Hang Lung Group Limited (10) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. My name is Joyce Kwock, and I'm the General Manager of Investor Relations at Hang Lung. Welcome to the analyst presentation for FY '26 interim results announcement that were made earlier today for both Hang Lung Properties 101.HK; and Hang Lung Group, 10.HK. We welcome the audience who are at our Hong Kong headquarters and also the audience who are on the live webcast now. Please scan the QR code for our presentation pack. There are versions of English and simplified Chinese here for you to choose from. So today, our senior management team is all here to join the presentation. They include Mr. Adriel Chan, our Chair; Mr. Weber Lo, our Chief Executive Officer; and Mr. Kenneth Chiu, our Chief Financial Officer. So our Chair, Adriel, may start with some remarks, and our CEO, Weber; CFO, Kenneth, will also walk through the results, including development projects and our financial management. And after that, we can take the questions from the audience. So, Adriel, please. Thank you.

Thanks, Joyce. So I think you've all seen the numbers by now. I hope you'll agree that it's a healthy set of first half figures. Consumption in China is continuing to hold. I think first quarter, if you break it down, was better than second quarter, but second quarter was still, all things considered, not bad. But first quarter was strong enough to really lift the whole first half for us. If you talk to some of the partners, I'm sure you've seen the LVMH numbers, the Kering numbers, everybody -- a little bit of a mixed bag. There's a little bit of pressure in Q2. But I think overall, the trajectory for the whole year is still relatively positive, and I think we would probably concur with that. That being said, sentiment is still somewhat low. If you look at the Chinese government National Bureau of Statistics sentiment score, it's still quite low. But at the same time, this is not the first half nor the first year where we've seen our sales sort of working against sentiment to the upside, of course. So sentiment, as you know, has been bad for quite a few years, but our numbers have sort of outperformed that for some time. So I think the trend in that respect is also holding. Hong Kong has been okay. I think we've definitely found the bottom. I probably found it a while back, but we're now starting to see the bottom in both office and resi as well. And I think retail continues to be a little bit challenging. But if you dig into our numbers a little bit more, which Weber and Kenneth will do, you'll see that actually despite having a headline negative figure, we're actually like-for-like positive, which I think is also healthy, even though it is low single digit. So we have a lot to talk about. Very interested to hear your questions, what you're focusing on. But maybe I'll pass it on to Weber first to give you a brief overview.

