CK Asset Holdings Limited (1113) Earnings Call Transcript & Summary

Welcome, and thank you for joining CK Asset Holdings Limited 2021 Interim Results Presentation. My name is Gerald Ma. With me, we have our Chairman, Mr. Victor Li; our Deputy MD, Mr. Edmond Ip; and our Chief Accountant, Mr. Simon Man. As in the past, I'll go -- I'll spend a few minutes on the highlights of the interim results before turning over to a Q&A session. 2021 interim results, $8.355 billion of reported earnings, up 31.4%. Earnings per share, $2.25, up 30.8%. As required, if you look at Note 1, we have acquired to -- the earnings per share is based on the weighted average shares issued during the first 6 months of 2021. And because of our other projects that you all know about, the share count is slightly adjusted. Dividend per share. Happy to report that we are -- there will be a 20.6% increase, HKD 0.41. Net book value as at June 30, 2021 comes to $97.69. 43% of our profit contribution is recurrent in nature. And this number actually goes up and down depending on our development bookings each year. But suffice to say that it is a solid part of our income base now. If you look at the -- if you look -- go back -- if you look at the waterfall chart in the bottom right corner -- right-hand corner, the major changes in 3 areas. On the property sales, there wasn't any major development bookings in Hong Kong in the first half. And Pub Operation had a reduction in loss recorded. And there is a solid increase in infrastructure income in the first half. Majority of our profit contribution in the first half comes from the Mainland, Overseas. Turning into the divisional performance, property sales. Very respectable overall contribution margin of 53.5%, even better than same period in 2020. Major contribution from Laguna Verona Dongguan, $4 billion; Upper West Shanghai, $1.842 billion; and Regency Garden Shanghai, $1.169 billion. As I alluded to earlier, the majority of the contribution in this division came from our Mainland activities. In Hong Kong and overseas only -- we only had bookings of a few unsold inventories. Hence, the contribution margins in Hong Kong and overseas are not quite meaningful. We are encouraged by the 55.5% contribution margin from our Mainland property sales. We still have over $41 billion of contracted sales not yet recognized and close to $20 billion will be scheduled for recognition within this year. And within that $20 billion, a major portion will come from Seaside Sonata in Cheung Sha Wan, which is scheduled for bookings in the second half. Turning to property rental. Despite the softness in Hong Kong retail and office in the first half, we still recorded a very healthy almost $2.9 billion of profit contribution and a very good 86.3% contribution margin, which is, as I understand, is quite a bit higher than our competitors. Major contribution from Cheung Kong Center is almost $700 million; Whampoa Garden, $360 million and change; Hutchison Logistics Center, almost $300 million. Overall investment property portfolio, we have 17.4 million square feet of IP assets, most of them are in Hong Kong. Fair value adjustment $121 million. There's a bit of up and down depending on the rental income for different -- various properties, but there's certainly a positive contribution from Hutchison Logistics Center. Turning to our Hotel division. We have recorded an improvement in occupancy in both -- from both our daily hotels and service suites. Hence, the improvement in contribution to $124 million in the first half. Majority of contribution from our Hong Kong operation as expected, we have over approximately 15,000 rooms and serviced suites and average occupancy for our daily hotels in the first half was 30%, up from 20% in full year 2020 and 90% for our average occupancy for our service suites up from 86% in the full year of 2020. Property and project management, as steady as always, 43.1% contribution margin, giving us HKD 186 million of profit. Aircraft leasing. Contribution margin was affected by the lease restructuring support we gave to some of our lessees and also lack of disposal or trading activity. As I said before, normally, the contribution margin in a normal cycle should be around 40%. Last year, we had 48% because of the disposal gain we had this year without that and also with the lease restructuring support, the contribution margin was 35%. 125 aircraft, 120 narrowbodies mostly for the domestic use. So hopefully, they will be the first to recover. Average remaining lease close to 5 years and average age of our fleet is just over 7 years. Turning to Pub operation. Last year was because of lockdown was very much like operating in a vacuum. Just to remind you, we have about 2,700 pubs, 3 different divisions. Pub company means managed pubs, our self-managed pubs, generating the bulk of our profit in a normal cycle. Pub Partners essentially, we are the landlord of a number of almost 1,000 tenanted pubs, where the tenants will provide us with either turnover rent or fixed rents together with many of them selling products that we -- which we manufacture from our third division. Brewing & Brands division in which we have 2 different breweries, 1 in Scotland, 1 in England manufacturing a range of products. There was a major impact in 2021 first half caused by over 4 months of lockdown. However, because we didn't have to record any impairment in the first half. There's a reduction -- solid reduction in overall loss from $1.9 billion last year to just over $1 billion this year with resumption of full trading starting on July 19. With the lifting of restrictions, we are happy to say that we are back to EBIT positive or profit contribution positive territory. And hopefully, we can start to catch up on some of the losses recorded in the first half. Turning to our infrastructure and utility division. The acquisition we completed in May. Just to remind you, it was for 4 -- for minority interest in 4 different assets. One is new for CKA, U.K. power network. The other 3 are increasing shareholding in Northumbrian Water, Wales & West and AVR. So as of now, we have 7 joint ventures in our divisions from top to bottom DUET, Reliance, ista, U.K. power network Northumbrian Water, Dutch Enviro Energy and Wells & West. And on the right, you can see their respective shareholding that we own. We recorded a significant increase in income from this division because as a result of the transaction that we undertook in May. And if you look at the right-hand side, you see very healthy contribution margin, particularly encouraging from Reliance in Canada in the first half. They reported a solid increase in margin. Just -- so the others that are not classified as joint venture are the remaining 3 assets under an economic benefits agreement. They are the business underlying businesses Park'N Fly in Canada, U.K., rails and Australian gas network. So total profit contribution came to $3.3 billion, a 34% increase for over 2020. I'll turn it over to Simon for the next few pages on some of our financial metrics and landbank situation. Thank you, Simon.

