Analogue Holdings Limited (1977) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the meeting for us to announce the 2020 interim result of the Analogue Holdings Limited. First of all, I would like to introduce my team. Sitting on my left, Victor Law, who's a Director of our company; and Dr. Kim Max, he is also a Director of our company; Raymond Chan, Director of the company; and Peter Cheng, the CFO of the group, okay? I will run through a few PowerPoints to you so that you can refresh your memory on what we are doing. And after then, I think I would -- in my question and answers, and my colleagues here will be here to already to -- and answer them. My presentation consists of 5 parts review, highlight, business review, financial review and growth strategy. Next one, please. Next one, please. Now this page illustrates our capability as a leading E&M engineering service provider, engaged in building services, environment engineering, ICBT and also lift and escalator. We have 40 years' experience, and we have 2,700 employees, and we have a very exclusive portfolio of clients. We are continuing our development on an innovative E&M engineering technology, and we own 35 patents on design and process internally -- internationally. I'm very pleased to say we have very strong contracts in hand. Running through the numbers. Yes. We maintain our leading market position in the -- in Hong Kong. In the first quarter of -- first half of 2020, we were awarded 155 contracts with an amount of $1.9 billion. And we also have a record high-value of outstanding contracts in hand amounting to HKD 10.8 billion, which is an increase of 21.4%. Revenue in the first half was HKD 2.4 billion, an increase of 17.4%. And order intake was also very healthy, HKD 2.6 billion. And we propose to give a dividend payout ratio of 50%. Now next, we're going to the business area. And I would like to first introduce Victor Law, who is in charge of the Building Services business, Mr. Law, please.

