CTF Services Limited (659) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Thank you for joining NWS Holdings Financial Year 2023 Final Results Earnings Presentation. I'm Catherine from the IR team and also today's MC. First of all, let me introduce our senior management members joining today's presentation. 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, Investor Relations and Sustainability. As a transition in relation to the offer by CTF to acquire enterprise as shares is still in progress due to regulatory reasons, our financial FY results will be shared on webcast. In addition, only questions related to our results will be addressed. Thank you for understanding. For today's agenda, we 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 segment and then followed by the Q&A session. If you have any questions related to our results please enter your questions into the text box on the left-hand side of the screen. Without further ado, let me pass the time to Gilbert. Gilbert, please.

Thank you, Catherine. Good afternoon, everyone. Let me give you a very brief introduction about NWS, especially regarding our business portfolio. As some of you may know, since 2018, we have undergone a portfolio optimizations. For the last 5 years, we have disposed a number of assets to unlock our value and reduce our risk exposures, and at the same time, we have added a number of assets with steady cash flow, as well as AOP contributions and positive growth prospect. From 2023 onwards, basically, our portfolio has been stabilized with more improved earning quality, more strengthened cash flow visibility and also reduce our risk exposures. We will focus on Roads, Logistics and FTLife expansions going forward. For FY 2023, our resilient business portfolio has actually made us very resilient. As you can see, for our Roads sections, we have a very strong recovery upon the exit of COVID-19 containment measures in the mainland and the gradual economy recovery. For Insurance, the strong pent-up demand released from mainland facilities after border reopened has actually push us from ranked #12 a year ago to rank #9 for the 6 months end 2023 June. Also for our facility management business, including Hong Kong CEC and Free Duty, also captured the growth momentum since the border reopened in the second half of 2023. Let's just look at the AOP. If you look at our operating business AOP, namely our Roads business, our Construction, meaning Hip Hing constructions, our Insurance business, Logistics as well as our Facility Management. Year-on-year, we have a growth of 11%. When we look forward, there are a number of growth -- industry growth support that actually supports our growth going forward. For Roads, the growth in mainland economy as well as the automobile sales will drive the gross growth going forward. For Construction, the Hong Kong government policy to increase the land and housing supply, as well as the expected increase in Hong Kong government projects in the Northern Metropolis will secure more projects in the years to come. For Insurance, needless to say, the strong pent-up demand for mainland visitors will continue. For Logistics, the economic development in Mainland China as well as government support to drive Logistics sector growth will further push our Logistics to grow even further. For Facility Management, all of the 3 subsegments, including GHK, Hong Kong CEC, as well as Free Duty will also benefit from the border reopening as well as the economic growth. In terms of our capital structures, we have done a number of things to optimize our capital structures as well as to strengthen our balance sheet. First of all, we have savings from the redemption of senior notes as well as perpetual security at discounts to par. Second, we are the first Hong Kong conglomerate to successfully register in China to issue onshore renminbi bonds, the Panda Bond in May 2023. And the first tranche was issued with CNY 1.5 billion at 3.9% coupon with a 3-year tenure. All this reduced to repay the Hong Kong dollar loan with high interest costs and against the natural hedge of our renminbi assets. We also continue to optimize our capital structure and cost of finance. During this year, we increased our proportion of borrowings denominated in renminbi. As of the June 30, 2022 -- '23, our renminbi debt to total debt ratios increased from 40% a year ago to 43%. This can mitigate the risk of escalating interest rate of our Hong Kong dollar and U.S. dollar borrowings as well as minimize negative impact on group's equity due to depreciation of renminbi. Due to the proactive capital management and strong balance sheet, we will continue to meet our capital needs and maintain our flexibility. As of the 30th of June, we have cash on hand of around HKD 19 billion and a net gearing ratio of 9%. We also have a committed undrawn banking facilities of over HKD 11 billion. In terms of dividends, over the last 20 years, we have consecutively paying our dividends, and we will continue to do that. We also uphold our sustainable and progressive dividend policies. For 2023, we have a total dividend payout of HKD 0.61. I will now pass on to Jim to give you some financial highlights of our results of financial year 2023.