Thanks, Gerald. At the interim reporting, the group's interest in the listed real estate investment trust remain more or less the same, 32.5% in Hui Xian REIT, which own and manage 11.8 million square feet of hotel and service fleet office and retail properties on the Mainland. Our investors in Hui Xian REIT is an associate and we take a share of reported profit amounted to $153 million for the period. Our investment in Fortune REIT, 26.8%, which owned and managed 3 million square feet of retail properties in Hong Kong and 18% in Prosperity REIT, which own and manage 1.3 million square feet of office, retail and industrial properties in Hong Kong. During the period, we received a total distribution of $154 million from the tourists and were recognized as investment income. Based on the market closing price at 30th of June 2021, we recorded an increase in fair value of $640 million. Whereas in the same period last year, we recorded a decrease in fair value of $1.3 billion. The group's Gearing and Maturity profile. At the interim reporting date, the group has a total bank and other borrowings, $93.2 billion, $23.7 billion will be due within 1 year, $52.7 billion would be due within 2 to 5 years and $16.8 billion will be due after 5 years. And cash on hand, $43.9 million, we have a net debt of $49.3 billion. And it takes the -- the net debt to call this one, we have a ratio of 13.8%. And if we take the net debt to -- net total capital is 11.8%. Our current credit rating from Moody's is A2 stable and from S&P is A stable. Our land bank as an interim reporting day, we have a total of 132 million square feet of land bank. By location, 27 million square feet in Hong Kong, 73 million square feet on the Mainland and 32 million square feet Overseas. By category, we have 80 million square feet under development, 8 million square feet in Hong Kong, 70 million square feet on Mainland and 4 million square feet Overseas. Properties help arrange we have 17 million square feet, mainly in Hong Kong. And under hotel and service operation, 8 million square feet in Hong Kong. And for the Pub Operation, we have 26 million square feet in U.K. How the acquisition during the first 6 months. In February, the group was awarded a government tender for a site at Kai Tak Area 4E Site 2, with an estimated developer growth for area of approximately 648,000 square feet. And in May this year, the group reached a land exchange agreement with the government in respect of sites At Kam Tai Road, Kam Tin and we estimated it could build a growth area of approximately 137,000 square feet. Back to you, Gerald.

