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

Hello, everyone. Welcome to the CK Asset Holdings Limited 2021 Annual Results. My name is Gerald. As usual, I'm joined by Mr. Simon Man, our Chief Accountant and fellow ExCo members. Shortly, Mr. Victor Li, our Chairman; and Mr. Edmond Ip, our Deputy MD, will also join us for the Q&A session. So let's get right to it. 2021 full year revenue came to $83.24 billion, up 17%. Net profit to shareholders came to $21.24, up 30%. In terms of earnings per share, because of the share buyback activity during 2021, it went up by 31% to $5.77. We're happy to declare a final dividend of $1.79, making our full year dividend to $2.20, up 22.2%. This is above our guaranteed dividend of $2.08 per share. Now some of you may say, shouldn't it be $2.07? So I would point you to note 2 of this presentation. Based on last year's transaction, we actually -- our guaranteed amount was the total dividend paid in 2020 plus the higher of $910 million or the actual cash distribution received by the acquired companies. And we actually received a cash distribution of $940 million. So the guaranteed dividend became $2.08 per share. But nevertheless, in any case, we declared a dividend of -- total dividend -- final dividend or full year dividend of $2.2. Our recurring income is now -- in terms of profit contribution is now 42% of our principal activities, which should act as a good buffer to mitigate against the volatilities that we have seen and are still seeing from the COVID outbreak and also the geopolitical uncertainties. In terms of geographies, 38% of our contribution comes from Hong Kong, 37% from The Mainland and 25% from overseas. Turning to divisional performances. Property sales. Revenue was $37.8 billion, profit contribution, $18.15 million not lot difference from 2020 and still recording a very healthy and solid contribution margin of 48%. Major contribution from Laguna Verona in Dongguan of $5.8 billion; Seaside Sonata, $2.75 billion; $2.7 billion from Upper West Shanghai, $1.57 billion from 21 Borret Road; Sea to Sky gave us $1.4 billion as well. Looking at Hong Kong, a big increase from 2020, almost $7 billion of profit contribution at an extremely good contribution margin of 44.5%. The Mainland gave us $11.1 billion and also a very solid 51.3% contribution margin. Very little activity from overseas in 2021 as a result, only $10 million. We still have $29.5 billion of contracted sales not yet recognized, about $25.2 billion scheduled for completion or recognition booking in 2022, the majority of which would be as expected from Hong Kong, as well as Mainland from projects such as Sea to Sky, Borret Road, [el futuro], City Link and Noble Hills. In terms of calendar year, 2021 calendar year contracted sales was about $31 billion altogether. Turning to property rental. $6.7 billion of revenue and $5.6 billion of profit contribution, and still a very healthy $84.6 billion (sic) [84.6%] contribution margin despite the uncertainties and the pressure brought on by the pandemic. Major contribution from Cheung Kong Center, $1.35 billion; Whampoa Garden, $713 million; Hutchison Logistics Center, $604 million, and we still have 17.6 million square feet of investment properties. We recorded an increase in fair value from investment property of $1.5 billion, mostly coming from 2 under development projects in Hong Kong, [indiscernible], as well as the redevelopment of Hutchison House. Also a solid increase from Hutchison Logistics Center as well. Turning to hotel and serviced suite operation, $2.7 billion of revenue and almost $400 million of profit contribution, a decent improvement but still impacted by the pandemic, especially for our daily hotel division. Now if you look at the $399 million of contribution, it's mostly from Hong Kong as expected. Out of the 15,000 rooms and serviced suites for the daily hotel, they recorded a 37% average hotel room occupancy rate and saved by the serviced suites recording a 93% average occupancy rate, which is a slight improvement from 2020. Property management and project management continue to be extremely steady, $355 million of contribution and margin of 40%. Turning to aircraft leasing. As you will see from our financial statement, is now -- this division is now recorded as a discontinued operation. But looking at it, it did give us a profit contribution of $887 million and a decent margin of 35%. But nevertheless, a drop of 21% from 2020. The disposal of this investment is expected to be completed sometime in Q2 before the first half, subject to the fulfillment of certain terms and conditions. People ask, what are these conditions. Normally these are antitrust filings that we have to do in 3 different countries, as well as some pre-closing adjustments calculations. If you're still interested, and there you see a drop in the Asian contribution, mainly from different leases, mainly leases expiring or extending. As an aircraft gets older, when you extend the lease and the rental contribution or the new lease contract, that would be at a much lower rate. Pub operation. Greene King, an integrated private retailer with around 2,700 pubs. So we have our managed pub divisions which we run the business out entirely ourselves. We have our pub partners division, essentially a franchise or tenanted division, and also our 2 breweries, 1 in Dunbar, Scotland, the other in Bury St Edmunds in the U.K. We not only have a good mix of pubs in the Central London area, if you can see from the picture, especially the upper left corner is one of our newer newly renovated suburbian pubs in other residential locations in and around the greater U.K., different areas. First half, we -- the country was under a strict lockdown situation. Second half, I believe, July 19, various restrictions began to be lifted. So a much more normalized situation return as a result the operating conditions in the second half was much improved, which enabled us to make back some of the losses in the -- incurred in the first half. And it was -- on a full year basis, the EBIT loss was just over HKD 55 million, HKD 55 million, which is a big improvement from 2020. Now this number excludes the goodwill impairment of around $2 billion, which we made at year-end. Infrastructure and utility asset operation. If you recall, in May 2021, we acquired an interest and also additional interest for our 4 infrastructure companies from the Li Ka Shing Foundation. The new interest was UK Power Networks and the additional interest was Northumbrian Water, Wales & West and AVR waste management. As a result, we now have 7 different JVs in this category. CK William DUET is a energy utility assets operator in -- mainly in Australia, also in the U.S., Canada and the United Kingdom. The Reliance Home Comfort, CKP Canada is a boiler HVAC aircon leasing company in Canada, and Sarvana ista is a metering submetering service company based in Germany and have businesses across Europe. UK Power Networks, a power distributor in the U.K.; Northumbrian Water, water company in the U.K. and a waste management in the Netherlands, as well as the gas distributor in Wales and the Southwest of England. And on the right-hand side, you see -- you can see there our interest in the respective joint ventures. As a result of the acquisition, our contribution in 2021 jumped 33% from 2020 to almost $7 billion. We didn't have a full year contribution from the 4 assets, but have they been contributing for on an annualized basis, that number will be roughly $7.5 billion of EBIT. The for 3 -- the others, the $405 million that you see, and grouped under others are actually Park'N Fly, U.K. Rails and Australian Gas Network. I will turn the rest of the presentation to Simon. Simon, please.

