

AOP FROM XIAMEN NEW WORLD XIANGYUTERMINALS ACHIEVED A SATISFACTORYGROWTH OF 55%.

AOP of Ports segment wasHK$71.7 million, an increase of11% over FY2005.

AOP from Xiamen New WorldXiangyu Terminals Co., Ltd.(“NWXY”) achieved a satisfactorygrowth of 55%. The increase wasmainly driven by a 16% volumegrowth in throughput to 736,000TEUs in FY2006 as a result of the

introduction of new shipping linesand the volume increase ofexisting major customers duringthe year. NWXY is dredging itsturning basin and channel toincrease its draft to -12m toaccommodate larger vessels,construction of which is expectedto be completed by the end of 2006.

Tianjin Orient ContainerTerminals Co., Ltd. (“TOCT”)operates four container berthsand one coal berth in TianjinXingang. While TOCT’scontribution decreased 26%from FY2005, its throughputgrew by 5% to 1.15 million TEUsin FY2006. The primary reasonfor the decline in TOCT’s AOP

was the cessation of its coalbusiness in March 2005.

To improve its handling capacityand overall competitiveness,TOCT decided to investapproximately RMB170 millionto convert the existing coalberth into a container handlingfacility. Major equipment andconstruction contracts have beensigned and the conversion isexpected to be completed byearly 2007.

In November 2005, the Groupinvested 18% interest in TianjinFive Continents InternationalContainer Terminal Co., Ltd.which handled 831,000 TEUs inits first few months of operation.




HUMAN CAPITAL

BUSINESSOUTLOOK

ENERGYMainland China’s electricityconsumption growth in 2005 was13.4% and slowed down to12.0% in the first half of 2006while supply shortages have beeneased especially since the fourthquarter of 2005. New capacitycoming on line in the next twoyears is estimated to beequivalent to one – third ofcurrent capacity, while theNational Development andReform Commission (“NDRC”)anticipates a further fall in thegrowth of demand for electricityto around 11% in 2006.

Pressure on profit margin isslightly eased by theimplementation of the secondround of “coal-tariff adjustment”mechanism. Apart from thegradual rise in coal prices,profitability is also threatenedby lower utilization hours andcompetitive tariff bidding asgrids move to market-basedpricing due to shortages arebeing overcome.

In light of energy price soaringand environmental concern, therecent Eleventh Five-Year Planarticulated by the CentralGovernment promotes theefficient use of energy andalternative energy sources.More detailed governmentincentive programs aimed atpromoting the development ofrenewable energy sources arelikely to create attractive anddiversified investmentopportunities.

Macau Power will continue toincrease electricity importationfrom Southern Grid of China asthe Macau SAR Governmentceased to expand localgenerating capacity and risingoil-fuel price gives pressure onself-production. Price reductionstrategy will be introduced toenhance social development andinvestment opportunities inMacau without negativelyimpacting shareholders’ returnsor quality of service.

ROADSMainland China’s GDP isforecasted to maintain anaverage growth between 7.5%and 8.5% during the EleventhFive-Year Plan period. Tofacilitate a booming economyand the demand for bettertransportation systems, anadditional 20,000 km ofexpressways is due to be built by2010 and this forms part of theCentral Government’s long-term

goal of constructing 85,000 kmof expressways across MainlandChina. Such plans offer ampleinvestment opportunities forroad investors. In addition to thevast investments planned for itsroad sector, the country is alsoexpanding other transportationmodes such as subways, light-railsystems and railways. As the mostheavily utilized and flexiblemeans of transportation for bothpassengers and goods, roadswould seem to be quite robustand viable among thesecompeting modes of transport.

By the end of 2005, the numberof privately owned vehicles inMainland China has reached17 million, representing astaggering 100% growth withinthe past 5 years. This trend isexpected to continue as peopleseek to improve their livingstandard and cars becomeavailable at more affordableprices. This is going to fuel thegrowth in traffic volume butcurrent high oil prices might inthe short run have adverseimpact on people’s motivationtowards owning vehicles andtheir travelling patterns.

Government policiesencouraging privately ownedlocal enterprises to enter thetoll road market have intensifiedcompetition between foreigninvestors and privately ownedlocal enterprises.This development has pushed upinvestment costs, negatively







impacting returns for investors.Unlike domestic joint ventures,sino-foreign joint ventures withinvestment cost over certainamount must be approved by theNDRC. In some cases, suchapprovals can take several years.State owned enterprises are nowreluctant to enter intopartnerships with foreigninvestors and hence, foreigninvestors are inevitably missing alot of investment opportunities.

