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Objectivity

IntegrityExcellence

3Standard & Poor’s

string of corporate financial scandals in recentyears has put the spotlight on the reliability ofcompanies financial reporting.

However, putting aside issues of corporate financial reporting

malpractice, experience has shown that publicly listed

companies often attempt to tailor their financial results to

reflect more closely the hopes and expectations of the stock

market. While companies are expected to follow generally

accepted accounting practices, these accounting standards tend

to be general, with numerous exceptions and options.

The purpose of this report is to help creditors negotiate the

labyrinth of different accounting practices and focus on what

really matters in evaluating the economic and financial health of

a company. We have reviewed the financial disclosure standards

of corporations rated by Standard & Poor's in Greater China,

and commented on the following key issues:

• Specific accounting policies that materially impact financial

results,

• Unusual accounting practices, and

• Areas that require analytical adjustments so that meaningful

comparisons can be made among companies.

We found that most of the rated companies in Greater China

either use or provide reconciliation of their financial statements

to international accounting standards or U.S. generally accepted

accounting practices. Nevertheless, we believe a significant

number of accounting issues still require analytical adjustments

to better portray credit risk.

One of the most common problem areas is not fully reflecting

the leverage of a company by moving debt off balance sheet to

joint ventures and associated companies. The current accounting

standards for consolidation are clearly lacking, or at least their

implementation is. There is surely something inadequate in an

accounting rule, or the way it is interpreted by companies and

their auditors, that in some instances permits companies to shift

off balance sheet the debt of associated companies over which

they have control and a majority beneficial interest.

Other popular accounting techniques frequently used by

companies to enhance reported financial results are profit

smoothing, both as it relates to deferring and amortizing 'lumpy

profits' and boosting flagging income with one-time gains, and

inappropriately capitalizing expenditure.

This report also tackles the importance of cash flow analysis.

Recent large corporate failures have reinforced the value of cash

flow analysis. Standard & Poor's believes that a company's

ability to meet financial obligations, particularly over the near

term, is more clearly recognized when looking at the cash flow

statement rather than the income statement. A close review of

several examples suggests that analysis of cash flow patterns

can often reveal a level of debt servicing capability that is

completely different from that which might be apparent from

observing reported earnings.

We hope you find this report valuable. Standard & Poor's is

committed to providing the financial community with accurate

and timely analysis, and to advancing transparency in financial

markets.

Introduction

A

John BaileyDirectorCorporate and Infrastructure Ratings

'

Corporate FinancialDisclosure inGreater China

4 Standard & Poor’s

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

CommentariesCash Flow Analysis Gets Fresh Attention in Turbulent Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Spotlight on Greater China Corporate Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Company Specific CommentariesAES China Generating Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Airport Authority Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Aluminum Corp. of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12ASAT Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Beijing Datang Power Generation Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cathay International Water Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cheung Kong (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cheung Kong Infrastructure Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13China Mobile (Hong Kong) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14China National Offshore Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14China Petroleum & Chemical Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Chinese Estates Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Chinese Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Chunghwa Telecom Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CITIC Pacific Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CLP Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CLP Power Hong Kong Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16CNOOC Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Compal Electronics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Far EasTone Telecommunications Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17GH Water Supply (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Hongkong Electric Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Hongkong Electric Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hongkong Land Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hon Hai Precision Industry Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hopewell Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Huaneng Power International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Hutchison Whampoa Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Hysan Development Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Jardine Strategic Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Kerry Properties Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Kowloon Canton Railway Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Kowloon Motor Bus Co. (1933) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Macronix International Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21MTR Corp. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Panva Gas Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PCCW-HKT Telephone Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Ritek Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Road King Infrastructure Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Shanghai Baosteel Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Sino Land Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Sun Hung Kai Properties Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Swire Pacific Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Taiwan Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24United Microelectronics Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Wan Hai Lines Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Wharf (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Key Ratings in Greater China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

DefinitionsGlossary of Financial Ratio Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Rating Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ContactsStandard & Poor's Corporate Analysts Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Standard & Poor's Asia-Pacific Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Standard & Poor's Affiliate Network in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Table of Contents

Table 1Compal Electronics Inc. Cash Flow Statement(NT$ mil.) 2002 2001 2000 1999 1998 1997 1996

Net income 7,919 5,403 5,983 5,398 4,871 3,398 1,159

Funds from operations 9,461 6,597 6,730 5,940 5,162 4,017 1,388

Working capital movement (4,118) 3,053 (4,318) (96) (149) (1,027) 379

Operating cash flow 5,343 9,650 2,412 5,844 5,013 2,990 1,767

Capital expenditure (6,579) (2,017) (9,537) (9,230) (3,213) (3,969) (791)

Free operating cash flow (1,236) 7,633 (7,125) (3,386) 1,800 (980) 976


Cash Flow Analysis Gets Fresh Attention in Turbulent Market

John Bailey, Hong Kong (852) 2533-3530

he financial community puts too much emphasison the reported earnings generated by corporatemanagement.

Standard & Poor's believes that prudent financial analysis

should focus on fundamental cash flow evaluation, as cash is

ultimately the only way a company can pay its bills, service its

debt, and provide returns to its shareholders.

Earnings Are An Abstract ConceptWhen companies announce their earnings, they are reported on

an accrual basis, reflecting costs and expenses 'matching'

concepts, and not based on cash receipts. For example: when a

property company recognizes revenue on a percentage-of-

completion basis, it may book a sale in one year but not receive

payment until the following year or several years later. Similarly,

companies reflect a depreciation charge on fixed assets as an

expense to be allocated against revenue, where the cash for this

expense was paid in previous years when the underlying asset

was acquired. Conversely, companies have to make new

investments to replace obsolete equipment, but these

investments are not reflected in the reported earnings.

What is included in earnings is also arbitrary. As shown in

recent years, reported earnings can be easily manipulated

through aggressive accounting policies. Xerox Corp., for

example, recently restated US$6.4 billion in revenue dating

back to 1997. Then there was MCI, formerly WorldCom Inc.,

which inflated its earnings by capitalizing and deferring rather

than expensing about US$3.9 billion of its leased network

access costs, which had previously been treated as an expense.

Earnings also ignore changes in working capital and do not

consider the amount of required capital reinvestment. This can

be a particularly important issue for companies that have short

asset lives, such as companies in the technology sector.

Measuring Cash FlowWhen calculating a company's level of operating cash flow or

funds from operations, Standard & Poor's starts by adding

depreciation and amortization, and other non-cash items to net

income. Next, capital expenditure and cash dividends paid are

subtracted, while working capital movements are included to

arrive at discretionary cash flow. Finally, we take into account

the cost of acquisitions, proceeds from disposals, and eliminate

changes in financial investments and other miscellaneous uses of

cash to arrive at prefinancing cash flow. Prefinancing cash flow

represents the extent to which a company must use net external

financing to build up its cash balances.

Ratios employed by Standard & Poor's to capture the

relationship of cash flow to debt and debt service include:

• Funds from operations/total debt,

• Free operating cash flow+interest/interest,

• Total debt/discretionary cash flow (debt payback period),

• Funds from operations/capital spending requirements, and

• Capital expenditure/capital maintenance.

Where the long-term viability of a company is more assured, i.e.

a company with a higher rating, there can be greater emphasis

on the level of funds from operations and its relation to total

debt. Focusing on debt service coverage and free operating cash

flow becomes more critical in the analysis of a weaker company.

Non-investment grade issuers typically face near-term

vulnerabilities, which are better assessed through free cash flow

ratios.

Case StudiesConsider the case of Compal Electronics Inc., a leading

notebook computer manufacturer based in Taiwan. The cost of

expanding production capacity and upgrading technology

requires continual investment for the company to remain

competitive. Over the past eight years the company has spent

about Taiwan dollar (NT$) 30 billion on property, plant, and

equipment. Account receivables grew to NT$21.5 billion in

2002 from NT$2.1 billion in 1996, and inventories rose by

NT$7 billion over the same period.

T



On first impression Compal has shown relatively strong

earnings performance since 1996. The company's net income of

NT$7.9 billion in 2002 covered interest expense by an

attractive 27.3x. However, in reality, the company has been

consuming cash, and free operating cash flow is highly volatile.

Net cash (as defined by funds from operations) provided by

operating activities was NT$33 billion between 1996 and 2002,

while net cash used in investments was NT$35.3 billion. To

finance the shortfall, the company used cash deposits and issued

equity securities. While net income peaked in 2002, free

operating cash flow was at its highest in 2001.

A simple EBIT/interest analysis would have ignored these

balance sheet changes and would not have recognized the cash

consumption patterns. EBIT-based ratio analysis will reflect the

relative stability and strength of earnings, but will not reflect the

considerable volatility in cash flow and the variable and

essentially non-discretionary capital expenditure. The cash flow

ratios provide a much more meaningful description of the

company’s financial performance in recent years.

Another good example that underscores the importance of

tracking cash flow is PCCW Ltd. The company has restructured

its operations in recent years, an exercise which has significantly

distorted its earnings. PCCW Ltd. reported a net loss of Hong

Kong dollar (HK$) 7.76 billion for the year ended Dec. 31,

2002, compared with a net profit of HK$1.34 billion in 2001.

However, the results included a write down of HK$8.26 billion

on its interest in Reach Ltd., a struggling undersea cable venture

with Australia's Telstra Corp. Ltd. In contrast, PCCW Ltd.'s

funds from operations was HK$5.2 billion in 2002, up 67%

year on year. Despite the hefty loss, PCCW Ltd.'s cash flow

patterns show a more robust level of debt service capability.

Cash Flow Is No PanaceaCash flow analysis offers creditors and analysts a clearer insight

into the true sources and applications of funds before they are

changed by subjective accounting judgments and sometimes by

window dressing. Large and/or inconsistent gaps between

operating income and operating cash flows usually warrant

further investigation. Nevertheless, cash flow analysis has its

own limitations and should not be used without caution. Issues

to be mindful of:

• In practice, the calculation of operating cash flow does not

follow a standard process and if a company wants to

manipulate the figures it has plenty of options. Off-balance-

sheet activities and material details hidden in notes can be as

much of a problem for cash flow analysis as it is for accrual-

based accounting.

• Flows of cash tend to be lumpy because they lack the

smoothing effect of accruals.

• Some cash flow ratios make no provision for the replacement

cost of assets or future commitments without which the

ability to repay debt may be impaired.

• Cash flow does not take into account qualitative information

about the nature of a company's financial flexibility. Access

to committed bank lines, cash balances, and saleable assets

can be crucial factors in assessing a company's financial

strength.

Despite these limitations, the use of cash flow measurements is

still a good basis to arrive at like with like comparisons and offers

an opportunity to complement the strengths and weaknesses of

traditional income statement and balance sheet analysis.

Liquidity and Financial FlexibilityCash flow does not take into account qualitative

information about the nature of a company’s liquidity and

financial flexibility. The ability of a company to manage its

liabilities to mitigate funding and refinancing risk, and

maximize near-term cash generation in times of stress, are

key credit issues. Gradual erosion in a company's

fundamentals can ultimately lead to liquidity problems.

Even a company with a solid business position and

moderate debt use, can, when faced with sudden adversity,

experience a liquidity crisis.

Key issues to consider when looking at liquidity

management include:

• What is the company's debt maturity profile and level of

cash holdings?

• What is the company's ability to sell saleable assets or

non-core businesses?

• Does the company have the ability to delay or cancel

capital expenditure?

• Does the company have committed undrawn bank lines?

• Does the company have restrictive covenants or rating

triggers that can block access to additional funding, or

even accelerate the repayment of existing debt.

• What are the currencies of issued debt, and is it fixed or

floating debt? How does the currency of debt compare

with the currency of the company’s assets and liabilities?


