"The coming year presents us with unique challenges and windows of opportunity . . . KMB fully intends to participate in providing sound transport solutions for the territory and the greater region in the face of this exciting new environment."

I am pleased to report that in 1996 our Company achieved good results. We continue to benefit from actions driven by our strategic emphasis on on-going enhancement of the quality of our operations, our services and our bus fleet. This emphasis forms the cornerstone of our business objective, which is to provide top level service to our customers, offering them an efficient, accessible means of transport at a reasonable price. Our accomplishments in 1996 are important in the on-going fulfilment of this objective; they also have added significance in the context of the unique opportunities that lie ahead for our Company and Hong Kong in 1997 and beyond.

Results for the Year

The Group's profit attributable to Shareholders for the financial year ended 31 December 1996 was HK$527.7 million (1995 - HK$461.1 million). The profit from franchised bus operations for the year, after the transfer of HK$1.8 million from the Development Fund (1995 - transfer of HK$2 million to the Development Fund), amounted to HK$525.5 million (1995 - HK$461.1 million), representing an increase of 14 per cent over the previous year. Earnings per share for the year amounted to HK$1.31 (1995 - HK$1.14).

The Company's bus operating profit for the year fell short of the permitted return by HK$1.8 million (1995 - excess of HK$2 million). The accumulated shortfall brought forward from previous years was HK$44.4 million. Subject to the Government's agreement, the shortfall is recoverable from the Development Fund in future years.

The Scheme of Control profit, after the deduction of the HK$12 million contribution to the Elderly Concessions Scheme and the transfer of HK$1.8 million from the Development Fund, represents a returnof 15.6 per cent on the 1996 average net fixed assets value for Scheme of Control purposes. Under the existing basis of calculation of the permitted return, leasehold land of the Company for Scheme of Control purposes is stated either at cost or, if acquired before 1 July 1959, at its 1959 valuation.

Dividends

At the forthcoming Ordinary Yearly Meeting, the Directors will recommend the payment of a final dividend of 80 cents per share for the year ended 31 December 1996 (1995 - 69 cents per share). Together with the interim dividend of 24 cents per share paid on 10 October 1996 (1995 - 22 cents per share), dividends for the year ended 31 December 1996 will amount to HK$1.04 per share (1995 - 91 cents per share), totalling HK$419.8 million (1995 - HK$367.3 million).

Growth, Change and Opportunities

Hong Kong is poised to see substantial growth into the next century. As the leading bus transport provider in the territory, we will capitalise on opportunities that are in line with, or are closely related to, our core bus service operations. Looking ahead, we see three strong areas of growth potential: the Chek Lap Kok airport and neighbouring Northern Lantau/Tung Chung, the New Territories, and the border area between Shenzhen and Hong Kong.

Chek Lap Kok and Vicinity

We anticipate high demand for transport services to and from the new Chek Lap Kok airport and Northern Lantau. Our wholly-owned subsidiary, Long Win Bus Company Limited (formerly known as Long Win Holdings Limited), has already been awarded a franchise to operate buses on 12 routes linking these areas to other points in the territory. The new Chek Lap Kok airport is due to open in April 1998. With an initial capacity of 35 million passengers a year, the new airport is really a community project under development. Upon completion, the island on which the airport is situated will be a complete township with malls, entertainment centres including restaurants and movie cinemas, dormitory facilities for airport staff and a five star international hotel for travellers and tourists. Moreover, we see a ripple effect from the development of Chek Lap Kok island on neighbouring Northern Lantau and the new town of Tung Chung, resulting in the creation of new residential and commercial sites in this region. The entire new airport infrastructure project, including the opening of the Western Cross Harbour Tunnel in mid-1997, will augment the need for bus services around the territory and provide strong growth impetus for us.

Rapid Growth of the New Territories

One trend that should augment customer patronage is the accelerating transformation of the New Territories as one of the largest residential expanses in Hong Kong. Approximately one-third of Hong Kong's six million people resides in the New Territories. Affordable housing, a less urban environment, shopping conveniences, and a growing commercial sector are increasingly making this area a preferred choice for those wanting something of a 'town and country' lifestyle. This development surge in the New Territories provides us with tremendous growth opportunities. In view of this trend, we have introduced services that cover the New Territories extensively and launched additional overnight and peak hour bus services to the New Territories to meet the high demand.

Likewise, we foresee high potential for ridership increase in the fast growing areas of development on both sides of the Shenzhen/Hong Kong border. The territory's proximity to southern China has made it the natural logistical threshold to growing commercial and industrial sites on the mainland, including Shenzhen, the booming special economic zone contiguous to the New Territories of Hong Kong. We anticipate residential development to occur at a rapid pace, in parallel with that of commerce and industry, resulting in the emergence of new border towns. To capture this potential market, Art East Limited was incorporated, of which 50 per cent is owned by our Company and the other 50 per cent by a Shenzhen company. A border shuttle bus service between Lok Ma Chau (Hong Kong) and Huanggang (Shenzhen) operated by Art East Limited was successfully launched on 20 March 1997.

Related Services to China

The advent of Hong Kong's reunification with China has sparked a positive momentum of growth and development in commercial and residential sectors in China which will increase the need for bus services. Because of this, the coming year presents us with unique challenges and windows of opportunity. Whether it be by way of a direct service, or in an advisory capacity, or through a joint venture, KMB fully intends to participate in providing sound transport solutions for the territory and the greater region in the face of this exciting new environment.

Ongoing Pursuit of Excellence

We will position ourselves favourably for what lies ahead by maintaining operational and service excellence. As of 1996, all of our service depots have been awarded IS0 9002 certification. We are pursuing our comprehensive ISO 9002 programme with the ultimate goal of having every department in our organisation certified. Moreover, KMB will also seek to remain a leader in adopting and commissioning the latest technology for the upgrading and maintenance of our fleet of buses. We affirm our commitment to excellence throughout the KMB organisation.

Investment in Human Resources

Most importantly, we will also continue to invest in our people with job training, skills enhancement and team-building programmes because our employees are the essential components that ensure the Company's continued improvement and growth. Our success largely depends on how well our employees regard their jobs and reflect our Company's values: customer satisfaction, respect for regulations, on-the-job expertise, achievement and continuous learning. We appreciate and give thanks for the dedication of the KMB team and are confident that they are up to the challenge of achieving and maintaining world-class operational efficiency in all our endeavours.

Directors

Under the Public Bus Services Ordinance, the persons holding the positions of Commissioner for Transport and Deputy Secretary for Transport (Transport Services) are appointed by the Governor to sit on the Board of the Company. The incumbents of these posts throughout 1996 were Mrs Lily Teresa Yam Kwan Pui Ying, JP and Mr Isaac Chow Yiu Nam, respectively. Mrs Yam resigned as a Director of the Company on 10 March 1997. Mrs Dorothy Chan Yuen Tak Fai, JP, Acting Commissioner for Transport, was appointed to the Board on 10 March 1997. I would like to express my appreciation for the valuable contributions that Mrs Yam and Mr Chow have made to the Company, and take the opportunity to welcome Mrs Chan to the Board.

The Promise of Tomorrow is Here Today

We are now benefitting from the visionary solutions to business challenges we made last year and the years before. Tomorrow's success is at our doorstep today. We will rally our resources and, as in the past, work with governmental regulators and all parties pertinent to our business, to enable us to provide the kind of high quality service that customers have come to expect of us. With enterprise, spirit and a commitment to high standards, we will continue to focus our expertise and management strength toward the service of customers, shareholders and employees.

P C Woo
Chairman

Hong Kong, 10 April 1997

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