Analogue Holdings Limited (1977) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining the 2022 Annual Results Investor Virtual Meeting of Analogue Holdings Limited. Today's meeting will be conducted in English. You're welcome to turn on your camera so that our management can reach you face to face. Before we start, let me introduce the management team to you. They are Dr. Otto Poon, Chairman and Executive Director. Dr. Kin Mak, Deputy Chairman and Non-Executive Director. Mr. Raymond Chan, Chief Executive Officer and Executive Director; Mr. Brian Cheng, Executive Director; and Mr. Peter Cheng, Chief Financial Officer. Now may I invite Dr. Poon to give you an overview of Analogue's results. Dr. Poon, please?

Good morning, ladies and gentlemen. Thank you for joining our 2022 annual report investor presentation. I'm going to share with you an overview of our company. Other members of the team will then walk you through our financials and operations for 2022, followed by highlights of our outlook and our growth strategies. Let me provide a quick recap of our company for new participants joining us today. Analogue is a leading electrical and mechanical engineering services provider headquartered in Hong Kong. We provide electrical, mechanical engineering services across our 4 major segments, namely: Building Services, Environmental Engineering, ICBT, which means Information, Communication and Building Technologies and Lifts and Escalators. Our customer portfolio covers both the private and public sectors in different countries and regions. What sets us apart is our ability to innovate as reflected by 61 patents and designs obtained internationally. We strive to create shared value for the community through ESG initiatives, a testament to this is our first Green Loan of HKD 300 million obtained the last year. Despite challenging market conditions, we are pleased to have sustained business growth and secured high-value contracts by leveraging our competitive strengths. In 2022, we made significant progress in a number of areas. Internally, we enhance our operational governance through reorganization, new appointments and newly established procedures. Our in-house research and development teams stand ready to drive innovation and respond to changing trends. Capitalizing on -- recognized the success in Hong Kong, Macau and Mainland China, we are actively exploring opportunities abroad and expand our footprint, particularly in U.S. through our alliance with TEI and in the U.K. through our first foothold of our Lifts and Escalator business. we will continue to explore synergistic opportunities in the Greater Bay Area, One Belt, One Road countries, Oceania, U.S., Middle East and Europe. As an industrial pioneer, we embrace and promote sustainability. We held our -- at our seminar series last October, which brought together our group's thought leaders with industry experts and academics to share experience on sustainability, innovation and development for building a smarter, greener world. A significant milestone ahead is the ongoing revitalization of an industrial building in Kwai Chung, to be renamed as ATAL tower where all our operational units are to be integrated to boost our productivity and promote a synergy among our business units. The integrated headquarters are scheduled to become operational in the second quarter of 2024. Thanks to our team's dedication we have achieved a number of awards during the year in recognition of our contribution to the construction industry, ESG, innovation and human resources. Our CFO, Peter, will present the group's financial performance in 2022. Peter, please?

Thank you, Dr. Poon, and good morning to everyone. Let me very briefly just go through the financials of our performance in 2022. The group delivered a solid trading performance in 2022 despite the pandemic and other global uncertainties. Contracts awarded, i.e., order intake has surged by 42% to HKD 6.8 billion. And with contracts in hand at a high of HKD 11.6 billion. Subject and our execution of our order in hand, the revenue rose by 21% to just below HKD 6.5 billion. The group is also in a very sound financial position with cash and bank balances increased by 22% from December 2021, now at a level of just below HKD 1 billion, and we still had a very low gearing ratio of 13.5%. Total consolidated net profit in 2022 was reported at $114.6 million which is attributable to a number of exceptional items, including the provision for litigation liabilities and impairment loss on group's interest in an associate and a one-off share-based payment. If excluding the provisions of litigation liabilities of HKD 150 million and the impairment loss of just below HKD 76 million. The 2022 profit would have been at HKD 340 million. That would represent a year-on-year increase of roughly about 8%. As we are committed to rewarding our shareholders, our dividend payout ratio remains at a high level of 52%. And then on a celebratory note, the Board has resolved to pay a special dividend of $0.045 per share as a special celebrations of the Group 45th anniversary. Now this slide is just some numbers. So I'm just going to go through very quickly trying to repeat the things I already mentioned, like the revenue has climbed 21% and then it reflects a very strong demand in our Building Services business segment. Gross profit also rose by 15% to over HKD 1 billion. Gross profit margin maintained about 15.6% in 2022. As I mentioned before, the year profit attributable to owners of the company amounted to HKD 114 million and then if we exclude the 2 exceptional items, the HKD 150 million litigation liabilities and the HKD 70.6 million impairment loss than we would have been at $340.2 million. That would have been representing a year-on-year increase of 8.2%. But based on the GAAP net profit, our basic earnings per share were HKD 0.8. Our various business segments sustained the performance despite the challenging operating environment, Building Services and ICBT both achieved strong year-on-year revenue growth of 26% and 28%. In terms of project nature, our revenue nature, revenue from contracting works grew significantly by 27%. And Maintenance work achieved mild growth, recording at $947 million. Both operations and maintenance services contributed to a significant share of our total revenue, reflecting the hard work and professionalism of our teams in these 2 areas. As for the group balance sheet and key financial ratio, we maintained strong cash flow with our cash balance rising by about 22% at just below HKD 1 billion, and we have sufficient committed bank facility to finance our growth and future development in addition to our cash in hand. Our gearing ratio remains at 13.5%, this is mainly the gearing on the mortgage of the group new office building ATAL Tower. Here show -- this slide shows our past record of dividend paid since listing since 2019. The total dividend for 2022 is HKD 4.27 per share, maintaining our dividend policy at over 50%. We are committed to rewarding our shareholders, the Board has resolved to pay a special dividend to celebrate our 45th anniversary in 2022. The special dividend is HKD 0.045 per share. Including the special dividend, our 2022 annual dividend yield as of 24th of March 2023, would have been at 6.7%. We believe this is still a very competitive dividend yield. I'll now pass on to Brian and Raymond to talk about business highlights. Brian, please?