Thank you, Simon. We are excited to include our ESG sustainability highlights in our presentation going forward. To the establishment of our Sustainability Committee in December 2020, we have adopted a number of governance-related policies, ranging from CSR environmental policies to human rights policies. And to deal with COVID, we adopted a number of measures to protect our customers, our staff and to support our community as well. The last page here basically highlights ranging from different actions and activities taken by different business units from property development, trying to save construction waste material to our property management team trying to reduce carbon emissions and increase energy saving efficiency to our Pub Operation being the first pub company in the U.K. to meet the carbon trusted 0 waste to landfill standard. Going forward, we will continue to update our stakeholders on our initiative on this front. Now that's the end of our presentation. We will now open the floor for questions. I can see that we have close to 200 participants online.[Operator Instructions]

The first question -- okay, the first question is about share buyback, CKA bought back shares over 3 days in June and then stop after that. Does the company have further plans for share buyback. Mr. Li?

I think our share buyback program is a mid- and long-term strategy. That's not going to change. It's good value and investments of the company. Remember, we just completed project raise. We've done a lot of share buyback in that project. But I'm not going to comment on short-term strategy. I think it's not my job to be disclosing our rather opportunistic decisions at a particular point in time.

Thank you, Mr. Li. The next question is, well, what is your dividend policy going forward?

Well, I think we've announced that the full year 2021 dividend will at least be $7.558 billion, if I remember correctly. And we've made make that policy a public document. But other than this, general policy, of course, for CK is to continue increase our dividend in line with our earnings increase. So that has not changed. And generally, our policy is to make sure that we have enough ammunition on hand to make acquisition too. So both dividends and share buyback, it's our long-term mission to return value to shareholders.

Next question is about the market. The market in the first half has been quite volatile. How would you sum up CKA's performance so far this year?

Well, we can only do performance in terms of our profit results. I mean we achieved -- given the pandemic, we've achieved a 30% increase in profit. So I think that's -- I'm never satisfied, but I think it's okay. Remember, a few of our divisions are still very stressed. You look at hotels, you look at aircraft, you look at pubs. They are -- I mean, for the first half, they are still in very stressful times. Now having said that, a lot of them have shown solid signs of improvement once the pandemic ease off. You take the pub operation, for example. If I'm correct, I think they are already in terms of revenue, about -- only about 8% or 7% roughly in that area, below 2019. So that shows that our assets are quite tough and quite resilient to various typical situations, and that earnings are quite reliable. I think once the pandemic ease off, a lot of our assets -- our quality assets that will show solid returns.

Again, I will consolidate your questions and -- into one. So the new questions have been answered already.

I should -- I mean, certainly, we keep talking about COVID. But in the meantime, property projects are doing quite well. The sales are doing fine. And we achieved pretty good prices for the property. For example, we look at Borrett Road. I think we have achieved certain records for the most expensive condominium ever sold in Asia. And it's not just one, but all of them set new records for that neighborhood. And it seems the momentum is continuing. Even without -- remember, this is all local buyers. We do not have mainland visitors in Hong Kong during that sales period. The same applies to Sea to Sky. It's all gone.

Since we are talking about property, now the next question is your view on property and future land bank acquisition?

We always look at land. I mean land is our -- property development is our oldest business. So we're actually participating in not only government land tenders, but converting our agricultural land portfolio, our hotels into residential development. But sometimes it's not just the market. It's also the architectural side and whether we can create value for a particular site. I mean, you can -- 1 example I can say is if you look at the Kait Tak site that we have acquired recently. And just a couple of days ago, we finalized our plans. And I'm pleasant to -- I'm quite happy to report that it's one of the few site when I can say that every single one site, every single 1 unit can have view of the Victoria Harbor. So not 1 single unit have a garden view only. Every single 1 has a water view, which is quite difficult to achieve. And that may be the record for that area among all other sites that was auctioned.

The next question is again on Hong Kong property on office. Office vacancy in Hong Kong has been rising. Do you expect further drop in property rental contribution in the second half?

I think we've seen the worst. Hong Kong economy is slowly recovering and also because of our portfolio, I mean our property is either in core central or in areas that is servicing the neighborhood. Now in the latter, actually, we don't see any damages during or before or after they've been quite steady. But if you look at Central, I think the rental has dropped from the all-time high a couple of years ago. But in terms of occupancy, if you look at Hong Kong's history, anytime when central occupancy is slightly higher, people from surrounding districts move back to Central. So if you give it a few months to settle, the vacancies will be seen in B and C class areas, when the A-class areas we have slightly lower rent but higher occupancy. That has always been the tradition in Hong Kong.

