CTF Services Limited (659) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Thank you for joining NWS Holdings Financial Year 2022 Final Results Analyst Presentation. I'm Catherine, today's MC. First of all, let me introduce our panel members: Mr. Gilbert Ho, Executive Director and Chief Operating Officer; Mr. Jim Lam, our Chief Financial Officer; and Mr. Ben Wong, Director of Corporate Development, Investment and Investor Relations. For today's agenda, Gilbert will first walk you through the key highlights of our company's results and strategy. After this, Jim will present to you the financial highlights, and then Ben will cover the performance of individual business segments and then followed by the Q&A session. If you have any questions, please enter your questions into the text box on the left-hand side of the screen. Without further ado, let me pass this on to Gilbert. Gilbert, please?

Thank you, Catherine. Good afternoon, everyone. Thank you for joining our analyst presentations. I would let -- as Catherine mentioned, I will let Jim to go through the details of financials and Ben to go through the details on the business segments. I would now first give you an overview of what we have done in financial year 2022. As you know, we have done a number of acquisitions as well as disposals of our business in 2022. We have acquired 2 roads, one in [ Guigang-Wuzhou ], is called Guiwu Expressway, and other is called Laogu Expressway. With that 2 acquisitions, our total Roads portfolio expanded to 17 toll roads altogether. And together with the existing toll roads, the total length is around 1,000 kilometers. We have expanded in our Logistics business with the acquisitions of 6 logistics properties in Chengdu and Wuhan. At the same time, we also formed an operating JV with our long-term partner Goodman for the operations and managements of these 6 logistics properties as well as for expansion in China. Last but not least, we have announced the disposal of Goshawk Aviation business in the aircraft leasing. At that, we will have more further details in the presentations ahead. As you can see, over the last 4 years since 2018, we have continued to optimize our business. From 2018, we have various businesses, which a lot of you may comment already, which is very complicated and very difficult to read, we have now simplified into 4 core business: Roads, Constructions and Insurance. And later on, we will -- we might likely to reclassify strategics into our core business. And together with our facilities, our Facilities Management will form our base -- our businesses, going forward. As I said, this is a very simplified portfolio and is very visible in terms of earnings and [ AOP ]. And -- the Roads portfolio, we have a very sustainable AOP as well as cash flow contributions, with long-term economic positive outlook as well as sector outlook. The new acquisitions for the last few years, it contributed significantly to our AOP immediately as well as cash flow. Our Construction has continued to be our core business and has delivered very strong results with strong growth in contract backlogs as well as increase in our new tenderings. Our Insurance business, which was acquired in 2019, also has delivered very strong results, aimed at the closure of the borders. We definitely can see the pent-up demand from Mainland visitors once the border reopens. For our Logistics business, we have expanded through the acquisitions of the 6 properties in China, and we will continue to look for targets to increase our cash flow and earnings. Together with all these 4 businesses, already contribute about 90% of our AOP. With the recurring businesses, which exclude our Aviation business as well as Strategic Investments, the recurring business increased 9% year-on-year on AOP contributions. As we have disposed a number of businesses over the last few years and have very disciplined acquisitions, we have now ample cash on our balance sheet with over $13 billion as of the June 30, 2022. Our net debt decreased around 30% to around $10 billion, with our net gearing ratio decreased 6% to around 19%. Our adjusted EBITDA also increased by about 4.3% year-on-year. Not only that we have delivered very strong results, we also have delivered our promise to our shareholders since 2019 with a sustainable and progressive dividend policies. Since the start of these policies, we have increased our dividends from a total of $0.58 in 2019 to now $0.61. We also announced a share repurchase program in 2022 of an amount of up to USD 300 million to purchase our shares to increase the shareholders' value. I will now pass on to Jim, our CFO, to talk about our financials as well as the performance by segments.