Thank you, Chairman. Ladies and gentlemen, good afternoon. I would like to then -- to have a report on the Building Service segment operation in the first 6 months of 2020. Up to end June 2020, our total outstanding building service contracts on hand is HKD 6 billion compared with the same period of last year, increased by around 19.7%. Our Building Services segment, our this -- the customer of our Building Services segment include: residential; commercial institution; data center; hospital; health care; infrastructure such as airport, mass transit, public transport. In the first 6 month of 2020, our teams are very busy in executing on quite a lot of mega projects. And we are -- now our team are -- please keep on -- they're busy in executing 2 pioneer projects, which include InnoCell, which is in Hong Kong Science and Technology Park. It's one of the first Hong Kong project at BOPIC MiC. And we utilizing BIM model and adopting MEP modularization to enhance efficiency and quality, and we experienced quite a lot of benefit from the executing of this type of new technology project. This project is still to be completed by end of this year. The other pioneer project our team are executing, including the Fu Shan Public Mortuary, who also adopting our in-house building service, prefabrication and modularization, construction technology. The prefabrication when modularization of the building service unit are progressing satisfactorily. And will be -- this unit will be moved to site according to the site progress. With the adoption of this new technology, MiC prefabrication, we can enhance safety, quality, productivity and migrate -- mitigate the problem of, a, workers' aging, and shortage of site worker in the coming years in Hong Kong. In the first half year of 2020, our team are also very busy in executing 3 major commercial project along Kai Tak development. These 3 projects are located well in the future business center of Kai Tak, which will -- which is next to the Kai Tak MTR station. And these 3 project, total value will be around HKD 1.5 billion. This project will also -- will adopt the MEP fabrication in order to reap benefit to their client and also the operation team in the future. Apart from Hong Kong, we are very busy -- also busy in Mainland China and Macau. In China, we -- our team are very busy in executing one of the project in Shanghai in Xujiahui Centre, which is developed by one of the major key Hong Kong developer. This develop will be the future landmark of -- in that area. And we are -- up to this moment, we are -- have good potential to secure another service project in this tower. We look forward to receive the good result in the coming months. Same in Macau, we are quite busy also. We are -- the major project we are executing is the Galaxy Hotel Phase 3, including electrical and HVAC. Apart from commercial and residential, our Building Service segment also concentrate on a -- quite a few new kind area, yes, segment. One of the first one is data center. With over 30 years of experience in handling the data center and project management, we believe we are one of the leading M&A contractor to provide total package E&M service to data center operator. Apart from contract execution, we also provide -- we can also provide maintenance, and we can also provide design and build of the -- we can provide design-build and help -- and provide complete solution to a data center operator, including energy-saving proposal. Same as the other project, data center project, we also utilize BIM and prefabrication. And we foresee this will be our future trend in Hong Kong, and we are looking forward to have a better quality, better, efficient, faster program in the future. The project, we are now -- the major 2Q project we are now executing is the -- one of the biggest data center project from Hong Kong SAR and also one of the biggest data center in Fo Tan, who is the data center operator -- is one of the major key data center operator in Hong Kong. I think source from property consultant in the past few weeks, we view that there will be 50% increase of data center space in the next 4 years in Hong Kong, mainly due to the increasing demand of the use of -- demand of the data storage and also data transmission. Due to the increasing use of IoT, 5G, cloud, fintech, logistics, e-trading, a lot, a lot, a lot. And we see there will be a great opportunity in the future, at least in the 4 to 5 years. And our company, our group is looking at this new business opportunity. And in order to utilizing, in order to use our current strength of project management and engineering resources, we are prepared to add more resources and investment to this sector and commit the future increasing demand of data center in Hong Kong. Apart from data center, we also foresee there will be a big demand of health care facility in Hong Kong. Our current health care team are handling quite a few existing hospital, helping the hospital authority to runway and do some -- runway and an addition and also converting quite a lot of existing hospital services into some isolation beds and including second tier isolation beds. And we also foresee that there will be a total HKD 350 billion investment in Hong Kong SAR in the future in health care hospital, and we are strengthening our team to get more projects in this sector. And apart from health care and data center, the infrastructure facility is also our main target in the future. Currently, we are doing some project in the airport, including the package vendoring system and due to be completed by this year. And also we -- we're also handling some maintenance contract from MTR. And also, we have -- we execute a intermodal transfer terminal in the airport. And with the track record of Hong Kong IA project, and we foresee we have a big opportunity in order to get the future runway projects. In conclusion, I think data center, infrastructure and health care will be our main focus in the coming years for our group. Then we -- I'm going to pass -- I would love to pass to Raymond.

Thank you, Mr. Law. Now I would like to invite Mr. Raymond Chan to talk about the Environmental business.

