CITIC Limited (267) Earnings Call Transcript & Summary

Dear investors and analysts, good afternoon. [indiscernible] and the shooting from the Board office, and today because of the pandemic, so we are going to conduct this conference by means live webcast, telephone conference on-site conference. The meeting will be conducted in Mandarin with simultaneous English interpretation. We have a Q&A session for today's results release and investor briefing. [Operator Instructions] Please note that the contents of this meeting and your questions may be recorded. First of all, please allow me to introduce the management attending today's meeting. They are Mr. Zhu Hexin, Chairman of CITIC Limited; Mr. Xi Guohua, Vice Chairman and General Manager; Ms. Li Qingping, Executive Director and Vice General Manager; Mr. Liu Zhengjun, Vice General Manager; Mr. Wang Guoquan, Vice General Manager; Mr. Xu Zuo, Vice General Manager; Mr. Fang Heying, Vice General Manager; and Mr. Cao Guoqiang, CFO. We also have Mr. Zeng Chen, Chairman of CITIC Pacific, who attends the meeting by telephone. Now let's start the 2021 half year results release and investor briefing. First of all, please allow me to welcome Mr. Zhu Hexin to address us.

Dear investors and analysts, good afternoon. I would like to welcome you to attend the 2021 half year results release and investor briefing of CITIC Limited. In the first half of the year, CITIC Limited, facing the complicated and severe external situation, seized the favorable opportunity for economic recovery, and its performance reached a record high. The net profit attributable to ordinary shareholders recorded HKD 44.2 billion, an increase of 64% over the same period last year. Our financial and nonfinancial segments have achieved good results. Among them the financial segment continued to improve steadily with a profit increase of 32%. The nonfinancial segment seized the opportunity and promoted. The overall performance should be significantly improved with a profit increase of 130%, and the business structure of comprehensive enterprises was further strengthened. This year is the first year of the 14th Five-Year Plan. In order to meet the demands of the 14th Five-Year Plan this March, we put forward the 5-5-3 development strategy, which includes 5 major segments, 5 major platforms and 3 major starting points. Over the last 6 months, we have carried out a number of special management working depths, including enhancing business collaboration, promoting increasing revenue and reducing expenditure, reducing costs and increasing efficiency and speeding up the establishment of a comprehensive risk management system. We achieved good resource in all aspects. These measures have laid a solid foundation for our 14th Five-Year Plan. In the future, other work will continue. We will, as always, pursue lean management, strengthen the foundation, reinforce the synergy and scientific and technological innovation. So that -- this -- we're going to firmly implement the development strategy of the 14th Five-Year Plan, continuous to deliver value for shareholders. Next, I will actually give the floor to Mr. Cao Guoqiang, CFO, to introduce us the company's performance in the first half of the 2021.