Okay. Thank you, Peter. I'm Brian Cheng. Let me first go through the performance of our Building Service segment during 2022. This segment has continued to be the group's largest revenue contributor, we had contracts in hand worth HKD 5,438 million at year-end, up to 11% year-on-year. Total value of new contract awards received increased significantly from HKD 2,924 million in 2021 to HKD 4,803 million in 2022. Revenues surged by 26% year-on-year to HKD 4,257 million. Our Building Services segment provides one-stop electrical and mechanical engineering service to clients from diverse fields, consistent with our strong emphasis on embracing new technology. Over 50% of our Building Services project employee innovative technologies, including Building Information Modeling, Design for Manufacture and Assembly and also multi-trade integrated mechanical, electrical and plumbing, MiMEP. We have been expanding our capability for Modular Integrated Construction, MiC and MiMEP. We have expanded our MiMEP facilities, which support the successful completion of an urgent public mortuary project during the fifth wave of COVID. We have also deployed our proprietary ATAL Building Service Prefabrication and Modularization, ABSPM construction technology in a number of contracts during the year. On the new market front, we are actively exploring opportunity in Mainland China and Macau, as Macau is to be transformed to a global leisure and tourism hub as part of Mainland China's blueprint for GBA. Since Hong Kong is forging ahead with digitalization, data center development process tremendous potential. In the next 5 years, the floor area of data center is projected to double. As a leader in this view, we are confident that we can capture the opportunity ahead. It is also worth mentioning that we are constantly developing innovative business model to meet customers' needs. This is why we have been able to secure new maintenance contracts with more than HKD 415 million in 2022 from both the private and public sector. This slide shows some of the signature project of our Building Services segment. The reprovisioning of Fu Shan Public Mortuary is a government pilot project, which pioneer the adoption of BIM from design to construction. As the facility was originally lead, we employed our proprietary ATAL Building Service Prefabrication and Modularization named ABSPM and digitalization technology to efficiently deliver the project to client's satisfaction. The commercial development and New Kowloon Inland Lot #6557 is a proposed commercial project in the Kai Tak development area, which is set to become a new landmark in Kai Tak. AIRSIDE, also in Kai Tak is the first commercial development project in Hong Kong to be award 5 green building accreditation and at the highest level. It is also our first commercial mall project with full-scale BIM deployment. We also took up in the development of North Runway Modification Works, which is part of Hong Kong International Airport 3 runway system project, it is expected to be completed in 2024 and '24. Our data center team has successfully completed construction of the Government Data Center compressed in Cheung Sha Wan, which is the largest data-center project that our team has completed in the [ time period ]. Our team has also secured ongoing operation and maintenance contract for this data center. We are also working on a data center for a large local colocation company. We are also actively seeking attractive project in the Greater Bay Area subsequent to completing the new world-class facility, Hong Kong Jockey Club Conghua Racecourse project located in Guangzhou. We have further secured to contract in expanding its training center. We have also been working hard on the Galaxy Hotel Lot 4 project in Macau. I will now pass on to Raymond, who will share with you the performance of other business segments.