Sure. Thank you, Gilbert. In fiscal 2023, our revenue increased by 45% year-on-year to HKD 45.2 billion. The increase was caused mainly by the increase in insurance revenue, which was up HKD 8.6 billion year-on-year as well as the increase in construction revenue, which was up HKD 4.4 billion year-on-year. On attributable operating profit, fiscal 2023 AOP was down 6% to HKD 4.1 billion. I will go through the reasons for the decline on the next page. However, I would like to highlight that if you just look at the operating business as AOP, which exclude the businesses that were disposed of or discontinued such as aviation and environment and excluding businesses, which are not anymore focuses. The operating business AOP was actually up 11% year-on-year to HKD 4.2 billion. During the year, we had nonoperating losses of HKD 550 million, which was a significant decline of 65% as compared with HKD 1.6 billion in fiscal year 2022. The nonoperating losses for the current year is driven mainly by the loss on disposal of a legacy project related to co-trading in the mainland and impairment losses from certain investments of the group. Our net finance cost was up 44% up to HKD 539 million which was driven mainly by the significant increase in interest rate for Hong Kong dollar loans. However, that was partly mitigated by the interest savings from our active management of that mix through increase in renminbi debt exposure. It is worthwhile to highlight that our renminbi debt as a percentage of total debt increased substantially from 14% in fiscal 2022 to 43% in fiscal year 2023. Overall, our profit for the year was up 22% to HKD 2.6 billion. Stripping out the distribution made to the perpetual capital securities holders of HKD 612 million, profit attributable to shareholders of the company was up 28% to HKD 2.0 billion in fiscal 2023. EPS was HKD 0.55, which represents an increase of 36% year-on-year. The Board announced this morning final dividend for fiscal 2023 of HKD 0.31, which together with the interim DPS of HKD 0.30 give rise to a full year DPS of HKD 0.61 for 2023, which is the same as fiscal 2022. Adjusted EBITDA was HKD 6.6 billion, which represent a small decline of 3% as compared with HKD 6.8 billion in [indiscernible] end 2022. Moving on to the sector performance. For the Roads segment, the AOP in 2023 was down 10% year-on-year to HKD 1.5 billion, which was caused by 3 reasons. First, the depreciation of the renminbi as we have Hong Kong dollar as our reporting currency. The containment -- the COVID-19 containment measures in the mainland during first half of the fiscal year as well as the cut in toll fee for trucks by 10% in the fourth quarter of calendar year 2022. Second, despite the difficult operating environment in the first half, we actually saw a strong recovery in both traffic flow as well as traffic revenue in the second half of the fiscal year following relaxation of COVID-19 containment measures in the mainland. If you exclude the renminbi depreciation impact as well as the financial incentive for both fiscal years, our AOP for the Roads segment actually declined by just 2% year-on-year. Moving on to the Construction segment. The AOP was down 18% year-on-year to HKD 746 million. The decline was driven mainly by the AOL attributable to our interest held in Wai Kee Holdings. If you just look at Hip Hing which is -- which account for the majority of the profit for our Construction segment, this AOP declined by only 7% year-on-year, and the decline was due to the lower gross margin recognized for the revenue recognized in the current year. For the Insurance segment, the AOP increased by 12% year-on-year to HKD 1.2 billion. The improvement was driven mainly by the rebound in business performance, the effective expense control as well as the change in valuation interest rate used in response to the increase in market interest rate. However, that was partially offset by the increase in expected credit loss related to certain bond investments made by FTLife. The Logistics segment saw a 27% increase in AOP to HKD 752 million. In terms of the key businesses within our Logistics segment, ATL maintained a steady growth trajectory during the fiscal year. CUIRC saw a strong increase in AOP as a result of the robust demand for multimodal transportation service and increasing terminal capacity from the new Guangzhou terminal. Also in fiscal 2023, the group benefited from the first full year contribution from the 5 logistics property that we acquired in Chengdu and Wuhan, as well as the new contribution from the 6 newly completed logistic property in Chengdu since January 2023. For the Facility Management segment, there was a substantial layering of AOL by almost 85% to just HKD 62 million. Both Hong Kong CEC and Free Duty turnaround from AOL to AOP, while GHK continues to see growth in this EBITDA as well as improvement in the businesses. For the strategic investment, also narrowed by 47% to HKD 76 million. So overall, the AOP for the group declined by 6% to HKD 4.1 billion. As mentioned previously if you just look at the operating businesses AOP, the group actually saw an 11% increase in operating business AOP to HKD 4.2 billion. I pass over to Ben to talk about the various business segments of the group.

