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

Good afternoon. Welcome to the CK Asset Holdings Limited 2022 Interim Results Presentation. My name is Gerald. As usual, we have our Chairman, Mr. Victor Li; Mr. Edmond Ip; and Simon Man joining me on the panel. I'll go through quickly our result presentations before opening the floor for questions. Revenue in the first half 2022 reached $47.6 billion, profit attributable to shareholders, almost $13 billion, up 55%. Earnings per share $3.55, up 58% as a result of some of our share buyback activities. Dividend per share $0.43, up 5%, net book value up 1.3% to $103.21. Looking at our principal activities, 50% of our profit contribution can be considered as recurrent in nature, up from 41% from the same period last year. 50% of our contribution is from Hong Kong in the first half, 17% from the Mainland and 33% from the United Kingdom and others. Looking at divisional performances, property sales $20.4 billion in revenue, profit contribution $8 billion, up 2% from last year and a healthy margin of almost 40%. Just a note that in the same period last year, we had 3 projects from the Mainland with the extraordinary margins of over 60% last year. Hence, you can see from the chart that last year contribution margin was almost 54%. For this year, the Mainland margins have returned to normal, but we are still recording a very, very encouraging 40% margin overall. Major contribution from Sea to Sky almost HKD 4 billion -- over HKD 4 billion, City Link Shanghai $1.5 billion, and 21 Borrett Road $1.4 billion. Healthy margins across different markets, Hong Kong 42.5%, Mainland 34.5% and overseas 32.4%. We booked a total of over 2,800 units in the first half of this year, including carve-outs. And that it's just residential units, it's about 1,500 of them. We still have $13 billion of contracted sales, but not yet recognized. About $5.6 billion will be recognized in the second half of 2022. Just for your information, first half calendar year contracted sales came to almost HKD 6 billion. Property rental, overall margins continued to be very healthy at 81%. Profit contribution dropped 16%. If you exclude the disposal effects of 5 Broadgate and exclude 181, the profit contribution reduction percentage would have been about 9%. We recorded a surplus on disposal of $738 million from the sale of 5 Broadgate, which was booked in March 2022. Great contribution from CKC, $653 million, $327 million from Whampoa Garden and $305 million from Hutchison Logistics Center. Investment property square footage amounts to almost 17 million square feet. We recorded a fair value decrease of close to $700 million. Majority -- most of it came from 181 Heritage. Hotels and service suite division. Happy to report a improved contribution from -- resulted from higher hotel occupancy to $315 million with a contribution margin of 20.5%. Mainland contribution still affected substantially by the COVID restrictions on the Mainland. Average hotel room occupancy went up from 37% at the end -- last year to 65% in the first half. Average service suites occupancy maintained a very high 88%. Property and project management steady as usual, $182 million profit contribution with a margin of 41.3%. Pub operation, post the lifting of restrictions, the pub sector or division started its recovery. We're still affected by the inflationary pressure and cost pressure. But the division recorded a $866 million of profit contribution on the back of over $10 billion of revenue. And hopefully, the recovery will continue in the second half, and the performance will continue to improve. Infrastructure and utility asset operation. The 7 JVs that we have, as you can see here, from DUET in Australia, Reliance in Canada and the second one, ista headquartered in Germany and the third one and the 4 additional infrastructure businesses that we purchased or added in terms of share percentage in May 2021 of this year. Hence, the profit contribution went up from $3.3 billion last year to $4.148 billion this year, with a very healthy contribution margin of over 35%. Over to Simon for the remaining pages. Simon, please.