Yes. Thanks Brian. Hello, everyone. I'm going to walk you through our other 3 business segments, namely Environmental Engineering, ICBT and Lifts and Escalators. For Environmental Engineering segment, we have contract-in-hand, value at approximately HKD 4.79 million (sic) [ HKD 4.79 billion ] in 2022 with revenue up by 10.5% year-on-year to HKD 1.234 billion. Our Environmental Engineering segment provides total solutions for environmental engineering facilities, including water, sewage, sludge, solid waste and gas treatment. We continue to develop advanced technologies such as Digital Twin to optimize efficiency of water and wastewater treatment operations. For new market, we have secured a wastewater project in Croatia. This is a [indiscernible] winning this contract opens to door to more water projects in overseas market. We are also actively tendering for projects in Philippines, Vietnam and Africa among other locations. We are looking for synergetic business opportunities and equity partnerships such as PPP for One Belt, One Road projects. With the green funds, we have obtained -- we aim to deliver quality environmental solutions for wastewater treatment and other applications that benefit the community. We are pleased to share with you that 2 projects in which we participate achieve international awards, namely O-PARK 1, the first organic resource recovery center in Hong Kong. It was named National Overall Winner and FIRE Category Winner by Energy Global Award 2022. The Yuen Long Effluent Polishing Plant project of the Drainage Services Department was awarded the 2022 Edmund Hambly Medal from the Institute of Civil Engineers, U.K. for combating climate change through innovation design. Other signature projects include the upgrading of the Cheung Chau Sewage Treatment and Disposal Facilities to accommodate the outline island population growth and development needs and design, build and operate Food Waste Pre-treatment Facilities at Sha Tin Sewage Treatment Works. We have signed a 5-year maintaining contract for Castle Peak Power Station and also Black Point Power Station and term contract for the inspection, overhaul and testing of M&E Installation at Stonecutters Island Sewage Treatment Works. Leveraging the experience game in handling the Southeast new territory landfill extension, we have secured the other project for the design and build contract for the New Leachate Treatment Plant in Northeast New Territory Landfill Extension in [indiscernible]. As for the wastewater treatment plant project in Croatia, we will be supplying Biological Aerated Filters upon completion that plant will become the largest of its kind in the country, and we hope it will serve as a [ signature plant ] for us to grab opportunities in nearby regions. For our ICBT segment, our contract-in-hand rose slightly to over HKD 888 million in 2022. Revenue from contracting work, maintenance work and sales of goods all increased with total revenue of around HKD 631 million, up 27.6% over last year. Our ICBT segment offers green and intelligent building solutions to facilitate Hong Kong's transformation into a Smart City. We are determined to capitalize on the increasing demand of specialist smart solutions. Our green and intelligent building solutions are let by our in-house R&D capabilities. We have also collaborated with different parties in developing applications for numbers of technologies such as the AI Energy Management Platform, IoT application and more. As for our energy and technology business, we have adopted a subscription basis under the software as a service, the short name is SaaS model. While our maintenance service capability has been enhanced through the deployment of digital technologies. The ICBT segment celebrated a number of new achievements during the year, including securing a contract for a comprehensive solution for an AI Energy Management Platform, IoT application, video analytics and Digital Twin technology, for a proposed world-class smart office building in Central. Also, our BMS IoT and energy analytic system will be installed in a series of Fortune's shopping malls. Other signature projects include an IoT-based Smart Hotel Solution with IT system for the new student residents at Hong Kong University, which is a MiC project. A Multi-functional Smart Lampposts Pilot scheme. For a completion of this power project, we have been awarded a contract for deploying smart Lampposts across the city, marking a milestone towards Hong Kong's recently go for Smart City development. Let's move on to our Lifts and Escalator segment. Our contract-in-hand reached HKD 540 million at the end of 2022, with revenue maintained at HKD 353 million. Our Lifts and Escalator segment provides one-stop solution for the design, manufacture, sales, installations, maintenance and modernization of lift, escalator and moving walkways. Our global brand Anlev was awarded the safety star in fire service quality star in their lift contractors and escalator contractors' ratings for [ 40 ] consecutive quarters as a proof of its highest network of safety and quality performance over the years. For new technology, we launched the Predictive Maintenance and Remote Monitoring System, the first commercial puzzle-stacking automatic parking system in Hong Kong and also the Machine-Room-Less, MRL lifts. Our successful track record has allowed us to serve millions of users in Asia, America and also Europe as well as winning new orders from Singapore. We will seek new distributors in U.S., in Europe, in Middle East and also Southeast Asia to expand our global business. We will increase production capacity as evidenced by the RMB 60 million expansion of our factory in Nanjing. Among the projects that particularly stood out in 2022 was a Central-Mid-Level Escalator and Walkway system completed in April last year. This icon project won on the achieve -- first place in Elevator Worlds 2021 Project of the Year, content under the escalator modularization category. Anlev was, in fact, their only Asia company among the winners showcasing our industry-leading expertise. We completed construction of the first puzzle-stacking automatic parking system in Hong Kong following the project's success. Anlev was awarded a further contract to provide automatic parking system for the new government building in Kai Tak development area. We have also secured contracts for universal as facility at Footbridges, elevator walkways and subways in Hong Kong. Our signature projects include the design and construction of a joint-user government office building in Tseung Kwan O, where we help to supply and install 27 units of lifts and 11 escalators. For overseas, we secured an icon, prestigious residential projects in Victoria Riverside in Manchester, U.K. We are expanding our business in Singapore with numbers of projects in there. We also expand our footprint in Brazil, in Mexico, where we have established a pleasant in the mass transportation services and hotel industry, respectively. Our maintaining service cover all 4 business segments and serve both public and public sectors. Our maintain business has maintained healthily recurring revenue and contract wise a significant 14.6% of the group's total revenue in 2022. That concludes my part of the presentation. I will now pass on to Kin to share of our market opportunity and our growth strategies.