Thanks, Gerald. The gross interest in the listed real estate investment trust remain more or less the same in the year-end days. We hold 32.7% of the Hui Xian REIT, we post approximately 11.8 million square feet of hotels and serviced suites, office and retail properties on The Mainland. Hui Xian REIT is an associate, and we share its profit in the amount of $288 million for the year 2021. We hold 26.7% of the Fortune REIT, which hosts approximately a total of 3 million square feet of retail properties in Hong Kong, and the group hold 18.3% interest in Prosperity REIT, which hosts approximately 1.3 million square feet of office, retail and industrial properties in Hong Kong. During the year, total cash distribution received from Fortune REIT and Properity REIT amounted to $310 million, which has been recognized as investment income. Turning to next page. For maturity profile, the group had a net debt at the [year-end date] of HKD 96.5 billion, and the maturity profile was spread over a period of 15 years, with $28.8 billion repayable within 1 year, $52.1 billion within 2 to 5 years and $15.6 billion beyond 5 years. If we deduct the cash on hand, $63.4 billion, it gave us a net debt of HKD 33.1 billion. For gearing ratio is 8.9% if we take the net debt to net debt to shareholders' fund, and the year-end ratio is 7.9%. If we take the net debt to net total capital. For our current corporate credit rating is A2 stable for Moody's and A stable from Standard & Poor's. Landbank summary. We have a total landbank of 125 million square feet, 73 million of which is under development and 17 million square feet is currently held for rental and 9 million square feet is under hotel and serviced suite rate operation and 26 million square feet is under pub operation. The geographic location is 25 million square feet of the 125 million square feet will be in Hong Kong and 65 million square feet on The Mainland, and 33 million square feet, obviously, mainly in Singapore and in the United Kingdom. Major property acquisition in Hong Kong. In February 2021, the group was awarded a government tender for a site at Kai Tak area 4E, Site 2, which has approximately 648,000 square feet of developable gross floor area. In May 2021, the group reached a land exchange agreement with the government in respect of a site at [Kam Tin], which has approximately 137,000 square feet of developable gross floor area. In August 2021, the group was awarded a government tender for a site at Lot No. 1677 in in D.D. 115, Yuen Long, which -- and the site has approximately 78,000 square feet of developable gross floor area. In March this year, 2022, the group was awarded a tender by the Urban Renewable Authority for the combined development of 4 projects at To Kwa Wan, which will give us approximately 526,000 square feet of developable gross floor area. And I'll pass it back to Gerald to talk about ESG.