Thanks, Gerald. The group's interest in the listed real estate investment trusts remain more or less the same. As of 30th of June 2022, it's 33.1% in the Hui Xian REIT, which invests and managed a total of 11.8 million square feet of hotels, service suites, office and retail properties on the Mainland; 26.6% in the Fortune REIT, which invests and managed a total of 3 million square feet of retail properties in Hong Kong; 18.4% in the Prosperity REIT, which invests and managed a total of 1.3 million square feet of office, retail and industrial properties in Hong Kong. Hui Xian REIT is an associate, and we share its net rental profit of $130 million for the period and received distribution of $60 million during the period. Cash distribution received from Fortune REIT and Prosperity REIT in a total amount of $128 million were recognized as investment income during the period. Turn the page. In April 2022, the group completed the disposal of its investment in aircraft asset and discontinued the operation of aircraft leasing business. A post-tax profit of about HKD 2 billion was recognized, which include a gain of HKD 1.4 billion on the disposal of the aircraft assets. As of 30 of June, 2022, the group had a total bank and other loans of $45.9 billion, a decrease of $50.6 billion when compared with bank and other borrowings at the end of last year, of which $5.2 billion will be repayable within 1 year, $28 billion within 2 to 5 years and $12.7 billion after 5 years. Taking into account the bank balance and deposit of $59.8 billion on hand, the group had a net cash of HKD 13.9 billion. The group's current corporate credit rating by Moody's is A2 stable and by S&P A2 stable. Looking at the landbank, currently, the group had a total landbank of 128 million square feet. 76 million square feet is under development, 17 million square feet is held for rental, 9 million square feet is under hotel and service suite operation and 26 million square feet is held for pub operation. By geographical location, 26 million square feet is in Hong Kong, 17 million square feet on the Mainland and 32 million square feet oversea in Singapore and the U.K. Property acquisition during the period in Hong Kong, in March 2022, the group was awarded a tender by the Urban Renewal Authority for the combined development of projects at Hung Fook Street, Kai Ming Street and Wing Kwong Street and to Kwa Wan. A total developable gross floor area of approximately 526,000 square feet would be built on the site. Pass it back to you, Gerald.

Thanks very much, Simon. So with that, we will open the floor for questions. I will consolidate similar questions. And I encourage you to continue to send your questions online to -- through our NOVA system. So I will go through each of the questions. And Mr. Li will respond or delegate to one of us to respond. The first question, there have been talks recently about revaluation issues, problems pertaining to commercial properties. Is CKA facing such problems?

First, CK Asset does not have any problem whatsoever regarding the downward revaluation of properties. We have been well-known for being ultra-conservative in financial management, and this includes our revaluation policy. In fact, sometimes people complaining to us for being too conservative. We noticed that the valuation of our properties substantially lower than that of others in similar locations. But looking back, it looks like our ultra conservative policy we have adopted over many, many years is now serving us well. So we have no -- not much pressure on any downward revaluation at all.

The next question, what is your view on the residential property market now? Do you have plans to buy more land or assets like the Evergrande building?

I'm not going to comment on particular property. But the first question is a tough question. I mean there is a strong demand for residential properties in Hong Kong. But at the same time, the government is looking at implementing measures to increase supply and interest rates are going up. And I think [ time ] will definitely go up. As expressed many times over the years, my advice to consumer is in Chinese [Foreign Language]. And sure one's -- I'll translate. Ensure one's financial situation is within one's means when getting into the market. On the second question, I don't think I can answer that directly, but we have always had a proactive land acquisition strategy. But as you know, our acquisition, we never have a must-win mentality [Foreign Language]. If a piece of land clears our return hurdle, then we're ready to move. We have now plenty of resources to do both property and sometimes non-property deals. But I'm sorry, I'm not going to comment on specific property.

Thank you, Mr. Li. The next question. With such a diversified business mix, do you still consider CKA a property company? Or do you see yourself more as a conglomerate?

Our name is CK Asset. And property is one of our most important assets. I think that's my answer. You look at even our pub business, can we consider the property business as we not only own the business, we own the land and the property and the buildings. So another way to look at it is in terms of identity, we consider ourselves very much a return or annuity-focused company. And we're agnostic when it comes to sectors, markets or geography. Incidentally, diversification of industries and geography, factors which strengthened our resilience. I think that is starting to become more evident in our income profile and in the last 6 months' results, while Hong Kong probably may be starting to be a bit stressed, the income from our international division give us a boost and help us strengthen our war chest on the next acquisition. So I think the answer is we are CK Asset. So we focus on the running of asset and property will continue to be an important one, but not property as in the most simplistic format.

Thank you, Mr. Li. The next question. What were the drivers of the revaluation deficit recorded in your results?

The current revaluation deficit is a tiny, tiny component within our portfolio. I wouldn't even focus on this. But look at the amount. This tiny amount highlights our super conservative revaluation approach that we have adopted over many, many years. That's why [Foreign Language], I don't know how to translate this.

I guess the translation will be we don't have to give it back out -- give it back.

Yes.

Next question. The CK group has announced the sale of 25% of Northumbrian Water recently. The price is an attractive one for your group. Will you be divesting more assets coming up?

