Far East Consortium International Limited (35) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Far East Consortium International Limited 2022 Annual Results Presentation. Before we begin, let me introduce the management representatives. They are Executive Director and Managing Director, Mr. Chris Hoong; Chief Financial Officer and Company Secretary, Mr. Boswell Cheung; Head of Corporate Development and M&A, Mr. Alexis Adamczyk. Now may I invite Mr. Hoong to start the presentation. Mr. Hoong, please.

Thank you. Good morning, ladies and gentlemen. I hope you have a copy of the presentation in front of you. Otherwise, it's on the screen that we'll be playing. Or you can access a copy of it from our website. We announced our results just about 12 hours ago. And we would like to spend the next session just to talk about our highlight of our results and after that open to Q&A. First of all, I'd like to just say that we -- this is the 50-year anniversary of our listing on the Hong Kong Stock Exchange. We are very proud of the achievements that we have made in this 50 years. Especially in the last 10 to 15 years, we have transformed a lot in terms of our business. We have transformed ourself from a local operation to now that delivers large-scale regional projects. We have built a very strong foundation with our development teams now in place in multiple jurisdictions. I think one of the key achievement that I like to highlight to you is our ability to steer through a crisis, as demonstrated in front of you, the results. We've been through, actually in the last 50 years, a lot of ups and downs, including the Asian financial crisis, as well as more recently the COVID crisis. Despite that we are able to still record strong profitability, demonstrating I think the fact that we have a good balance sheet and also deep-rooted regional teams that help us diversify across different geographies. We now have 4 core businesses with approximately $74 billion in total assets, spanning real estate development and hotels and car parks. I think one of the key attribute to our strength is our diversification, which leads to our resilience. In fact, that is also the theme of our presentation for this financial year. Actually, before we started this presentation I actually went to search for the results of other hospitality group enlisted in Hong Kong. I'm very pleased to say that we are one that still record actually pretty strong earnings compared to our competitors who have in some cases recorded 2 consecutive years of losses. Just a quick recap of our milestone. We were listed in 1972. Initially we were focused in some residential development in Hong Kong. We also had some entertainment business, some warehouse business. We really started actually our international expansion phase in terms of repositioning the group, refocusing our effort in property development. We adopted the China wallet strategy about 10 years ago, and that has helped us basically grow our business aggressively regionally, in particular the hotel space and the residential development space. We are now in 9 countries in terms of operation with 4 core businesses. 31 own hotels in operation with approximately 8,200 rooms. And also 12 hotels now under construction. And it's quite remarkable to actually see the journey in the last 10 years. And we are very proud of this achievement. And we have shifted to, I think, a number years ago I mentioned about the Asia wallet strategy which has helped us actually position ourselves with a wider group of customers. I think looking forward, we will continue to deepen our regional operations, increasing the quantity of our larger-size projects with greater economy of scales and while maintaining a very prudent capital structure. If I may just quickly turn to, I think, the key highlights of our 2022 results. I think if you turn to Page 7 of the presentation. That really can be summarized in 6 points. The first point being sustainable growth of our core businesses. If you look at the results that we've published, in property development we have accumulated presales. This represent a sales number that have been contracted but unbooked as of the 31st of March. The figure was $16.7 billion, which is also a record for us. If you look at the actual revenue that was recognized during the full year for property development, adjusting for the sale of 21 Anderson Road which was booked as a sale of subsidiary, we actually recorded a growth of about 8.3% in that segment. Hotel is actually the bright spot. I think despite the COVID we adjusted very early on our business model which resulted in very strong growth. We are doing a lot of quarantine stay at the moment. And also with I think the restrictions on traveling gradually relaxing across the different regions, we are seeing last year 58% increase in revenue compared to the year before. Likewise, with the reopening, car park business also recovered strongly. And gaming revenue rebounded over 160% year-on-year after the reopening of TWC Casinos in May 2021. The second point that I like to highlight is that we started actually a program of actively rebuilding and recycling our noncore assets. That resulted in basically the signing of about contracts which is worth about $5.7 billion in terms of asset sales, which included Kai Tak development for an office block, Dorsett City, and also some affordable housing in the U.K. We also sold some smaller car parks as well as retail units as well in Australia. We will continue with this asset recycling program in this current year. And I'll talk a bit more about that later on. In term of the hotel business, right, if I may say that, we are actually at an inflection point. I think this is the year of financial year 2022. It shows that it is at an inflection point with actually the strong recovery flowing through directly to the bottom line as well. And we are very proud of the achievement that the team has made. Especially in the very early stage of the COVID we adjusted our business model very early on. Currently we have 12 hotels under construction, I mentioned just now, with 1 we recently opened and 1 opening very soon in the current financial year plan. So this will add to, I think, the growth momentum in the hotel business. In term of replenishing land bank. As you can see from our announcement in the last few months, right, we managed to replenish a number of very-large-size land bank at very attractive pricing. In particular, be able to take advantage of the, some of the weaknesses that the Mainland Chinese developers are facing. So we've managed to secure some very important land bank replenishment at very attractive pricing. The next point I'd like to make is about