Thanks, Simon. Turning to the next page. You will see that the climate change is an issue for all of us. So the group is committed to reduction and certain targets have been set, such as electricity, water, rate management, waste and carbon emission reduction. To the extent that we can, a series -- a lot of our developments are now qualified as green buildings, and we will continue to hopefully do better in this particular area as well. And in terms of financing, we're also participating in green financing. And this year, we did 2 of them and totaled HKD 5.5 billion. This last page I would suggest not to go into detail. And you can -- at your leisure, feel free to look at the highlights of the various ESG initiatives by different business units. Our Chairman, Mr. Victor Li and our Deputy MD, Mr. Edmund Ip, have joined us. So that's -- I think it's a good time to turn to our Q&A session.

Now as in the past, thank you for all your questions. Please continue to send them in. I will -- for similar questions, I will try to consolidate them and ask them all in one go. If there are questions that I do not have an answer, then I -- or maybe not quite relevant for this particular occasion, feel free to contact us via e-mail at a later point.

Gerald, I'm just testing. You can hear me properly, right?

Yes. Now questions have been coming in steadily. The first question, I'll ask the question and our Chairman, Mr. Li, will direct traffic, so to speak, and see who is the appropriate person to answer such questions. The first one is about Broadgate. Why did you decide to sell Broadgate and how much of a return are you generating? Does it mean you are barrish on U.K. property investments? And what will your gearing be after completion?

First, buying and selling property is our daily business. So I don't think we have to read too much as why we're selling or why we're buying. Tomorrow, we may be buying another property if we see good value. So this is purely an exercise to recognize a gain and allow us to look at new deals. And I think the return is a little bit complicated because there's a part of the profit that it goes with the derivatives from the hedging profits. So in total, I think we made a profit of approximately $4.8 billion, which is a 45% return on our total investment. So Simon, correct me if I'm wrong. But before December last year, our net debt to net capital is about [ $7.9 billion ], so the sale would reduce about 2% to 3% reduction in the total gearing, which would bring us to about 5%, 5% roughly?

Yes, that's right.

Yes, so about 5% during. So I hope I answered that question.

Yes. The second question, when will the sale of your aircraft leasing business be closed or completed? Can you remind us again on your rationale behind the sale and the profit to be booked?

Maybe I'll start with general remark. I think Gerald is the best person to answer that question. But the general remark is that the -- we went through a tough time during COVID on aircraft business. And at the end of the day, we still can achieve almost double-digit return on our investment over the 7-year period. So we thought it's a good time to book it to receive some money and receive some profit. Maybe Gerald, you can give some more concrete numbers.

Yes, Mr. Li. Now we expect the transaction to close sometime in Q2. So in the next 1 or 2 months, hopefully. And if you look at the impact by the pandemic on the industry, there has been a -- as we stated in our announcement, there has been a structural or some would say paradigm shift in the sector. The risk and return dynamics have become very volatile and much more unpredictable. And the industry has gone through a lot of different consolidation, M&A activities and people are trying to grow bigger to mitigate the volatility, as well as the lower return being forecasted for the near to medium term. So like Mr. Li said, we thought it would be a good time because we had a decent portfolio, narrow-body focus and there was a strong and willing buyer. So it was a good time for us to exit the sector, recycle the capital and focus strategically on other things. And per the announcement, the profit is in the region of USD 170 million, subject to closing adjustments. You always have these precompletion adjustments depending from signing to closing the amount of rent you receive, the amount of maintenance expenses you incur. So there are some adjustments. And like Mr. Li said, the IRR for 7 years is roughly double digit. Question #3, your announcement says that there is a $29.5 billion contracted sales not yet recognized. And what -- which projects are expected to be booked in 2022? I think I covered some of that, but we can expand more. I think a lot of the deals that you hear in the media will definitely -- are not booked in 2021, obviously. And quite a number of development projects, they happen to be all constructed or completed in some time in 2022. January, so naturally booked in 2022. Maybe Edmond, you have the numbers in more concrete numbers?