Spotlight on Greater China Corporate Financial Disclosure

John Bailey, Hong Kong (852) 2533-3530; Raymond Woo, Hong Kong (852) 2533-3526; Paul Coughlin, Hong Kong (852) 2533-3502

he recent accounting fiascos at MCI, formerlyWorldCom Inc., Enron Corp., Ahold N.V.,Adelphia Communications Corp., and many

other large corporations, have placed considerable focuson the reliability of company accounts and the auditfunction.

Today's accounting standards are, in general, flexible in the way

expenses, revenue, assets, liabilities, and even cash flows are

reported. The combination of this flexibility in reporting and

the pressure on managers to perform—in accordance with

measures prescribed by market analysts—can give rise to

accounting practices that can distort the financial and credit

strength of companies. However, in exercising this flexibility, it

should not be inferred that corporate management is necessarily

doing something illegal or immoral; in most cases it is just

following normal accounting practices. Nevertheless, it is clear

that for some company accounts, adjustments are needed if a

more transparent representation of the company's credit

strengths is to be obtained.

A lot has been said about the quality of accounting disclosure in

the U.S. and Europe, but the issues are equally, and in some

cases even more, relevant in Asia. In an attempt to throw more

light on these issues, Standard & Poor's has completed a survey

of the financial disclosure standards for all the companies it

rates in Greater China. The survey primarily focuses on the

following key themes:

• Specific accounting policies that materially impact financial

results,

• Unusual accounting practices, and

• Areas that require analytical adjustments to allow for a

meaningful comparison among companies.

Here we describe some of the more common issues when

analyzing companies in Greater China.

Non-Consolidated AssociatesPerhaps the most common form of financial distortion is the use

of non-consolidated associates and affiliates. Many of these

entities are effectively controlled by the group holding company

but are not included in the consolidated statement of assets and

liabilities because they are usually under the 50% consolidation

threshold. Standard & Poor's believes this can lead to an

overstatement of credit protection measures and an

understatement of underlying gearing.

For example, Cheung Kong (Holdings) Ltd.'s 49% interest in

Hong Kong-based conglomerate Hutchison Whampoa Ltd. is

accounted for in Cheung Kong's books using the equity method

of accounting. This means that a proportionate share of

Hutchison Whampoa's net assets and bottom line earnings are

reflected in the group's financial accounts, while its debt is

excluded from the group's balance sheet. Similarly, Hutchison

Whampoa's equity base is counted for gearing purposes in its

own accounts and part of it is counted again in the accounts of

Cheung Kong. This 'double leveraging' of equity and earnings

fundamentally distorts the comparisons between Cheung Kong

and other companies with conventional structures, and

overstates the degree of creditor protection implied in the

company's published financial statements.

Table 1 shows what Cheung Kong's leverage and coverage

ratios would be if Hutchison Whampoa were fully consolidated.

While Cheung Kong is shown to be a substantial and strong

company, clearly its underlying gearing is higher than it initially

appears.

Other notable examples of non-consolidated group companies

include Jardine Strategic Holdings Ltd.'s 41% interest in

Hongkong Land Holdings Ltd., one of Hong Kong's major

property companies, Wheelock & Co. Ltd.'s 48% interest in

Wharf Holdings Ltd., a major Hong Kong conglomerate, and

Swire Pacific Ltd.'s 46% interest in Cathay Pacific Airways Ltd.

T

Table 1Cheung Kong (Holdings) Ltd. Consolidation

Cheung Kong including Cheung Kong includingHutchison on an equity Hutchison on a fully

method basis (2002) consolidated basis (2002)*

Equity (HK$ mil.) 172,681 306,805

Debt (HK$ mil.) 21,873 201,270

Debt to capital ratio (%) 11.2 39.6

Pretax interest coverage ratio (x) 18.8 8.0

*Standard & Poor's consolidation estimate. Excludes off-balance-sheet liabilities.



Jointly Controlled EntitiesIn a similar fashion, partnership and joint ventures are also used to

shift debt off balance sheet. A good example of this can be found

in Cheung Kong Infrastructure Holdings Ltd. (CKI). The company

has a 50/50 shareholding in three highly leveraged Australian utility

companies together with its affiliate Hongkong Electric Holdings

Ltd. If these companies were fully consolidated, Standard & Poor's

estimates that CKI’s ratio of debt to capital would increase to 43%

in fiscal 2002 from 24%. It is remarkable that the Australian

utilities remain unconsolidated given the obvious majority

beneficial interest and control that CKI enjoys.

Property companies in Hong Kong are also significant users of

jointly controlled entities, sometimes in partnership with related

companies. In many cases, disclosure about the nature of these

ventures is relatively poor. Sino Land Co. Ltd., for example, has

about 35% of its total assets in joint venture property

developments and rental property investments. Sometimes

companies provide financial support to such joint ventures,

such as guarantees and shareholder loans. CITIC Pacific Ltd.,

for example, guarantees some of the debt of its associated

companies. If these guarantees were included in the total debt

figure, CITIC Pacific's ratio of total debt to capital would

increase to 22% in 2002 from 19%.

Earnings ManagementCompanies sometimes use profit smoothing techniques to

reduce fluctuations in reported earnings. Consider MTR Corp.

Ltd. (MTRC), one of Hong Kong's major transport companies.

The company receives large up-front cash payments from

property developers that are recorded as deferred revenue and

brought to income over the term of a property development,

despite the fact that these payments are unconditional and not

contingent on the successful completion of the property

projects. While the company has not overstated or understated

profits, over the long term, this treatment camouflages the true

volatility in its operational performance.

Similarly, CLP Holdings Ltd. and Hongkong Electric Co. Ltd.

use the adjustment mechanisms allowed by the Scheme of

Control Agreement that governs the earnings of electricity

companies in Hong Kong to smooth earnings. Fuel costs above

or below projections are debited or credited to a fuel clause

recovery account, which insulates the company from reporting

the impact of fuel price volatility in its income statement.

Likewise, a development fund, which is made up of the

difference between the company's revenue from regulated

operations and permitted returns, is recorded as a deferred

revenue reserve that can be used to smooth profits.

Profit smoothing is also evident in the property sector. A

considerable number of property development companies

report profit on presold projects as they are built, rather than

when units at the projects are sold or when payment is received.

While this method of reporting earnings is a normal accounting

practice, the key point is that it introduces a gap between cash

flow and reported profit. Moreover, if the company fails to

finish the project or the purchaser walks away from its presale

commitment, the reported profit and related retained earnings

would prove to be illusory.

Capitalized ExpenditureExpense and cost capitalization trends should be closely

monitored and analyzed. Accounting standards often provide

management with discretion in determining whether to expense

or capitalize certain costs. Interest costs and certain other

overhead costs associated with development projects are

frequently capitalized. Some companies apply a liberal

interpretation to other expenses such as technology license fees,

research and development costs, and administrative overheads.

Standard & Poor's observes that MTRC has a significant

amount of capitalized expenditure. In recent years, the company

has capitalized a large portion of its interest costs related to the

funding of its new rail extension projects. In 2002, MTRC

capitalized about Hong Kong dollar (HK$) 618 million, or

12% of pretax earnings. When the capitalized amount is added

back to the interest expense figure, the company's ratio of

EBITDA interest coverage falls to 2.3x in 2002 compared with

3.5x if capitalized interest were excluded (see table 2).

Table 2 MTR Corp. Ltd. Capitalized Interest Costs

2002 2001 2000 1999 1998

Reported interest expenses (HK$ mil.) 1,153 896 1,209 1,349 690

Capitalized interest costs (HK$ mil.) 618 1,026 793 377 458

EBITDA interest coverage (x) 3.5 4.5 3.2 2.6 4.8

EBITDA interest coverage including capitalized interest (x) 2.3 2.1 2.0 2.0 2.9


Power project developers in mainland China provide an

additional example of cost capitalization. Huaneng Power

International Inc., an independent power producer, capitalized

a large amount of previously incurred interest costs during the

construction of new power plants. Likewise, AES China

Generating Co. Ltd. had a relatively large amount of capitalized

interest in 2001, amounting to about 50% of its reported

interest expenses.

While capitalising expenditure is a generally accepted accounting

practice, it should be understood that reported interest coverage

ratios might fall dramatically once the relevant capital

expenditure programs are completed. For companies with

continuous capital expenditure programs, this accounting policy

leads to an inflated, or at least very positive view of profit.

Operating LeasesThere are several problem areas in how some accounting rules

treat long-term operating leases. Finance leases are reflected on

balance sheet, in that both the asset and related liability is

shown in the accounts. However, if a company operates the

same asset under an operating lease, there is no recognition of

the liability associated with this revenue-generating asset. It is

important to note that recording operating leases off balance is

perfectly acceptable under most general accounting standards.

Nevertheless, this can distort the true representation of

economic reality, and certainly prevents 'like with like'

comparisons between companies that own their assets and those

that choose to lease them.

Standard & Poor's analysis includes an adjustment for long-

term operating leases, with the assets and related liabilities put

back on the balance sheet. This is done by capitalizing the

discounted value of the future lease payments and allocating the

annual minimum lease payments to interest and principal. In

addition, depreciation expense figures are adjusted to reflect a

depreciation of the asset capitalized. Under most accounting

systems, companies disclose future operating lease

commitments, although the level of detail can vary. Not only are

ratios of debt to capital affected, but also interest coverage

ratios, operating margins, and return on capital.

Operating leases are used significantly in the transport

sector.Taiwan-based shipping company Wan Hai Lines Ltd., for

example, had capitalized operating lease adjustments of Taiwan

dollar (NT$) 21.5 billion in 2002, which was 60% more than

its reported debt figure. Table 3 illustrates how the leverage and

interest coverage ratios change once the ratios are adjusted for

operating leases.

One-Time GainsNon-recurring items flowing through the accounts should

warrant further investigation of earnings quality. Boosting

profits with one-time gains, such as gains from selling assets,

sale-leaseback arrangements, reversing earlier provisions, or

implementing accounting changes, is common among

companies that want to present overly positive financial results

or understate the inherent volatility in the business.

For example, Taiwan-based United Microelectronics Corp.

(UMC), the world's second-largest chip semiconductor

company, reported a better-than-expected upturn in 2002

profit, despite very difficult market conditions. When the

figures are closely examined, it is clear that almost all the profit

came from gains made from the sale of assets, while the base

operations were barely profitable (see table 4).

2002

Reported debt (NT$ mil.) 13,336

Capitalized operating leases (NT$ mil.) 21,517

Debt to capital (%) (lease adjusted) 65.1

Debt to capital (%) (unadjusted) 41.6

EBITDA interest coverage (x) (lease adjusted) 7.6

EBITDA interest coverage (x) (unadjusted) 21.2

Table 3 Wan Hai Lines Ltd. Operating Lease Adjustments

Table 4 United Microelectronics Corp. Gains From Asset Sales(NT$ mil.) 2002 2001 2000 1999 1998

Operating income (loss) 112 (6,412) 47,543 4,074 312

Gains on disposal of investments 8,473 2,347 588 3,737 1,165

Gains on disposal of fixed assets 66 186 373 191 -

Profit after tax 7,072 (3,157) 50,780 10,498 4,407



Similarly, Hysan Development Co. Ltd., a property company in

Hong Kong, has also benefited from one-time gains. Following

a drop in rental income and the absence of property sales in

1998 and 1999, management tried to smooth out the rapid

decline in earnings with gains on the sale of shares in China

Mobile (Hong Kong) Ltd. Table 5 shows that the fall in earnings

is significantly more pronounced if profits from the sale of

investments and property disposals are excluded.