Thank you very much, Jim. So let's start with the Road segment. Overall, the AOP is down 10%, but if you exclude RMB depreciation which our AOP will be decreasing by 4%. And if you also excluding some of the financial incentives, the overall AOP is down 2%. And on the left-hand side, you can also see for the like-for-like traffic year-on-year on the second half, we have seen strong recovery, up 19% and 17%. And if you compare in terms of the pre-COVID levels in 2019, second half, both the traffic flow and the revenue has surpassed the pre-COVID level. Our major expressway contributed 90% of our Roads AOP and with the overall like-for-like traffic flow up 2% year-on-year. It's -- if you look into the average remaining concession, it's up about 5% at around 11 years. Last year was an active year for us in terms of acquisitions and expanding our Roads portfolio. We've made -- we completed the acquisition, 40% in Guiwu Expressway. We have also acquired the remaining 60% of Sui-Yue Expressway, and we have continued to work on the expansion of the Beijing-Zhuhai Expressway, as well as extension of the Shenzhen-Huizhou Expressway. If you look into the outlook, we have seen second half making a strong recovery, and we continue to look for opportunities going forward to strengthen our growth portfolio. To the next segment, in Construction, AOP is down 18%. But if you look into Hip Hing only, it's only down 7%. New contract awarded for -- to Hip Hing Group is HKD 5.2 billion, and contract on hand is HKD 56 billion, and the backlog is HKD 25 billion. The mix of the projects is about 68% to 32% private to government. As mentioned earlier by Gilbert, the outlook for the industry continues to show positive outlook with government policies, which we expect to have more projects coming online over the next few years from the development of the Northern Metropolis. Moving on to Insurance. If you look at the AOP for insurance, it's up 12%, but if you look in further down into the individual APE growth has been up 162% on second half year-on-year and for full year, it's up 47%. Our ranking for the first half of 2023, we are up from 12 to 9th. VONB is up 70% to about HKD 900 million. And with the border reopening, we have seen mainland visitors returning as our clients. And if you look into the embedded value, it's up 9% to HKD 19.3 billion. As we have ran through some of the basic key figures of Insurance, we have seen strong demand from -- coming from mainland visitors after the border reopening, particularly on the second half of the year, especially the last few months. And if you look at some of the key figures highlighted here on the screen, you have seen APE at HKD 2.5 billion. Market ranking is up. VONB is up to about HKD 900 million. Embedded value to HKD 19.3 billion. And if you look at the rating, it remains steady and our solvency is at 325%. With the upcoming accounting policy changes of HKFRS 17, we would expect to have some impact on our financial position, such as the increase in total equity and for illustration purpose, if you compare the AOP on the HKFRS 17 versus HKFRS 4, we would potentially see a decrease in AOP and also a decrease in revenue. For further details, you can look into the accounting policies and our announcements for further detail. And in terms of the risk-based capital update, we would -- based on current estimation, the solvency under the RBC would be 260%, which will be adopted in FY '25. Looking into Logistics. We have seen stable plus growth from our various assets. For example, on the logistics asset and management in ATL, which has been very stable and has been delivering strong cash flow as well as income with a 2% increase in rent. It's currently at 99.8% occupancy and with the recently acquired warehouses in Chengdu, Wuhan and Suzhou, you have seen the 5 logistics properties, occupancy at 90.1% and the 6 newly completed logistic property in January with currently at 51.2% occupancy. We have also acquired a logistic property in Suzhou with 100% occupancy completed in June. So the Logistics segment, with the logistics asset and management portion of the Logistics segment has definitely delivered stable cash flow income, as well as growth with the recently acquired properties. If you look into the