Thank you, Gilbert. In fiscal 2022, our revenue was up 10% to $31 billion, which was driven mainly by the Insurance business, whose revenue was up 28% year-on-year to $12.4 billion. In terms of AOP, or attributable operating profit, our overall AOP was down 17% to $4.4 billion. However, if you exclude the Strategic business and those businesses that were disposed of or will be disposed of and classified as asset held for sale, our recurring AOP actually went up by 9% year-on-year, which is considered to be quite respectable in the current environment. Between core business and strategic portfolio, our core business AOP went down by 1%, while that's for the strategic portfolio was down 84%. During the period, we recorded an operating loss of $1.6 billion, which is related mainly to the $1.9 billion share of remeasurement loss, asset impairment costs, provision for expected credit loss, et cetera, from Goshawk, which included the $0.8 billion full provision that we made for the 6 aircraft leased to the Russian airlines. And that $1.9 billion loss share from Goshawk was partly offset by the gain on disposal of SUEZ NWS as well as the Derun Environment. During the period, our finance costs went down by 12% to $425 million, thanks mainly to the decline in average loan balance. We utilized the $6 billion proceeds that we generated from the sale of SUEZ NWS and Derun to repay some of our Hong Kong dollar loan -- bank loans and to redeem the -- about half of USD 650 million senior note due 2029. Excluding the distribution made to the perpetual capital securities holders, our profit attributable to shareholders of the company went up by about HKD 1.6 billion. Moving on to Page 9 of the presentation, in terms of the AOP performance of each segment. Within the core business, our AOP for the Roads segment declined by 5%, which was driven mainly by the outbreak of COVID-19 in various provinces of the Mainland in the second half of the fiscal year and also the temporary prohibitation of Type 5 and 6 trucks on the Hangzhou Ring Road, which was lifted by the end of June 2022. Aviation's AOP increased by 3%, driven mainly by the higher mark-to-market gained on the interest rate swaps. Our Construction AOP declined by 6% year-on-year, which was due mainly to the decline in AOP contribution from Wai Kee. We disposed about half of our 23% stake in Wai Kee towards the end of fiscal 2021 and hence, the reduced contribution in fiscal 2022. [ However ], we just look at Hip Hing, which accounted for about 90% of the AOP of the Construction segment, it's AOP actually went up by 4% year-on-year in fiscal 2022. For the Insurance AOP, it went up by 11% due to the enhanced product mix and the [ tight ] control on expenses. Despite the border remain close and hence, no business -- sorry, no AOP contribution from the Mainland visitors. Moving on to the strategic portfolio. Logistics AOP declined by 11%, which was due mainly to the lack of profit contribution from Xiamen Container Terminal Group. If you strip out the contribution from Xiamen Container Terminal Group 1 year ago and just look at the contribution from the remaining Logistics assets, the AOP actually increased by 5% year-on-year. Facilities Management, the AOL or attributable operating loss, declined by 37% to $410 million. All the 3 businesses within the Facilities Management, namely GHK, Hong Kong Convention Exhibition Center and Free Duty, saw a decline in AOL. For GHK, it was driven by the continued ramp-up of the business. For Hong Kong CEC, it was driven by the significant increase in the number of local events, such as the Hong Kong bookstore, the Legislative Council election, the Chief Executive election, et cetera. For the Free Duty, while the border remained closed, the business saw significant increase in profit from the contribution from Hong Kong-Zhuhai-Macao Bridge outlet and also its pop-up stores. For the Strategic Investments, the segment saw AOL of $142 million from AOP of $739 million 1 year ago. The decrease in contribution was driven mainly by the lack of significant net fair value gained in fiscal year 2021 and also the expected credit loss that we made on a number of investments, including some of our bond holdings. Overall, the AOP declined by 17% to $4.4 billion. As mentioned earlier, if you strip out Strategic Investments and also the businesses that we disposed of or will be disposed of, our recurrent AOP actually increased by 9% year-on-year. Okay. I will then pass on to Ben to talk about the performance of each of our individual businesses.