BC. BC is a mortgage financing platform. For those who are not familiar with it, it is a lending platform that focuses on mortgage businesses that is supported by financial institutions, sovereign wealth fund, as well as banks in terms of funding. And then we lend that funding to end-customers. We now have an AUM of about $3.8 billion as of 31st of March. The operation is growing very strongly. And with the recent acquisition of Mortgageport, that helps us to diversify our ability to originate new mortgage loans as well. The next point I'd like to make is about our balance sheet management. We are very actively reviewing our balance sheet to see how we can lengthen the maturity of our debt. I think the balance sheet also reflects that we have a number of very-large-scale projects which are at the tail end of its development. And we have, I think before, the talk about the inflation as well as the rate hike we mentioned, also issued some additional bond doing a recap of our 2024 note. Moving on to the next page, Page 8. It kind of summarizes I think the key numbers for our results. I think the key theme again is diversification yields resilience. And in terms of the top line on the statutory account basis, this was $5.9 billion which is basically flat from last year. But if you adjust for the disposal of 21 Anderson Road which is a project that we have in Singapore, a completed property, we sold it as a subsidiary. It was recorded as such. The adjusted revenue was $7.1 billion, which is up about 20% compared to the year before. Our gross margin improved from 31% to 34%, primarily driven by the strong recovery of the recurring cash flow business. I think one highlight is the cash profit. The cash profit figure. And this is adjusting for depreciation or the noncash expense and also deducting the revaluation surplus. We managed to actually record a adjusted cash profit of $1.4 billion, which is up about 126% compared to last year. And EPS figure was $0.54, which is up about 136% compared to last year. And the board yesterday had discussions on the proposed dividend, and we are recommending that for final dividend we increased it to $0.16, taking the total dividend for the year to $0.20. And in addition, in order to celebrate our 50th listing, we also are proposing to issue 1 for every 10 shares held in bonus shares. So this is what we are proposing which will be voted in the AGM. So far as cumulative presales, I mentioned just now we recorded a presales, these are unbooked sales as of 31st of March of about $16.7 billion. And the NAV, adjusting for the hotel revaluation surplus was HKD 33.4 billion which is equivalent to about HKD 13.8 per share. Moving on to Page 9. I think the column I would like you guys to focus on is the gross profit line before depreciation. And you will see that across all the recurring cash flow businesses, hotel, car park, gaming, we recorded actually a very strong growth. In particular on the hotel side you can see that the gross profit before depreciation almost doubled compared to last year. Likewise, I think car park demonstrated actually even stronger momentum, as well as our TWC operations. And if you turn to Page 10 of the presentation, it give you a summary of our NAV per share for the last 10 years. And we are a company that specialize in property development. And as you are aware, if we don't sell the assets, those assets are recorded at costs on our balance sheet. So this figure here, we adjust for only hotel revaluation surplus every year. And every year we have a independent valuer to value the hotel assets. And you will see that actually consistently we are able to create an increase in NAV per share. And that's something which we will seek to achieve in the next 10 years or so. And if you look at the dividend figure, that has also demonstrated an uptrend. And with the business expanding, we are hopeful that actually the uptrend can be continued as well. In term of our balance sheet analysis, if you turn to Page 11, our total net debt was about $21 billion, which was up from last year, particularly reflecting, I think, a number of our big projects coming to kind of the tail end of the development, and supported by construction alone. And a lot of those developments have been presold as well. So I'm not too worried about the slight increase in net debt position. And in particular, if you look at our net leverage ratio measured on the basis of net debt to total adjusted assets, is stood at about 28.9% as of 31st of March 2022, especially when you compare to, I think, some listed REITs in Asia. This compare very favorably to the other listed REITs in Asia. If we zoom into the liquidity position of the group on Page 12, you'll see that in fact we have, especially under this market conditions, maintained a very high level of liquidity. We have total available liquidity of about $18 billion. This includes cash position as well as our treasury position and some undrawn facility. That far exceeds the $3.5 billion of CapEx required for the coming years. But importantly, I think is to understand right the presales of $16.7 billion. A lot of these presales, the cash is not on our balance sheet yet. So when we complete our development, these presales will come, the cash will come back onto our balance sheet, that gives us very strong visibility on future cash flow stream. And in addition of this presales as well as our liquidity position, we also have a portfolio of assets which are completely unencumbered, hotel assets, there are 5 of them which are unencumbered, and also residential inventory of about $6.6 billion which are completely unencumbered. So these are all flexibility that we have on our balance sheet. If you turn to Page 13, especially for those fixed income investors as well as our banks, you'll see that you'll get a lot of comfort by looking at Page 13. That shows actually improvement across the different various benchmarks, including current ratio which stood at about 1.8x. Our adjusted cash profit figure, this is net of interest as well as tax, continued to, actually moved up. And we reached $1.4 billion in the last financial year. And EBITDA to interest coverage ratio stood at about 7.9x times compared to 6.7 last year. So there's a lot of, I guess, cushion. And I think the thing that the management team is very focused on is to look at the way interest rate is moving. We are very vigilant about this, to try to see how we can manage the situation. And one thing I must say is that the return on our development is very good and far exceeds, I think, and far offset, I guess, the increased interest rate. Turning to Page 14. I mentioned just now about our active recycling of noncore assets. And this