Yes. Good afternoon, everybody. Regarding Environmental Engineering sector, our order in hand up to end of June is around HKD 2 billion. In the first half year, we are very busy. There are 2 main projects under the final stage of the construction. One is San Wai waste water treatment plant. This is the first drainage sewage department project using BIM in design and also in progress monitoring. And this project is now under the final construction stage. And we foresee by early next year, we will receive the payment for the operating cost on a monthly basis. Because it is a design, build and operating -- operation projects with 10 plus 5 operation period. The second project is SENTX landfill leachate plant. It is also in the final stage of construction, and we will start the test and commissioning around next month. And this is also a project, fully adoption of BIM, B-I-M, in design stage. And we also have 2 operating projects under operation and receiving payment in a monthly basis. One is the organic waste treatment plant in O•PARK in Siu Ho Wan. And this is the first project under design, build and operate for 10 plus 5 years. And then we are now reshifting the organic waste from the public. And the second project is in China, also in operations stage is the Qingdao Jimo waste water treatment plant. And this project using our own technology, High Rate Clarifier to treat the sewage up to the [ treasury ] treatment standard. Except Hong Kong and Mainland China, we also secured the second project outside Hong Kong and Mainland China. It is in Vietnam. And this is a wastewater cement plant for industrial waste. And then we held the end user to do the design and review the process. And this is our second project outside Hong Kong and China, and it is also a good opportunity for us to follow their One Belt, One Road business. Okay. Next page. And then the other sector, Information, Communication and Building Technologies. Up to June of this year, we have HKD 888 million order in hand. It is 35% more than last year. This business is mainly on the IT and also on the innovation business. We are now commissioning the first commercial smart parking system in Science Park, Shatin. This is a project we design, build and commissioning of the projects. And then this is a very innovation project in Hong Kong using AGV, Automatic Guided Vehicle system to help the visitor to park their car. The visitor just put their car in the entry. And then the AGV will help the visitor to park their car in somewhere. In the second quarter, under final stage is the Tsing Yi Vehicle Examination Center. It is a EMSD, electrical mechanical department of Hong Kong government. It is an essential car vehicle examination center to test the car annually. And this is also the first project in Hong Kong, fully automatic for car testing. And it saved around 20% space for the same capacity. And then one more project is the Hennessy Road 28. We held the end user to use our cloud-based chiller plant energy management platform to reduce the operating cost on energy. And this is the project that we work together with the end user to save energy because in a commercial building, energy is the -- in chiller plant is the main electricity consumption equipment. So you will save a lot of power during the operation. And the next one is the Queen Mary Hospital, which is a new project that we got 2 months ago. This is a project, we held the end user hospital to build the ELV system. It includes CCTV, access control system, et cetera. And the other sector is lift and escalator. Up to end of June, we have around HKD 1.7 billion order in hand. This is around more than 3x more than last year, which is due to the acquisition of TEI. And in lift and escalator sector, we also got a secured another second project in Hong Kong Hospital Authority, Hong Kong Housing Authority. And Hong Kong -- as you know, Hong Kong Housing Authority is the single largest customer of lift in this market. And we are lucky to have the second project, and we hope that we will complete it within more than 2 years. And we still continue to improve or to uplift our standard on protection maintenance on lift and escalator, and we already installed our own [ design ] system to improve their performance, the reliability performance of lift and escalator. Okay. In this COVID-19 period, we also have our own sterilization system for lift and escalator sector. We have our own UV disinfection system for the handrail. And also, we have a touchless lift button. All this is our own design. And in the existing project, on the first half year, we have -- we still continue to install the essential midlevel escalator and walkways system in central. We also award a project on a lift and escalator in Queen Mary Hospital. It is also a big project for the coming 2 to 3 years. And then we're also commissioning an -- a plant outside Hong Kong and China is in Mexico in the rail station is in the commissioning stage. Okay. That's all my presentation. And I'll pass back to Mr. Poon.

Thank you, Mr. Chan. The next on our agenda is financial overview. And if I may, I would invite our CFO, Peter Cheng, to give us the presentation.

Thank you, Dr. Poon. And thank you very much, ladies and gentlemen, for your attention and your time this afternoon. Let me just start off, go through some of the key financial data for this half year. So the revenue for the first half in 2020 is reported as HKD 2.441 billion, which is an increase of HKD 361.8 million, equivalent to roughly 17.4% against the same period first half of 2019. I'm not going to go through every single figures. Then the next one I'm going to talk about is the profit attributable to the owners of the company. First half in 2020, we're reporting HKD 106.9 million. In comparison to the same period, first half, in 2019, it is on par with that. So we are just less than 1% against the same period in 2019. And then I would like to draw your attention then to our dividend information data. The group for the first half 2020, we are maintaining at a high level of dividend payout ratio of 50%. And based on that ratio, and based on the profits attributable to the owners of the company, our dividend per share is remaining at the high level of $3.82 per share for our shareholders. And then the last figure I'd like to highlight, my colleagues has already -- Dr. Poon has already highlighted, is that our value of outstanding contracts in hand as at the end of 30th of June 2020 is HKD 10.8 billion, an increase from the same period of 21.4%. Next page, please. So this here just gives some analysis on the revenue. Rather than going through all the -- all the data, et cetera, you can see that the revenue, as I said before, has increased for the same period -- from same period in 2019 first half to first half 2020 by 17.4%. And you can see that every segment that my colleagues, Mr. Law and Mr. Chan has already talked about. In Building Services, in Environmental Engineering, in ICBT and in Lifts and Escalators, all 4 segments has increased during this period of time in comparison to the first half 2019. Next page, please. Next page, please. Okay. So again, there's a lot of numbers, so I'll just try to highlight. So we are talking about the financial position of the company. Firstly, let me just make a point to start. We are looking at 30th of June 2020 in comparison to 31st of December 2019 at the year-end. So the main point I would like to draw your attention to is the bank balances and cash. On 30th of June 2020, we are reporting HKD 989.9 million, in comparison to 31st of December 2019, is an increase of 300 -- over HKD 300 million or more less or 44%. So based on all of these bases, I think we can report that financially, we are very healthy. We are doing well. And then I'd like to pass it back to Dr. Poon, please.