Next question is on property, the U.K. property. There's been news report of CKA selling 5 Broadgate, the headquarter of UBS in the U.K. Is it true? What is the expected transaction time line?

How should I say this? Because every day, I've got offers on some of our properties, be it U.K., Hong Kong or China or Singapore. And the fact that a person has made an offer, be it good or not good pricing. It doesn't mean that we have to sell. It's nice to feel that our -- a lot of interest on our portfolio, but I don't think receiving an offer means that we have to sell. Now I keep answering this. It happens actually more often in Mainland China. When we receive offers on our property from time to time, and we have to tell the market that whether the rumors are true or not. So I'm not going to comment on the individual of them. But given Cheung Kong's portfolio, there would be some trading, but the bulk of our investment will continue to be long-term hold.

Let's -- with staying in property, there's been news reports of CK obtaining approvals to convert some hotels into other users. What is your time line of redevelopment plan for these sites?

Well, we have a huge hotel portfolio. And about 10% of that portfolio, which is not small, 10%, 15% of that portfolio, the neighborhood has changed. Pricing has changed. And there's value generation by converting some of the hotel users to residential, and we're just working on that smaller percentage. It's not a small portfolio, but it's a small cut of our total portfolio. So we'll continue to be opportunistic. Remember, at the same time, we're building a new hotel in Ap Lei Chau near the mass transit station near South Horizon. So while we're converting existing hotels to residential, on the other hand, we're also building new hotels to add to our portfolio. That new hotel is a long-term lease. It's going to be long-term service suite leases. 5 minutes to Causeway Bay. Sorry, I can't help, but do an [ advertisement ].

Next question. Are you concerned with the hotel business in Hong Kong?

Well, I think if you look at CK's portfolio, you have to divide into 2 very distinct categories. We have long-term stay suites. And these are for people who are residing in Hong Kong for 3, 6, sometimes months or years. So those are not quite affected by the pandemic. Actually, in the next couple of months, I think we'll be increasing rental for these service suites. They're more in line with the property market in Hong Kong than the tourism business, there's one category. So we're quite big in that category also. I think thousands of units there. Now there's another category, which I call it the daily category, which are focused more on tourists. Now that one, I don't need to add. I mean it's gone through possibly the most difficult period they've seen. Now I've gone through SARs. I mean an early part of my career is in hotels. So I've gone through SARs, and I still remember the tough time during SARs. All I can say the lesson I learned from SARs is that they go away and the tourist comes back and the business will recover. And we have a history of doing good HOP per square foot on our tourist hotel business. Now in the meantime, while the tourists are not coming, we've converted the daily tourist hotel into the long-term stay categories. So that helps us improve our P&L. But the design of the units are different. Some can be converted, some cannot. So we're doing the best we can. But I'm quite sure that one day tourists will come back, and it will be giving good numbers.

Thank you, Ms. Li. The next question is on the Greene King business. With the U.K. government having relaxed the legal restrictions, do you expect the business to turn around for the full year?

I think just earlier in the presentation, I think if you take a snapshot today, Greene King is already profitable. And the revenue is almost close to the 2019 level. I think it's about below 10% off from the 2019 level in terms of revenue. And if you look at U.K. pubs, there are really 2 categories. One category is in residential districts. And they are very close to people's daily life. And some of our U.K. friends, you asked them not to visit the pub for more than 3 days. They actually personally feel very uncomfortable. So that is a very steady recurring income business in the residential areas. Now there's also another section of this operation, which operate in London, mainly for tourists. Now that sector is still affected because fewer tourists arriving in London. Now the majority of our business is in the first one. So I think that they're going to be fine. And in total, what we're trying to do is how much we can catch up on the losses that were booked before, but they're improving very quickly. Actually, the improvement is better than I thought that people's habit of visiting pub is very entrenched in the British culture. And actually not only on pubs, but on all our businesses. What -- the last 1.5 years or almost 2 years now, what this has taught us is that if you have quality assets, and we've just gone through a major, major stress test. I think we come out of this stress test in fine colors, very fine colors.

Okay, good. Next question on infrastructure-related earnings. The infrastructure division has -- contribution has gone up a lot. Are there plans or opportunities to do more?