page give you a summary of what we did last year. The key for us for this year will be to look at some of the non-Dorsett branded hotels such as the Sheraton, Gold Coast, the Ritz-Carlton, and also the TWC hotels. These are all potential targets should there be a good bid for these assets. We think these are noncore to us, so we will be happy to entertain any offers there. And also I think on the car park and this is rather smaller one that we don't feel is quite mature and noncore, we will also consider disposing those as well. So the program of active recycling of noncore assets will continue this year. The next page is about really talking about reestablishing growth momentum. I think we've been through 2 years of COVID situation, and we did manage to come out of that I think pretty strongly. I think in the coming year we have a number of major completions coming up, including West Side Place Tower 3 and 4, Hornsey Town Hall in London, New Cross Central in Manchester, The Star Residences, which are already completed and being handed over as we speak. And Ritz-Carlton Melbourne is also completing. And more importantly, I think the casino in Queen's Wharf, we are now targeting the opening to be in around June of 2023. And Page 16 is just to show you the pipeline in the next few years of our major completions. So I think it gives some guidance as to what sort of booking we can make and also what additional recurring cash flow stream we are able to enjoy following the completion of these assets. Turning to Page 18. I think just to give you some highlight in terms of this page. I think the message there is that there are $66 billion of saleable residential inventory of which we have locked in about $16.7 billion already. So if you look at this, I think it shows that, look, we have enough pipeline for at least 7 or 8 years, so very comfortable so far as our pipeline is concerned, and also the presales give us very good visibility on the cash flow in the coming few years as well. The large-scale projects that we added to our pipeline, turning on to Page 19. Last year we added a number of parcels of land in Manchester, in Kai Tak, that project we are doing with New World on a 50-50 joint venture basis. It's a big project with GDV of about $13.2 billion, and that we just have the plan revised to offer about 1,400 apartments on the runway in Kai Tak. Lam Tei, Tuen Mun, that's a new acquisition that we made last year. Again we bought at a very good price, especially immediately after we managed to increase the plot ratio, doubling I think the GFA as well. And Vauxhall Square is another one that we acquired recently. And that's a very important and significant development in Zone 1 of London, and we are very happy that we are able to secure that deal at a very, very reasonable price. I think the next few pages is about, I think, details of some of our projects, which I won't go through in detail. I think the highlight there is probably on Page 21, which is a project that we launched in March and -- prelaunched in March and then official launch in April. The sales have gone very, very well. It is quite a big project with 819 apartments with our attributable GDV of about $2.5 billion. So total GDV -- because we own 50% of this, right, the total GDV is actually $5 billion. And the response for this project has been phenomenal. And we are now, I think, close to 85% sold already on this project even though I think the completion is not until 2024-'25. MeadowSide, these are some of the photos of projects that we completed. So I won't go through every single project here. The other sort of page I maybe spend a minute to talk about is on Page 25. This is West Side Place Tower 3 and 4, so it's another major completion that we are expecting in the current financial year. We topped the building already. And in this development there is also going to be a Dorsett Hotel. And we're expecting handover of the first batch of apartments maybe towards September or October of this calendar year. And Page 26 is The Star Residence Tower 1. That project we already completed. So we are handling it now. So again, I won't go through every single picture, given the time constraint. If I may talk about -- turn to Page 30 to talk about hotel. On Page 30, right? You will see that actually across the board, across different geographies, the RevPAR has improved a lot. Despite that, right, in fact the occupancy rate for the full year only was at about 62%. So that what this is saying is basically there is scope for still ability for capacity to take on more customers. I think what is interesting to note there is that with the new sort of strategy that we adopt and with also I think government in different regions reopening, we are also seeing room rate actually increased quite substantially as well across geography, right, and not just Hong Kong, but across the different geography. So this is, I guess, I think the positive side, right? And I think the growth in the coming year will be, in my view, coming from higher occupancy, higher room rate as well as room additions that we -- for those hotels that we are completing. So I do expect that this business will continue to improve in this current financial year. Turning to Page 31. You have some pictures of Dorsett Gold Coast which was opened in December. And this is a joint venture project with 313 rooms, very high-quality project and doing a lot -- doing very well, actually. In fact, is recording above budget at the moment. And in terms of the pipeline, the 12 hotels, summarized on Page 32, I think it's primarily in Hong Kong, the Kai Tak project with 400 rooms, which currently we are building. We I think topping the building in maybe next month. U.K., we are adding in Canary Wharf 1 new hotel, as well as the Hornsey Town Hall resi project. We have just launched a new brand called Dao by Dorsett which is a service apartment type hospital -- sorry, it's a park hotel type of offering, it is doing well. And also in Australia we are adding a number of hotels, including the Queen's Wharf 4, number of hotels there, as well as in Melbourne as well. So Dao by Dorsett, Page 33, I think for those who are planning to be in London this summer, I would encourage you to try out this hotel. It's slightly bigger in size in terms of room. I guess because of the nature of current traveling pattern, people typically like to stay a little longer in any particular location. And this product is actually very good. So it's an extension of our Dorsett Shepherds Bush Hotel. But this one has got small, I guess, kitchenettes, and the feedback I got is that it's very well received by customers. The other sort of big hotel addition that is going to be