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

Welcome to CK Asset Holdings Interim Results for 2024. My name is Gerald Ma. I'm going to go through the results presentation, which will take about 15 minutes, hopefully less than that, and then we will open the floor for questions with our management team afterwards. On my right, our Chairman, Mr. Victor Li; and followed by Mr. Edmond IP, our Deputy Chairman; and our Executive Committee member, Mr. Simon Man. We are all with you today and happy to be showing you our results. Let's go through the presentation, [ Charlie. ] First half 2024, revenue, HKD 34.7 billion, down 4.9%. Profit before IP revaluation HKD 6.7 billion or HKD 1.91, down 9.1% on a per share basis, IP revaluation HKD 1.8 billion, giving us a profit to shareholders, HKD 8.6 billion or HKD 2.44, down 15.3% on a per share basis. We're happy to declare an interim dividend of HKD 0.39, down 9.3%, in line with our profit before revaluation. Net book value up 1.4% to HKD 110.23. Principal activities analysis. 87% of our revenue and 82% of our profit contribution is now recurrent in nature, giving us a very strong foundation to move forward. In terms of geographical spread, 39% of contribution from Hong Kong, 8% from the Mainland and 53% from Overseas. Turning to divisional performances. We recorded fewer sales recognition in the first half, leading to a lower contribution, revenue HKD 4.6 billion, profit contribution HKD 1.8 billion, margin -- overall margin, a solid 39.3%. Major contribution coming from Laguna Verona, Dongguan for HKD 57 million; LYOS from Hung Shui Kiu, for HKD 439 million; 90 Repulse Bay, giving us HKD 327 million; Upper West Shanghai, giving us HKD 212 million. We recorded solid margins across all markets, 40.1% from Hong Kong, 40.3% from the Mainland and 24.5% from Overseas. We still have HKD 28.4 billion of contracted sales, which we have not yet recognized. That is up from HKD 19.4 billion at the end of last year, mainly due to the successful launch of Blue Coast. HKD 5.4 billion of the HKD 28 billion will be recognized or scheduled for recognition in 2024 financial year. Property rental, HKD 3.1 billion of revenue, up 9%, profit contribution, HKD 2.4 billion, up 6% and a very healthy 78.4% margin. Contribution from our social infrastructure from the U.K., HKD 648 million; Cheung Kong Center, HKD 512 million; Hutchison Logistics Centre, HKD 327 million; and the Whampoa HKD 325 million. If you look at the different sector -- contribution from different sectors, from a revenue perspective, retail HKD 971 million, down 7.6%; office HKD 890 million, down 7.7%. Industrial holding firm at HKD 385 million, social infrastructure, up 171% to HKD 648 million, giving us a total of HKD 3.1 billion of revenue contribution. If you look at profit contribution, HKD 1.8 billion from Hong Kong, and HKD 139 million from the Mainland and HKD 489 million, giving us HKD 2.4 billion of contribution altogether. We have 22.2 million square feet of investment properties in our portfolio and recorded in the first half, a fair value increase of HKD 1.4 billion before tax and non-controlling interest. This is a result of the net increase we have in Hong Kong, mainly from Hutchison Logistics Centre and a revaluation deficits from a number of our Mainland property assets. The after tax and after controlling -- after non-controlling interest, valuation came to HKD 1.8 billion in the bottom of the box in the middle. Hotels and Serviced suite. We had a solid recovery in both margin and contribution this year. HKD 823 million of profit contribution, up 29% and margin recovery from 32.7% last year to 38.6% this year. Average occupancy for our daily hotels 81%, and 88% for our serviced suites. And to no surprise, Hong Kong has recorded a majority of our contribution, HKD 853 million. Property and project management, we have 264 million square feet under management and a very steady profit contribution of HKD 180 million and a very good margin of 40.4%. Our Pub operation, again, we have about 2,600 pubs across the U.K. The sector is still affected by the high cost pressure and also the slow recovery in terms of volume recovery and recorded a 5% increase in revenue in the first half and a 2% increase of profit contribution to HKD 597 million. Infrastructure and Utility Asset division, these are JVs and the respective percentages. Just to highlight that CK William, which is our Australian joint venture company also acquired Phoenix Energy, in the first half of this year, Northern Ireland Gas Network for GBP 312 million. U.K. Power Network also acquired UU Solar, an owner and operator of renewable generation assets in the U.K. in the first half as well for GBP 88 million. '24 first half revenue came to HKD 12.6 billion, and contribution came to almost HKD 4.1 billion with a 32.6% margin. You see that Dutch Enviro Energy, which is essentially AVR, had a negative contribution due to the fire incident for one of our facilities last year. I'll turn the rest of the floor to Simon to finish the rest of the presentation. Simon?

