THE KOWLOON MOTOR BUS HOLDINGS LIMITED
(Incorporated in Bermuda with limited liability)

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INTERIM REPORT 1998

Notes:

1. The Kowloon Motor Bus Holdings Limited ("the Company") became the new holding company of the Group under a Scheme of Arrangement with effect from 18 November 1997. The Group has been treated as a continuing entity and accordingly the consolidated accounts for the six months ended 30 June 1997 have been prepared on the basis that the Company was the holding company of the Group commencing from 1 January 1997. In the opinion of the Directors, the above basis of preparation of accounts for the six months ended 30 June 1997 would provide a more meaningful comparative for the results of the Group for the six months ended 30 June 1998.

2. Turnover comprises fares, trading receipts and other income derived from passenger transport operations.

3. Taxation represents provision for Hong Kong Profits Tax calculated at the rate of 16% (1997 -16.5%) on the estimated assessable profits for the period.

4. The calculation of earnings per share is based on the profit attributable to shareholders of HK$287,600,000 (1997 - HK$264,100,000) and 403,639,413 shares in issue during the period.

RESULTS

The Group's unaudited profit attributable to shareholders for the six months ended 30 June 1998 amounted to HK$287.6 million (1997 - HK$264.1 million). Earnings per share for the period amounted to 71.3 cents (1997 - 65.4 cents). These represent an increase of 8.9% over the same period of 1997. The Group's result was mainly derived from the operation of franchised bus services by the Company's wholly-owned subsidiaries, The Kowloon Motor Bus Company (1933) Limited and Long Win Bus Company Limited.

INTERIM DIVIDEND

The Board has declared an interim dividend of 27 cents per share (1997 - 26 cents per share), totalling HK$109 million (1997 - HK$104.9 million), for the year ending 31 December 1998. This interim dividend will be paid on 9 October 1998 to the shareholders who are on the Register of Members at the close of business on 5 October 1998. The Register will be closed from 28 September to 5 October 1998, both dates inclusive. To qualify for the interim dividend, all transfer forms accompanied by the relevant share certificates must be lodged with the Company's Hong Kong share registrars, Central Registration Hong Kong Limited at Rooms 1901-1905, 19th Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than 4:00 p.m. on 25 September 1998.

OPERATIONS

The Kowloon Motor Bus Company (1933) Limited ("KMB")

• In the first half of 1998, 10 new routes were introduced; 244 new buses were licensed and orders for 100 additional buses were placed. Total ridership for the period under review was 512.2 million passenger trips, or a daily average of 2.83 million, representing a decrease of 2.4% over the same period last year. Fare revenue, however, increased by 11.7% as compared with the first six months of 1997. The increase was mainly due to the fare increase which came into effect from 1 December 1997 and the introduction of more air-conditioned buses into service. Bus operating costs for the period under review also increased by 11.7% due to a rise in salaries and wages and in other payroll costs, an increase in financial expenses and additional costs incurred as a result of enhancement of the quality of service.
• Following the opening of the Country Park Section of Route 3 in mid-1998, the Yuen Long/Tin Shui Wai bus routes were re-organised in order to provide a more convenient and efficient service to the customers. This was achieved through a comprehensive service enhancement package including the introduction of new routes, widening of network coverage, frequency improvement, extension of service time and the setting up of the Tai Lam Tunnel Interchange.
• To cater for the new mode of passenger demand due to the introduction of the MTR Tung Chung Line, two new feeder routes linking Tsing Yi MTR station and other districts in Kowloon and the New Territories were introduced during the period under review.
• To further improve the quality of service, two Tate's Cairn Tunnel routes Nos. 85M and 89X were fully converted to air-conditioned services. It is expected that the remaining three routes operating through the Tunnel will be fully converted into air-conditioned routes by the second half of 1998.