WATERThe outlook of the ShanghaiChemical Industry Park (the“Park”) remains optimistic.Several new industrialists haveconfirmed their investments inthe Park, and some have alreadymobilized their site constructionworks. Both our water treatmentand waste water treatment plantshave commenced operations inearly 2005 and have contributedAOP to the Group since the firstyear of their operation. Due tolarge demand for waste watertreatment services in the Park,the waste water treatment plantis expected to reach full capacityby the end of 2006. The jointventure company has alreadystarted the third phase ofinvestment which aimed atsatisfying further increases indemand. Besides, our hazardouswaste incinerator project in thePark commenced operation inAugust 2006. Our projects willalso be benefited once the Park’s

Phase II development is formallyapproved by the CentralGovernment. The Phase IIdevelopment includes a 10million tonnes/year crude oilrefinery project, an ethyleneplant of production capacity of1 million tonnes/year and otherdown stream ancillary facilities,with estimated total investmentof US$4.2 billion and an area of4 sq km.

In the National Conference withthe Commissioners of the PriceBureau held in December 2005,NDRC indicated that it willimplement water tariff reformsin 2006. Its proposed set ofmeasures includes: 1) expandingthe scope of fee charges forwater resources; and 2) raisingcity water and sewage tariffs.Such steps are likely to provideour concessionary projects witha favourable climate whenapplying for an increase inwater tariffs.

In addition, to cope with theincreasing water demand,Macau Water Plant hasscheduled an extension of itsexisting treatment capacity.

PORTSDespite the CentralGovernment’s macroeconomiccontrol policy, Mainland China’sGDP grew by approximately 11%during the first half of 2006.Container throughput growthfor the same period was 22%.

Despite the pressure of tradedispute and appreciation ofRMB, the foreign trade growth isexpected to maintain at arelatively high growth rate in thesecond half of 2006.

Xiamen port reported a 16%growth in container throughputand handled 1.9 million TEUs inthe first half of 2006. Under theEleventh Five-Year Plan, Xiamenport will focus on expanding itsoverall handling capacity bydeveloping new port zones inHaicang, Songyu and Liuwudian.Xiamen port’s ultimate aim is toreplace Kaohsiung port as theregion’s key transhipment hub.Meanwhile, Xiamen Governmenthas commenced construction ofsix berths in Haicang which aretargeted to become operationalin 2009.

Tianjin port reported a 23%growth in container throughputand reached 2.8 million TEUs inthe first half of 2006. The growthof Tianjin port has beenconstrained by the terminals’limited handling capacity. As aresult, the port is acceleratingcontainer terminaldevelopments in North Basinand Man-made Island.


Management Discussion and Analysis


HUMAN CAPITAL

SERVICE & RENTALSignificant increase in AOP was mainly attributableto the turnaround of Contracting segment and theongoing recovery of Hong Kong’s economy. With thecontinued robust performance of Mainland China’seconomy and the ongoing expansion of Hong Kong’stourism sector, the Group remains cautiouslyoptimistic regarding economic outlook in thecoming years.

OPERATIONAL REVIEW & OUTLOOK

ATL Logistics Centre, Hong Kong

Photo by Ms Rosa Suen – NWSH Photo Competition 2006







AOP Contributionby Segment 2006 2005 Change %For the year ended 30 June HK$’m HK$’m Fav./

(restated) (Unfav.)

Facilities Rental 390.7 384.0 2Contracting 163.0 (252.7) 165Transport 85.6 64.4 33Others 182.3 208.6 (13)

Total 821.6 404.3 103

-300 9006000 300

AOP Contribution by Segment

2005

2006

Contracting Facilities Rental Transport Others

HK$’m

FACILITIESRENTAL

FY2006 saw AOP from the Group’s Service & Rental division double,growing from HK$404.3 million in FY2005 to HK$821.6 million. Thissignificant increase in AOP was mainly attributable to the turnaroundof Contracting segment and the ongoing recovery of Hong Kong’seconomy.

FACILITIES RENTALSEGMENTCONTINUED TO BE ASTEADY SOURCE OFPROFIT AND CASHINFLOW.


Management Discussion and AnalysisService & Rental


HUMAN CAPITAL

EFFECTIVE COSTCONTROL MEASURESAND INCREASEDVOLUME OF WORKSSIGNIFICANTLYIMPROVED OPERATINGRESULTS.