Thank you, Gerald. As of 30th of June 2024, the group's interest in Real Estates Investment Trust remain more or less the same. 34.5% in Hui Xian REIT, which only managed a portfolio of 11.8 million square feet of hotels and serviced suites, office and retail properties on the Mainland. A 26% in Fortune REIT, which only manage a portfolio of 3 million square feet of retail properties in Hong Kong and Singapore. A 18% interest in the Prosperity REIR, which only managed a portfolio of 1.3 million square feet of office, retail and industrial properties in Hong Kong. Recently it's an associate, and we share a net north of HKD 4 million for the period, taking into account its net rental of HKD 56 million and exchange loss of HKD 60 million upon realized upon bank loan repayment during the period. Distribution received from Fortune REIT and Prosperity REIT amounted to HKD 113 million and were recognized as investment income. Together with the HKD 3 million distribution from Hui Xian REIT, a total distribution of HKD 116 million (sic) [ HKD 113 million ] was received by the group during the period. For the gearing and maturity profile, as of 30 of June 2024, the group's bank and other loans amounted to HKD 56.1 billion. HKD 14.9 billion repayable within 1 year, HKD 34.9 billion within 2 to 5 years and HKD 6.3 billion beyond 5 years. Taking into account bank balance and deposit of HKD 32.8 billion on hand as of 30th of June 2024, the group carried a net debt of HKD 23.3 billion. The net debt to net total capital ratio was 5.5%, and the net debt to shareholders' fund ratio was 6%. We received credit rating from Moody's A2 Stable and credit rating from Standard & Poor, A Stable. As of 30th of June 2024, the group had a total land bank of 132 million square feet. 74 million square feet was under development; 22 million square feet was held for rental; 9 million square feet was for hotel and serviced suite operations; and 27 million square feet was for Pub operation. For geographic location, 28 million square feet was in Hong Kong and 69 million square feet was only Mainland and 35 million square feet Overseas, mainly in the United Kingdom. I'll pass it back to you, Gerald, for Q&A section.

Thanks very much. Simon, that was a short and sweet out. And now we will open the floor for questions. I can see that many of you who have joined us online today and questions have begun flooding in. I will go through each of them and consolidate questions that you may have. Please keep them coming. Again, thank you to our Chairman, our Deputy Chairman, for joining us. Let's go -- I'll go to the first question. CKA's profit before revaluation on a per share basis dropped 9.5% largely because of the 48% drop in development contribution. Can you give us your overall thoughts on your results?

I think a drop in development earnings is not a surprise to anyone, given we underinvested in land sites in the past. We're pleased to be able to maintain a very strong balance sheet during uncertain times with gearing only at 5.5%. Our investment into U.K. social housing has also strengthened the resilience of the investment property portfolio, helping us to more than offset the challenges we are currently experiencing in the Hong Kong market. Together with the strong performance of our infrastructure businesses, our recurring income continues to be solid. Hotel and Serviced Suites earnings continued to improve over last year. However, the U.K. Pub Sector is still facing a few challenges due to the high cost environment. With continued geopolitical and economical uncertainties under a backdrop of still a higher interest rate environment, I would say, this is a respectable set of results. We will continue to embrace our diversified and global approach to seek out investment opportunities with double-digit returns and high social structural liquidity to further strengthen the quality of our balance sheet and the quality of our earnings, while continuing to focus on returns and being financially prudent.

Thank you, Chairman. The next question upon the online audience. You dropped your dividend in the first half. What should investors expect in terms of dividend payout for the full year? Are you going to drop your dividend again or do more share buybacks?

We'll decide on our final dividend payout in due course when we have better visibility of our operating results for the whole year. But it is appropriate for the dividend payout to be correlated to our financial results. As I've said in the past, you can deliver long-term value to shareholders by way of dividends or share buyback, especially when our stock is trading at a discount. We've been quite active in the last few months and have so far spent HKD 1.538 billion, buying back close to 49 million shares in the first half. Adding this to the HKD 1.97 billion we spent in 2023, we should have spent a total of HKD 3.5 billion in buyback in the last 18 months and bought back over 94.5 million shares. That's our way of returning value to shareholders.

Thank you, Chairman. The next question is on the Hong Kong Residential Property market. What is your view on the residential market. The launch of Blue Coast received very strong responses. Will you continue to adopt a similarly aggressive approach for the upcoming launch of Blue Coast Phase 3C and also your Kai Tak project?