Yes. It's about $25.2 billion, as Gerald just said. The property sales we've transacted, but not yet booked and will be booked in Q2 and beyond. The major contributors are Sea to Sky in [Tseung Kwan O], Borrett Road, of course, and then [indiscernible] as well as CityLink in Shanghai. On top of that, obviously, the Broadgate property in London, a disposal gain of GBP 108 million will also be booked in Q2 instead of what we said last year. The other one is the aircraft leasing business, again, it was going to be USD 170 million to be booked this year as well. Those are the numbers for the transacted deals but having been booked into profit.

The next question, how does the recent Russian-Ukraine conflict affect your business?

I think, I mean, the contract is at -- but in terms of CKA business, I think the direct impact, it's rather small. Let me see. I think Greene King has some beer exports to Russia, but that's tiny numbers. And Gerald, maybe you are better to answer the 2 aircraft. I think we leased to Russian airlines. But that's, again, small numbers.

Yes. There are 2 aircraft that operate in Russia, those -- so there's some impact, and we are managing the best we can. But the situation of whatever happens to these 2 aircraft is not going to impact the completion of the rest of the transaction, so which is much more important.

Yes. We're talking tiny numbers here.

Yes. And next question, there have been news reports on the potential sale of UKPN. Could you please give us an update?

I cannot possibly comment from media rumors. I think the fact that there is an offer does not mean that we are thinking of selling or content leaving a sale. All I can say is that under the CK Group, we have a lot of quality assets. And the value sometimes are not yet fully appreciated by some shareholders. And I think outside EPO and the market, in general, recognize that these are very valuable and quality assets. And I think these type of things will happen from time to time, that people will try to offer certain of our businesses.

Next question, what's your view on the property market right now? Do you plan to buy more land?

Let me see. I think Hong Kong has a long-term demand for homes. And I think our sales will continue to be quite strong. But -- we never have a mentality of -- in any deals or any purchase that we have a must-win mentality. I don't think that's healthy for returns. We look at projects that has healthy return and that it is our quality. So whenever the opportunities manifest themselves, we certainly have the muscle to purchase them. So in 2021, we have invested over $11 billion in 3 new projects in terms of land purchase. And we've just made another purchase, another plot in [To Kwa Wan] for about almost $6 billion. So all I can say that -- how should I put it? We have the resources, we have the ability but we will never go crazy. Financial discipline, that's our motto.

Next question. Overall Hong Kong office vacancy is still high. Do you expect a further drop in property rental contribution in 2022? When will CKC Phase 2 commence pre-letting?

I think Hong Kong office vacancy, obviously, it's -- vacancy will be higher in the -- during COVID times. But there's 1 big difference between central and other districts because Central office space is not only about space. Being in Central is telling the whole world who you are. So whenever Central rents are slightly more affordable companies who aspire to grow bigger or tell the world that they are here to stay and be strong, would like to locate in Central. So Central is a lot more than just convenience. It's prestige, it's telling the world who you are. So I'm a bit more optimistic about central. There's only 1 Central.

Next question, considering the COVID situation in Hong Kong, do you have plans to offer rent concessions to tenants?

This question we've answered last year also. I mean, remember, our property are full range. So we generally analyze it on a case-by-case basis. Not everybody needs our assistance. Some businesses actually do better during COVID times. Of course, some business to work. And so we cannot have a broadbrush approach. Once you do a broadbrush approach, then it's a bit too bureaucratic. We usually, we value on a case-by-case basis. And in the last COVID crisis in Hong Kong, I think, we've handled it quite well. A lot of -- in addition, a lot of our malls are in what I call basic necessities. So they are less affected by the COVID measures.

Next question. There have been news reports of CKA obtaining approved approval for converting hotels into other users. What are your redevelopment plans for these sites?

I don't think I can give an update immediately, but we do review other options for the -- for various of our properties from time to time. For example, during this pandemic, we converted a lot of our short-term stay rooms to longer-term stays, be it for staycations or for people to enjoy the hotel facilities for a few months. As a result, even during the worst of COVID our hotel division is always cash flow positive. And this year, I think this year, meaning 2021, I think our profit contribution from the Hotel and Suites division has gone up 53% compared to 2020. So I think we do review our assets and the utility from time to time.