Thank you, Peter. Ladies and gentlemen, you have seen our results, and we have introduced to you our 4 business sectors. What I'm going to talk next is to introduce Dr. Kin Mak to talk about the growth strategies of the company.

Thank you. Let me start with our growth strategies. Firstly, we have $10.8 billion of contracts in hand, which is a record high. Secondly, our efforts to enhance our maintenance business has seen a commensurate growth of the revenue to $475 million in the first half of the year. With these strong foundations, we shall be nurturing young talent, both at the level of engineers and apprentices. This will, not only help our delivery of the significant workload on hand, it will also help us sustain our future talent pipeline. In addition, we shall maintain our growth strategy by developing new markets, new technology, and new business models. In terms of new technology, we have been investing in research and development, which we shall continue. And these will provide us with our own processes and know-how to enhance our competitiveness in project bidding as well as to serve our clients better. In addition, we will deploy the results of our research and development and various projects to enhance time and cost efficiency and thereby, maintain the sustainability of our growth. In terms of new market, our development will facilitate business growth, both horizontally and vertically. And we will also be pursuing geographic expansion from Asia through Euro Asia to Eastern Europe. Specifically, we have identified environmental engineering and lift escalators as 2 sectors, which will see new market development. In terms of new business model, we have already noted the development of the maintenance business, which will give us a stable revenue stream. Furthermore, we are developing the consultancy model to allow us to leverage our technology in different markets. And we will also have a subscription model and term contract as our business develops. We'll be looking out for suitable M&A opportunities to strengthen our business. Therefore, with the continuous development of new technology, new market and new business model, we shall maintain our position as an innovative, leading, sustainable multidisciplinary E&M Engineering Group. Thank you.

Thank you, Dr. Mak. Now ladies and gentlemen, we have completed our presentation to you. This is the time for the Q&A session.

Thank you, management, for the detailed presentation. [Operator Instructions] The first question is, to what extent will the latest outbreak, he means of pandemic, affects the group's operation and revenue?

Thank you for the question. To a certain extent, the pandemic, will affect our group, the performance in the first few months, especially in February and March. But this will not cause too much effect to us. And every -- most of the issues have been -- can be controlled. And it -- the -- our -- most of our project operations have been resumed normal around end April to early May. And in order to minimize our waste, we have already have some internal monitoring and have necessary rescheduling of our works in order to fit the most updated program.

Okay. The second question is about how would the sanction from the U.S. as such future operation and cooperation with your U.S. partner in the future?

Let me try to answer the question. So first of all, as we have made the announcement on the 9th of August regarding to the sanction that is implemented on some of the Hong Kong officials. The announcement is quite clear that there is no implications to the group as such. So our relationship with our partner in the U.S. and with all our partners in across our businesses. There will not be any implications relating to the sanction, as we can see it.

Okay. Thank you, management. So the third question is, how are the group's order in the second half of 2020, what are your thoughts on the results for the second half of this year?

We have very strong order in hand, and we would expect more of this to come in the second half of this year. We cannot, of course, forecast what would be the total revenue or the profit. But I think we are very optimistic on the -- for the second half of this year.

