Annual Report 2015
FINANCIAL SECTION
131
4 FINANCIAL RISK MANAGEMENT AND FAIR VALUE ESTIMATION
(continued)
(a) Market risk
(continued)
(ii) Interest rate risk
The Group is exposed to interest rate risk through the impact of rate changes on interest bearing assets
and liabilities. Cash flow interest rate risk is the risk that changes in market interest rates will impact cash
flows arising from variable rate financial instruments. The Group’s interest bearing assets mainly include
deposits at bank and amounts due from joint ventures and associated companies. The Group’s floating
rate borrowings will be affected by fluctuation of prevailing market interest rates and will expose the
Group to cash flow interest rate risk. The Group’s borrowings issued at fixed rates exposed the Group to
fair value interest rate risk.
To mitigate the risk, the Group has maintained fixed and floating rate debts. To match with underlying risk
faced by the Group, the level of fixed rate debt for the Group is decided after taking into consideration the
potential impact of higher interest rates on profit or loss, interest coverage and the cash flow cycles of
the Group’s businesses and investments.
If interest rates had been 100 basis points (2014: 100 basis points) higher/lower with all other variables
held constant, the Group’s profit before taxation would have been HK$161.3 million higher or HK$156.1
million lower respectively (2014: HK$204.9 million higher or HK$213.0 million lower). The sensitivity
analysis has been determined assuming that the change in interest rates had occurred throughout the
year and had been applied to the exposure to interest rate risk for financial instruments in existence at the
end of the reporting period. The 100 basis points (2014: 100 basis points) increase or decrease represents
management’s assessment of a reasonably possible change in those interest rates which have the most
impact on the Group over the period until the end of next reporting period. Changes in market interest
rates affect the interest income or expense of non-derivative variable-interest financial instruments. As a
consequence, they are included in the calculation of profit before taxation sensitivities.
(iii) Price risk
The Group is exposed to equity securities price risk arising from the listed and unlisted equity investments
held by the Group. Gains and losses arising from changes in the fair value of available-for-sale financial
assets and financial assets at fair value through profit or loss are dealt with in equity and the consolidated
income statement respectively. The performance of the Group’s listed and unlisted equity investments
are monitored regularly, together with an assessment of their relevance to the Group’s strategic plans.
The Group is also exposed to other price risk arising from fair value of certain interest rate swaps which
is determined based on the in-house indexes of banks. Changes in fair value of these interest rate swaps
are dealt with in the consolidated income statement. The Group is not exposed to commodity price risk.
At 30 June 2015, if the price of listed and unlisted equity investments in available-for-sale financial assets
had been 25% higher with all other variables held constant, the Group’s investment revaluation reserve
would have been HK$1,727.3 million (2014: HK$1,182.3 million) higher. If the price of listed and unlisted
equity investments in available-for-sale financial assets had been 25% lower with all other variables held
constant, the Group’s profit before taxation and investment revaluation reserve would have been HK$28.6
million and HK$1,698.7 million (2014: HK$15.7 million and HK$1,166.6 million) lower respectively. The
sensitivity analysis has been determined based on a reasonable expectation of possible valuation volatility
over the next 12 months.
At 30 June 2015, if the price of listed and unlisted equity investments in financial assets at fair value
through profit or loss had been 25% higher/lower with all other variables held constant, the Group’s profit
before taxation would have been HK$211.8 million (2014: HK$152.0 million) higher/lower. The sensitivity
analysis has been determined based on a reasonable expectation of possible valuation volatility over the
next 12 months.