Dear investors and analysts, good afternoon. So I'm going to brief you the highlights and the results of CITIC Limited in the first half of the year. So we have in front of the complex cooperational environment, we have seized the opportunities and we have achieved rapid growth in our business. Revenue grew by 38% to HKD 352 billion. And the profit attributable to shareholders was 64% to HKD 44.2 billion. So the average 2-year growth rate is -- was 11.3% and 13.1%, respectively, outpacing overall economic growth for the same period. The financial services continue to improve, which have stabilized the fundamentals of the performance. Nonfinancial business managed to significantly increase the contribution of the revenue and the profit, highlighting the advantages we have as a conglomerate. So in the first half of the year, so the earnings per share is HKD 1.52, dividend per share, HKD 0.15. And the total asset is over HKD 10 trillion, up by 5%. And net asset per share, 24 -- more than HKD 24.58, up by 6%. This is segment information. Total assets. In terms of total assets, 93% of it is from the financial services. And the contribution of revenue and profit are mainly coming from the advanced material, financial services. I'm not going to dive into details. Next, let's have a look at this slide. This is the summary of the key earnings of the key subsidiaries of the corporation. So -- and later on, I'm going to dive into details one by one, so I'm not going to talk too much about it right here. Next, let's move on to the -- our businesses by segment. In the comprehensive financial services, the revenue is HKD 132 billion with a net profit of HKD 41 billion, which has been up by 13% and 32%, respectively. Excluding the impact of exchange rate translation, revenue and the profit increased by 4.1% and 26%, respectively, with all businesses in the segment delivering solid performance. The PBoC has accepted the CITIC's financial holding company application. And CITIC will leverage this good opportunity to become a leader in integrated financial services. Speaking of some important companies within financial services, CITIC Bank reached recorded revenue of RMB 105 billion, increase by 3.4% and the profit grew 14% to RMB 29 billion, focused on promoting a capital-light business. And the noninterest income increased by 12%, driven by rapid growth of wealth management and bank card business. The net interest income increased 0.2%, mainly due to the expansion of interest-bearing assets, but the net interest margin declined as it was affected by the market rates. And we see that we have a solid asset quality with decline in both NPL ratio and NPL balance. The NPL balance decreased by 3.8% at the end of June, and the NPL ratio dropped by 0.14 percentage point to 1.5%. And the bank strengthened the disposal of NPL, and the nonperforming asset disposal and recovery in the first half of the year increased significantly by 49%, reached RMB 16.5 billion. For CITIC Securities, it recorded revenue of RMB 47 billion, grew by 38%, and the profit rose 37% to RMB 12 billion, all benefited from the steady growth of the market and revived the domestic capital market. CITIC Securities led the market in A-share lead underwriting, bond underwriting, financial advisory and asset management, so leading the market and our counterparts. For CITIC Trust, it has performed very well. Revenue grew 23% to RMB 4.1 billion, profit grew 88% to RMB 2 billion, maintaining the leading position in the industry, and its cultivated new drivers of growth. The AUM proportion of innovative business such as standard security investments, family trust increased to 25%, up by 4 percentage points year-to-date, while the revenue from the innovative businesses achieved a year-on-year growth of 47%. CITIC-Pudential Life's premium income reached RMB 14 billion and an increase of 11%, which was one of the highest in the industry. Profit grew 57% to RMB 1.2 billion. It continued to leverage the competitive advantage in the bancassurance channel with a focus on higher-value business. The proportion of term business increased by 11 percentage points to 72%. The total investments of insurance bonds increased by 14% to 146.2 billion at the end of June as compared with the beginning of the year. So -- and for advanced manufacturing (sic) [ advanced intelligent manufacturing ], revenue increased by 697% and the net profit up by 192%. And we see that excluding the consolidated impact of Dicastal, revenue increased by 58%, mainly benefited from the recovery of production and operations. For this advanced intelligent manufacturing and for CITIC Dicastal, revenue grew by 46% to RMB 15.5 billion, profit grew 81% to RMB 500 million, with increased demand for lightweight vehicles due to the revival of automotive market. The sales of aluminum wheels and castings increased by 44% and 53%, respectively, year-on-year. And