So it will be my last time, and then, bear with me. This will be very enjoyable as well because I wear the same tie as my first interim results. So 8 years, no change, at least I didn't find anything on the tie. But -- just maybe I'll quickly go through the numbers, and then we will discuss more. Of course, I think a lot of us doesn't want to look at the optics that we have a negative 10%, which because we make a provision, the noncash provision for the DP, actually, specifically in Wuhan, which we will talk about it. But without the underlying net profit provision that impact, our HLP underlying net profit was down by 2% and our group was up by 1%. Now of course, I will explain later. But if you look at our core business, leasing, revenue up by 5%, operating profit up by 4%. Underlying profit is flat, mainly because the capitalized interest is less. The interest cost was up. But the core interest expenses is down, but it's because of the capitalization. But that is really our core business, accounts for over 100%. Hotel, we lose less, performing, and then plus 14%, plus 15%, plus 7% in underlying profit. The optics creation is coming from the sales because I think we made $1 billion revenue in both Hong Kong and Mainland, but there is some money-losing sales happened mostly in the second half of 2025 when the market was still unclear at that time. And that's why we make some transaction with a loss. But actually, it's not loss, but because we do the amalgamation at that time in Amoy, that actually valued up the price. The actual margin is at 26%, 27%. But because of the valuation up, there will be a loss a little bit from The Aperture. But I think the most important thing is we make a $124 million provision in Wuhan serviced apartment that actually skewed the number from negative maybe 50 something to $187 million. That actually made the loss in the underlying. So I'll explain a little bit more later on this one. So in terms of the revenue mix, most of the time, we do not have DP, right? So therefore, overall maybe 95%, 96% of our leasing business. But this time, with DP over $1 billion, the Mainland rental revenue account for 56% and Hong Kong rental revenue account for 24%. So add together, 80%, hotel account for 3% and the property sales account for 17%. Rental revenue in Mainland, after negative 4% in 2024, flat in 2025, now in '26, it's up by 3%. But in the 3%, you can see a divergence of story. So retail, very positive 6% up. Office down by 12%, the supply issues, the competition issue continues. Serviced apartment because it's very small numbers in Wuhan, and that actually make a huge numbers. But at the end of the day, it's only RMB 4 million. So altogether, it's 3% in Mainland in terms of renminbi sales. If you look at the trend, also '24 was negative 3%, '25 was plus 1%. So this first half, plus 6%. And if you look at the plus 6%, almost across the board, except the younger brothers at the bottom. Heartland, we will talk about it. Forum, we will talk about it. But the good news, I would like to also highlight to you that even though it's a negative 18%, but you compare the second half of 2025, it's only negative 3%. So that means we are almost at the bottom now. Hopefully, we can turn back into positive soon. Forum also is a negative single digit. So I think overall, if you look at the sales across the board, basically, we benefit across from all the trades, not only to mention luxury, but also the non-luxury and also the F&B are doing really well. Okay. This number, I think, really interesting, right? So when we announced our last year full year result in end of Jan, we see a strong January. We also said if the January is not that bad and the February will be even better because the year-on-year difference in terms of Chinese New Year. So the first quarter was 24% up, very strong. But the second quarter come down, but still plus 9%, I think it is more or less like normalized. So it's still doing well, but not as good as the 24% in first quarter. So across the board, also, you see, look at the shopping mall, Shanghai, very strong. Center, Olympia, Spring City, Parc, Palace, they are very strong. Again, the 2 younger brothers at the bottom and Westlake is new. So that's why there's no comparison. And worth to mention, out of the 10 operating mall, excluding Westlake because Westlake is a new mall, 7 of them record high sales, 7 out of 10, right? So I think this is really not only a one trade or 2 doing well. It's across the board that we managed to get the traffic up. We managed to get the occupancy up, and we also managed to get across the board sales increase in 7 out of 10 record sales in Mainland. This is not new, but I think very positive. We got more valid customers. Valid customer means they were active in the last 3 months, up by 25%. New members, up by 41%. Member sales up by 18% compared to the 17% sales up, which is very important because the penetration is 71% to our overall mall. So that means the member sales still carrying and also driving the sales for our shopping mall. And the penetration basically keep more or less the same level. That means we engage the customer at least 70% of our customers in our shopping center. As I mentioned, record high foot traffic. We just plot the chart without Westlake 66, you see that we are now higher than 2024, higher than 2025 in terms of traffic. And look at also the mall occupancy. Most of them are above 90%, except Westlake 66 because new, only 2 months old, and also Forum because 88%. I think otherwise, every mall are at 90% or above. And worth to mention the net LFA change. We have some decrease in luxury is because there are some close in Heartland and Forum. But lifestyle, maybe you will ask me what lifestyle means, like the gadgets, like Huawei, like Xiaomi, like DJI and some of those or MINISO or POP MART or MUJI, some of those actually increased a lot, which help us to differentiate and provide or offer experiential experience to the customers. F&B increased by 4% and jewelry and watches increased by 8%. And the number of first in town, I think this is something we are very proud of. First half already doing more than the last year 6 months, 2-year 6 months, right? So we achieved 103 already. We will be able to achieve over 200 in 2026. So opening of Westlake 66, we will welcome you to join us in October, right? In our roadshow. This is something we would like to present to you all. But I think it's important to look at we achieved very high traffic in this new mall. So in the May Golden Week, on average, 120,000 daily footfall in the mall, which our mall is not the biggest in our portfolio, but we can be able to attract over 120,000. Now even stabilized, they are at 40,000, 50,000 level. The good news is if you look at the occupancy rate as of end of June, it's 89%, but the commitment rate is already 98%. So some of the stores they took over, but they take longer time to renovate and/or do the fit-out. So the 98% already there. And number of store, 250, first to the market is 100 of them. In terms of office, we lease the B and E first. The B and E occupancy rate already 47%, so we just hand over the C and D. And if you look at the total number, excluding the A, we are already 45% commitment in B, C, D, E. And if you look at even together with the Tower A and E, we are already at 22%. So I just look at the numbers compared to our Heartland office, our Spring City office, they are more or less the same pace even in an even tougher environment today. So we believe that by the time of end of 2027, we will be able to achieve 70% of occupancy in the office in the Westlake. So this one, I think, is important. We talk about pavilion. This is only one of the puzzle. What we are trying to do is upgrade Plaza 66 again. So this year is our 25th anniversary. If you recall 7 or 8 years ago, we do the renovation, and now we will do it redefine luxury once again. We will add a pavilion in the second half, which add another 4,300 square meter and 1,725 square meter pavilion outdoor area and the rooftop garden that we will add different trades and make it very vibrant. And we will launch a brand-new VIC lounge on the fifth floor and also to elevate the customer experience as well as we are now adding a lot more F&B in Plaza 66 in order to really provide not only a luxury for a thing, but a luxury for an experience. So this is really something we want to keep the customer longer to keep the customer with a, I would say, more stickiness and therefore, they will be spending more time with our shopping center. Key opening in the next 18 months for our hotel. Our Curio Collection by Hilton in Wuxi will be opened, I think, in the next 45 days. So we just got the license. They have to go through some of the final touch. So hopefully, we will be able to launch it early September. Mandarin Oriental, our target is still in Q1 2027. The fit-out will be complete by Q4, and then we will get the OP by Q4. And hopefully, everything will be ready to launch in Q1. Kimpton Xujiahui, the renovation continues, is on track. And hopefully, we will continue to be targeting this second half 2027. V.3, not much update, except at Nanjing Xi Lu, the internal fit-out and the upgrade are already happening. If you pass by Nanjing Xi Lu today, the whole thing is already on and internal construction is already doing. So I think this one is 100% responsible by the landlord. So we don't need to do anything. They are really making ready for us. Then we are doing the design. We are actually just formed the JV company with the partner already. Center 66, we are doing the design and also form the JV company and the Westlake 66 expansion, we are doing the design because this will be 100% with us. So that there is no JV partner company to form. Okay, office. This is really a top challenge. If you see from a plus 5% in 2023 and suddenly turned into very chill weather and now into a very cold weather, negative 12% in first half of 2026. So you see across -- I will not mention particular cities, but in Shanghai, the competition is very, very keen, right? So the reason why I say, we are the existing buildings having all the top clients. Everyone try to steal your tenant and offer them 1/2 of the price with the fit-out. So it's not a -- it's a news now, is in public domain. LV will go to CR Land building, but we keep all the other LVMH brands staying with us. But the LV brand will go there because they subsidize everything. They give them a rooftop, they give them a garden. So -- and then they pay only 40% of the price. So I think this is the market today. And that's why the good news is our occupancy is almost everyone over 80%. We are doing our best to retain the best tenant. The good news is we lose LV, but we get Tiffany. We lose some, but we got Patek Philippe. So we are trying our best to retain the best tenant in our mix. But the market is very tough. Like in Wuxi, you cannot believe someone offered $1. We are charging $2.8. Someone offered $1, we fit-out. So I think the market is brutal, but I think the team are trying very hard to retain the best tenant, but at the same time, offering the best service to them.