Predominantly comprised ofHong Kong Convention andExhibition Centre (“HKCEC”)and ATL Logistics Centre(“ATL”), the Group’s FacilitiesRental segment continued to bea steady source of profit andcash inflow to the Group. Thissegment recorded an AOP ofHK$390.7 million for FY2006,an increase of 2% over FY2005.

HKCEC continued to achievesatisfactory result in FY2006 withmore than 1,300 events heldduring the year serving over 4.9million guests. Its averageoccupancy rate achieved arecord high of 58%, up by 5%due to the positive impact of theSixth WTO MinisterialConference held in December2005. New venues such as theAsiaWorld-Expo and otherconference and exhibitionfacilities in Mainland China andother Asian countries haveincreased competition in thismarket. Construction works ofthe atrium link expansion has

commenced in August 2006 andis due for completion in 2009.The new 19,400 sq m expansionwill increase HKCEC’s availablespace up to a total of 83,400 sq m.

ATL had also benefited from theongoing recovery of localeconomy and the growth ofMainland China’s market. Itrecorded a steady profit withaverage occupancy rate reaching96% in FY2006. Being one of thelargest multi-storey drive-inwarehousing/container freightstation complexes, ATLcontinues to provideprofessional warehousing andterminal services to ademanding global clientele.As such, it remains as the marketleader in the industry. TheGroup expects that ATL willcontinue to deliver stable profitsas a result of the continuousgrowth of Hong Kong’s economyfollowing the relaxation ofpersonal travel restrictions onMainlanders and increased localconsumer spending.

CONTRACTING

In FY2006, Contracting segmentachieved satisfactory results witha turnaround from a loss ofHK$252.7 million in FY2005 toa profit of HK$163.0 million.The significant improvement inoperating results was due to acombination of factors includingeffective cost control measures andincreased volume of works.

Leveraging its proven expertisein managing mega-sized andhigh quality constructionprojects and following the recentrecovery of the private propertydevelopment sector, ourConstruction group had securedcontracts of substantial size withtotal contract sum over HK$21.0billion as at 30 June 2006. TheGroup was also among the mostcompetitive and successful







2

1

3

TRANSPORT

1 HKCEC

2 The Peak Tower, a project of Hip Hing

3 CitybusPhoto by Ms Au Chi Lan – NWSH PhotoCompetition 2006

MANAGEMENT CONTINUED TO RESTRUCTUREAND STREAMLINE MANPOWER ANDOPERATIONAL REQUIREMENTS AND ACHIEVEDNOTABLE SAVINGS.The Group’s Transport segmentachieved an AOP of HK$85.6million in FY2006, a 33%increase compared with FY2005.However, excluding the impactof impairment provisions madein FY2005 which were not

required to be made in FY2006,the result of FY2006 actuallycompared unfavourably to thatof FY2005 by 20%. Theunfavourable result was mainlyattributed to the vast increase infuel costs by nearly 30% over the

specialist players in Macau’srapidly expanding constructionmarket. Notable among anumber of large-scale projectsHip Hing Construction CompanyLimited secured in Macau werethe Grand Lisboa Hotel and theMGM Casino projects.

Performance of the Group’sEngineering business remainedsatisfactory during FY2006 givena market whose prevailingconditions included materialprice fluctuations and tenderprice war. Contracts on hand asat 30 June 2006 amounted toHK$4.6 billion, while thecontracts awarded for FY2006amounted to HK$2.3 billion inwhich 64% was secured inMainland China and Macau.


Management Discussion and AnalysisService & Rental


HUMAN CAPITAL

ROBUST PATRONAGEARISING FROM THEREBOUND IN HONGKONG’S TOURISMCONTRIBUTED TOFREE DUTY’SEXCELLENTPERFORMANCE.

OTHERS

Free Duty engaged in retailbusiness selling duty freetobacco and liquor at HongKong International Airport andthe ferry terminals in ChinaHong Kong City and Shun TakCentre. Robust patronagearising from the rebound inHong Kong’s tourismcontributed to Free Duty’sexcellent performance duringFY2006. Following the increasingtrend in spending per passengerand the opening of its new retailoutlets totaling approximately28,000 sq ft at the Lok Ma ChauKCRC Station, it is expected thatFree Duty will continually deliversteady revenues to the Group.