in June, we see that Phase 2 of the Moroccan plant achieved full production in June, adding annual production capacity of 3 million on aluminum wheels, and overseas annual production capacity of aluminum wheels is now 9 million. CITIC Heavy Industries recorded revenue of RMB 3.8 billion, up by 40% and profit of RMB 174 million. Transformation programs achieved solid results with high-speed growth in new business streams such as offshore wind power and specialized mining robots. For -- in terms of the advanced materials, the revenue reached HKD 142 billion, and net profit reached HKD 14 billion, so up by 66% and 226% (sic) [ 262% ], respectively, driven by economic recovery and abundant liquidity, which supported the rising commodity prices, particularly the prices of iron ore, and the copper reached new highs. CITIC Pacific Special Steel, Sino Iron and CITIC Metal Group all achieve the best performance in history. When it comes to CITIC Pacific Special Steel, it recorded revenue of RMB 49.1 billion and a profit of RMB 4.2 billion, a Y-o-Y increase of 35% and 52%, respectively. It's continue to strengthen operations, management to optimize the product portfolio and adopted technologies to reduce consumption of materials. Accounts receivables and inventory turnover were further shortened. For Sino Iron, benefiting from the buoyant iron ore price and continuous efforts to reduce operating costs and improve efficiency. It recorded a significant rise in profit, key operational indices, achieved a historic high. 10.57 million wet tonnes of iron ore concentrate were shipped in the first half of this year, a year-on-year increase of 8.5%. The effective operating rate is now at an advanced level. For CITIC Metal Group, its revenue grew 83% to HKD 68.1 billion and profit grew 153% to HKD 1.8 billion. For trading business, it seized the opportunity of rising commodity prices, and the trading volume of iron ore, niobium products and the copper increased. The profit increased significantly by nearly 200% year-on-year. For the mining investment business, we see that the copper mine in Peru delivered a substantial profit increase, and the Ivanhoe copper mine in DRC commenced production in May ahead of schedule. And the profit of mining investment business increased by 62%. So the copper mine of Ivanhoe in DRC commenced production ahead of schedule in this May, contributed to the profit and revenue. For CITIC Resources, the revenue grew 38% to HKD 1.7 billion, delivered a turnaround profit of HKD 427 million. The business mainly benefited from the increase of the product prices, improved management of the oil production business as well as the optimized debt structure. For the new consumption segment, so the delivered revenue of HKD 32.9 billion, down by 7.1% and a turnaround profit of HKD 791 million. Excluding the deconsolidation of McDonald's China, the revenue of this segment increased by 25% year-on-year, mainly due to the revitalization of the consumers' markets. CITIC Telecom International recorded revenue of HKD 4.8 billion, and profit of HKD 534 million, maintaining steady growth, increased by 9.4% and 4.2%, respectively, and became the first provider in Macau in the indoor and outdoor 5G coverage. For CITIC Press, the revenue grew by 19% to RMB 952 million. Profit grew by 40 -- 52% to RMB 145 million. Sales of books increased 12% year-on-year, ranked second among publishers in terms of market share and the sales. The retail business explored new operational models and established online/offline membership system. Bookstores recovered steadily. For Dah Chong Hong, it recorded revenue of HKD 26 billion, up by 28% and delivered turnaround profit of HKD 280 million. So last year, it's lost -- it recorded a negative increase. So this year it has turned around. Vehicle sales improved by 19% year-on-year. Revenue of consumer products and other businesses improved by 9%. And we have achieved HKD 22 billion, up by 52%, and our profit was HKD 3.2 billion declined by 22%. If we exclude the provision made for overseas projects affected by the pandemic, profit will increase by actually 24% year-on-year. All businesses achieved a year-on-year improvement in operating profit. So for new-type organization, the property development, operation and management, we have achieved HKD 3.5 billion, up by 24%. And for the construction and engineering, we have achieved HKD 1 billion, up by 143%. For its subsidiaries, focused on regional markets in China with the total value of new contracts matching RMB 17.7 billion, an increase of 34% year-on-year. For urban operation, profit grew 65% to HKD 460 million, mainly due to the increase in revenue from the operation of CITIC Environment. Circular economy industry park and rapid recovery of CITIC offshore Helicopter's offshore oil business has been developing very fast. That is my brief overview.