Just if I can just cut in very quickly on that. If you look at our occupancy for the offices, I think it's actually still very decent. So we've been forced to reduce prices because the market is the market. But the fact that we're able to keep our occupancy at a high-level means that we still are competitive in the market, and we're doing everything that we can. So I think that is something that's worth mentioning.

Hong Kong from a negative 9% in 2024, negative 2% last year, now to flat. So I don't want to repeat, but it seems like we find the bottom of offices, we show 1% up. Residential is going strong. Retail, negative 2% is because of a huge brand leaving in Causeway Bay and now we are swapping in. We are doing landlord provision now. It takes a few months. That's why it's a void for 3, 4 months. And hopefully, with the new tenant coming in, we already identified, we already confirmed when they come in, the negative will become positive. I just want to exclude -- if we exclude that particular hole, our rest of the business is plus 1%. So that means the others are okay, except that one, but that one hopefully will be done in Q4. Our sales is up by 3%. So that's why we do not have luxury in Hong Kong. So we are more or less a neighborhood mall. The good news is Amoy is doing well. Kornhill is doing well. Amoy will do better, hopefully, because we just completed a bridge to link with the Kowloon ECC. That will help people to walk without the rain and with the cover from the MTR station, go back straight to Amoy. That will help us to improve traffic, that will help us to improve the leasing progress as well. And also, hopefully, that will have positive rental reversion to us. Same thing in Kornhill, we make a decision to swap out the cinema and change into a kids area called Adventures. So very good. The business is doing well. We have sales trends and then we turn into experiential. So I think some of those, we just need to add fast and then try to meet the customer need, especially now finally, we heard from some verbatim, "Oh, now I don't need to go to Shenzhen, you have something similar. I can stay in Kowloon, Hong Kong East to enjoy some of the kids activities, especially in the summer." Property sales, maybe I'll pass to Kenneth to have a few words on that.