Thank you, Raymond. The business outlook for the group is expected to be positive as evidenced by our strong tender activities throughout 2022 due to high market demand and opportunities for growth and expansion in the group's varied market segments. The Hong Kong SAR government has announced major infrastructure projects, including new towns in the new territories and expansion of the Hong Kong Zhuhai-Macau Bridge which will drive demand for Building Services, while demand for residential and commercial properties in the city is also growing steadily. As for data centers, as digitization forges ahead, the demand for available space in data center is expected to double over the 5 years from 2022. As a leader in this segment, we are well positioned to capture the anticipated demand in both contracting and maintenance services. On the health care front, with an aging population and increased demand for healthcare services in Hong Kong, it has led to a demand for more sophisticated building services works and new technologies to support the operation of new healthcare facilities. As Hong Kong continues to develop as a smart and sustainable city there will be growing demand for big data analytics, artificial intelligence and IoT in urban applications through next-generation territory-wide connectivity. The group is ready to capture business opportunities that emerge from this process. Going forward, we will strengthen our leading position by implementing the 3 pillars of our new technology, new market, new business, new model strategy to capture these market opportunities. In line with this strategy, we'll continue directing R&D investments in new technologies, including Digital Twin, IoT, AI and big data analytics, but also in BIM, MiC and MiMEP construction technologies and robotic solutions that will help to better design, build and operate important assets. With respect to new markets, we will build on our expansion efforts in the U.S. and Europe by continuing to seek opportunities for synergistic business partnerships that expand our footprint, create business opportunities as well as develop new revenue streams. In terms of the new business model, we'll continue to strengthen our operation and maintenance, O&M capabilities. With our proven track record in deploying intelligent automation systems, including our state-of-the-art Predictive Maintenance and Remote Monitoring System. The group is well equipped for maintaining its position as the preferred partner in the O&M services sector. The past 45 years have been a wonderful journey as the group has grown in tandem with Hong Kong, overcoming many challenges and helping make our city a better place. In preparation for the future and further business growth and development, operating units were reorganized and new appointments as well as procedures were reinforced and established to strengthen the group's governance and enhance our business development in new technology promotion and new market segments. We are confident therefore, that our high level of contract-in-hand and strong pipeline of business opportunities, both domestically and overseas will further drive our business growth while contributing to the communities in which we operate. This concludes our presentation. Before we move on to the question-and-answer session, we would like to address the concerns that some shareholders may have about the proceedings initiated by the Competition Commission in June 2022. The group has entered a cooperation agreement with the Competition Commission in relation to the resolution of proceedings. Subject to the terms of the cooperation agreement the proceedings will not result in a finding of any contravention of the competition ordinance on the part of the company. Among the terms agreed the aggregate pecuniary penalty of HKD 150 million will be subject to the order of the Competition Tribunal. When it resolved to proceed with the cooperation agreement, the group wishes to let our shareholders know that we have taken into consideration a number of factors including the time, internal resources and costs, which the group would have otherwise incurred for potentially protracted tribunal proceedings. We believe the decision is in the interest of the group and its shareholders and do not anticipate any further penalties in the future. The group has commissioned an independent review and adopted a comprehensive group-wide competition law compliance program to ensure full compliance with the competition law in Hong Kong. The compliance program is a significant reinforcement and update to relevant procedures. We also arrange training sessions on a regular basis to ensure our staff are fully aware of and comply with statutory requirements relevant to our business, such as the competition ordinance. The group has also reorganized its operating units and established new appointments and procedures to further strengthen its governance and enhance its business development. We're now ready to turn a new page and focus our business expansion to bring maximum value to our shareholders. I will now pass the floor back to our MC for the question-and-answer session. Thank you.

[Operator Instructions] Okay. There is a question from [ Erwin Lau ] of [ ZTSE ]. The question is, why did the group design to appoint Ms. Or as the Nonexecutive Director, what contribution do you expect her to bring.

If I may answer this question. As we said earlier, our looking-forward strategy is on new technology, new markets and new business models. And Ms. Or was the President of the well-known international electrical engineering company, and she has a -- well experienced on new technology and also new market which is in line with our strategy on new technology and new market. And with that, we believe Ms. Or could contribute substantially to our growth strategy not only in Hong Kong but particularly overseas. So that's the reason why we invited Rerina Or to join our company.

There is a question from Mr. David Webb.

A few questions and comments. I'm not sure that a dividend can be described as special at HKD 0.045 when it's less than the HKD 0.0725 you paid last year. And there's nothing to be proud of to have a growing cash pile up 20% when it's already close -- as you got it close to HKD 1 billion. And I know there are about HKD 300 million of borrowings for the Toppy Tower, but that's secured on the property. And you could have paid out much more if you wanted to celebrate, I would suggest something like HKD 0.245. The non-GAAP measure of profits that you mentioned in the presentation and in the results announcement is not a fair one because although I agree that you should try to look at the recurrent earnings capability in presenting such a measure, you didn't deduct from the gain on sale of shares in Nanjing Canatal which were quite substantial. So that's not a good measure of recurring core earnings next time -- if you're going to do it, do a fair measure and then it would look a lot better. A question on the tax. If you back out the Hong Kong profits tax in the notes, it looks like the taxable profits are about HKD 350 million, which is far higher than the report. Obviously, there's a provision of HKD 150 million for the competition tribunal. But that arises as a direct result of the business activities of the company when BP was fined for the Macondo oil spill in the Gulf of Mexico, all of its penalties were tax deductible. Will you make the case to the inland revenue that the HKD 150 million should also be tax deductible, which would be valued at 16.5% is worth about HKD 24.75 million to the company after tax. And more generally, can you explain the taxable profits of the company for the year because that overall tax rate is extremely high. That's the first question.