Thank you, Jim. Thank you, Gilbert. I will now give you a review of what has happened in our core businesses as well as strategic portfolio as well as an outlook for each of this business. So in Roads, last year was a year for value-accretive acquisitions, focusing on positive long-term growth prospects. As Gilbert has mentioned, we have made 2 acquisitions in last year, one being Laogu, an expressway in Hubei, approximately 39 kilometers, as well as 40% in Guiwu Expressway, pending completion, will be a rather long acquisition of 198 kilometers. Both have an extended remaining concession, which has now extended our overall portfolio concession to 11 years. Operationally, it was a bit of a challenge, with traffic volume down by about 5% as well as toll revenue down by 8%, mainly attributable to the outbreak of COVID-19 variants and also power crunch as well as temporary prohibition for the Type 5 and 6 trucks in Hangzhou Ring Road. Overall, our major expressway constitutes about 90% of our roads AOP, and the overall AOP is down slightly by 5%. Looking into the outlook of Roads, as we have explained also in the press conference, we have been applying some innovative as well as sustainability features in one of our new lines of business, which is operating a new service center in the Hangzhou Ring Road, named Zhiyi West Lake Service Area. It has soft-opened in July -- end of July, and it has incorporated AI technology, unmanned hotels, unmanned convenience stores and also make good use of renewable energy technologies to reduce carbon footprints. We have also been looking into other value-accretive investment opportunities. So hopefully, over the next 12 months or so, we'll have more investment opportunities that can continue to accrete value. And in terms of our businesses in Construction, Hip Hing has done very well and has led to a 4% increase on Hip Hing Group to about $834 million, and it has really been defying a lot of challenges with a very good outlook, sanguine outlook, with some of the policies pushing from the government as well as the Northern Metropolis. If you look into the new contract awarded to Hip Hing Group, it's up 239% to $23 billion. The contracts on hand would be $62 billion, and the backlog would be $37 billion. And as Jim had mentioned, this year's AOP for the segment was down mainly due to part of the stake of Wai Kee that has been sold, which led to less attributable operating profit. Looking into the outlook for Construction, I think you can divide it into two parts. One is the continued pickup in the overall demand for premium construction services and not just on the housing side, but also on the land formation, site formation, deep excavation works, so that it has really been picking up. And if you look into the types of contracts, I think right now, currently Hip Hing's portfolio is mainly skewed in the private sector, which we would expect to have more pickups in the government segment as well. And I think, internally, if you look into what Hip Hing has done over the last 12 months, they have won quite a lot of awards, applying modular construction and make good use of technologies as well as in BIM and reducing overall construction energy, waste consumption and mitigating cost pressure. Looking into the Insurance side, it was a very good year, with AOP up 11%, given the market to Mainland visitors have not really reopened yet. We have seen about 11% growth in AOP, 30% growth in gross written premium and about 77% in gross new business written premium. And we have also seen an enhanced product mix as well as repricing, which has led to an increase in the VONB margins to about 30%. Embedded value has been down 17% due to the unexpected spike in interest rate and credit spread widening. If you look into the overall investment return, we have achieved about 5.2% and the solvency for FTLife remains strong at 342%. Looking into the outlook of FTLife, again, with COVID being passed us and looking into the reopening of the borders, we would expect there would be some pent-up demand from the Mainland visitors as well as an increasing demand for higher-level health and protection coverages. We continue to push for internal growth and drive more synergies from the New World Group. And if you look forward into the regulation part, I think there will be a couple of challenges that you would see from the changing of the accounting and also the solvency regime in FY '24 as well as FY '25, and those will be an industry-wide implementation. And we're certainly taking our steps to get ready for the new standards. Looking into our strategic portfolio. Logistics has also been an interesting year with very stable foundation, which we have laid via ATL as well as CUIRC. But we have also seen exciting new acquisitions that we have made this year, investing into 6 logistic properties in Chengdu and Wuhan for about $2.3 billion. This year, we have also segregated our logistics into subsegments, Logistics Asset & Management, which will have ATL Logistics Centre as well as the 6 logistics centres we recently acquired. If you look into ATL, the average rent is up 2% and occupancy is very high, maintaining at 99.4%. And if you look into the 6 logistics properties that we have recently acquired, those are properties with immediate AOP contribution as well as cash flow contribution to avoid some of the gaps that you have seen in the sale of XCTG, which is the Xiamen Container Terminal Group, which led to part of the decrease in AOP for Logistics as a whole. Continuing in Logistics, if you look into the CUIRC, which has grew remarkably, AOP is up 16%, throughput is up 4%. And if you look into the organic expansion, the new Guangzhou terminal commenced operation in late December 2021. And if you look into the Wuhan, Zhengzhou terminals, we are focusing on doubling the handling capacity, as well as for the Xi'an station. So all in all, we have been trying to build a small ecosystem within Logistics to create synergies amongst the few Logistics investments we have made. Looking into the outlook for Logistics, we have definitely laid a strong foundation via ATL and warehouses. And now that we are more focused on new acquisitions in the Mainland warehouses under the Logistics Asset & Management, I think we certainly share a view that it has a bright outlook in -- within Logistics. Also, with the government supporting the sectors, we have seen CUIRC demand continue to grow and contributions continue to grow. And hence, as Gilbert has mentioned, one of the focus for the year in terms of M&A would have -- would be Roads and Logistics. And moving into our Facilities Management, we have seen AOL narrowing by about 37%, which has been reflected in the strong, continued ramp-up as well as growth in GHK Hospital. And our outpatient and inpatient is up 26% and 14%. And if you look into the regularly utilized beds, has increased to 264 and occupancy is about 61%. In terms of CEC, the AOL has remarkably narrowed by 40 -- which constitutes about 40% of the segment, as we saw events continue to come back, patronage continue to come back. And hopefully, with the new government push for the 0+3 quarantine measures and potentially less, going forward, the activity within the HKCEC will continue to recover from COVID. Free Duty remains close with our outlets in Lo Wu, Hung Hom and Lok Ma Chau. And as Gilbert had mentioned earlier, the businesses within Free Duty have gradually picking up on -- through pop-up stores, through online sales. And I think overall, if you look into the outlook of the segment, it certainly -- we have seen continued improvements and also bottoming out on the losses. And hopefully, next year with the COVID measures continue to improve and with the new events coming back online, such as rugby events, conferences as well as other large-scale type of events to be held in Hong Kong, it will continue to improve for the segment. Last, but not least, many of you may have wondered where has the Aviation segment has gone because it has always been in the core businesses. And we have made an announcement in May that Goshawk Aviation Limited has announced its disposal of Goshawk Management Limited, which is essentially selling all of its aircraft leasing businesses except for the 6 aircraft that has -- that was leased to Russian airlines. And it was a very timely disposal as well as at a very attractive valuation with an enterprise value of $6.7 billion. The valuation was very close to book value as well as it has mitigated some of the headwinds that we have seen in some of the less sees recently. Although you might have think that the air traffic is recovering, but with the high interest rate as well as the high oil prices, it remains a lot of uncertainties for the lessees as well. If you look into the AOP, it has about 11 months of AOP, yet it still outperformed last year's AOP by about 3%. So I think with the completion of the transaction, we would expect that we will have continue to build our M&A [ watch ] and continue to improve our gearing overall. And I will talk about the ESG part of the businesses that we -- that has -- that we have this year. Just going through some of the highlights of the year, if you look into the Hang Seng Corporate Sustainability Index, the overall rating is very high at AA+, which we have been in the index for the 12th consecutive year. MSCI ESG rating has been upgraded to A from BBB. From the Sustainalytics side, the sector ranking is 35 out of 298. And if you look into some of the social related -- was the -- recognitions that we have received such as the Employer of Choice Award, CSR Award. It has really validated the efforts that everyone from the NWS Group has put in. And if you look also looking into the ESG achievement awards, it's not just at the corporate level, but FTLife has also received as the ESG Performer of the Year for Large Enterprise. So for climate resilient measures, there are a few key initiatives that we have rolled out in 2022. We are one of the first batch of signatories of the Carbon Neutrality Partnership of the HKSAR. We continue to explore various sustainability-linked financing transactions. And as of June 30, it's -- we have a total of almost $4.5 billion, which are sustainability linked, which also shows our commitment to upkeeping and also improving our ESG-related measures. And from the climate side, we have done physical risk assessments for the 2 toll roads in China, and we continue to explore how we can adapt to the TCFD disclosures. As I mentioned earlier -- so being socially responsible corporate, we have done quite a bit with -- during the fifth wave of COVID outbreak, showing our care and love for the society and our stakeholders, such as donated more than 10,000 anti-epidemic items such as oximeters and participating in the New World Group's Share for Good platform. Gleneagles Hospital at GHK Hong Kong has also given free video medical consultations for 1,250 patients, FTLife offering free COVID insurance coverage, Hip Hing providing 120 fully-serviced quarantine units within 63 days, and CEC, the management of HKCEC supporting the government, providing free storages and logistic services for pandemic-related supplies. So I think, all in all, it's not just the corporate-level pushing for being a socially responsible corporate, but at all levels as well. And if you look into the -- as I mentioned earlier, we continue to explore various sustainability-linked financing to continue to ramp up. In terms of environment, we are generally on track on carbon -- reducing carbon intensity, energy intensity, water intensity and construction waste, as well as focusing on wellness in social targets such as wellness and caring. And in our Roads operation, we have also done a few things such as developing patent in Antiglare Solar Panel, noise barriers, as well as for the Zhiyi West Lake Service Area, we aspire to be the first LEED-certified service area in Mainland. And in terms of FTLife, we continue to support investing into companies, investees, influencing -- with influencing or skewing some of the -- not skewing, but making investments within corporates have shown strong social responsibilities. And if you look also into HML, which is the management company of HKCEC, we continue to make improvements and asset enhancements to help our focus and continue to improve in terms of various points within the ESG side of things. So I think that is a wrap up of our presentation, and we'll now go to Q&A.