Write-Downs, Restructuring, AndImpairment ChargesStandard & Poor’s observes that companies often use special

charges to artificially boost future operating profit. By

overstating restructuring and impairment charges, usually

during market downturns, a company can inflate future

earnings by lowering the holding costs on investments and

writing off future normal operating expenses. In the future,

increased gains would be recognized upon the disposition of the

assets, lower depreciation or amortization charge, or 'non cash'

reversals of the provision. Property companies in Hong Kong

have been particularly aggressive in writing down assets in

recent years, which is understandable considering the depressed

Table 5 Hysan Development Co. One-Time Gains(NT$ mil.) 2002 2001 2000 1999 1998

Rental income 997 1,132 1,241 1,405 1,833

Gain on property sales – – – 483 1,136

Gain on sale of investments – – 294 166 (439)

Profit from operations 927 1,067 1,475 1,995 2,908

Profit from operations excluding investment gains 927 1,067 1,181 1,829 3,347

Net profit 544 600 850 1,204 1,139

Table 6 The Cost of Employee Bonus Shares in Taiwan(NT$ mil.) Net income 2001 2000 1999 1998

Taiwan Semiconductor Manufacturing Co. Ltd. Taiwan GAAP 14,483 65,106 23,527 14,389

U.S. GAAP (21,975) 21,740 13,884 1,249

United Microelectronics Corp. Taiwan GAAP (3,157) 50,780 10,498 4,407

U.S. GAAP (23,247) 27,134 4,747 (69)

market conditions. However, if these charges are overly

conservative, future earnings are likely to be distorted.

Stock Compensation BenefitsAccounting for employee shares and options is one of the more

contentious accounting issues today. Although these charges

form part of an employee's compensation, there is usually no

real cash cost to the company. Even though the cash flow

implications are neutral, they still need to be carefully

considered when doing comparative ratio analysis.

Employee share compensation is not generally significant in Asia,

but certain industries face substantial exposure. In particular, they

are prevalent in technology companies in Taiwan, where companies

pay out large numbers of employee bonus shares. These are free

shares, which have no lock-up period. Table 6 highlights the

significance of these unrecorded expenses on two of Taiwan's largest

technology companies, Taiwan Semiconductor Manufacturing Co.

Ltd. and UMC. It also shows that there would be a significant

impact on earnings if the market value of the employee bonus shares

was passed through the income statement, as allowed under

U.S. generally accepted accounting practices (U.S. GAAP).


This is primarily an issue for shareholders, whose interests are

diluted and who consequently bear the cost in earnings per

share, rather than a direct concern of creditors. However, if

shareholders are no longer willing to bear these costs, or if

changes in accounting standards make it harder to hide these

costs, creditors must consider whether the company can afford

to retain key staff without bonus shares or whether they need to

boost cash salary payments.

Asset RevaluationsThe inclusion of revaluation reserves in equity needs to be

carefully scrutinized. In Taiwan, mainland China, and Hong

Kong, periodic revaluation of fixed assets is permitted. It is not

that the values are necessarily wrong, but they can create

problems with international comparisons because some

countries, such as the U.S., do not generally permit any upward

revaluation of real estate assets. When analyzing debt leverage

and return on asset ratios, a company's revaluation policies, and

the related amounts, must be valued carefully to allow for

meaningful comparison.

In Hong Kong, for example, revaluation reserves are significant

contributors in bolstering property companies' capital positions.

This, to some extent, helps to explain the low gearing levels that

have been characteristic of most Hong Kong property companies.

If revaluation reserves were deducted from shareholders' equity to

make them more comparable with U.S. companies, Hong Kong

property companies would show reduced capital and higher

leverage ratios than at present. Table 7 illustrates how different

the leverage ratios would be for some of Hong Kong's major

property companies if asset revaluation reserves were excluded.

Users of financial information should take great care in

familiarizing themselves with the corporate reporting practices

of the companies they are analyzing. The ability to distinguish

between conservative and liberal accounting practices, and

differences in accounting standards are essential aspects of

credit analysis. This report reflects on a variety of accounting

issues, some simply require an awareness, as they are industry

specific, some need to be recast for analysis, and others are

highly misleading and hard to justify.

Table 7 Revaluation Reserves for Selected Property Companies in 2002 — Hong KongCompany Net debt to capital Net debt to capital

(includes asset (excludes assetrevaluation reserves) (%) revaluation reserves) (%)

Chinese Estates Holdings Ltd. 32 48

Hysan Development Co. Ltd. 22 32

Jardine Strategic Holdings Ltd. 29 35

Sung Hung Kai Properties Ltd. 14 20

Swire Pacific Ltd. 16 22

Wharf (Holdings) Ltd. 29 49

Accounting In Mainland China—Is It Real?Although mainland China's accounting system has achieved

some success in moving towards accounting

standardization, the quality of domestic financial statements

is still a long way from meeting international standards. The

country's accounting profession is in its infancy and there is

a shortage of well-trained auditors. Professionalism takes

time to form. However, the root causes of mainland China's

accounting problems are structural. Historically, accounting

in mainland China has been used as a tool to meet official

targets rather than a real recording of financial performance.

This has put pressure on state-owned-enterprises to report

stable sources of tax revenue and avoid reporting

embarrassing losses. In this system, the reporting of asset

write-downs is difficult and full disclosure of off-balance-

sheet liabilities, such as schooling and health care facilities,

is lacking. The absence of institutional shareholder pressure

also removes any incentive to incorporate full disclosure in

published financial accounts.



Company: AES China Generating Co. Ltd. (AES Chigen)

Credit rating: B+/Stable

Analyst: Raymond Woo

Accounting standard: U.S. GAAP

Reporting currency: US$

AES Chigen's financial disclosure is relatively good, although some adjustments need to be made for capitalized interest. In 2001,

capitalized interest amounted to US$6.7 million, which is relatively large at about 50% of the reported interest expense of US$13.1

million. However, with the completion of the Yangcheng power project, capitalized interest dropped to about 10% of the reported

interest expense of US$17.6 million in 2002. The company consolidates all its joint ventures, except for its 25% interest in the

Yangcheng power project, which is dealt with on an equity accounted basis. As the Yangcheng power project reached full

commercial operation in 2002, AES Chigen's earnings from affiliates increased substantially to US$26 million in that year from

US$2 million in 2001. In 2002, the company reversed a large provision on uncollectible accounts related to minimum offtake

compensation and arbitration awards, which amounted to US$15.2 million.

Company: Airport Authority Hong Kong (AAHK)

Credit rating: A+/Stable (foreign currency), AA-/Negative (local currency)


Accounting standard: H.K. GAAP

Reporting currency: HK$

No adjustments to AAHK's financial ratios are required, although a significant accounting policy change has been noted. The

company changed its depreciation policy in fiscal 1999/2000 by extending the life of some of its fixed assets. This resulted in a net

reduction in depreciation charges of about Hong Kong dollar (HK$) 538 million in 2000, which in turn increased AAHK's net

income. EBIT for fiscal 1999/2000 was HK$291 million, but would have been negative under the previous depreciation policy. The

company has relatively low contingent liabilities relating to committed capital expenditure. AAHK has no equity accounted earnings.

Company: Aluminum Corp. of China (Chalco)

Credit rating: BBB/Stable (foreign currency)

Analyst: Huiyi Qu


Reporting currency: RMB

Chalco's accounts are relatively straightforward, although some adjustments need to be made for capitalized interest. In 2001,

capitalized interest stood at Chinese renminbi (RMB) 78.4 million, or 14% of the company's reported interest expenses. As with

most Chinese companies, the interpretation of consolidated group statements is quite complex as a result of limited availability of

financial information on the parent company. Clearly, creditors need to be aware of the relationships between companies in the

group to fully appreciate the company's credit risk. The parent company operates at a loss and depends on Chalco to fund most of

its welfare obligations. Chalco amortizes its mining rights and expenses its environmental expenditure in accordance with industry

practice.

Company: ASAT Holdings Ltd. (ASAT)

Credit rating: B/Negative

Analyst: Huiyi Qu

Accounting standard: U.S. GAAP


ASAT's accounts are fairly straightforward and only minor adjustments in calculating the company's financial ratios are required.

Standard & Poor's usually excludes non-cash extraordinary charges, including write-offs and impairment charges, when calculating

ASAT's operating income and interest coverage ratios. During the nine months ended Jan. 31, 2003, non-cash extraordinary charges

amounted to about US$63 million. Frequently writing down impaired assets as a result of rapid inventory obsolescence is a standard

practice in the semiconductor packaging and testing industry. Inventory items more than one year old are written off and long-term

assets are regularly reviewed.


Company: Beijing Datang Power Generation Co. Ltd. (Beijing Datang)


Analyst: Mary Ellen Olson

Accounting standard: IAS


Beijing Datang's accounts require only minor adjustments. All project joint ventures are fully consolidated and there is only a small

amount of capitalized interest and operating leases. About 70% of the company's Chinese renminbi (RMB) 7.9 billion in debt is at

the subsidiary level. In compliance with IAS 32, which requires that derivatives be marked to market, Beijing Datang reported a

RMB240 million charge on an interest rate swap in 2002. This charge reduced the company's profit in 2002, although it did not

affect its cash position. If interest rates increase, Beijing Datang can reverse the charge against income. Like most Chinese

companies, financial information from the parent company is relatively weak.

Company: Cathay International Water Ltd. (Cathay)

Credit rating: CCC/Negative




Financial disclosure by Cathay is relatively poor. The way in which the company recently changed its year-end balance date to June

30, 2002 from Dec. 31, 2001 is not considered standard practice. The change meant important audited financial information was

not available at a time when the company was undergoing financial difficulties.

Company: Cheung Kong (Holdings) Ltd. (Cheung Kong)

Credit rating: A-/Negative

Analyst: Renee Lam



When it comes to considering Cheung Kong's financial profile, Standard & Poor's fully consolidates Cheung Kong with its 49%-

owned associate, Hutchison Whampoa Ltd. (Hutchison). If Hutchison were consolidated, Cheung Kong's ratio of total debt to

capital would increase to 40% in 2002 from 11%. Standard & Poor's also adjusts Cheung Kong's reported EBITDA ratios by

including cash dividends from associates but excluding equity earnings. Cheung Kong recognizes revenue and profit from property

developments only upon completion. This is more conservative than the more commonly used percentage-of-completion method,

but could result in more cyclical earnings. Income patterns for companies in the property sector vary depending on management's

choice of a particular revenue recognition policy. The company also makes individual provisions on development properties rather

than the standard industry practice of provisioning on a portfolio basis. Capitalized project interest costs are significant. Cheung

Kong's ratio of EBITDA net interest coverage fell to 11x from 19.6x in 2002, after adjustments for capitalized interest.

Company: Cheung Kong Infrastructure Holdings Ltd. (CKI)





CKI has a significant amount of off-balance-sheet debt. In particular, the company does not consolidate its investments in Australian

power utilities Powercor Australia LLC, ETSA Utilities Finance Pty. Ltd., and CitiPower I Pty. Ltd., even though the Cheung Kong

group has effective control over them. In equal partnership with its effectively controlled affiliate, Hongkong Electric Holdings Ltd.

CKI owns 50% of Australian distribution companies ETSA Utilities, CitiPower, and Powercor. Standard & Poor's estimates that

CKI's 2001 ratio of debt to capital would have increased to about 43% from 24% if these power utilities had been consolidated.