Tricor Holdings Limited(“Tricor”) achieved excellentresults with a year-on-year growthof 40%. Tricor had successfullyexpanded into the MainlandChina and Singapore marketsfollowing the opening of offices inShanghai and Beijing and theacquisition of a Singaporebusiness. Both Taifook SecuritiesGroup Limited (formerly knownas Tai Fook Securities GroupLimited) and New WorldInsurance Management Limitedreported stable results for FY2006.

The property managementbusiness contributed a stableprofit to the Group despite toughmarket competitions andmaintained a clientele of over165,000 residential units undermanagement. The Groupcontinued to explore new marketopportunities in Mainland China.

previous year. Other negativefactors including the rise ininterest rates, tunnel tolls andvessel maintenance costs alsoplayed a part in reducingprofitability. The AOP of localbus businesses recorded a dropof 12%. Despite a fare increase,the local ferry operationregistered a loss of HK$3.5million. New World First FerryServices (Macau) Limited saw apatronage growth of 9% but wasmerely able to maintain theguaranteed profit from Chow TaiFook Enterprises Limited underthe current vessel leasingarrangement.

In face of these adversities,management continued torestructure and streamlinemanpower and operationalrequirements and achievednotable savings. This in someway acted as a relief to a veryunfavourable situation.

The Group’s Others segmentcomprises various servicebusinesses which reported anAOP of HK$182.3 million. The13% decrease in AOP was a resultof the closure of certainsubsidiary companies and keencompetition of the local market.

1

1 Free Duty at Hong Kong InternationalAirport







BUSINESSOUTLOOK

Benefiting from steady growth inthe local economy, FacilitiesRental segment is expected tocontinuously deliver consistentlystable contributions as a result ofHKCEC’s and ATL’s marketleadership positions across theregion. To consolidate itsposition as Asia’s foremostinternational exhibition centreand Hong Kong’s premier venueof choice, HKCEC intends tocontinually enhance its servicequality, facilities and equipment.

The outlook for the Group’sContracting segment is slightlymore mixed. Although theexpenditure on public workslooks set to fall slightly in thisfiscal year, the Governmentremains firmly committed tobuilding new infrastructure andimproving Hong Kong’s publicfacilities. To this end, theGovernment has reiterated thatit will continue to allocate anaverage allocation of HK$29.0billion annually in the next fiveyears for infrastructure projects.The Government has alsoresolved to accelerate itsplanning and consultationprocess with the public overmajor development projectssuch as the development ofKai Tak, the Central WanchaiBypass and the new CentralGovernment offices at Tamar.Such huge Governmentinfrastructure projects are sureto provide many excitingopportunities for theContracting segment in thecoming years.

The Group’s attitude towardstendering for new projects inMainland China remains

cautious and selective. As aresult, our involvement in thismarket looks set to remainstable. Our businessperformance in Macaucontinues to be encouraging,with all projects we havetendered for, or been awarded,being predominantly sizableones. The potential high yieldsfrom entertainment and gamingbusiness enable the employers topay a premium for high qualityworks we deliver. As a result, it isexpected that Macau willcontinue to be a major driver ofthe Group’s profitability duringthe next two to three years.

Rising fuel prices andGovernment policies favouringrailway operators mean theoperation of the Group’sTransport segment remainsdifficult. Throughout the year,the management has consistentlyimplemented cost reductionmeasures through betterresources allocation andutilization between the two buscompanies so as to minimize theadverse impacts of escalatingfuel price and intensified marketcompetition arising from theproposed merger of MTRCorporation Limited andKowloon-Canton RailwayCorporation. Facing thechallenges ahead, the Group willcontinuously strive to controlcosts, while further enhancingservice levels. We will alsocontinue our ongoingcommitment to further improveour performance by seeking outsuitable business developmentopportunities in Mainland Chinaand overseas.

Notwithstanding the surging oilprices and increasing interestrates, Hong Kong’s economycontinues to show above-trendgrowth with real GDP rising by5.2% in the second quarter of2006 on a year-to-year basis.Thriving external trades,resilient consumer spending andescalating investor confidencehave fuelled growth of the localeconomy and benefited theService & Rental division of theGroup. Given the continuedrobust performance of MainlandChina’s economy and theongoing expansion of HongKong’s tourism sector, the Groupremains cautiously optimisticregarding economic outlook inthe coming years.

While focusing on enhancingreturns from its existingbusiness interests, the Group isalso actively but meticulouslyseeking out exciting newbusiness opportunities withwhich to drive its future growthin Mainland China, Macau andother potential markets for allsegments in the Service &Rental division.

Management Discussion and Analysis INFRASTRUCTURE

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