Thank you, Mr. Webb. Can I -- know it, our CFO, Peter, to respond.

Good morning, Mr. Web. I think First of all, let me just try to address the questions you raised regarding toward non-GAAP profit. The point about the NCA disposal in 2022, that was for 1% of the shares that we disposed roughly about HKD 32 million gains that we recognized. I think here is that in 2021, we actually disposed about 3% of the shares which give us about HKD 65 million profit. So if we want to try to compare like-for-like, I mean, we didn't take into account of the NCAs at this point...

Yes, I think you would exclude that in both years because you're not going to be able to sell Nanjing Canatal as a business that's not your business to sell shares in Nanjing Canatal year-after-year. And eventually, you won't have any more to sell, I hope, because you will have sold all of them which will bring me on to another point.

Yes. No, I think is that in anticipation of your next question, I think here is that we are reviewing and assessing the market on what we can do with Canatal's shares, obviously, we need to try to find buyers for the shares or what we can do with the divestments of these shares. So...

Well apparently Nanjing Canatal, sorry, let's finish on the tax point first, then we'll get to Nanjing Canatal.

And at the tax point, to the HKD 150 million. As you know, we signed the cooperation agreement very late on in the year last year 2022. We haven't given up on the getting tax allowable deductions on that penalty. We are working with our advisers on that. We are working on it. That's all I can say now.

You haven't made a -- you haven't adjusted your tax provision, you've assumed that you will be paying tax on profits excluding that -- HKD 350 million of implied profits if you divide by 16.5%.

We, at the moment, we haven't got to inland revenues and our advisers have finalized the agreements on the tax deductible on HKD 150 million. So we haven't.

Right. Well, you may have to fight that for a period of years even if you want to go to the inland revenue tribunal and so on to sort it out, but I would encourage you to do so.

We are working with our advisers with the inland revenues, they're trying to minimize our tax liability, I think, like...

It does appear then that the rest of the business generated about HKD 352 million of taxable profits -- accessible profits for the year.

That's probably about the right figures of [ HKD 350 ] million, yes.

Okay. And the -- let's talk about Canatal then. The other day, they found buyers for some shares. You say you might struggle to find buyers, but they managed to find buyers for 27% of the share capital. And they did so in a private placement. But -- can you explain why the price on that appears to be RMB 10.74 net or expenses per share, when the shares were around RMB 14. What was the -- is it -- was the price determined a long time ago under some bizarre Chinese rules, Mainland rules or what?

Well, let me try to answer your first question, why the private placements have found buyers and we haven't found yet because at the moment, we are not proposing to provide a discount of that level to our potential buyers at the moment. So we are trying to maximize our income. Regarding to the private placement, the private placement in the Shanghai Stock Exchange, the maximum allowable discount is 20% off, I think, 20 -- on the average of the previous 20 days trading prices when they execute. So the 20% was passed by the Board of Canatal as a maximum discount as possible. And I believe as we all know, I think the financial markets are rather tight at the moment. So I think they wanted to raise the RMB 900 million to complete the expansions on the data center business. And hence, they went through as far as I understand, they went through the market, talk to all the potential investors, and that's how they could get the RMB 900 million.

Okay. So they've done that and you have no say in the matter. You don't have board representation and you're now down to about a 16% diluted shareholding, which strengthens the case really to dispose of the rest in an orderly manner through the market as fast as you can because it's no longer a stake where you could be said to have significant influence although you're still accounting for it as an associate. Maybe you do have a board seat, but you didn't seem to have much control over the placement.

Why are we still accounting the associates because we do have 2 board members and 2 supervisors on the board. And that's why it's associated although it's below 20%, that's one. And then the second thing is that I think the word you mentioned is orderly. We want to dispose this orderly and trying to maximize our return. So we don't want to...

Well, I would just encourage you to do that without regard to the actual market price because you can't time the market. I can't do it. Believe me, people have tried. So -- and you can still work with NC as a business partner, regardless of whether you have a shareholding in it. It's always good to be at arms length. And that capital, along with the excess cash is dragging down your share price distributing in the core business because people don't know what's going to happen to that money.

Yes. I think the shares in Canatal, we are not trying to speculate or guess what the markets will behave. We are orderly trying to talk to potential interested parties and then trying to negotiate a good return for the company.

And in your presentation, please don't brag about dividend yields because the denominator has come down so much. There's no wonder it's 6.7% when the share price used to be way towards $2, that's not a measure of success to have a lower share price at a higher yield when you're paying out less money, Okay? I'll come back to the dividend point. You could have done a lot more comfortably without alienating potential customers. They look at the strength of the balance sheet and have anything they ask you for more credit terms, longer payment periods and so on because of that. briefly Croatia...