CKI's total proportionate share in off-balance-sheet debt, most of which is non-recourse, amounted to about Hong Kong dollar

(HK$) 11.9 billion at the end of 2002, which compares with total on-balance-sheet debt of about HK$12.6 billion. Standard &

Poor's also adjusts CKI's interest income in calculating net interest coverage ratios, since a substantial portion of such interest

income is related to shareholders' loans extended by CKI to its Australian utility investments.



Company: China Mobile (Hong Kong) Ltd. (China Mobile)

Credit rating: BBB/Positive (foreign currency)

Analyst: Huiyi Qu



China Mobile has substantial operating lease commitments, which amounted to Chinese renminbi (RMB) 14.7 billion at the end of

2002. Standard & Poor's considers these as additional debt obligations and adds the debt-equivalent value of these leases to the

company's debt figure when calculating the leverage ratio. In addition, lease adjustments are also made to the interest and

depreciation expense figures. On a lease-adjusted basis, China Mobile's EBITDA interest coverage decreased to about 30x from 40x

in 2002. Standard & Poor's notes that it is difficult to accurately assess the financial strength of the consolidated group, because of

limited financial disclosure by China Mobile's parent company, China Mobile Communications Corp.

Company: China National Offshore Oil Corp. (CNOOC)


Analyst: Huiyi Qu

Accounting standard: P.R.C. GAAP


No adjustments to CNOOC's financial ratios were required, although it was noted that there is some off-balance-sheet debt in the

45%-owned Nanhai Petrochemical project and the 33%-owned Guangdong Liquefied Natural Gas project. CNOOC's share of

debt in these two projects is about Chinese renminbi (RMB) 10 billion, which is relatively small compared with the overall size of

the company. In comparison, CNOOC's net cash position was about RMB25 billion at the end of 2002. Parent company accounts

are relatively transparent.

Company: China Petroleum & Chemical Corp. (Sinopec)


Analyst: Huiyi Qu



An interesting element of Sinopec's accounts is a Chinese renminbi (RMB) 36 billion shareholder loan from its parent company,

Sinopec Group. The loan has strong equity characteristics, since its term is 20 years and no interest payments are required. If it were

treated as equity, Sinopec's net debt to capital would strengthen significantly to 20% from about 34% at the end of fiscal 2002. As

with most state-owned enterprises in mainland China, information about the parent company is relatively poor. The parent operates

at a loss and relies on dividends from Sinopec to maintain its operations. The company uses the successful efforts method to account

for its oil and gas exploratory costs, and amortizes its proven reserves on a unit of production method, which is standard practice

in the oil and gas industry.

Company: Chinese Estates Holdings Ltd. (Chinese Estates)

Credit rating: B+/Negative

Analyst: Renee Lam



Like most Hong Kong property companies, Chinese Estates revalues its investment properties yearly. This can cause problems when

making international comparisons because some countries do not permit upward revaluation of assets. If asset revaluation reserves

were excluded from the equity base, Chinese Estates' ratio of net debt to capital would have increased to 40% from 32% in 2002.

Chinese Estates recognizes revenue and profit from property developments on a completion basis. Income patterns for companies

in the property sector vary depending on management's choice of revenue recognition policy. Chinese Estates uses the equity method

to account for investments in associates. While the amount—at less than 9% of total assets—is relatively small, these investments

accounted for 25% of the company's annual average pretax losses in 2001 and 2002. In calculating the company's EBITDA,

Standard & Poor's excludes equity earnings but includes cash dividends received from associates.


Company: Chinese Petroleum Corp. (CPC)

Credit rating: A+/Stable

Analyst: Tony Tsai


Reporting currency: NT$

Some adjustments need to be made to CPC's financial ratios for capitalized interest. Capitalized interest amounted to Taiwan dollar

(NT$) 568 million in 2002 and NT$516 million in 2001. As a general practice, CPC regularly revalues its fixed assets and records

any increase as capital surplus. The last time CPC revalued its assets was in 2001. CPC revalued its property assets in 1996 and

1997, resulting in a NT$69.6 billion increase in equity. The company's ratio of debt to capital would have increased to 21% in

2002 from 16% if these revaluations were not included. Standard & Poor's also notes that inventory revaluations are recorded as

non-operating income or losses and not as a cost of sales.

Company: Chunghwa Telecom Co. Ltd. (Chunghwa)

Credit rating: AA-/Stable

Analyst: Tony Tsai

Accounting standard: Taiwan GAAP


Chunghwa Telecom's accounts do not require any analytical adjustments when the company's financial ratios are calculated.

Because the company is a government-owned enterprise in Taiwan, its employees are granted an annual cash bonus equivalent to

four and a half months' salary if the budgeted profit is achieved. Chunghwa changed its accounting year to December from June in

1999 in line with Securities Exchange Commission requirements.

Company: CITIC Pacific Ltd. (CITIC)

Credit rating: BBB-/Stable




As a holding company, share of profit from associated companies constitutes a significant portion of CITIC's earnings. Standard &

Poor's adjusts CITIC's EBITDA and EBIT ratios by including cash dividends from associates, while excluding equity earnings

because of their potential non-cash nature. In 2001, the company reclassified intangible assets of Hong Kong dollar (HK$) 3.6

billion as goodwill subject to a maximum amortization period of 20 years under transitional accounting rules. This resulted in a

deduction in retained profit of HK$1.2 billion on Jan. 1, 2001. CITIC has modest contingent liabilities in the form of guarantees

on associated companies' debt, which amounted to about HK$1.9 billion in 2002. Standard & Poor's estimates that the company's

ratio of total debt to capital would have increased to 22% from 19% in 2002 if these guarantees were treated as debt.

Company: CLP Holdings Ltd. (CLPH)





The accounts of CLPH and its subsidiary, CLP Power Hong Kong Ltd. (CLP Power) are a challenge to credit analysts despite the

relatively straightforward nature of the company and its operations. CLPH's reported debt excludes the debt obligations of its

jointly controlled entities, associated companies, and other off-balance-sheet obligations. Standard & Poor's adjusts CLP Power's

accounts and financial ratios to include these items. As a result, CLPH's ratio of debt to capital rises to about 55% compared with

20% before the adjustments, while its ratio of funds from operations interest coverage falls to 5x compared with 28x. CLPH's

acquisition of an 80% interest in Powergen's Asia-Pacific power generating assets in 2001 was subjected to surprising off-balance-

sheet accounting treatment. Despite a clear majority interest, and, in Standard & Poor's view, effective control, the auditors did not

require consolidation of this investment. As such, a significant amount of debt was not reported in the 2002 accounts. This should

be corrected with the publication of the 2003 accounts, where CLPH's additional investment may result in the full consolidation

of these assets.



Company: CLP Power Hong Kong Ltd. (CLP Power)





CLP Power's audited financial accounts understate materially the level of gearing implicit in the company's operations. CLP Power's

40%-owned affiliate, Castle Peak Power Co. Ltd., (CAPCO) provides most of its electrical power, and CLP Power is obligated to

meet CAPCO's costs and return on equity. CLP Power and CAPCO are effectively a single economic entity. As such, Standard &

Poor's consolidates CAPCO, including Hong Kong dollar (HK$) 11.8 billion in debt, into CLP Power and CLP Holdings Ltd. for

the purpose of analysis. In addition, Standard & Poor's added HK$6.7 billion reflecting commitments by CLP Power and CAPCO

to purchase nuclear power and natural gas to CLP Power's debt profile. As a result, CLP Power's adjusted debt to capital increased

to 54% from 24% in 2002, and its adjusted funds from operations interest coverage decreased to 8.3x from 30x before the

adjustments were made.

A scheme of control agreement (SCA) with the Hong Kong government also allows the company to smooth its earnings. CLP

Power's tariff mechanism allows for a fuel adjustment account, a rate reduction reserve, and a development fund. Fuel costs above

or below projections are debited or credited to a fuel clause recovery account, which insulates the company from fuel price volatility.

The development fund is the difference between SCA revenue and the company's permitted return. Use of the development fund

can replace changes to base tariff rates and help smooth profits. The rate reduction reserve is generated through an 8% interest

charge on the sum of the average balances of the development fund and the special provision account, which is rebated to customers.

CLP Power's development fund had a balance of HK$3.4 billion, while the company's rate reduction reserve account had a balance

of HK$458 million at the end of 2002.

Company: CNOOC Ltd. (CNOOC Ltd.)


Analyst: Huiyi Qu



The only adjustments made to CNOOC Ltd.'s financial ratios were for a small amount of operating lease commitments. The

company uses the successful efforts method to account for its oil and gas exploratory costs, and amortizes its proven reserves on a

unit of production method, which is standard practice in the oil and gas industry.

Company: Compal Electronics Inc. (Compal)


Analyst: Jonathan Lee



Compal's method of accounting for employee bonus shares is a notable feature of the company's accounts. Under Taiwan GAAP,

the value of such bonuses is based on the par value of the issued common shares in a company. Under U.S. GAAP, the fair value of

issued common shares is included in expenses. Compal's net income would fall if such bonuses had been calculated in accordance

with U.S. GAAP. However, the employee stock bonus is a non-cash item and does not affect the company's cash flow protection

measures.


Company: Far EasTone Telecommunications Co. Ltd. (Far EasTone)


Analyst: Tony Tsai



Far EasTone capitalizes major improvements and interest expense incurred for telecom construction, while expensing maintenance

and repair costs. Standard & Poor's adds back capitalized interest, which amounted to Taiwan dollar (NT$) 175 million in fiscal

2002, to interest costs when calculating the company's interest coverage ratios. Far EasTone treats promotional expenses, including

commissions and cellular phone unit subsidies, as marketing expenses in the year in which service to the subscriber is activated. The

company states its property and equipment at cost. These are depreciated using the straight-line method over eight years in

accordance with standard industry practice.

Company: GH Water Supply (Holdings) Ltd. (GH Water)

Credit rating: BB+/Stable




GH Water's accounts are fairly straightforward although the company does have some relatively large off-balance-sheet

commitments. Capital commitments for the renovation of GH Water's water projects amounted to about Chinese renminbi (RMB)

4.7 billion in 2002. This compares with the company's total assets of about RMB21.2 billion and total debt of about RMB15.4

billion in 2002. The company's principal asset is a 30-year operating right for a major water project that supplies water to Hong

Kong, which is amortized over a 30-year period.

Company: Hongkong Electric Co. Ltd. (HKE)





Under a scheme of control agreement (SCA) with the Hong Kong government, HKE's tariff mechanism allows for a fuel adjustment

account, a rate reduction reserve, and a development fund. Fuel costs above or below projections are debited or credited to a fuel

clause recovery account, which insulates the company from fuel price volatility. The development fund is the difference between

SCA revenue and the company's permitted return. Use of the development fund can replace changes to base tariff rates and help

smooth profit. HKE's development fund had a balance of Hong Kong dollar (HK$) 138 million, while the company's rate reduction

reserve account had a balance of HK$9.6 million at the end of 2002. Neither HKE nor its parent company, Hongkong Electric

Holdings Ltd., maintains cash balances against these reserves, and the reserves are viewed as a way of offsetting potential earnings

below those mandated by the SCA.



Company: Hongkong Electric Holdings Ltd. (HEH)





Standard & Poor's made notable adjustments to HEH's financial ratios during the analysis process, primarily relating to the

company's equity accounting method. In equal partnership with its effective parent, Cheung Kong Infrastructure Holdings Ltd.,

HEH owns 50% of Australian distribution companies ETSA Utilities, CitiPower, and Powercor. In accordance with the practice of

equity accounting, HEH's holdings in these companies were not consolidated. Furthermore, since HEH's shareholders' equity in the

distribution companies is in the form of shareholder loans, the contribution from these utilities is booked as interest income. To

better reflect HEH's potential debt obligations because of the heavy debt burden of these utilities, Standard & Poor's performs an

analysis consolidating HEH's 50% interest in these three utilities. For 2002, the pro forma consolidated debt to capital ratio is

about 40% with funds from operations interest coverage at about 5x, compared with 22% debt to capital ratio and 11x funds from

operations interest coverage before the adjustments were made. Excluding intercompany loans, about 75% of HEH's debt

obligations represent HKE's borrowings.