Thank you, Mr. Cao. Now let's enter to the Q&A session.

We are going to invite institutions online. [Operator Instructions] Now let's welcome Ronald, Merrill Lynch Securities to pose the questions.

Can you hear me?

Yes, exactly.

I have 2 questions. The first one is that CITIC Limited has attached a high importance to the assets management quality and also reduce the cost. So in the first 8 months, how is about our growth performance? Do you have any data? What is the amount of the exhibit of nonperforming assets? And what is the target for the cost reduction? Second, could you share with us the dividend policy? What it will be like in the future? We have seen that the mother company is going to invest in financing or financing holding companies. So is there any possibility that the dividends will be increased? These are my 2 questions.

Thank you for your question. As for your second question, I want to share with my observations. Actually for the dividends sharing, it is very stable and consistent. In the first half year, we are HKD 0.15 per share, which has seen a significant increase with that of last year. And our dividend policy with the development of policy, high-quality development, actually, we are moving ahead of the entire industry. With regards, the Huarong, we have made in-depth research. As for your first question, I will give the floor to Mr. Guohua to answer this question.

Thank you for your question. For the reduction of cost and efficiency increase is our target. Lean management and outstanding enterprise is our routine work. Last year, we have seized the great opportunity brought by the external environment on operational business. We have converted the pressure into opportunities. We undertake the cost reduction and open source for profit generation. We have made a great performance. Our work can be summarized into the 3 aspects. First, we identify targets and push it forward steadily. Lastly, our target is that we are going to increase profits by HKD 5 billion and reduce cost by HKD 10 billion. We can -- we have increased HKD 4.2 billion and reduced the cost by 1 -- HKD 18 billion. So the morale of our colleagues has been enhanced. And our collective consciousness has been increased. It has facilitated the business profit generation. In 2021, our target is to increase HKD 10 billion and reduced costs by HKD 20 billion. By the end of July, we have achieved HKD 10.9 billion open source for profits and reduced the HKD 12.9 billion production -- reduction of profit. We have achieved 97 -- 79% reduction, and we have conducted the outcomes sharing. Not long ago, we have held the outcomes sharing and demonstration in terms of the new manufacturing. And we have accumulated the research outputs, and we have set up the database for innovation. For those best practices for cost reduction, profit generation, we summarize the best cases and convert it into the treasure of our knowledge. We have made great performance. For example, our Special Steel, it has innovated the theory for reducing cost and increasing profits. We have formulated our own model. In the second half of this year, there will be the financial sharing for the profit generation and cost reduction will become our routine. That will be an important component of CITIC culture. Thirdly, lean management has been improved considerably. All subsidiaries have vigorously undertaken, all staff, all procedure an omnidirectional cost-reduction profit increase. For example, by innovating -- by innovation and research, we have extended product pipelines and expanded scope of the customers and the markets. And by the replacement of the product with the higher level ones, we have reduced the cost reduction and the financial burden has been released. For example, by concentrated procurement to master the trend of the raw materials, and we master the cost of procurement by optimizing the procedure for manufacturing, enhanced automatic manufacturing to reduce the manufacturing cost. Those what we have done in the cost reduction and profit increase. As for the disposal of NPL -- nonperforming assets, actually since last year, we have undertaken the disposal of nonperforming assets and the low efficient assets. We have introduced 271 projects and with regard to the return of RMB 336 billion assets. Actually, we have seen a great optimized assets. In the future, we are going to follow the 14th Five-Year Plan and the streamline management guideline and the specialized activities, we are going reinforce our efforts on disposal of nonperforming assets. Generally speaking, centering on the 4 aspects, we are going to further enhance our efforts on the disposal of low-efficient nonperforming assets, so those noncompetitive assets is going to be disposed. For example, like oil, gas and coal all these resources. Despite the positive performance and good results compared with other companies, we have no competitive edge. So we are going to dispose further. And for each company, we have formulated the guidelines and targets. It stipulated that the 3 major businesses in each subsidiary and for others must get rid of them. And ROE low companies or the companies with bad cash flow, we will dispose them. And for IRR is low, we are going to dispose of them. We have set up a standard for finance. It should be not less than 10%. For nonfinancial, it should not be less than 8%. Therefore, in this year, we are going to intensify our efforts to dispose the nonperforming asset and low-efficient one. Thank you. That is my answer.

Thank you for the Chairman and General Manager answers. Let's welcome the second question. Now let's give floor to investor for CICC, Huang Yuehan, to pose a question.

I'm Huang Yuehan. I have 2 questions for the management. The first one is CITIC Bank. We know that nonperforming ratio, so we want to know the outlook for the nonperforming ratio reduction, and how do you view this phenomenon? The second question is the wealth management. In the first half, the wealth management has seen successful conversion like the deposit of the nonmonetary deposits and like the CITIC Securities and the sales on behalf of third party, we have seen a great increase propulsion. So what is your outlook for the wealth management?

Thank you for your question. And since we have the head of the bank, the Vice President is there. We will invite him to answer this question.