Answering your question about your cash balance -- you mentioned I think here is that near to just below the HKD 1 billion. We have HKD 200 million overseas. So in China and Macau as working capital. And then in Hong Kong, we need about HKD 500 million. I think I mentioned more or less every year, HKD 500 million is working capital. And then what we have is that in [ UOP ] i.e., when we list when we raised, we still have a commitment to spend HKD 20 million on the expansion of the Nanjing factories and the HKD 68 million on the M&A activities on the use of proceeds. And I have...

In rest of your are in the scheme of HKD 1 billion. And you're not committed to spend that money, you intended to spend that money. But you won't just buy something for the sake of spending it.

I agree. We enhance why we haven't spent it yet because we are carefully selecting the target companies.

And on that you did spend HKD 330 million on TEI, if I add up the contingent payments and that book is now closed, I think, and you've now impaired at an impairment charge of HKD 75.6 million. Is that right?

Yes.

And -- is it fair to say that, that acquisition has not worked out the way you hope? I mean it seemed that they got a loan forgiveness from the U.S. government, which artificially boosted their profits. That was unexpected. But then the contract the acquisition contract basically require you to pay it all to the management as de consideration. And then this year, it looks like the profits have come down. But since you haven't yet published your financial statements, we can't separate the various associates of the company to see how the profits were in TEI Canatal and so on.

Yes. The revenues of TEI stand-alone in 2019, there were about HKD 920 million. In 2021, despite the pandemic they were over HKD 1 billion revenue. In 2022, where they hit hard because in 2021, the order intake had slowed down and lower. And in 2022, they are just under HKD 900 million. Now the profit before tax because there is a lot of very different tax credits, state, city, fed, et cetera. So we talk about profit before time. They've been at HKD 80-something million as a stand-alone business. In 2022, they have dropped down to about -- to below HKD 20 million. But in 2022, the order intake had gone back over HKD 1 billion when they've been doing about HKD 900 million before. So we are we're working very closely with TEI and trying to see what we can do to help. And then what we can see is that the commercial activities in New York City, it seems to be picking back up. And I think they are slowly -- the projects are now being executed. So we are hoping that TEI will still be a success. It has been impacted by pandemic, significantly during the pandemic. And as we know, New York City has severe lockdown.

Right. So although you've impaired it heavily. We can't deceive it's a failure.

And unfortunately -- the impairment is based on independent values because it has lowered the profitabilities in 2022. They take -- they don't take into account the pandemic. They don't take into account. They just look at the figures and they do the evaluation based on forecast cash flow.

Now in terms of this group cash, are you saying that you want to cap it at the current level? Or are you aiming to grow the pile even further? I know you've got some need for some cash, but where do you draw the line on this? I mean, if you sell more managing shares, will they just add to the cash pile or you on to stop paying out more sensible, not special, but regular dividend. I mean I've never seen a reduction in dividend called special before, but there is.

Okay. So I think here is that, the Chairman, please jump in to help. I think here is that we will continue to value our shareholders by keeping our promise of 50% or more payout ratio. And when we do divest our assets like Canatal shares. I think the first step, I believe, most shareholders would want us to invest this money to grow the business. I think here is that if we do not as a management team find opportunity, then we can -- I'm sure we'll discuss because we talk about many other ways, apart from dividend, shares purchased, repurchase, et cetera. We talk about this on the management team as well as the Board -- at the Board level as well to trying to maximize...

You've got plenty of cash to invest. I mean, the concern is that you might do so badly as TEI has already led to impairments. And if the cash is sitting around in the balance sheet, that is something that investors dislike when they could be investing themselves in the interim. And it doesn't inspire when one of your management can't pronounce Croatia and calls it Carotia and you're putting money into projects there. That was just now, by the way. That's -- will you be able to control receivables and not get ripped off by politics in foreign countries as you start to diversify into these developing markets.

We are negotiating with the client who is a belt and road partner in China. We are looking at trying to do the FOB, Shanghai, et cetera. Obviously, this is what we're trying to do to protect our interest.

[indiscernible] it doesn't cover anything. I mean it doesn't give you any insurance. Does it? It's just a concept.

And FOB Shanghai, I think here is that in other foreign orders, we have FOB and we do want to receive them.

If I may add Mr. Webb [ accept ] compliment what Peter just said, yes, we do have some cash in hand. But I think we believe that we are having a number of interesting potentials in U.K., in the Middle East and also in Singapore and in China, which we would create the bigger business and bigger pie and that will bring more profit in the years to come. But again, all this M&A is -- we are a very prudent company. We do heavy deal diligence. And -- but I think, hopefully, in the year of 2023, we might be able to close a couple of deals that will increase our market share and also increase our market presence in different countries.

So now Mr. Stephen Wang from [indiscernible] Capital, have questions.

So this is Stephen. So I'll get a couple of questions. But because we have been talking about dividends for a while. So I think I will go for the dividend first before I go to those questions about the operation. So about the dividend payout. I just wonder like why in the interim, we are talking about paying 50% of the pre-provision profit, and we told like we even wrote it on our letter or on the like management MD&A, telling shareholders that we intend to keep -- or I think we keep the -- paying 50% to you despite we have a provision. So why do we change our mind in the -- like during the final results. So what has changed during the time that makes you feel like, oh, now we are paying 50% of net profit instead of like net profit before provision.