Company: Hongkong Land Holdings Ltd. (Hongkong Land)

Credit rating: BBB+/Negative

Analyst: Renee Lam



Since 2001, Hongkong Land has adopted IAS 40 and recorded its leasehold investment properties at depreciated historical cost.

The principle underlying IAS 40 is that leasehold property is accounted for as a prepaid expense and amortized over the life of the

lease, which implies that no revaluation is possible. Hongkong Land also publishes a supplementary set of accounts to show the

effect of asset revaluations. Net debt to capital was 24% as at Dec. 31, 2001, but if asset revaluations are excluded, net leverage

increases to 62%. Since 2002, Hongkong Land has amortized its rent-free tenant incentives over the life of the lease. Previously this

was done only for rent-free periods of more than six months. This creates potential for some profit smoothing, although it is usually

relatively small.

Company: Hon Hai Precision Industry Co. Ltd. (Hon Hai)

Credit rating: BBB/Stable

Analyst: Tony Tsai



A big issue for Hon Hai, as for many other high technology companies in Taiwan, is the company's use of employee bonus shares.

Under Taiwan GAAP, the distribution of employee bonus shares is treated as an allocation from retained earnings. Hon Hai is not

required to charge the value of the bonus to income. If the accounts were prepared under U.S. GAAP, the fair value of the common

shares issued would be shown as an expense in the income statement. In 2001, Hon Hai issued employee stock bonus shares

amounting to Taiwan dollar (NT$) 3.5 billion. Another interesting issue is the way the company accounts for its investments in

mainland China. According to government regulations, Hon Hai's investments in mainland China have had to be made through

offshore holding companies. Earnings from these companies are recorded in Hon Hai's quarterly accounts using the equity method

of accounting, but in the full year financial statements they are fully consolidated.


Company: Hopewell Holdings Ltd. (Hopewell)

Credit rating: BB-/Stable




Hopewell's financial ratios are adjusted to take into account joint venture accounting. Hopewell's large and growing Delta Road's

division consists of several joint ventures with mainland China parties. Hopewell's turnover and EBITDA calculations include

interest income from joint ventures amounting to Hong Kong dollar (HK$) 202 million in fiscal 2002. The interest income is based

on Hopewell's loans to joint ventures and does not necessarily reflect a cash receipt. Therefore, calculations of EBITDA interest

coverage including non-cash interest income can differ materially from cash interest coverage figures. For example, in fiscal 2002,

EBITDA interest coverage was 0.4x compared with funds from operations interest coverage of 0.2x. Beginning in fiscal 2003,

interest income from joint ventures should decline significantly, reflecting shareholder loan repayments in fiscal 2001 and 2002.

However, cash flows will not be significantly affected because the cash receipts corresponding to the interest income included in

turnover have been negligible since the start-up of these joint ventures. Hopewell revalues its investment properties on a yearly basis,

but this does not make a material difference to debt leverage ratios.

Company: Huaneng Power International Inc. (HPI)





Although HPI's accounts are relatively straightforward, a broader view of the consolidated group is difficult to obtain because of the

limited amount of financial information available on the parent company, China Huaneng Group. All of HPI's power projects are

consolidated except for the company's minority interest in the Rizhao project. Standard & Poor's treats HPI's US$230 million convertible

bond issue as pure debt instead of separating it into equity and liabilities under IAS. In Standard & Poor's financial ratios, adjustments are

made for operating lease commitments and contingent guarantees. This weakens the ratios but only to a small degree. For example, after

making the adjustments, HPI's funds from operations interest coverage in 2002 would fall to about 11x from 12x, while the company's

funds from operations to net debt would decrease to about 64% from 66%. The company's off-balance-sheet commitments are modest.

As at Dec. 31, 2002, HPI had contracted capital commitments of Chinese renminbi (RMB) 2.7 billion in respect of coal purchasing,

renovation and construction of the third phase of its Dezhou project. This compares with total debt of about RMB12.4 billion.

Company: Hutchison Whampoa Ltd. (Hutchison)





Standard & Poor's considers the financial profile of the fully consolidated Cheung Kong Group important in analyzing Hutchison's

credit. Hutchison's pro rata share of non-recourse debt held at associates and jointly controlled entities, contingent liabilities, and

operating lease commitments are taken into consideration in analyzing the company's financial profile. After adjustments,

Hutchison's funds from operations interest coverage ratio in 2002 would decline to less than 3x and the company's adjusted debt

to capital would near 50%.

One-time gains, derived principally from the sale of telecommunications investments, have played a crucial role in Hutchison's

financial results over the past few years. Such exceptional gains amounted to Hong Kong dollar (HK$) 1.5 billion in 2002, HK$3.1

billion in 2001, HK$25.7 billion in 2000, and HK$109.5 billion in 1999. By way of contrast, in its 2002 results, the company

recorded a HK$3.1billion revaluation deficit on holdings in Deutsche Telekom AG and Vodafone Group PLC shares. In accordance

with H.K. GAAP, the loss was recorded as an offset to equity and did not impact earnings.



Company: Hysan Development Co. Ltd. (Hysan)

Credit rating: BBB/Negative

Analyst: Renee Lam



Like most Hong Kong property companies, Hysan revalues its investment properties yearly with changes in market value reflected

in the company's asset revaluation reserves. It is not that the values are necessarily wrong, but problems can arise when making

international comparisons because some countries do not permit upward revaluation of assets. If asset revaluation reserves were

excluded from shareholders' equity, the company's net debt to capital would have increased to 32% from 22% in 2002. Hysan also

has a record of increasing profit with one-time gains from the sale of investments. With a drop in rental income and the absence of

property sales in 1998 and 1999, management tried to smooth out the rapid decline in earnings with gains on the sale of shares in

China Mobile. Standard & Poor's excludes these gains when calculating the company's EBITDA and EBIT figures.

Company: Jardine Strategic Holdings Ltd. (Jardine Strategic)


Analyst: Renee Lam



The Jardine group has an unusual cross shareholding structure. Jardine Strategic is 79%-owned by Jardine Matheson Holdings Ltd.,

which is 51%-controlled by Jardine Strategic. Standard & Poor's considers the financial profile of the overall group, including the

operations of Jardine Matheson, when analyzing the credit profile of Jardine Strategic. Also taken into consideration is the off-balance-

sheet debt in the group's 41%-owned Hongkong Land Holdings Ltd. This company is effectively controlled by Jardine Matheson, but

is not consolidated because it is under the 50% consolidation threshold. Standard & Poor's includes Jardine Matheson's proportionate

share of Hongkong Land's debt in calculating leverage and debt coverage ratios to obtain a better idea of the group's overall liability.

Ratio adjustments are also made for operating lease commitments. Compliance with IAS 40 has meant that the Jardine group has

recently started to record its leasehold investment properties at depreciated historical cost. Jardine Matheson's ratio of net debt to

capital would have risen to 39% from 35% in 2002, if asset revaluation reserves were excluded from equity.

Company: Kerry Properties Ltd. (Kerry Properties)

Credit rating: BBB-/Negative

Analyst: Renee Lam



Kerry Properties' accounts are relatively straightforward, but information on the controlling parent company is less transparent.

Kerry Properties is 63%-owned by Kerry Holdings Ltd., which in turn is controlled by the Kwok family. Kerry Properties regularly

revalues some of its key assets, such as investment properties. Revenue from property developments is recognized on a percentage-

of-completion basis. The danger with this type of accounting method is that it recognizes profit before the cash is actually realized.

If cost overruns occur late in a project, a charge to earnings may be required to reflect lower actual profit. The company also shifts

costs to future periods by capitalizing interest. If capitalized interest is added back, the company's pretax net interest coverage ratio

would have dropped to 3.4x from 5.3x in 2002.


Company: Kowloon Canton Railway Corp. (KCRC)





Standard & Poor's calculates KCRC's financial ratios on a gross interest (interest plus capitalized interest) basis to better reflect its

operating strengths. KCRC has recorded high levels of capitalized interest income and capitalized interest expense in recent years.

This is because KCRC typically prefunds project construction by investing project-related equity contributions and debt proceeds.

As a result, interest income has exceeded interest expense in each of the past five years. As KCRC's construction projects are

completed and contractors are paid, the company's cash level will drop while debt will increase. Interest expenditure is likely to

exceed interest income in 2003. KCRC also capitalizes staff costs associated with projects under development. Staff costs totaling

Hong Kong dollar (HK$) 914 million associated with projects under construction were capitalized in 2002.

Company: Kowloon Motor Bus Co. (1933) Ltd. (KMB)

Credit rating: A/Stable




No adjustments to KMB's financial ratios were required, although a significant accounting policy change was noted. In 2001, Kowloon

Motor Bus Holdings Ltd. and its subsidiary, KMB, changed their accounting policies in connection with employee retirement reserves

to comply with new accounting standards. This had the effect of increasing the company's capital base and lowering its reported

leverage ratio. KMB's ratio of debt to capital fell to 44% from 65% in 2001 after taking into account this policy change.

Company: Macronix International Co. Ltd. (Macronix)

Credit rating: B/Negative




Macronix capitalized interest amounting to Taiwan dollar (NT$) 364 million in 2002, compared with reported interest expense of

NT$1.17 billion. There are several differences between Taiwan GAAP and U.S. GAAP accounting standards that should be noted.

Under Taiwan GAAP, directly owned subsidiaries with total assets or total net sales of less than 10% of the company's

unconsolidated assets or sales are not consolidated. Royalty costs under local accounting standards are included in research and

development expenses, while under U.S. GAAP, these expenses would usually be accounted for as sales or administrative expenses.

Most of the company's production equipment is depreciated on a five-year straight-line basis.

Company: MTR Corp. Ltd. (MTRC)





MTRC's financial profile is relatively complex and requires significant adjustments. It is important to note that the company

receives large up-front cash payments from property developers that are recorded as deferred revenue and brought to income over

the term of a property development. While the company has not overstated or understated profit, over the long term, this treatment

camouflages the true volatility in the company's operational performance. Standard & Poor's excludes cash from property

developments in calculating MTRC's funds from operations and reclassifies it as cash from investments. This enables a better

assessment of the ongoing profitability of MTRC's rail lines on a stand-alone basis. MTRC capitalizes costs associated with the

construction of new rail projects. Shifting these costs to the balance sheet as capitalized expenses artificially boosts headline

earnings. In fiscal 2001 MTRC began reporting on a consolidated basis, including investment in subsidiaries.



Company: Panva Gas Holdings Ltd. (Panva)

Credit rating: BB+/Stable




In analyzing the creditworthiness of Panva, Standard & Poor's reviews the financial strength of the parent company, Sinolink

Worldwide Holdings Ltd. All of Panva's operating joint ventures are consolidated. Panva recognizes revenue from gas connection

contracts on a percentage-of-completion basis. Standard & Poor's makes adjustments for the company's operating leases. Panva's

ratio of EBITDA interest coverage in 2002 declined to 47.6x from 61.5x after it was lease adjusted. Panva has some off-balance-

sheet obligations, principally capital commitments, which amounted to Hong Kong dollar (HK$) 87.6 million in 2002.