What is your rationale for making a goodwill impairment for Greene King? What is your outlook for the pub business?

Can I answer that question in 2 separate angles? One, CK has always been conservative in terms of our carrying book value. And this is not in particular to Greene King, this is on everything. So I think we're quite well-known in the industry for carrying conservative book value for all our rental properties, for all our long-term investments. So making a revaluation gain on revaluing our property is not what we normally look forward to unless we have to. So we tend to be rather conservative on all of our carrying book value as a general rule. So the rationale for making that goodwill impairment is basically something that's in line with our tradition. So that is part 1 to the question. If I may go on to part 2, actually, I think we're getting a bit more optimistic about the pub business, especially during the second half of 2021 because as soon as the COVID measures are slightly more relaxed. The pubs are actually quite full. And businesses are coming back. And maybe Gerald can say this more better, but I think recently, they are almost, in terms of revenue, back to pre-COVID levels, is that correct?

Yes. We are back to pre-COVID, more or less 2019 pre-COVID revenue. Obviously, inflation is an issue. Supply logistics, a bit of an issue. So we're doing what we can, either raising prices a bit and try to keep the margin up.

But the basic thing is that pub is more than F&B. It is U.K. culture. And as soon as COVID measure is up, a lot of people, a lot of customers quite eager to go back to their local pubs. So business has returned very quickly. And I think actions is the best demonstrator of how we see that business during 2021. We acquired an additional 40 pubs during the year because we can buy them at good value. So we're expanding.

Next question is you have announced the disposal of 5 Broadgate, the aircraft leasing business and mulling over a possible sale of UKPN, which with so much cash on hand, what are your acquisition plans? Any countries of interest?

First, I have to correct that question first. Don't say we are mulling over a sale. We have received an offer, and this is our duty to look at an offer. I don't want to go as far as mulling over a sale of UKPN. But in terms of countries of interest, we -- as a general rule in this whole CK Group, we never looked at a country first and then we look at the investment. We look at the deal first. So I don't think I have a particular budget for 1 country versus the other. Our analysis is very, very clear. It is the numbers on return on equity and the quality of the projects or businesses. And we like to work in countries where the ecosystem is clear. And so the whole world because we've been operating in so many countries for years. So in our vocabulary, the there are little places we call really too foreign the market. A lot of countries we have colleagues there for over 30 years. So we consider them our domestic market. Of course, Hong Kong and The Mainland is something that's close to our heart. So it is easier because we're close to it, but we don't restrict ourselves to just 1 market.

The next question is, could you share with us your outlook on CKA in 2022? A very high-level general question.

Okay. Sorry, can I jump back to your earlier question about which country. I think the more important thing for shareholders is that the return. For example, earlier in our press conference, people asking about whether selling U.K. or selling this country or selling that country. To the shareholders, money from 5 Broadgate is the same as money from a sale of property, be it in New York or Shanghai. And so as long as we can provide the return, I don't think shareholders make a big difference as to where we make that money as long as we make the money. So I think, again, I go back to quality and return. Sorry, I go back to that question, the outlook in CK in 2022. I'm not going to tell the whole world as to our strategy. I think that that's more for the Board and then for public consumption. But all I can say is that we have muscle. We have knowledge, we see opportunities and we're going to be busy.

Next question. Any plans for further share buyback?

I can't go on detail on share buybacks, but we have done deals on the on-market buyback. And we'll consider as one of the capital management strategy to enhance shareholder value. We'll be opportunistic.

I think the next one should be our final question for the period, as I understand, Mr. Li will have to go to Hutchison for a Q&A session with the analysts as well. Your final dividend was above your guaranteed amount, which is positive, what is your dividend policy going forward?

I think it should be roughly in line with our profit outlook. This year, I think the numbers are quite nice, and this year 2022. So you noticed there are a lot of 2s in our total dividend this year. And I mean, just a nice round number. We have increased our dividend this year by 22.2%. And our total dividend is $2.20 and announced in the year 2022. So lots of 2s. In Chinese, that's very good numbers.

So with that, I'd like to thank our management team for participating, and thank you online for participating. And this concludes our analyst presentation and Q&A session. We wish you good health, and we'll see you everyone soon again.

I look forward to having an analyst meeting when I don't have to stare at a screen until my eyes will dim. I'll see some of you again in the CKHH meetings. So I'm going to leave now, okay? Thank you.