As I mentioned before, the CK group has a number of assets which are considered real treasures, in Chinese [Foreign Language]. We -- currently, we carry them at relatively conservative value. That's why whenever a transaction takes place relating to these assets, the potential real market value of these assets become more prominent. But as always, we would like to continue our conservative valuation of our asset on our books.

The next question. Your interim results are very impressive. What is your projection for the whole year?

Now this is going to get me into trouble. I cannot make any profit forecast, if I -- there's -- but I would caution anyone trying to extrapolate half year results for the whole year. But sorry, I cannot make projections. But we are optimistic about our future. Let's put it this way.

The next question is on the office market. Overall, Hong Kong office vacancy has remained high. Do you expect further drop in property rental contribution in the second half of 2022? When will CKC 2 commence pre-letting?

I have a temptation, hold on 1 second. This is a brand new photo. This is CKC 2 rendering.

Come back to me.

Our rental contribution has dropped in the first half because we sold 5 Broadgate in London. So the portfolio is different. We took our profits. But in terms of Hong Kong office rentals, rental rate will continue to be more, what I call, tenant-friendly. But in terms of vacancy in central, I'm cautiously optimistic because when rental rates drop a bit in Kong Center, history tells me that tenants from other areas will relocate back to CBD. This is a strength of central. Completion of CKC Phase 2 is expected to be in late 2023. So pre-letting most likely will commence in later part of this year. And so that you know, the architectural expression of CKC 2 will look like a twin of CKC 1.

And next question is on the pub business. What is your outlook for the pub division?

Now, Gerald, you have to tell me when you want to add more to the pub business. But the way I see it is the operation of the pub division returned to normal following the lift of COVID restrictions. Sales are almost back to pre-COVID level, which was driven by sort of increasing in prices and also volume. But volume is still about 10% below pre-COVID. But we expect the pace of recovery to continue. But inflation continues to be a concern on cost. But I'm quite happy to report is that the COVID just gave the pub operation a major, major stress-test that it has never seen in its history. We have seen that the pub culture is a integral part of the British way of life. And they -- this sector has demonstrated its resilience to economic downturns and COVID and whatever. And people's habit of going back to pub is very, very strong. And I think the team will continue to deliver the best possible returns. Also, don't forget there are property opportunities that we are enjoying right now. So some of the pubs we sold as redevelopment opportunities, potential joint ventures with the property group. And at the same time, we are continuing to acquire some pubs when we see opportunities around. So there's movement on purchase and sale assets within the pub division. But normally, they are small. So it's not in -- each of them is small. That's why it's not in the news.

The next question is on our cash position. CKA is in a net cash position. Could you share with us your outlook on CKA in the second half and your capital deployment plans?

Well, there are uncertainties on the macro level, be it economic or geopolitical. We are still optimistic that the quality of our assets and our financial discipline, I think the second one is very important to me, will allow us to perform well. We have now a very good war chest, and we will continue to be on the outlook for new deals.

Next question. Are you concerned with rising interest rates and its impact on your interest expenses?

Interest rates now have very little impact on us. We are practically debt-free and with a net cash position of $13.9 billion. So maybe an extra points will give us additional income.

The next question is on the share buyback. Any plans for further share buyback?

How can I answer this diplomatically? Share buyback is one of our capital management strategies to enhance shareholder value the pace of which, of course, depends on market conditions.

I think the next one should be the last question based on what I can see. Which absolute -- your DPS is higher than interim 2021, but the increase is below your profit growth. What should investors expect from CKA as a dividend policy going forward?

Let me give you the simple answer and then maybe I conclude from another angle and see if I can answer this question better. The simple answer is this is only the interim dividend now. Don't read it as an indication of particular -- any long-term strategy. But if you go back to my earlier questions, I keep emphasizing on the fact that we are debt free. We are for good war chest. We have no downward revaluation pressure at all. And when the right opportunities arise, our aim is to deliver value to shareholders on a per share basis. And last -- you noticed that in the last 6 months, the earnings growth and the earnings per share growth are slightly different because of the share buyback that has already happened. So we'll be looking out for deals. And I think the -- we may be at the right time at the right place. Gerald, I think I've answered all questions. Can I go to the Hutch one?

Yes. I think with that, thank you, Mr. Li; thank you, Mr. Edmond Ip; and Simon Man and I would -- thank you all for joining. We would end the analyst and fund manager meeting now, and we'll see you soon.

So Gerald, I'll log out and log back in, right?

Yes.

Okay. Thank you.

Thank you all.

Thank you, everybody. Thank you for your support.

Thank you.