Recurring income is something that we do well because they complement the cyclical nature of property business. So the way I look at some of the -- I don't like to use the word utility as much as recurring income businesses. For example, the business we have in Ontario, where the -- if not the biggest -- well, we are the biggest. I think the biggest and the largest market share in the water heaters and air conditioners as in all of Ontario. They're not very different from our property portfolio in terms of character of income, very steady. It's people slightly good. And they go up faster than -- the income goes up faster than inflation. And I think in this type of recurring income businesses will continue exactly the way as we buy more rental property, the same thing. We just look at the IRR. And in this case, some of the recurring income overseas are slightly better than probably rental in Hong Kong, and that's why we're interested. It's the numbers.

A slightly related question. Any particular country of interest in your acquisition plan considering your gearing right now?

We're privileged that we can look at many deals. I wouldn't say there are any countries that we particularly target. I think we are already -- we've operated in so many countries for many years. And to us, they're not a foreign market, they are our domestic market. So Mainland China, obviously, Hong Kong, Singapore, Europe, U.K., Canada, we consider them as our domestic market that we are very comfortable and working there all the time. Generally, personally, I prefer to send our colleagues to places that is safe and healthy. And when the rule of law is clear, and we don't have to worry about personal security for our colleagues. So unlikely that I'll be going to 1 or 2 countries that may not be that safe, excuse me for not naming names.

Well, I think we have time for 2 more questions, and thank you for your participation. The rest of the questions we may not be run. So here we will deal with them in our usual IR sessions. The second last question is -- has to do with the aircraft leasing business, given the lower EBIT results in the first half. Do you have plans to buy more aircraft?

We have -- I think we have just negotiated to buy 2 more in the last couple of weeks. So that business continues. But the aircraft business is not only tapped for rental. We sometimes buy, sometimes we sell 1 or 2 aircraft. So it's a continued trading exercise also. We are starting to develop in-house expertise in the training of aircraft. But I mean our aircraft business has just gone through what I call the major stress test in the last 1 to 2 years. Now earnings are down. Cash flow is down. But on the other hand, if you take a step back and say that if we did do an independent evaluation or valuation of our total portfolio on aircraft, what would the value show? It would have shown that the value today of our portfolio would be more than our book costs or more than our original cost, I should say, more than our original cost. And so it's still a good business because the expected cap rate for steady income from aircraft and for other businesses have dropped quite a bit. So the multiple has gone up. So I think that business is going to be fine.

The last question is a pretty general one. It's like a crystal ball type of question. What are your views...

Sorry, sorry Gerald. Maybe -- sorry, if I may, if I -- in other ways to look at the Pub portfolio, we can also say like this too, that a pub on 1 hand is an operation of drinks, wine and food business. It's also -- don't forget we are a property company. It's a property business. We've got thousands of -- 2,000s of property and land everywhere. I think the property value in U.K. has gone up rather than down post pandemic. So that's why I keep going back to one thing if I may share with our analysts and our investors is that it's not looking at only at the return of the asset. We have for the quality of the return in these assets and the speed of recovery. So that's what we've been spending a lot of time working on. Sorry, Gerald for the interruption. Your last question?

Your last question is your overall view on the second half of 2021.

I thought -- I had my company secretary sitting next to me. I thought it was a crime to predict profit. But bearing unforeseeable circumstances in pandemics or delta or alpha whatever. It's looking okay, it's looking quite nicely. Now the exact timing of booking on property is now getting quite erected, not because of the market. It's getting the OP at that particular point before Christmas or before mid-year. And some of these can be early or later based on very, very arbitrary reasons, like the particular inspector is busy and didn't come for that week and came next week or water connection burst or something like that or a minor fire. So the exact timing when you compare completion timing on projects is quite arbitrary, and it's not because of operation quality or not, it's just really construction site regular issues. And some of them is just administration, not even construction.

With that, I would like to thank everyone for participating, and we would draw the -- our presentation and Q&A session to a close. Thank you to our management for participating, and thank you for the audience. We will see you again soon.

I hope -- I strongly hope that next meeting will be in person and everybody is in good health, and the business will be better. Because if I can see all the analysts in person, that means hotel must be good.

Take care everyone. See you soon.

Thank you.

Bye-bye.