Long Win Bus Company Limited ("LWB")

• LWB commenced operations of its bus services for North Lantau in 1997 with the introduction of Route E31 (Tsuen Wan - Tung Chung Town Centre) and Route E32 (Kwai Fong MTR - Chek Lap Kok). Two additional services to Shatin and Tuen Mun were introduced in April and May 1998 to cater for the transport demand of Tung Chung and the Airport. Between late June 1998 and the opening of the Airport on 6 July 1998, nine additional routes to Chek Lap Kok commenced operations, of which two were Airbus routes linking the Airport to Tsuen Wan (A31) and Shatin (A41).
• At present, LWB has 160 new air-conditioned double deck buses servicing Tung Chung and the Airport. The bus servicing site at Tung Chung Town Centre area began operations in June 1998 and provided supporting services like refueling, coin-collection and parking. A bus depot at Siu Ho Wan is now in construction and is expected to become operational by October 1998.
• Total ridership for the period under review was 3.7 million passenger trips, or a daily average of 20,669. With the 13 routes in full operation, the ridership for July 1998 has risen to 2 million passenger trips, or a daily average of 64,516. With the full support of the above depot sites and the new bus fleet, we are confident that LWB will be able to fulfill its commitment to provide an efficient, comfortable and high quality transport service for North Lantau and the Airport.

Sun Bus Limited ("SBL")

• SBL was formed in 1997 to explore potential transport service opportunities other than those of the core franchised bus services in Hong Kong. As at 30 June 1998, SBL had seven non-franchised bus routes in operation. The routes were run on contract basis with various residential estates, commercial centres and major employers. The service areas covered various districts, including Shatin, Sheung Shui, Tai Po, Tuen Mun, Wong Tai Sin and Tseung Kwan O. At 30 June 1998, a total of 16 new deluxe single deck air-conditioned midibuses and coaches with seating capacity ranging from 24 to 50 passengers were deployed for the above services.

Interest in associated companies

• The Group's interest in associated companies was in respect of the operation of three bus routes in Dalian and a cross boundary bus transport service between Lok Ma Chau and Huanggang. Contributions from the above non-franchised bus operations to the Group during the period under review were insignificant.

DEALINGS IN THE COMPANY'S LISTED SECURITIES

During the period, the Company and its subsidiaries have not purchased, sold or redeemed any of the Company's own shares.

COMPLIANCE WITH THE CODE OF BEST PRACTICE

None of the Directors of the Company is aware of information which would reasonably indicate that the Company is, or was at any time during the six months ended 30 June 1998, not in compliance with the Code of Best Practice as set out in Appendix 14 to the Rules Governing the Listing of The Stock Exchange of Hong Kong Limited, except that the independent non-executive Directors of the Company are not appointed for a specific term but are subject to retirement by rotation and re-election at the Annual General Meeting in accordance with the Bye-Laws of the Company.

The Company is in the process of setting up an audit committee with written terms of reference.

YEAR 2000 COMPLIANCE

For its Year 2000 compliance, the Group adopts the definition of Year 2000 conformity requirements issued by the British Standards Institution (DISC PD2000-1), i.e. neither performance nor functionality is affected by dates prior to, during and after the Year 2000.

The management is fully aware of the impact of the Year 2000 issue and has seriously assessed its effect on the Group's operations. A Year 2000 programme ("the Programme") is implemented to ensure that all critical areas will have been properly addressed. The Programme is closely monitored by a project team under the leadership of a Year 2000 Co-ordinator who reports directly to the management on the progress on a regular basis. The Programme covers all relevant computer systems and applications, including equipment with embedded systems. Business partners and major suppliers are further requested to provide assurances that the Group is not exposed to risk arising from their Year 2000 non-compliance.

Information technology ("IT") is widely used in the Group and most applications were self-developed. In 1997, the Group's IT staff have begun to convert those applications which are not Year 2000 compliant. As at 30 June 1998, about 50% of the applications conversion was completed. By the end of 1998, it is expected that all mission critical applications will have been converted. The Group intends to achieve full compliance by the first quarter of 1999.

It is expected that the total additional costs for the Year 2000 modifications will not have a significant effect on the Group's operating results. As at 30 June 1998, there were no material commitments in respect of the Year 2000 modifications.

PROSPECTS

As the leading bus transport provider in Hong Kong, the Group will continue to strive to provide safe and reliable bus services to our customers. The unfavourable economic environment has had an adverse impact on every sector of the economy and the public at large. In order not to aggravate the burden of the community, the Company has earlier announced that it would not apply for a fare increase in 1998. The Company will seek to continue to improve the quality of its passenger transport services and enhance its cost efficiency to achieve the best value for its customers and shareholders. Population growth and the on-going development of the New Territories, Tung Chung New Town and the Airport will provide scope for further development of bus services serving the areas. The Group will also focus its resources to explore the growth potential in non-franchised passenger transport business. Your Directors are confident that the Group will be able to continue its growth in the future.

P C Woo
Chairman

Hong Kong, 10 September 1998

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