Company: PCCW-HKT Telephone Ltd. (HKT)

Credit rating: BBB/Positive

Analyst: Huiyi Qu



In analyzing the creditworthiness of HKT, Standard & Poor's also reviews the financial strength of the parent company, PCCW Ltd.

It also takes into consideration the company's off-balance-sheet debt in the group's 50% joint venture, Reach Ltd. In 2000, PCCW

Ltd. wrote off Hong Kong dollar (HK$) 172 billion in goodwill arising from its acquisition of HKT. This reduced PCCW Ltd.'s

equity base to negative HK$14.9 billion under H.K. GAAP. In contrast, under U.S. GAAP, where goodwill can be amortized, PCCW

Ltd. would have shown a positive HK$127 billion equity base. This can distort the income statement and requires the analyst to

focus more on the group's cash flow trends. Capitalized interest is relatively small and does not negatively affect ratio calculations.

Company: Ritek Corp. (Ritek)

Credit rating: B+/Negative




Under Taiwan GAAP, Ritek's directly owned subsidiaries with total assets or total net sales of less than 10% of the company's

unconsolidated assets or sales are not consolidated. However, the company's major investment in RiTdisplay Technology Co. Ltd.

has been consolidated since 2001. Ritek amortizes its copyrights, including recording production fees for issuing compact discs, over

a two-year period based upon the estimated production quantity of finished goods.

Company: Road King Infrastructure Ltd. (Road King)





Road King's financial statements do not provide a complete picture of the company's credit profile. Most of the company's

operations are held in off-balance-sheet joint ventures. With the exception of the Qijiang project, all of Road King's projects follow

the equity method of accounting, even when they control more than 50%. This means that only a proportionate share of the joint

venture's net assets and bottom line earnings are reflected in the group's financial accounts, while its debt is effectively excluded

from the group's balance sheet. Toll income, net of joint-venture operating expenses and depreciation, is recorded as profit from

joint ventures. In the cash flow statement, income from most of these joint ventures is not classified as operating cash flow but as

cash from investing activities in the form of dividends received and loan repayments. Standard & Poor's treats all dividends and

loan repayments from infrastructure joint ventures as part of funds from operations.


Company: Shanghai Baosteel Group (Baosteel)


Analyst: Huiyi Qu

Accounting standard: P.R.C. GAAP


Baosteel's financial statements are prepared according to P.R.C. GAAP. No major adjustments were made to the company's

financial ratios, although it is recognized that the quality of accounting information in mainland China does not meet international

standards. The reporting of fair value information and write downs can sometimes be difficult. Off-balance-sheet liabilities of

uncertain quantities, such as subsidized housing, schooling, or health care benefits, can further reduce the transparency of financial

statements. Investments, over which Baosteel has control, even if its ownership is less than 50%, are consolidated. For example,

36%-owned Meishan Ltd., over which Baosteel has full control, is fully consolidated.

Company: Sino Land Co. Ltd. (Sino Land), (Guarantor of Golden Million Finance Corp.)

Credit rating: BB/-- (Golden Million Finance Corp.)

Analyst: Renee Lam



Sino Land's accounts are not particularly transparent. There is a lot of off-balance-sheet debt in jointly controlled entities. Sino Land

keeps about 35% of its assets in joint ventures, and information on the private businesses of the controlling shareholder is limited.

To avoid understating debt, Standard & Poor's includes its share of debt incurred by associates in calculating the company's

leverage and debt coverage ratios. With the exception of Sino Land's hotel properties, the company revalues its investment

properties yearly with changes in market value reflected in its asset revaluation reserves. This can sometimes cause problems when

making international comparisons because some countries do not permit upward revaluation of assets. If the asset revaluation

reserves were excluded from shareholders' equity, the company's net debt to capital would have increased to 28% from 24% as at

Dec. 31, 2002. Sino Land recognizes revenue and profit from property developments only upon completion. This is a more

conservative revenue recognition method, but it can result in more cyclical earnings than if the company used the percentage-of-

completion method. About 18% of total interest expense was capitalized over the past few years.

Company: Sun Hung Kai Properties Ltd. (SHKP)

Credit rating: A/Negative

Analyst: Renee Lam



SHKP's investments in associates and jointly controlled entities are equity accounted. Standard & Poor's adjusts SHKP's EBITDA

ratios by including cash dividends from associates and excluding their equity earnings because of their potential non-cash nature.

Like most property companies in Hong Kong, SHKP revalues its investment and hotel properties yearly with changes in market

value reflected in the company's asset revaluation reserves. This can sometimes cause problems when making international

comparisons because some countries do not permit upward revaluation of assets. If the asset revaluation reserves were excluded

from shareholders' equity, the company's ratio of net debt to capital in fiscal 2002 would have increased to 20% from 14%. The

company also capitalizes a significant amount of interest. For 2002, EBITDA to net interest coverage would have dropped to 11.4x

from 17.7x if capitalized interest were included.



Company: Swire Pacific Ltd. (Swire)


Analyst: Renee Lam



Standard & Poor's includes Swire's share of debt liabilities in 46%-owned Cathay Pacific Airways Ltd. when calculating the

company's leverage and debt coverage ratios. Cathay Pacific is effectively controlled by Swire but is not included in the consolidated

balance sheet because the shareholding is slightly less than the required threshold of 50% consolidation. If Cathay Pacific is

consolidated, Swire's 2002 leverage ratio rises to 30% from 17%. Like most companies in Hong Kong, Swire revalues its investment

properties yearly with changes in market value reflected in the company's asset revaluation reserves. This can sometimes cause

problems when making international comparisons because some countries do not permit upward revaluation of assets. In 2002,

Swire's ratio of net debt to capital would have increased to 22% from 16% if asset revaluation reserves were excluded from the

equity base. Capitalized interest is significant. The EBITDA to net interest coverage ratio would have dropped to 6.6x from 10.4x

in 2002 had capitalized interest been included. Swire adopts a percentage-of-completion method in recognizing revenue and profit

from property developments.

Company: Taiwan Power Co. (Taipower)

Credit rating: AA-/Negative

Analyst: Tony Tsai



Several key adjustments need to be made when calculating Taipower's financial ratios. Standard & Poor's capitalizes the company's

power purchase agreements and adds-back capitalized interest. Capitalized interest was significant in 2002 at Taiwan dollar (NT$)

4.143 billion, compared with total interest expense of NT$12.525 billion. Standard & Poor's notes that Taipower depreciates its

fixed assets over 20 years, compared with 30 years for U.S. utilities. Accelerated depreciation can result in lower net worth and

deflate earnings. Taipower sets aside reserves in a sinking fund for decommissioning nuclear plants. Pension liabilities are currently

under provided for but the company has started to accelerate its provisioning to prepare the company for possible privatization.

Taipower plans to make a further NT$2 billion in provisions per year between 2003-2005 for pension commitments.

Company: United Microelectronic Corp. (UMC)

Credit rating: BBB/Stable

Analyst: Tony Tsai



A big issue with UMC is the company's use of employee bonus shares. Under Taiwan GAAP, the distribution of employee bonus

shares is treated as an allocation from retained earnings and is not charged to the income statement. These are free shares, which

have no lock-up period. Even though the cash flow implications are neutral, they still need to be carefully considered when doing

comparative ratio analysis. If the market value of employee shares were reported as an operating cost, UMC would have recorded

a loss in 2002. Capitalized interest amounted to Taiwan dollar (NT$) 551 million in 2002, but this had only a minor affect on the

way interest coverage ratios were calculated. Machinery and equipment is depreciated on a straight-line basis over five years, which

is standard industry practice. UMC's research and development costs are expensed and not capitalized. The company also has

treasury stock, which is deducted from shareholders' equity.


Company: Wan Hai Lines Ltd. (Wan Hai)


Analyst: Daniel Hsiao



Wan Hai uses operating leases quite readily. In 2002, the company capitalized operating lease commitments of Taiwan dollar (NT$)

21.5 billion, which was 60% higher than its reported debt figure. Wan Hai's ratio of EBITDA interest coverage in 2002 fell to 7.6x

from 21.6x after it had been lease-adjusted. Under Taiwan GAAP, directly owned subsidiaries with total assets or total net sales of

less than 10% of the company's unconsolidated assets or sales are not consolidated. As a result, Wan Hai Lines (America) Ltd. and

Yi Chun Steamship Agencies Sdn. Bhd. are not consolidated even though the company owns more than 50% of their voting stock.

Wan Hai depreciates its Taiwan registered vessels over 18 years plus one year of residual value.

Company: Wharf (Holdings) Ltd. (Wharf)

Credit rating: BBB/Negative

Analyst: Renee Lam



Assessing the credit strength of Wharf involves several analytical accounting interpretations. Standard & Poor's views Wharf in the

context of the credit profile of its parent, Wheelock & Co. Ltd. While Wheelock owns slightly less than 50% of Wharf, and hence

does not consolidate Wharf in its accounts, Standard & Poor's is of the opinion that Wheelock effectively controls Wharf and that

their affairs are closely aligned. Joint ventures between Wheelock group members and inter-group transfers of assets reflect its

economic integration. Standard & Poor's considers that full consolidation of Wharf and Wheelock better reflects the credit profile

of the group, although different fiscal year-end dates make consolidation challenging. Accordingly figures are only approximate.

Focus on a Wheelock group consolidation makes a significant difference to credit measures. Interest coverage drops to 3.9x from

5.6x, based on results for the financial year ended Dec. 31, 2001 for Wharf and results based on the financial year ended March

31, 2002 for Wheelock.

The issue of consolidation also raises an interesting study in contrasts. Wheelock, with its 48%-ownership and control of Wharf,

does not consolidate Wharf. While Wharf, in recent years, has consolidated the very profitable Modern Terminals Ltd. (MTL) in

which it has increased ownership to 55%. The difference in the ownership interest in both cases is modest. A more substantial

difference between the two situations is the presence of significant minority shareholders in MTL and, it is understood, the

requirement for all parties to consent to major decisions. In short, Wheelock would appear to exert more influence over Wharf than

Wharf does over MTL. It is perhaps coincidental that consolidating Wheelock and Wharf weakens the latter's credit measures;

while consolidating MTL materially improves credit measures.

Aside from the issues relating to consolidation, analysts need to be conscious that Wharf revalues its investment and hotel properties

yearly, with changes in market value reflected in the company's asset revaluation reserves. As with other property companies

Standard & Poor's considers credit measures both incorporating and excluding the revaluations. In 2002, the company's net debt

to capital would have increased significantly to 49% from 29% if asset revaluation reserves were excluded. Wharf adopts the

percentage-of-completion method in recognizing revenue and profit from property developments, which means there will be some

variance between cash flow and profit measures. Another Standard & Poor's adjustment, which is common among credit analysts,

is to include capitalized interest in interest expenses when calculating the company's interest coverage ratios. Wharf's EBITDA to

net interest coverage ratio would have increased to 10.4x from 8.9x in 2002 if capitalized interest were excluded.



Foreign currencyCompany credit rating Outlook Business

Key Ratings in Greater China

Ratings as at June 2003.