Okay. And the other question is about the innovation and the technology of the group. How would the group leverage on your strength in these 2 areas to sustain your revenue growth?

Yes. I think the business now is different than many years ago. Starting from -- I think from 2 or 3 years ago, we only started our R&D or innovation idea to improve, not only the investment cost, but also the operation cost because the end-use now is not just concentrated on the operate -- on the investment cost, but also how to save money in the operation. There are a few areas in operation costs that we can reduce through our R&D, our innovation idea. Like as I mentioned before, the chiller energy consumption. We have a cloud-based platform to monitor the chiller machine in order to keep the machine in optimum operation condition so that they can save the energy consumption. And the second is the environmental side. We have our own technology, our own process. With the same capacity, but reduce the area, the foot team. This is also very important to the end user because now the -- this chart standard is higher and higher. But the footprint affects how we can use a new idea, new process to reduce the footprint, but the capacity will be same as before or even bigger than before.

Okay. Thank you, management. So here comes rather long questions. I will read it directly. You had the 25.81% stake in Nanjing Canatal and announced a plan to sell up to 3% stake. So far, up to the 30th of June, you appear to have sold very little, contributing only around HKD 14 million gain on disposal. Based on the share price of CNY 21.09 at the 30th of June, the stock was worth around CNY 1,181 million. The p of Nanjing Canatal is about 59x, and your p is only about 5x. Why not sell all of it or as much as regulations allowed?

So I answer the number of questions and then you can answer the Canatal's prospect. So let me try to answer some of the questions. Yes. During the first half, first, like during first 6 months of 2020, we saw 0.37 of the issued shares of Nanjing Canatal. We -- this is the first time we attempt the process of reducing our shareholdings in Nanjing Canatal. After that, as you probably have all seen already that Nanjing Canatal has gone -- has just went through an exercise on convertible bonds issued, which is -- which went very successfully. So during that period of time, we are working with the -- with our partners in Nanjing Canatal. We have -- we delayed our further any processes on the disposals or maintaining the same shareholding. So we will continue to review our shareholdings in Nanjing Canatal, and if and when we think it's appropriate, then the Board will decide we will dispose or we'll maintain the same level of shareholding. Maybe Dr. Poon can talk about prospects.

I would like to further quantify our strategy. Probably at the end of last year or beginning of this year, we see the price level of Canatal has improved significantly. And based on the same theory as the gentleman who raised this question, we thought it would be a good thing to dispose some of the shares of Canatal. However, more recently, I think the economy of the -- of China has changed substantially, particularly on 5G and also on the data center. The -- we've -- as you might have seen on the newspaper, China is building tens of thousands of stations for 5G. And also, they are going through a very strong program of the data centers. Although this will demand and lot recruitment from Canatal, and we see the opportunity to -- in those markets, and we believe the price of the stock price of Canatal will go further. So it is the time we would take a little while of -- to evaluate the situation, and then we will consider the situation further.

Okay. Thanks management. The next question, the receivables with age more than 90 days were higher by about HKD 175.5 million, but the allowance for credit loss was down by about HKD 13.5 million. Why the allowance is lower, not higher?

Okay. But the increase on the profile of the age of our account receivable is mainly based on our acquisitions in America. So the -- on the second part of the question, the reductions of the provision for doubtful debt has been released because we have been very successful with the help of all our colleagues across the business units to help to try to recover some of the aged-older debts and hence, why we can release some of the provisions for doubtful debt.

Okay. And the next question, is there any material impact on the elevator business from COVID-19? Did COVID-19 provide any acquisition opportunity in this segment?

Sorry, I do understand. Can you repeat the question, please?

The first part is about any impact from COVID-19 on the elevator business. And the second part is did pandemic provide any acquisition opportunity in this segment.