finished this year is the Ritz-Carlton in Melbourne, 257 rooms. And we think that this will be completed, I think, towards the end of the calendar year or early next year. So this will be, it is a 100% owned hotel. The Kai Tak hotel, on Page 35, you will see basically some CGI images there. It's going to be a flagship Hong Kong hotel. This one is with 400 room, right across from the office block that we sold to China Light and Power to serve as their headquarter. So this project, if you go to Kai Tak now, you see that the building has been topped, and we think this one should be completed in the financial year 2024, yes. Moving on to the next page, talking about car park operations. You see that our revenue for car park operations increased about 32%. So the total number of bays that we are managing now is about 120,000. So it shows consistent growth across the years. And we are very pleased to see that this momentum is continuing, especially in the U.K. where we entered the market a couple of years ago. We have been now getting a lot of inquiries for us to manage for third parties. So this business will organically continue to grow. Turning on to Page 39, Queen's Wharf. I think these are some of the photos of Queen's Wharf. I think the plan there is that we will open the casino floors first, probably towards the summer of next year. And then we will then gradually open the hotels as well. The retail component has been leased to DFS, which is a part of, I think, the big luxury group company, and DFS has leased out all the retail space. And they are going to be doing, bringing in a lot of luxury brands into the retail there. So we don't have to worry about leasing out the retail component. To summarize, right, we do have a 99-year lease on this casino with 25 year of exclusivity. PALASINO, this is the new brand that we launched, rebranded all the casinos in the Czech Republic. And after the reopening in May 2021, revenue actually jumped significantly. And the momentum seems to be continuing. We have recently actually applied for a Malta online gaming license to try to service more customers who are unable to come to a casino. And we expect that this license should be granted to us in the next couple of months or so. So this hopefully will bring in more revenue for us. And our partnership with Star. I think there are a lot of negative news about Star in recent months. I must say that I think it is towards the tail end now. I think we are encouraging the board to actually replace the managing -- well, a few management, senior management team members have resigned with the new CEO being appointed. I think an announcement actually came out today. We think that he's the right person to lead The Star. And there are a lot of synergies that we see to continue to work with The Star Group, including the joint venture that we have in Brisbane as well as in Gold Coast. So we look forward to actually building a strong partnership with STAR as the [indiscernible]. And last but not least, it's our mortgage business, if I may turn to Page 43. I think you'll see from the chart below that the AUM is demonstrating a very strong growth year-after-year. After all, we only operated this business for 4 year plus, right? But now it is demonstrating very strong growth momentum. We also have more financial institutions supporting us. We've done 4 securitization issues now. And every time we see our investor base expanding and continue to gain a lot of support from the sovereign wealth fund in Asia and also credit fund, pension fund as well as insurance money. And at the moment, we are seeing growth of about $200 million every month in AUM. So a very, very positive momentum that is demonstrating in the business. I think the idea there is that I think when the business becomes more mature, we should be looking to spin it off separately given that the business nature itself, right, it's not exactly the same as what FEC is doing, but there's strong, very strong synergy. Providing our customers with financing is actually a very strong synergy to our current real estate development business. So that's the comment I'd like to make. And moving on to, I guess, the last section, just to summarize and to provide the outlook of the business. For property development, I think, as mentioned just now, we have very strong unbooked presales figure. And the pipeline of about $66 billion actually provides the company with very strong future revenue stream. And we will actively continue to sell down the inventory. In fact, the recent performance has been pretty, pretty good. And we hope that this momentum can continue. On the hotel sector, I think this, especially for this year, right, we are seeing continued, the recovery in this segment. And with the new hotel that will be added to the pipeline, it will just add to the revenue stream of this business. The car park operations, I think the key growth driver will come from more new management contracts. And gaming operations, I think the key there is to get the opening of Queen's Wharf, and that would add a new revenue stream to the business. And also the online PALASINO. Hopefully that can provide a bit of growth momentum there as well to the operations. And finally, BC, it is a very promising new business, and we just recently expanded into asset management with the launch of a new fund that targets retail and high net worth. And yesterday we got a rating for that fund. And I think we got a 3.75 star rating, which is a very good start for a young fund. So very happy to see that the team is doing well there. And in terms of ESG, if I may just say a few things, we have formulated or still implementing, I think, a number of strategic direction for the team to work on. More importantly, I think the net 0 road map, right, is something which we are keen to actually develop, and we are exploring various emissions reduction strategy to achieve that goal. And in terms of, I think, the financing framework, we have also recently established a financing framework with S&P Global Ratings providing us with a aligned opinion from them. And the last page I want to talk about is about, I think, the awards that we have won, on Page 48. As you can see, and thank you all for giving us the support, we have won a lot of awards in the past months. And the one that I'm very proud of is the Asia Overall Best Managed Company and Best Managed Listed Company in Hong Kong by FinanceAsia. So thank you all for your support there. And we will continue to work hard to provide the transparency that investors expect from us and continue to deliver hopefully a strong return to our shareholders as well. So with that, I conclude my presentation, and thank you very much.