China and MongoliaAluminum Corp. of China Ltd. BBB Stable AluminumChina Mobile (Hong Kong) Ltd. BBB Positive TelecommunicationsChina National Offshore Oil Corp. BBB Positive Chemicals and PetroleumChina Petroleum & Chemical Corp. BBB Stable Chemicals and PetroleumCNOOC Ltd. BBB Positive PetroleumHuaneng Power International Inc. BBB Stable PowerBeijing Datang Power Generation Co. Ltd. BBB Stable PowerShanghai Baosteel Group BBB- Stable SteelGH Water Supply (Holdings) Ltd. BB+ Stable WaterPanva Gas Holdings Ltd. BB+ Stable Gas DistributionAES China Generating Co. Ltd. B+ Stable PowerErdenet Mining Corp. B Stable MiningCathay International Water Ltd. CCC Negative Water

Hong KongAirport Authority Hong Kong A+ Stable AirportCLP Holdings Ltd. A+ Stable PowerCLP Power Hong Kong Ltd. A+ Stable PowerHongkong Electric Holdings Ltd. A+ Stable PowerHongkong Electric Co. Ltd. A+ Stable PowerKowloon-Canton Railway Corp. A+ Stable Transportation (Rail)MTR Corp. Ltd. A+ Stable Transportation (Rail)Kowloon Motor Bus Holdings Ltd. A Stable Transportation (Bus)Sun Hung Kai Properties Ltd. A Negative PropertyCheung Kong (Holdings) Ltd. A- Negative PropertyCheung Kong Infrastructure Holdings Ltd. A- Negative InfrastructureHutchison Whampoa Ltd. A- Negative DiversifiedHongkong Land Holdings Ltd. BBB+ Negative PropertyJardine Strategic Holdings Ltd. BBB+ Negative DiversifiedSwire Pacific Ltd. BBB+ Negative DiversifiedHysan Development Co. Ltd. BBB Negative PropertyPCCW-HKT Telephone Ltd. BBB Positive TelecommunicationsWharf (Holdings) Ltd. BBB Negative DiversifiedCITIC Pacific Ltd. BBB- Stable DiversifiedKerry Properties Ltd. BBB- Negative PropertyRoad King Infrastructure Ltd. BBB- Stable Road InfrastructureGolden Million Finance Corp. BB N.A. PropertyHopewell Holdings Ltd. BB- Stable DiversifiedChinese Estates Holdings Ltd. B+ Negative PropertyASAT Holdings Ltd. B Negative Semiconductor

TaiwanChunghwa Telecom Co. Ltd. AA- Stable TelecommunicationsTaiwan Power Co. AA- Negative PowerChinese Petroleum Corp. A+ Stable PetroleumHon Hai Precision Industry Co. Ltd. BBB Stable ElectronicsUnited Microelectronic Corp. BBB Stable SemiconductorCompal Electroncis Inc. BBB- Stable ElectronicsFar EastTone Telecommunications Co. Ltd. BBB- Stable TelecommunicationsWan Hai Lines Ltd. BBB- Stable ShippingQuanta Computer Inc. BBB- Positive ElectronicsChi Mei Corp. BB Negative Petrochemical/ElectronicsRitek Corp. B+ Negative ElectronicsMacronix International Co. Ltd. B Negative Semiconductor


Glossary of Financial Ratio Definitions

atios are helpful in broadly defining a company sposition relative to its rating category.

However, caution should be exercised when using ratios for

comparisons because of differences in business environments and

financial practices. While the absolute levels of ratios are

important, it is equally important to focus on trends. Below are the

definitions for some of Standard & Poor's key financial ratios.

Total debt includes current and non-current debt, secured and

unsecured debt, subordinated debt, bank overdrafts, loans,

finance lease liabilities, redeemable preference shares, non-

recourse debt, debenture stock, promissory notes, convertible

notes, and bills payable (non-trade).

Equity consists of paid-up capital, capital reserves, long-dated

subordinated loans, perpetual subordinated notes, unappropriated

profits and minority interests, less treasury shares. Subordinated

convertible notes and bonds are excluded from equity.

Total capital is total debt plus equity.

Permanent capital is equity,

adjusted for provisions for

deferred tax and future tax

benefits (where appropriate),

plus total debt.

Operating income is

operating profit, adjusted for

non-operating items (where

appropriate), before tax

expenses, interest expense,

and interest income.

Earnings before interest andtax (EBIT) is operating profit

plus interest income, but

before tax and interest

expenses.

Earnings before interest, tax, depreciation, and amortization(EBITDA) is EBIT plus depreciation and amortization.

Gross interest expense is interest expenses plus capitalized

interest.

Funds from operations (FFO) is defined as operating profit after

exceptional items but before tax expenses, plus depreciation and

amortization less income tax paid, and is adjusted for non-cash

items and net losses or gains on the sale of assets.

Operating Lease Adjustment where applicable, financial ratios

are adjusted for operating lease commitments. Standard &

Poor's operating lease model improves the comparability of

financial ratios by considering de facto assets and liabilities,

whether they are accounted for on or off the balance sheet. The

specific nature of a company's lease obligations (for example:

term, asset type, residual values, matching customer leases, and

contracts) often requires several subjective analytical decisions.

The operating lease model establishes parameters that serve as

a starting point for such decisions.

In capitalizing non-cancelable operating lease commitments, a

present value is calculated by discounting future lease

commitments at a standard discount rate, currently 10%. This

method converts a stream of payments tied to temporary assets

to a debt-financed purchase of property, plant, and equipment.

Standard & Poor's reallocates the average of the current and

previous year's minimum first-year lease commitment to

interest and depreciation.

• Interest expense, which is the average of the current and

previous year's present value multiplied by the interest factor

(10%); and

• Depreciation, which is the

remainder of the average

lease commitment.

Each ratio is then adjusted

according to the following new

values:

• Operat ing margin i s

adjusted by adding both the

additional interest and

additional depreciation

expenses back to operating

income;

• EBIT interest coverage is

adjusted by adding the

additional interest expense

to both EBIT and gross

interest;

• EBITDA interest coverage is adjusted by adding the

additional interest expense to both EBITDA and gross

interest;

• FFO-to-total debt is adjusted by adding additional

depreciation to FFO and the present value of operating leases

to total debt;

• Return on permanent capital is adjusted by adding the

additional interest expense to EBIT, and adding the average

present value of the current and previous annual operating

lease commitments to permanent capital; and

• Debt-to-capital is adjusted by adding the present value of

operating leases to total debt in both the numerator and

denominator.

R

Operating margin (%) =Operating income x 100

Sales

Pretax interest coverage (x) =EBIT

Gross interest

EBITDA interest coverage (x) =EBITDA

Gross interest

FFO-to-total debt (%) =FFO x 100

Total debt

Return on permanent capital (%) =

EBIT x 100

Average of current and previous years' permanent capital

Total debt-to-total capital (%) =Total debt x 100

Total capital

'



Rating Definitions

Standard & Poor s credit rating is a currentassessment of the ability of an obligor s overallfinancial capacity (its creditworthiness) to pay

its financial obligations.

Ratings are based on current information furnished by the borrower

or debt issuer or from data obtained by Standard & Poor's from

other sources which it considers reliable. Standard & Poor's does

not perform an audit in connection with any credit rating and

may, on occasion, rely on unaudited financial information.

Long-Term Issuer Credit RatingsAAA An obligor rated 'AAA' has EXTREMELY STRONG

capacity to meet its financial commitments. ‘AAA’ is the highest

Issuer Credit Rating assigned by Standard & Poor's.

AA An obligor rated 'AA' has VERY STRONG capacity to

meet its financial commitments. It differs from the highest rated

obligors only in small degree.

A An obligor rated 'A' has

STRONG capacity to meet its

financial commitments but is

somewhat more susceptible to the

adverse effects of changes in

circumstances and economic

conditions than obligors in higher-

rated categories.

BBB An obligor rated 'BBB' has

ADEQUATE capacity to meet its

financial commitments. However,

adverse economic conditions or

changing circumstances are more

likely to lead to a weakened

capacity of the obligor to meet its

financial commitments.

Obligors rated 'BB', 'B', 'CCC', and 'CC' are regarded as having

significant speculative characteristics. 'BB' indicates the least

degree of speculation and 'CC' the highest. While such obligors

will likely have some quality and protective characteristics,

these may be outweighed by large uncertainties or major

exposures to adverse conditions.

BB An obligor rated 'BB' is LESS VULNERABLE in the

near term than other lower-rated obligors. However, it faces

major ongoing uncertainties and exposure to adverse business,

financial, or economic conditions, which could lead to the

obligor's inadequate capacity to meet its financial

commitments.

B An obligor rated 'B' is MORE VULNERABLE than the

obligors rated ‘BB’, but the obligor currently has the capacity to

meet its financial commitments. Adverse business, financial, or

economic conditions will likely impair the obligor's capacity or

willingness to meet its financial commitments.

CCC An obligor rated 'CCC' is CURRENTLY

VULNERABLE, and is dependent upon favorable business,

financial, and economic conditions to meet its financial

commitments.

CC An obligor rated 'CC' is CURRENTLY HIGHLY-

VULNERABLE.

Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be

modified by the addition of a plus or minus sign to show

relative standing within the major rating categories.

C A subordinated debt or

preferred stock obligation rated 'C'

is CURRENTLY HIGHLY

VULNERABLE to nonpayment.

The 'C' rating may be used to

cover a situation where a

bankruptcy petition has been filed

or similar action taken, but

payments on this obligation are

being continued. A 'C' also will be

assigned to a preferred stock issue

in arrears on dividends or sinking

fund payments, but that is

currently paying.

SD and D An obligor rated 'SD'

(Selective Default) or 'D' has failed

to pay one or more of its financial

obligations (rated or unrated)

when it came due. A 'D' rating is

assigned when Standard & Poor's believes that the default will

be a general default and that the obligor will fail to pay all or

substantially all of its obligations as they come due. An 'SD'

rating is assigned when Standard & Poor's believes that the

obligor has selectively defaulted on a specific issue or class of

obligations but it will continue to meet its payment obligations

on other issues or classes of obligations in a timely manner.

Please see Standard & Poor's issue credit ratings for a more

detailed description of the effects of a default on specific issues

or classes of obligations.

Public Information (pi) Ratings

Ratings with a 'pi' subscript are based on an analysis of an

BBB

BB+ B

BBB- A-3

A-

A

A+ A-1

AA

AA A-1+

AA

AAA

BBB+ A-2

Ratings CorrelationsStandard correlations of short-term ratings

with long-term ratings is shown below.

A ''


issuer's published financial information, as well as additional

information in the public domain. They do not, however, reflect

in-depth meetings with an issuer's management and are

therefore based on less comprehensive information than ratings

without a 'pi' subscript. Ratings with a 'pi' subscript are

reviewed annually based on a new year's financial statements,

but may be reviewed on an interim basis if a major event occurs

that may affect the issuer's credit quality.

Short-Term Issuer Credit Ratings A-1 An obligor rated 'A-1' has STRONG capacity to meet

its financial commitments. It is rated in the highest category by

Standard & Poor's. Within this category, certain obligors are

designated with a plus sign (+). This indicates that the obligor's

capacity to meet its financial commitments is EXTREMELY

STRONG.

A-2 An obligor rated 'A-2' has SATISFACTORY capacity

to meet its financial commitments. However, it is somewhat

more susceptible to the adverse effects of changes in

circumstances and economic conditions than obligors in the

highest rating category.

A-3 An obligor rated 'A-3' has ADEQUATE capacity to

meet its financial obligations. However, adverse economic

conditions or changing circumstances are more likely to lead to

a weakened capacity of the obligor to meet its financial

commitments.

Local Currency and Foreign Currency RisksCountry risk considerations are a standard part of Standard &

Poor's analysis for credit ratings on any issuer or issue.

Currency of repayment is a key factor in this analysis. An

insurer's capacity to repay foreign currency obligations may be

lower than its capacity to repay obligations in its local currency

due to the sovereign government's own relatively lower capacity

to repay external versus domestic debt. These sovereign risk

considerations are incorporated in the debt ratings assigned to

specific issues. Foreign currency issuer ratings are also

distinguished from local currency issuer ratings to identify those

instances where sovereign risks make them different for the

same issuer.

