The Kowloon Motor Bus Holdings Limited

1997 marked the end of one era and the beginning of another. Against the momentous backdrop of the reunification of Hong Kong with mainland China, KMB was reaching important goals, investing for the future and taking action to position ourselves solidly for the opportunities ahead.

New Group Structure

Under our new group structure, The Kowloon Motor Bus Company (1933) Limited ("KMB") has become a wholly-owned subsidiary of The Kowloon Motor Bus Holdings Limited ("KMB Holdings") which replaced KMB as the Group's flagship listed on the Stock Exchange of Hong Kong. Shareholders of KMB received shares of KMB Holdings on a one-for-one basis. The KMB Group has been rationalised into five divisions: franchised public bus operations, property holdings, mainland PRC operations, non-franchised transport operations, and internal financial services. Although our business has been segmented into divisions, the KMB Group's core competency remains staunchly the provision of public bus transport services. A detailed description of each division and its functions is given in the Review of Operations.

KMB has historically sought to make the best use of its assets and funds, and has operated a cost efficient organisation. However, the times have ushered in unprecedented challenges, as well as opportunities for the Group to explore new markets and prospects. At an administrative level and for the purpose of monitoring performance, the modern, clear corporate structure allows for greater transparency of activities and financials, assisting us to better capitalise on our strengths and resources. The more transparent structure will also make it easier for individual divisions to seek bank loans or funding for future growth, should the need arise. We have re-invented the KMB organisation to be compatible with the dynamic business environment of today and of the future.

Grant of New 10-year Franchise

We are pleased to report that KMB was granted a new public bus service franchise by the Hong Kong SAR Government for 9 years and 11 months from 1 September 1997. We believe this is a strong endorsement of KMB's performance and services.

In the course of the negotiations leading up to the new franchise, an agreement was reached with Government whereby KMB would, shortly after commencement of the new franchise, transfer the ownership of its permanent depot site at Kowloon Marine Lot No. 3, Lai Chi Kok ("the Lai Chi Kok site") to a wholly-owned subsidiary of KMB. Following the transfer, the subsidiary company will lease the site back to KMB at a nominal rent for the Company's principal franchised public bus operations, until such time as Government is satisfied that a replacement depot on the West Kowloon Reclamation is ready for use. The replacement depot will be constructed on a site to be provided by Government which may be granted through a land lease. The costs arising from the transfer, construction and use of the replacement depot will be borne by KMB using Shareholders' funds. Once the replacement depot is ready for use, KMB will seek release of the Lai Chi Kok site, which was acquired by the Company in 1955 on the open market, using Shareholders' funds from franchised bus operations. The site, which has been re-zoned as a Comprehensive Development Area, will then be available for redevelopment.

The terms of the new franchise usher in a more demanding and competitive operating environment. Unlike its predecessor, the new franchise does not provide KMB with exclusive rights to operate any of the 360 routes it encompasses, nor does it include a Profit Control Scheme with a Permitted Return. This places the new franchise on all fours with the other public bus franchises granted by Government in recent years, reflecting the community's concern to see greater public accountability and competition in the bus industry. These changes in the operating environment will no doubt put greater pressure on KMB's management to achieve ever higher efficiency and productivity. KMB welcomes the challenge and is confident that it will continue to prove its ability to provide customers with the world class service they have come to expect and demand.

KMB's network of routes, the largest in the territory, has been said to have monopolistic characteristics. We have, however, never operated in an environment with such latitude or advantage. Conditions of operation, including the setting of routes and fares, are stipulated by Government. Moreover, we have been ever conscious that Hong Kong commuters are a very sophisticated, cosmopolitan group with a good choice of public transport at their disposal. They have high expectations and we believe they reward transport providers with patronage if their needs are met with efficiency and comfort. Our continual upgrading of buses - our plans to replace every one of them over time with leading-edge vehicles - and extensive training for drivers and maintenance staff, have all been for the purpose of providing the kind of service that keeps our customers happy and wins new patronage.

KMB will continue to cooperate and conduct a dialogue with Government and opinion leaders to help provide Hong Kong with world class bus transport solutions. We will pursue high standards in our bus transport services, building on our strong track record and exercising prudent resource management. We believe that we are well qualified to offer Hong Kong excellent solutions for its transport needs in this imminent period of strong growth and bright prospects.

Increased Ridership

In the year under review, KMB saw an overall increase in daily ridership of 2.1 per cent over the same period last year. We believe high caliber service, provided at reasonable cost, has contributed to increased favour and patronage, fuelled by the new ranks of Hong Kong commuters from mainland China and other immigrants to the territory. Our ridership also received a boost from the introduction of 28 new routes in 1997. It is gratifying that KMB has been able to sustain growth in market share among all public transport modes despite heavy competition and factors that affect bus ridership such as the protracted rainy weather and the addition of three statutory holidays in 1997.

Financing

In September 1997, some 18 months after our fares for cross harbour routes and other routes were respectively raised on 3 March 1996 and 4 April 1996, we proposed a 9.2 per cent fare increase. This proposed increase approximated the rate of inflation for the period under review. The Chief Executive in Council approved an average increase of 7 per cent, which took effect from 1 December 1997. The range of fare increases for individual routes ranged from zero to 9.1 per cent.