[Operator Instructions]

Yes. The first question that we have is, "Any update on the U.K. exposure. And in such a case, is there any way to hedge the FX risk?"

Yes. I think the way we hedge ForEx risk is by borrowing locally. I think I mentioned this a few times, right? We always look to get domestic source of financing. We don't hedge the equity, but we do hedge partly the using local currency debt. So we do, for example, the projects that we have in U.K. are mostly, well, it's often funded by U.K. sterling loan, right? So that is the way we can hedge in part. Profit, unfortunately, it's very expensive to hedge. But I think long term, you'll find that sometimes it's in your favor, sometimes it's not in your favor. Now probably not in our favor, but there was moment in time when it was very much in our favor. So we just take the view that we don't -- we hedge in terms of -- in part using loan, but the equity or the profit part, we don't hedge.

"Well, the property development margin in Australia and U.K. are relatively low. How do you expect going onward?"

Well, actually, I think the margin that we have is pretty stable. I wouldn't say it's low. I think historically I think China, our projects in China because the cost base is very low. We have a very high margin for our projects in Shanghai and Guangzhou. But that's at the tail end of the development now. I think the margin that we can expect going forward are more than normalized margin. I think U.K. and Australia are, what we have experienced are actually normalized margin.

Yes, one point I want to add is that actually in Australia, well, and U.K., most of the projects are very stable in terms of the profit margin. The last year, last financial year, 2021, when we hand over the stage 1, Tower 1 and 2 West Side Place, that was -- most of them are actually on the lower floor. So honestly, this is a lower margin. This is the main cost as well. So upcoming, the second phase, talking about the mid-floor, high floor, of course the profit margin are same, yes -- I mean is higher.

[Operator Instructions] Okay. This comes to the end of our investor presentation. Thank you again for joining us. Thank you.

Thank you very much. Thank you. Bye-bye.