National Scale Credit RatingsStandard & Poor's national scale credit ratings provide an

opinion of the relative creditstanding of entities and specific

obligations in a given country.

National scale credit ratings differ from Standard & Poor's

global scale ratings in two important respects: (1) national scale

credit risk opinions are based on comparative credit risk

analysis of obligors in one country, instead of the broad

international comparisons used for global scale ratings; and (2)

unlike global scale credit risk opinions, national scale ratings do

not address direct sovereign risks.

National scale ratings are conveyed by symbols that distinguish

them from Standard & Poor's well-known letter-grade symbols

(eg: 'twAAA' for national scale ratings in Taiwan).

CreditWatchCreditWatch highlights the potential direction of a short- or

long-term rating. It focuses on identifiable events and short-

term trends that cause ratings to be placed under special

surveillance by Standard & Poor's analytical staff. These may

include mergers, recapitalizations, voter referendums,

regulatory action, or anticipated operating developments.

Ratings appear on CreditWatch when such an event or a

deviation from an expected trend occurs and additional

information is necessary to evaluate the current rating. A listing,

however, does not mean a rating change is inevitable, and

whenever possible, a range of alternative ratings will be shown.

CreditWatch is not intended to include all ratings under review,

and rating changes may occur without the ratings having first

appeared on CreditWatch. The ''positive'' designation means

that a rating may be raised; ''negative'' means a rating may be

lowered; and ''developing'' means that a rating may be raised,

lowered, or affirmed.

Rating OutlooksA Standard & Poor's Rating Outlook assesses the potential

direction of a long-term credit rating over the intermediate to

longer term. In determining a Rating Outlook, consideration is

given to any changes in the economic and/or fundamental

business conditions. An Outlook is not necessarily a precursor

of a rating change or future CreditWatch action.

• Positive means that a rating may be raised.

• Negative means that a rating may be lowered.

• Stable means that a rating is not likely to change.

• Developing means a rating may be raised or lowered.

For a full listing of definitions, go to our website at

www.standardandpoors.com. Select Credit Ratings, Credit

Ratings Criteria, Ratings Definitions.



Standard & Poor’sCorporate Analysts Contacts

Asia PacificPaul Coughlin, Managing Director

ph: (852) 2533-3502, fax: (852) 2533-3599

[email protected]

Regional Practice Leader (Asia Pacific)

Hong KongJohn Bailey, Director

ph: (852) 2533-3530, fax: (852) 2533-3599

[email protected]

Team Leader (Greater China)

Mary Ellen Olson, Director

ph: (852) 2533-3539

[email protected]

Raymond Woo, Director

ph: (852) 2533-3526

[email protected]

Huiyi Qu, Associate Director

ph: (852) 2533-3503

[email protected]

Agnes Lee, Associate Director

ph: (852) 2533-3512

[email protected]

Renee Lam, Associate

ph: (852) 2533-3517

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Hilda Chan, Senior Research Assistant

ph: (852) 2533-3519

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Richard Pardoe, Editorial Manager

ph: (852) 2533-3531

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MelbournePaul Stephen, Director

ph: (61) 3-9631-2070, fax: (61) 3-9650-6349

[email protected]

Team Leader (Australia & New Zealand)

Ian Greer, Director

ph: (61) 3-9631-2032

[email protected]

Craig Parker, Director

ph: (61) 3-9631-2073

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Jeanette Ward, Director

ph: (61) 3-9631-2075

[email protected]

Brenda Wardlaw, Director

ph: (61) 3-9631-2074

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Parvathy Iyer, Director

ph: (61) 3-9631-2034

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Colin Atkin, Associate Director

ph: (61) 3-9631-2035

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Kevin Lewis, Associate Director

ph: (61) 3-9631-2033

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Mark Legge, Associate Director

ph: (61) 3-9631-2041

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Peter Stephens, Associate Director

ph: (61) 3-9631-2078

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Andrew Lally, Associate Director

ph: (61) 3-9631-2077

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Laurie Conheady, Associate Director

ph: (61) 3-9631-2036

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Paul Draffin, Associate Director

ph: (61) 3-9631-2122

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Augusto Medeiros, Associate

ph: (61) 3-9631-2039

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Lucie Kistler, Rating Specialist

ph: (61) 3-9631-2072

[email protected]

Judy Cheung, Rating Specialist

ph: (61) 3-9631-2073

[email protected]

Adrian David, Rating Analyst

ph: (61) 3-9631-2079

[email protected]

George Tsengos, Senior Research Assistant

ph: (61) 3-9631-2043

[email protected]

SingaporeGreg Pau, Director

ph: (65) 6239-6303, fax: (65) 6438-2321

[email protected]

Team Leader (SE Asia)

Manggi Habir, Director

ph: (65) 6239-6308

[email protected]

Sharad Jain, Director

ph: (65) 6239-6340

[email protected]

Yasmin Wirjawan, Associate Director

ph: (65) 6239-6302

[email protected]

Ee-Lin Tan, Associate Director

ph: (65) 6239-6394

[email protected]

Erly Witoyo, Rating Specialist

ph: (65) 6239-6321

[email protected]

TokyoMichael Petit, Managing Director

ph: (81) 3-3593-8701, fax: (81) 3-3593-8571

[email protected]

Regional Practice Leader (Japan, Korea)

Daisuke Fukutomi, Director

ph: (81) 3-3593-8714, fax: (81) 3-3593-8571

[email protected]

Team Leader (Japan, Korea)

Mami Yoda, Director

ph: (81) 3-3593-8730

[email protected]

Team Leader (Japan, Korea)

Taiwan Ratings Corp. (Taipei)Chris Irwin, Director

ph: (8862) 2368-8053, fax: (8862) 2368-9169

[email protected]

Tony Tsai, Director

ph: (8862) 2368-8721, fax: (8862) 2368-9102

[email protected]

Daniel Hsiao, Associate

ph: (8862) 2368-8277 ext. 210

[email protected]

Jonathan Lee, Rating Specialist

ph: (8862) 2368-8277 ext. 207

[email protected]

Business DevelopmentAngela Hui, Director

Ratings Origination (Hong Kong)

ph: (852) 2533-3561

[email protected]

Denis O’Sullivan, Director

Ratings Origination (Melbourne)

ph: (61) 3-9631-2028

denis_o’[email protected]

Anthony Foo, Director

Ratings Origination (Singapore)

ph: (65) 6239-6368

[email protected]

Hiroshi Atobe, Director

Ratings Origination (Tokyo)

ph: (81) 3-3593-8576

[email protected]

Websitewww.standardandpoors.com

www.ratingdirect.com



Asia-Pacific Offices

Hong KongSuite 3601, 36/F Edinburg Tower, The Landmark

15 Queen’s Road Central, Hong Kong

ph: (852) 2533-3500

fax: (852) 2533-3577

Lincoln Chan, Managing Directorph: (852) 2533-3505

[email protected]

MelbourneLevel 37, 120 Collins Street

Melbourne VIC 3000, Australia

ph: (61) 3-9631-2000

fax: (61) 3-9650-8106

Christopher Dalton, Managing Directorph: (61) 3-9631-2020

[email protected]

SeoulSuite 400, 8/F Leema Building

146-1, Soosong-dong, Chongro-ku

Seoul 110-140, Korea

ph: (82) 2-733-1021

fax: (82) 2-734-7345

JungTae Chae, Director & General Managerph: (82) 2-398-5830

[email protected]

Singapore30 Cecil Street, Prudential Tower, #17-01/08

Singapore 049712

ph: (65) 6438-2881

fax: (65) 6438-2321

Surinder Kathpalia, Managing Directorph: (65) 6239-6363

[email protected]

TokyoYamato Seimei Building, 19/F

1-1-7 Uchisaiwaicho

Chiyoda-ku, Tokyo 100-0011

ph: (81) 3-3593-9700

fax: (81) 3-3593-8691

Yu-Tsung Chang, Managing Directorph: (81) 3-3593-8724

[email protected]

Affiliate Network in Asia

JakartaPT. PEFINDO Credit Rating Indonesia

Atrium Mulia 2/F, Suite 205

Jl. H.R. Rasuna Said Kav. B10-11

Jakarta 12910, Indonesia

ph: (62) 21-252-5523

fax: (62) 21-252-5532

ManilaPhilippine Rating Services Corp. (PhilRatings)

18/F, Ramon Magsaysay Centre

1680 Roxas Boulevard

Manila 1000, Philippines

ph: (63) 2-525-8608

fax: (63) 2-525-8593

MumbaiCredit Rating Information Services of India (CRISIL)

4/F, Energy Group

Crisil House (Pinnacle Chambers)

121-122, Andheri-kurla Road

ph: (91) 22-691-3001

fax: (91) 22-691-3000

TaipeiTaiwan Ratings Corp. (TRC)

23/F, 100 Roosevelt Road, Sec. 2

Taipei, Taiwan R.O.C

ph: (8862) 2368-8277

fax: (8862) 2368-9169

Standard & Poor’s Asia-Pacific Offices


Also Available

Greater China Corporate Report Card

Hong Kong PropertyReview 2002

Hong Kong InsuranceOutlook 2003

South and Southeast AsianCorporate Report Card

Taiwan Insurance Outlook 2003

Taiwan bankingOutlook 2003

China BankingOutlook 2003-2004

Analyst Directory 2003Asia

Greater China CreditStats2002



Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices:36/Fl Edinburgh Tower, The Landmark, 15 Queens Road, Central, Hong Kong. Copyright 2002 by The McGraw-Hill Companies, Inc. Reproduction in whole or in partprohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief ExecutiveOfficer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; Frank Penglase, SeniorVice President, Treasury Operations. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility ofhuman or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any informationand is not responsible for any errors or omissions or the result obtained from the use of such information.

Standard & Poor's receives compensation for rating obligations. Such compensation is based on the time and effort to determine the rating and is normally paid either bythe issuers of such securities or by the underwriters participating in the distribution thereof. The fees generally vary from US$5,000 to over US$1,000,000. While Standard& Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications. Ratings are statements of opinion,not statements of fact or recommendations to buy, hold, or sell any securities. Ratings are based on information received by Ratings Services. Other divisions of Standard& Poor's may have information that is not available to Ratings Services

Standard & Poor's Credit Information Services uses web usage, billing, and contact data collected from subscribers and registered users for billing and order fulfillmentpurposes, for product development and/or enhancement purposes, and occasionally to inform subscribers about products or services from Standard & Poor's and TheMcGraw-Hill Companies that may be of interest to them. Additionally, we may use subscribers' and registered users' contact information from time to time to inform themabout new features, additions, and changes to Standard & Poor's products or services. If you would prefer not to have your information shared as outlined in this Notice,or for more information on our Privacy Policy, call us at (1) 212-438-7280 or see The McGraw-Hill Companies Customer Privacy Policy http://www.mcgraw-hill.com/privacy.html. You can also call us to confirm the accuracy of the data we have collected from you.

This report and the ratings contained within it are based on published information as of June 17, 2003. Subsequent information may result in the assignment of ratingsthat differ from the ratings published here. Please call Standard & Poor's at (852) 2533 3500 for the most recent rating assigned.

Company Credit rating Analyst Comments

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Corporate Financial_17june

Documents

rate reduction reserve

permit upward revaluation

executive vice president

huaneng power international

jointly controlled entities

managing director ph

hotel properties yearly

wan hai lines