Okay. Mr. Wang. I think here is that when we looked at the -- in the interim, that was an audited account. So we did not expect the provision for the litigation liabilities to be at HKD 150 million. That came about much later on during the year. So I think here is that the big increase is from the HKD 60 million that we estimated to HKD 150 million is, I think that's the big change that we experienced. So I think here is that also in our IPO document, we always had -- we said is 50% of our net profit, I think it's here then at the interim, we did a different adjustment, but we didn't do that in the final because that was the audited account. And then we then -- the Board had added the special dividend of HKD 0.045 to celebrate 45th Anniversary.

Yes. Yes. I know that, I mean, of course, I can't say you're wrong with the 50% like floor. But what I was expecting a lot of shareholders were expecting, actually, it was like, oh, when you did that during the interim. So we're expecting like -- oh so we are -- because we have a lot of cash, a lot of assets we should have the ability to pay, but we know we didn't. But I mean, yes, parts, but I think this is a disappointment that as a shareholders that we have. And also on -- just going back to the dividend part, I think right now, I think as we first approach like ATAL, we also mentioned that we feel like ATAL is very undervalued. I think partially was people misunderstood or don't really understand our business. And partially, I think it's also about capital allocation because right now, I think what I disagree is that I don't think every shareholders look for growth. We want to look for something that is available growth because ultimately, it depends on like how we spend the cash. we spend on like businesses that do not generate a very decent return on capital. I don't think it really makes sense for us to grow for that reason. So I'm just want to know more a little bit about our M&A strategy. When we are going to expand overseas, are those businesses profitable? And how do we make sure that we can manage those companies? Because from my understanding, like usually the margins in China or in some place else, they might not be that decent. So like what kind of companies are we looking into? And what are criteria and valuation that we are willing to pay for these companies.

Sure. I'll just answer some of the more financial or technical side of M&A. I think here is that we obviously look at target companies that are complements our skill set. So we are an E&M engineering company. We look at targets based on our core competence, we are not, for example, buying a financial companies or anything's like that. We are based on our core covenants, we are expanding based on that. Then we look at the culture. I think TEI although it's everyone -- because we made an impairment loss due to the back performance in 2022, everyone think is about investment. It is -- for me, it is a very good company, a very good culture, and they have very sustainable business models in New York and hopefully help us to expand in the East Coast. But the point I'm making here is that we would look at someone with core competence. The second thing is that we look at the culture that can match our culture. So whether is it China, U.S., U.K. or Singapore or whatever the case maybe the culture is very important to make sure it happened. And then more technically, obviously, we are a listed company. If we acquired or we are looking at investing into any partnership, equities or otherwise, we will do due diligence. We will engage the legal advisers and do legal due diligence as well as financials, due diligence, et cetera. And then I think here is that then maybe I can pass on to the team to talk about how they select targets, et cetera.

Yes. Thank you, Peter. I think to answer Mr. Wang's question, basically, we look at companies that are complementary to our capability. Just for example, we worked strong in municipal wastewater treatment and water treatment. But we let the technology and the market for industrial wastewater treatment. So we believe that combining the 2 together, we not only make the pie bigger, but also increase our capability and hopefully, profit for the shareholders. That's just 1 example. And I think we can -- what Peter just said. We look at the synergy, we look at the culture. And also, we look at the current and past performance I think we look at least 3 to 5 years, their past performance, and then we will -- before we start talking to them. So I think we believe that any M&A projects that will only make the business bigger and generate more profit for the shareholders.

Okay. Sorry, I still have 2 to 3 questions. So Peter, I think I want to follow up on the impairment for TEI as well because normally, when we have an impairment is because of the future cash flow itself, like we have a loss in 2022. So I just wonder, is it because the future -- our expectation on the future of this subsidiary is not as better as what we thought when we bought it. Or in other words, do we think we actually overpaid the acquisition that lead to the impairment right now.

Okay. We worked with the independent valuers and obviously then the independent valuers with the auditors to look at the assets that we hold on the balance sheet and whether it needs to be impaired or not. So it is -- like you say, it's on future cash flow as well as the historical performance. And I think -- the issue here is TEI, the historical performance, if you were to take out the PPP, the government loan, then they see that in 2022, it has deteriorated. And then they then have their own business model to try to forecast the cash flow. Obviously, we provide a forecast plan for them. And we have discussions and debates and with us as well as with TEI management team and then with the auditors. We -- I don't believe -- we are not believe -- we don't believe that TEI is about investment. I think it's a good investments for us. It is unfortunately that the 2022 performance has been impacted greatly by the pandemic. And then they have to rebuild the order book. And in 2022, they have started increased their order intake. The time it will take it to go back to let's say, pre-pandemic level, it will take time. So we still believe in TEI and the business model. It's just the timing of it because as you pointed out, they only look at 5 years cash flow, they don't look any further. And then if I were to take any other companies, listed companies, their market valuations is adjusted because there is still future beyond 5 years.