CUIRC, AOP also grew noticeably by 28%. Throughput is up 17% with the increase in capacity from -- in the Guangzhou terminal doubling the handling capacity for the Zhengzhou terminal, as well as the expansion of Xi'an terminal. And we continue to look into other logistics-related investments, hoping that with the logistic asset management, as well as CUIRC and other logistics-related investment, we would be able to form a logistic ecosystem within the segment. On the outlook for the segment, it remains to be resilient. And obviously, from the Chengdu, Wuhan properties, we have seen occupancy steadily increasing, and we have also seen growth in the CUIRC investment. Moving on to the last segment, Facility Management. We have seen the AOL decreasing by 85% to about HKD 62 million AOL. And if you look -- mainly is contributed by the ramping up and the returning of the customers from CEC and Free Duty, as well as the ramping up in GHK. Looking into CEC and Free Duty, you have seen both benefiting well from the border reopening in January and in -- January and then with the reopening of the shops in January and February and Free Duty, as well as we have seen many regional and international events coming back to Hong Kong. And if you go to GHK, we have seen the EBITDA increase by 759% and further improvement in AOL and I mentioned earlier, the EBITDA margin improved as well. So I think looking forward for CEC and Free Duty is definitely has benefited from the second half rebound, and we continue to look for opportunities to expand in the service offerings to facilitate the ramp-up in the Gleneagles HK Hospital. Moving on to ESG. We have seen improvements in the ESG rating performances, particularly in the Hang Seng Corporate Sustainability Index we have been awarded with a best overall score within the conglomerate category. And we have seen MSCI ranking us A in the rating. And obviously, we have also achieved improvements in Sustainalytics and also we have received awards from reputable organizations such as HKICPA, HKMA, WGO and the Best HR awards. And if we move on to the sustainability part, this year, we have aligned our ESG strategy together with our revamped core values. Act with Integrity, Grow As One, Advance with Agility, Create Shared Value and Evolve Sustainably. And I'll walk you through briefly on each of them. So obviously, in Act with Integrity, we have strong governance overseeing our business operations as well as monitor, manage and collaborate with -- across BUs with strong oversight. In Advance with Agility, we look into how to leverage innovation and turn risk into opportunities, some of the examples, we have used in HKCEC, in Hip Hing, as well as we have now further developed our road map accelerating to net zero. So we'll be looking into Phase I and Phase II implementation, focusing on key industries, such as construction, facility management and insurance in Phase I and in Phase 2, we'll then focus on Roads and Logistics. Evolving Sustainably, we target to reduce resources, time, savings on electricity. Also, we have looking into going green with securing warehouse -- green warehouse certificates and the newly acquired warehouses. And if you look into the investment for the future, we have now implemented a ESG due diligence guideline for our investments, taking into account ESG-related risk, and particularly on the climate-related risk. And we are -- in FTLife, we have also been looking into greening the investment portfolio. So we are -- in terms of capital deployment, investment, we will take into account of ESG measures, as well as specific climate-related risks. Growing As One, we focus on wellness and connectivity. In Hip Hing, we have started a 5-day work week. We have also pushed through some of the initiatives to build a better connection with -- amongst our employees as employee is always the most important asset to the company. And in terms of Creating Share Value, we would like to grow together with our community. We care about the well-being of our workforces such as partnering with startups, providing hot food at remote construction sites, as well as contributing back to the community to foster an inclusive community. And I think that will conclude our presentation. I'll pass it -- mic to Catherine.