Thank you. Thank you for your question. As for the nonperforming ratio, in the first half of the year, CITIC Bank nonperforming loans and ratio has seen quarterly reduction. That is the first time for us to achieve the new lows since 2016, and the preferential coverage has achieved the highest level since 2014, up by 18% to 189%. For the subsequent outlook, based on the situation and the structure of asset, liabilities, our judgment is that under the current situation and policies, as far as we're concerned, first, with the difficulty and challenges so we can achieve sustainable development. It can be justified as follows. Firstly, with regards, the 3 indicators, the relevant indicators for nonperforming ratio, the generation ratio of nonperforming has been decreased from 0.88 points to 0.5, and we can see the trend can be sustained. Secondly, for the loans -- related loans has been increased. But there are 2 factors. First, due to the pandemic impact, since March, accepting the preferential inclusive micro loans. We are still entitled to the policies and some others have been exited from that. And secondly, the key issue is that we imposed stringent standards on the categorizations for one part. In my words, for those where I think it's not normal, we have categorized into the risky ones for those without interest, without principles and their -- we haven't pay. So we have imposed stringent standards. And thirdly, our expectation is the credit cards nonperforming ratio has been improved. In the first half of last year, our credit cards impact on nonperforming ratio is very large. So for -- the credit cards impact is increased with the same period of last year, but because of the extension policy due to the pandemic. However, we must think -- we must see that via positive indicators. There are 3 positive indicators, which may help you have comprehensive understanding. And the [ 7 ] -- in July, the nonperforming ratio increase compared with the first quarter nonperforming ratio, it has decreased by 40%. The second indicator from the normal to the expected one in July because for the credit cards, some are the good customers that compared with 2020, it has been reduced by 50 on a daily basis. Thirdly, for our priority deposit, which has been reduced to HKD 7.5 billion from over HKD 10 billion at the beginning of the year and which has been automatically included into the NPL. This is my third point. My fourth point is that for some of the over companies with excessively high NPL. So because of the development of the business, improvement of the business, so the value has been greatly recovered, which has exerted a very good contribution to our provision demand. So before, we provided like RMB 4.8 billion for -- and for [ ST Yang ], we used to have this -- the repayment of the debt with the materials and assets but now, we can recover by HKD 1 billion. And for your time, we provided by 70%. But now we can see the improvement of their business. And also, the HKD 1 billion has been for the hydropower stations also have been improved. So in the late -- in the past year, so we see that the businesses of many companies and the provisions have been provided. So -- and for the HKD 138.5 billion and of them, the HKD 6.2 billion has been improved. And at the end of the year, so we can reach HKD 8 billion. For those with higher recovery rate, it's a very good signal for us to boost our confidence.

And for wealth management, let's welcome Qingping to share with us the information and answers.

For wealth management, the wealth management business of CITIC Bank, like you said. And the data you have mentioned has elaborated that CITIC Bank over the last few years has transitioned its retail business. And from the data you have accessed, has proved that we have done a very good job. So I would like to answer your question about the branding -- about the building of the brand of our wealth management business of CITIC. About the wealth management business, CITIC has attached great importance to it, and we are very positive about it's development because wealth management is a potential driver of growth of financial services, which is also very competitive. And the comprehensive financial services will move deeper into this segment. We have a very good competitive edge. Like you said, we have the good brand. So in the segment of comprehensive financial services, especially the 2C, which is CITIC [indiscernible] wealth management. Secondly, about -- we have the advantage in our licenses. The 8 subsidiaries under the CITIC Group has the licenses needed. Many of them are the leaders in their respective sectors or industries, so the financial holding company we are applying. So this is the model, which means that all the subsidiaries will be contained in this financial holding company in -- we're going to follow this separation of the management requirements. We are going to build one group, one client, one account system. And this system is very possible. We can't say that it is very easy, but we say this it is possible. So we will have a very clean business in this financial holding company. And we also have this advantage in the integration of businesses and industries. And we need the allocation of assets. And we need the good quality assets. This is an advantage of CITIC. We have very good leading real businesses. So the wealth management, and we have the provision of products because we have the assets available, good quality assets available. In the other -- on the other hand, we have the integration advantages, which can help us to build a comprehensive capability of financial services. Starting from last year, when we started to build an integrated brand, I can report the data to you, and you can have a look, and you will see that the CITIC Group's wealth management or our brand of wealth management. You can see our current value and our potential value in the future at the end of June. The 8 financial subsidiaries, including our securities of [indiscernible] foundation and Baoshan, [indiscernible] and [indiscernible] foundation, all the 8 financial subsidiaries have an AUM starting from -- increased from HKD 7.1 trillion to HKD 7.6 trillion. So last year, we have 290 million. No we have 310 million clients. All those data can help us to see that our cross-sells to see clients from last year is HKD 45 billion, now we have increased 83%. And we have 40,000 third-party trust clients. We can see that while we are building a integrated brand outside and internally, we have enhanced our top level designs and integrations, which has led to a very good outcome. We hope that in the future, we're going to continue to build a competitive mega wealth management system, and we are going to continue to improve our integrated allocation of resources, management of assets, integration of channels and the driving forces by technologies in shaping of the brands and our added value provided to the nonfinancial services. So that the comprehensive financial service segment can be a cornerstone of the whole group.