Although KMB endeavours to continue to enhance revenue and contain costs, our business requires long-term planning and intensive capital investment to yield significant improvements. This is a task on which KMB's management places ongoing focus and which requires our best efforts to continue delivering satisfactory results. We continue our discussions with Government in order to create reasonable mechanisms for determining fares that strike the right balance between the interests of bus operators and those of the travelling public.

Driving Towards Greater Excellence

Last year we were pleased to report that four of our service depots, namely, Lai Chi Kok, Sha Tin, Tuen Mun and Kowloon Bay, had attained ISO 9002 certification. For 1997, we are happy to report that our ongoing objective of having KMB buses operated and maintained to international standards of excellence has taken another great stride. KMB attained ISO certification for its three "build and overhaul" facilities - the Bus Body Construction Depot, KMB Overhaul Centre and Kwai Chung Major Unit Overhaul Depot. In sum, this means that all of our service facilities have been certified as meeting ISO 9002 requirements. In 1998, our Traffic Department will gear-up to seek ISO certification. We are the first bus company in Hong Kong (and possibly one of the first in the world) to seek certification on such a comprehensive scale. But our commitment to operate by world class standards does not end there. The ISO quality assurance system requires continuous improvement and periodic reaffirmation after initial certifiion. Our goal is to have every operational department attain this high level of international recognition.

Operation of New Airport Routes

Having made a successful bid for airport routes in 1996, one of the Group's companies, Long Win Bus Company Limited ("Long Win"), will be operating 13 routes to the new Chek Lap Kok Airport and its vicinity. The new Dennis Trident buses will be running past some of the most scenic views in Hong Kong, including those of the Tsing Ma Bridge, which has been likened to San Francisco's Golden Gate. Long Win plans to operate an Airbus Service Centre to offer information and assistance to its customers. Airbus assistants will be available to help passengers in baggage handling.

Milestone in Transport Technology

Long Win began running the new generation of buses, the "Dennis Trident", with the introduction of a new route for Chek Lap Kok in December 1997. This route, the E32, operating between Kwai Fong MTR Station and Chek Lap Kok, has proved to be a success due to the spectacular scenery and the deluxe comfort of the vehicles. For many first-time visitors to the SAR disembarking at the new international airport, these Dennis Trident buses will be their first impression of Hong Kong. The Dennis Tridents are the newest air-conditioned easy access vehicles fitted with state-of-the-art features - the first double deckers of this kind to be used anywhere in the world. Bus captains have undergone advanced training for driving along the Tsing Ma highway system and the new roads to the airport. Long Win has bought 150 of these buses to service the 13 routes to Chek Lap Kok and its vicinity.

Dalian New Venture

1997 was also highlighted by the start of bus operations in Dalian through our joint venture, Dalian HK Macau Motor Bus Services Limited ("DHKM") in August. DHKM is a cooperative joint venture between and HK Macau Limited, which in turn is owned by the KMB Group and a Macau-based company, with the KMB Group holding majority interest. We believe the KMB Group is well-positioned to undertake many such business ventures in the future, and we maintain a close relationship with parties in mainland China to explore further possible associations of this kind.

A History of Success - A Future of Promise

For 65 years KMB has been an integral part of the energy and life of Hong Kong. We are part of and contribute to this remarkable metropolis and its vibrant economy.

KMB is one of Hong Kong's oldest operating bus transport companies, yet it has a modern fleet of buses. We are a home-grown organisation, but our measure of accomplishment has always been against world class benchmarks. We have an extensive network of routes covering an array of traffic conditions and consumer needs - from challenging high-density urban meccas to near-rural communities - which we serve with an above-average level of professionalism. We are success-oriented, ploughing back into our business funds for new technology-improved transport management, state-of-the-art buses, customer service enhancements and the development of future capabilities to serve the commuting public. In 1997 KMB provided over 12,000 jobs and invested HK$1 billion in improvements. We also transported 2.88 million people a day - more passengers than any other public transport provider of any mode in the SAR.

Accomplishments do not occur all at once, nor does success materialise on its own. They are the sum of the diligence and dogged attention to detail accounted for in the day-to-day ledger of our efforts and actions. Through thoughtful planning, careful allocation of resources and exploration of opportunities, KMB progresses every day to fulfill our goal of "working together, caring for people, adapting to change and committing to service". For this, we are thankful for the dedication of our team of employees, and our shareholders' support of our business plans in pursuit of these goals.

We are proud to have been part of Hong Kong for 65 years, participating in a period of exciting development and change. We now turn a new page, with a new Hong Kong and a new KMB, to look forward to the advent of the 21st century and the tremendous potential of the territory's future - where KMB will again contribute to, and be part of, the fabric of Hong Kong's growth and success for the benefit of our customers, our employees, our shareholders and, ultimately, the Hong Kong community at large.

John Chan Cho Chak
Managing Director

16 April 1998

Total Number of Bus Routes Operated as at the End of the Year KMB

Total Number of Passengers Carried for the Year Franchised Public Bus Operations

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