Maybe I answer the second half of the question first and go back to the first half. On launching projects, we've always adopted a more market-focused approach when it comes to launching new projects. So I trust Justin and his sales team will come up with the right market-friendly tactics that will be the best for the projects. As to the market in general, I don't have a crystal ball, but what I can say is Hong Kong has been through many cycles in the past decades. And each time the person who makes the most money is a person who buys when everyone else is bearish. My experience tells me that when Hong Kong market turns around, it can turn around very rapidly. History has shown that when this happens, there is not much time for reaction. I'm not going to bet against Hong Kong's ability to recover. Everyone, who has done that in the past has been proven wrong on. [Foreign Language]

Thanks, Chairman. Next question is on -- for our Infrastructure and Utility division. This division has been performing really well, and you have made a few more investments recently. Is this the direction? And are you going to invest even more in this sector?

Indeed, this division has been the most resilient in the past few years and has served the company well. Subject to returns meeting our requirement, we are always interested in doing more. While we continue to search for attractive opportunities globally, but also with a keen eye on property and for projects locally, we're pleased to be able to enjoy double-digit IRRs in many of our Overseas infrastructure businesses. They have good structural liquidity. What that means is that, if a great opportunity comes our way in Hong Kong, we have the ability to raise capital internationally for deployment in Hong Kong. [Foreign Language]

The next question. Given how property transaction and prices have been trending, what kind of development margins should we expect going forward? Are you still interested in bidding for more projects in Hong Kong?

It's answer is, yes. Margin is a function of market conditions. When the market is weaker, margins can be lower. But when the markets start to recover, margin can expand quickly and more quickly than one can react. Of course, we have interest to bid for new projects in Hong Kong. The key is profit margin and the cost of entry. But then again, we do not have a must win mentality. We are in an advantageous position now with choices. Currently, we have a number of investments overseas, generating double-digit returns. And when opportunities present themselves in Hong Kong and should the need arise, we can generate substantial liquidity from these assets to take on very large projects in Hong Kong or the Mainland. [Foreign Language]

Thank you, Chairman. Another question from our audience. Your property rental contribution went up in the first half, but the Hong Kong office market continues to be weak. Against this backdrop, what is your outlook for the Hong Kong rental division and the office segment in particular? And could you give us an update on CKC II?

Our investment in U.K. Chelsea housing in the last few years has helped us to mitigate the weakness in the Hong Kong rental market. As a result, the overall profit contribution for the division in the first half was quite resilient. The overall occupancy of our Hong Kong investment property portfolio is about 85%, and will continue to drive us to do better. As for CKC II, it is a great building in an iconic location. It should do great when the market begins to recover. Thank you.

The next question is on revaluation. Are you worried about the negative revaluation pressure for your investment property portfolio?

We actually recorded a revaluation surplus of Hong Kong about HKD 1.88 billion in the first half, which is a net result of recording of revaluation surplus for the Hutchison Logistics Centre in Hong Kong and deficits for certain properties on the Mainland. I think, this result is because we've always taken a more conservative approach than maybe our neighbors. So I think we'll be fine.

Next question. Any comments on the performance of your Hotel and Serviced Suite division?

The Hotel and Serviced Suite division contributed HKD 823 million, a solid 29% increase in contribution to the group in first half '24. The government and private event organizers have been working very hard to bring visitors to Hong Kong. I'm hopeful the overall occupancy of the Hotel and Serviced Suite division should remain quite steady.

Thank you for all your questions. The next one is what is your outlook for the Pub business for the rest of the year?

In terms of outlook, volume recovery is still a challenge due to the high cost of living and high interest rate environment. And we have been protecting our margins, mainly through price increases. Maybe Gerald, you are better positioned to answer that.

Well, I think, the team is tasked to find ways to improve the overall profitability and going forward, while at the same time, offer customers a great experience. It's a tough challenge, but we're not shying away from it. We hope to cut in interest rates in the U.K. will start to improve the level of income -- disposable income for all consumers, which should help our business. The next question is on our gearing. CKA's gearing remains very low at 5.5% net debt to net total capital, how much will you set aside for new investments?

Our gearing is low enough that we do not have to set a cap on new deals. In addition to our low gearing, we also have investments that are structurally quite liquid outside Hong Kong. I've been using this term quite liberally today, structurally quite liquid. We are patient and there is a -- there's never a must-win deal. The focus is on the margin available and the cost of entry. Simply said, because of our investments Overseas, we have the ability to deploy capital from Overseas to Hong Kong or the Mainland for mega projects when the opportunity arises. [Foreign Language]

Thank you, Chairman. I believe most of the questions have been answered. I will, I guess, we can close our analyst presentation and conference for today. Thank you for joining us, and we will see you soon. Thank you.