Thank you. Mr. Fang and Madam Li. Now let's welcome the third analyst. Morgan Stanley, investor from Morgan Stanley, let's welcome.

I'm from Morgan Stanley. Huarong. And I'd like to ask 2 questions. The first question is that whether you can introduce us about the shareholding in Huarong. So some information about this trading. And do you have a timetable for the progression of the work and about the management and nonperforming business? So what kind of plans do you have? The second question is about whether the management can introduce us about the strategy for the peaking for carbon emissions and carbon neutrality and what's the layout in your industries?

Thank you for your 2 questions. That was about Huarong. So this is a very important issue, which is in progression and which has attracted a lot of attention for Huarong management company -- Asset Management company. So this is in line with the strategy of the whole group. We are following the requirement of market-based operation and law-based management, too. Now we are in a very important phase of disposing of the nonperforming loans. So we attached a great importance to this work. We're going to give full play to the integrated and the synergies of the whole group so that we can give full play to the potential of our group. Second about the carbon peak and the carbon neutrality. I would like to give the floor to Guohua to answer your question.

Thank you very much for your question. So we strive to be an ESG leader in the industry. And we are going to seize the opportunity of the low carbon transition strategy to follow the path of low carbon and green development. In May 10, we have announced to the society that we strive to peak our carbon emissions by 2025, carbon neutrality by 2050, which is higher, and there's more ambitious than the national strategy of carbon peaking and the carbon neutrality. In order to deliver those goals, we have these 2 increase and 1 decrees. 2 increases are, firstly, we're going to increase the green finance so that it can benefit the transition to low-carbon development. Secondarily, about the nonfinancial businesses development. We are going to expand the supply chain and to give full play to the role of carbon, of low current development. And we're going to reduce the investment with a high impact on the environment or with high intensive -- or high intensity in carbon. So we're going to follow the strategy of carbon peaking and carbon neutrality. While proposing this strategy -- this proposal of this strategy is based on our past experience and work. So for example, for the transition of green finance, by June 30 this year, the balance of green finance is HKD 130 billion. We're going to continue to improve the ratio of the green finance. For our 2 securities, so this issuance of green bonds are the top 2 in the industry. For carbon neutrality concept solvency bonds has been increasing and in the -- trading in the market, the innovations of carbon products. And now we are integrating ourselves into the global supply chain of energy transition and the low carbon development. So for example, the automotive industry is developing to the lightweight direction. The Dicastal production of lightweight components is 650,000 tonnes comparing to the traditional steel components. We are going to reduce the consumption of oil of 200 million tonnes,, and reduce carbon emissions by 500,000 tonnes. And we are -- we also deploy in the niobium industry and -- to develop the niobium steel industry so that we can reduce the weight of the steel products. And now we take up about 80 -- more than 80% of the market share. The intensity of carbon emission is lower than the whole industry by 30%. This is benefiting from the improvement optimization of the innovative technologies, so which can reduce the emissions by 650,000 tonnes. And we are doing 2 work. Firstly, we have carried out the accounting of carbon emissions across the board. We are surveying the carbon emissions of the whole group. We are starting and developing first of its kind the accounting table for carbon peaking, and carbon neutrality so that our strategies can be traced, tested and evaluated. In the meantime, we are developing 2025 carbon peaking and the 2050 carbon neutrality road map. We plan that at the end of the year or the beginning of the next year, we're going to publish the white paper for carbon peaking and carbon neutrality. In order to achieve these 2 goals, on one hand, we are going to optimize our business structure so that for those businesses can be modified and optimized, they should do that. And secondly, for those difficult to decarbonize, we need to make use of our platforms and the resources to adjust this structure in the whole portfolio. Secondly, we are going to improve the proportion of green businesses. And we are going to make strategic investments in clean energy low-carbon technologies so as to accelerate the innovation of financing investment business and to participate in the carbon trading market. And to also innovate our financial products.

Thank you Chairman and Mr Xi. Next, let's welcome the fourth investor or analyst for Goldman Sachs, [indiscernible].