The first question is that I think the COVID-19 have impacted on all sectors of business, not only on lift and escalators. And for lift and escalator, we have seen interesting development in a sense that the people are using less of the lifts. And -- but also, as such, that our frequency for maintenance could be reduced and so as a matter of fact, COVID-19 for lift and escalator business actually can help us a little bit in the profit. What was your second question?

The second question, yes, did pandemic provide any acquisition opportunities for the elevator business?

I think opportunity is always there. And I cannot give specific answers. But for example, there are companies in Europe, which are doing better because of the epidemic. And we are discussing 1 or 2 of them on possibilities, nothing more than that's just possibilities.

Okay. Thank you for that report. So here comes another rather long question. You lost HKD 3.128 million on a Hong Kong-listed investment in the first half of the year. Why do you still hold this now that you are a Hong Kong-listed company yourself? And then 50% is not a high payout ratio when you have that much cash on hand. So would you consider distributing more dividend given you have surplus capital?

The HKD 3 million, this is some utilities, public utilities shares that the company has held for a period of time. We are continuing to review our strategies on the purpose of holding shares of other listed companies. And these -- let me just reemphasize, most -- all of these companies are all public utilities companies that are listed in Hong Kong. So we will continue to review the situation. And then we will then look at whether we dispose or increase, et cetera, as we go along. And then on the cash positions, I think here is that it is very good for the company that we hold. We have this much cash or bank balances that we are holding at the moment. Under the current pandemic economic business environment. I think it is important that we continue to have that liquidity inside the company, especially when we have $10.8 billion order book, working capital, et cetera. So it is important that we hold those liquidity. We will continue -- obviously, we will continue to look at the dividend policy, and we are maintaining the high levels of 50% distributions on the dividend. And then the Board will decide and review the positions in the next dividend time.

Thank you, Peter. So here comes to the last question about the data center. Data center is becoming a hot topic worldwide, and we noticed that the company is working on data center projects. So could you please share with us how many data projects, the data center projects are you working on? And how do you see the potential in this area?

Thank you for your questions. Our group have been in data center business for over 40 years, and we have built up a very strong and capable management team and a good [ project ] team. And we have gained a very good reputation in handling data center project in the past 40 years. And especially in the last 4 to 5 years, okay? And also we consider there will be an increasing demand of data storage transmission due to the IoT business, big data business. And also the car business, fintech and logistics, e-trading, these -- all this business require data storage and transmission. And also according to the -- some of the property research, in Hong Kong in the next 4 years, this space -- the data center -- increasing data center space will be increased by 50% in Hong Kong in the coming 4 years. And with the -- our experience and reputation, reputation and resources, and competent resources in the final group. We are sure to take, to catch this big opportunity, big opportunity in the future and continue our great effort in getting more data center project in the future. And we will increase resources. And also, we will increase investment in the coming years. In order to gain more projects and increase revenue due to data center. And also in order to get more market share in the construction of new projects and also the future maintenance and servicing of this data center service in the future. Thank you.

Thank you, management. So -- and that's the end of our Q&A section. So I will pass the time to the management.

If I may. I would invite Dr. Kin Mak to give a quick summary of our discussion.

We have maintained our vigilance about COVID-19, which was a significant event in the first half of the year, and we're happy to report that our projects are controllable. And as a result of the efforts of the different business sectors, we have achieved a record high in contract in-hand at $10.8 billion, which will be advanced progressively in the coming months and year. And with the continuous development of new technology, new market, and new business model, we expect the business, both in data center, ICBT and other associated areas will continue to develop in Hong Kong. And in the other markets, we will have identified environmental engineering lift and escalators to be our drivers. And so we are guardedly optimistic, and we will continue to develop talent, and that will ensure the sustainability of our leading position in this market. Thank you very much.

Thank you, Dr. Mak. Apart from the questions received from the investor, we have already also got some congratulations note and some suggestions, and we will share those message with the management accordingly. This concludes our presentation today. Thank you for your continued our support to Analogue. See you next time.

Thank you.

Thank you.