Yes. I mean, I work in valuation in [ PwC ] before actually. So I actually think I mean if you really believe in the future, I think this is actually negotiable and with the auditors. But by any way, is what it is. So then my next question is on the outlook. So after the case being brought by the like of Competition Tribunal. I just wonder like -- I mean, on one hand, I mean, we are very happy to see that our contracts-on-hand actually are still very stable, and we still win contracts even in the air conditioning related like contracts, right? But on the other hand, I just wonder like now, do we see any impact when we had tried to bid for other like government contracts especially during the tendering process. Do we need to like -- do we feel like we have a disadvantage having some disadvantageous where we try to be for these contracts and also about the margins. Do we see any like potential decrease in the margins for the new contracts that we are bidding because of this case?

If I may respond to your question, Mr. Wang when the case was put into our attention, we analyze our situation very carefully. And I have talked to initiative of basically writing actually a letter to the major customers. And I -- and on a few occasions, when the client has some queries, I personally respond to their queries. And then I believe I have responded to the questions well. With government contracts, because the government look at the contractors based on the list of registered companies. And it's only in one company that this incident occurred. So it did not affect at all the license of other companies in the government. As a matter of fact, we do not see any slowing down of invitation of tenders from the government sector. And so I think the impact on this incident has been isolated and were addressed and to the comfort of our customers in the private and public sectors. So the growth of business in 2022, so this is evident to the situation. And we can see more tenders coming out because of the public government -- the government investment. And also, we do see a slow revival of projects in the private sector. So we believe in terms of taking out -- picking up the tenders and contracts. The completion ordinance incident did not affect us at all. Thank you.

Okay. I just want to express my gratitude to you and the management as well. I think we actually did very well in the industry. I think we have a mode in those large-scale projects. And I think -- I mean I'm very happy to see that our contracts-on-hand are actually still very strong. And I really hope that like we can continue to do very well in this industry. But I think the only thing I really hope management can put a little bit more asset on is to see like how we can address like our capital allocation because that was one of the reasons why we are still very undervalued. I hope management can think of ways like maybe our barrier dividends to pay out some of our excess cash or repurchase in the future. So that -- I mean, every shareholders can be benefit from that. And yes, I look forward to seeing such improvements in that -- in the capital allocation area.

Well, thank you very much, Mr. Wang for your advice. I think we will definitely take that into consideration. I know in our business plans. And I think we can look at the business in 2 ways. Number one, we will keep on the existing business. And probably giving a little bit more dividend. But at the same time, I think if we could make use of those money to develop new business. And I think that he could probably, as I said, making a bigger pie and making profits. For example, I think we are with. I could just mention that in the last 6 months, the management had aggressively going out to different countries. We attend the delegation Indonesia. We attended a number of Indonesia -- in Indonesia. And I personally went to Middle East to look at new opportunities where I think in the Middle East the economic and business situation is very conducive to -- for our business because I think with China, it's developing a more friendly relationship with Middle East. The companies I met in Middle East, they all wish to do more business with companies in China and Hong Kong. And also the -- as far as I understand, the profit margins in the Middle East is probably a little bit better than Hong Kong and China. So we are trying to create more business in -- not only in Hong Kong but also in other parts of the world.

Due to the interest of time, here is the last question from Mr. Jeffrey Tam of Titan International. The question is, with the regulation imposed on the pandemic all lifted earlier, how will this impact the group's overall operations like in project progress and number of tenders. What are the growth drivers of the group in 2023?

Raymond, would you wish to response, please?

Yes. In fact, all our 4 business units are the growth drivers. In Building Service, because government announced major infrastructure projects. So we see a lot of opportunity in Building Service and as well as the residential commercial properties development. In Environmental Engineering, most of the facility in Hong Kong in water treatment, wastewater treatment plant were built around 20 years ago. Now government tried to rebuild the plant using new technology. So it's also an opportunity to our Environmental Engineering...

And yes. Its just to reduce the size of the plant, but grow the technology.

Yes. And also Hong Kong will be a Smart City. It will help our ICBT department to enable the use of big data analytic, artificial intelligence and also IoT in urban application through next-generated territory-wise connectivity. For Lift and Escalator, if we have new building, then we have Lift and Escalator. And also for the existing building, we also need to maintain maintenance of the existing Lift and Escalator or modularization. So we foresee all the 4 BU we will have more opportunity in the near future.

I think I can just add on the Lift and escalator segment. Most of the population of lift in Hong Kong, most of the lifts are over 30 years old. And there is a growing demand for modularization of lifts that are 20, 25 or 30 years old, and we can also see a lot of opportunity there in -- for the Lift and Escalator segment.

Okay. Thank you, that's the questions from the investors as well as your continuous support to Analogue. This concludes our investor presentation today. If you would like to have a separate meeting with the management please do not hesitate to contact SPRG for coordination. Once again, thanks for your participation today. You may now disconnect.

Thank you very much.

Thank you.

Thank you.

Thank you.

Thank you.