Thank you, Weber. I think this first half was a very fruitful 6 months for our property sales. If you look at this chart, upper part, actually, it represents the sales revenue that we have booked. We have hand over quite a lot of units at The Aperture as well as one house at Blue Pool Road. So I think substantially, this $1 billion revenue book came from our Hong Kong property sales. If you look at the lower part, it summarize the contract sales that we have achieved in the first 6 months. Total contract sales, if we include the sales of Summit, which is an investment property, the total sales proceeds account for $1.5 billion. If you look at our whole-year contract sales last year, it was around $1.6 billion. So this 6 months, I would say it was a fruitful period. I think we took the advantage of this time window when the market is good, we speed up the property sales. For information, only in July, we have further sales in Summit, 3 units. So which is not -- which are not included in the first half result, but those sales will be recorded. One is -- will be recorded in the second half and the other 2 will be recorded in the earlier next year. Yes. For financial management, I think the key highlight is that our debt portfolio right now, as you can see, around 1/2 of our debt is renminbi-denominated. And the average debt maturity is around 3 years. We have sufficient available facilities unused, around $18 billion. If you look at the bottom right-hand corner, you can see that for those debt mature more than 2 years account for 69%, which has lengthened compared to the previous period. And I think I show this page as well. For the net gearing, you can see that it came down from 33% in first half last year to 31.6% by end of June this year. Our average borrowing cost further came down to 3.7%. We benefit from a relatively low HIBOR in the first half this year. And also my treasury team managed to get better refinancing terms in the past 6 months. So overall, we have achieved savings. I think as you may know, we have already completed a lot of projects. The biggest one is Westlake 66, and we have already opened on 28th of April. Because of this, the capitalization ratio of our finance costs came down from around 50% last year to this first half, 40%. Going forward, we believe this capitalization ratio will continue to go down. We expect overall for 2026, the capitalization ratio will be around 30%. Okay. Next page. Okay. I'll pass it to Weber to share with you guys.

I think, just a lot of things going on for ESG. We published the Bending the Curve report to really set the -- sorry. I forgot. I have 2 things. To really set the tone and also set our goal for 2030. Renewable energy, very proud to present 10 out of 11 of our Mainland projects are powered by renewable energy. The last one will be Tianjin, and then we are working very hard to get this 100% renewable energy breakthrough. So the public engagement as well as the community engagement continues and ESG benchmark rating and everything improved over the year, and that helps our finance costs, that helps our other achievements. So I think overall, I think we have a very fruitful year for the sustainability as well. So I will stop it here and then maybe go for Q&A.

I think there is a slide that somehow was skipped, which is this slide that we have new development.

Oh, okay.

Shouson Hill.

So maybe we just quickly talk about Shouson Hill. We finally get the green light from the government. So we will get more area by paying a little bit more, 50% more area, so we can build more houses. Instead from the 5, we can get more houses. We can really do a much better product for our customers. All right?

Okay. Cool. So thank you very much, Adriel, Weber, Kenneth for the presentation. We now start the Q&A. [Operator Instructions] So from the floor, I see Karl from JPMorgan, please.

First of all, I just want to take this opportunity to thank Weber for the past 8 years. Happy retirement, and we will stay in touch. Okay. So I guess my first question is about the CEO, right? Because today, we had the announcement -- we saw the announcement, but then we saw there's no name from the announcement. So just curious, can you give us like a sneak peek on how the new CEO is like? For example, what made him a tick? What make him -- what make you feel like very impressed by this new CEO? And maybe like a bit of a background on the new CEO. So maybe that's the first question. And the second question is on Mainland China retail. So for the first half, I think we saw pretty outstanding results. But then for this, like, starting in around May or June, I think there have been more commentaries about how tenant sales or retail sales in China further slowed down. So just curious, can you give us, like, a breakdown on the tenant sales trend by month roughly, say, for June and July so far, how is it compared to April and May? And then for the second half of this year, what's your expectations for tenant sales in Mainland China? So that would be my second question.

Thanks. I think more details on the new CEO will come in due course. So you won't have to wait too long, don't worry. It's probably a week or 2, a couple of weeks. And it's -- we just want to be as transparent as possible. The Weber's retirement was announced quite some time ago. And I think that the least we could do is explain that we have actually found somebody with a name to be announced. On the second question, which I think is much more interesting. The retail -- I alluded to this earlier in my opening comments. I think that second half is shaping up decently. So we're all relatively optimistic, cautiously optimistic. As you've seen, there's a little bit of a divergence in some of what the brands are reporting and some of what we have just reported. And that's -- for many reasons, partly, we've been increasing our exposure to luxury, but also as the luxury brands close stores, it's not closing per se, it's consolidating. So their GFA might be increased, but the number of stores may have decreased, which means that the existing stores have either gotten bigger, which it has in some cases for us. And that also means that sales are consolidating into those fewer number of stores. And so we've seen a little bit of beneficiary -- we've been a bit of a beneficiary from that, although it cuts both ways. So in some cases, we've been on the opposite side. But net-net, it's balanced out in the positive for us. And so I think the brands are still conservative. There is concern over sentiment, but there's been concern over sentiment for like the past several years. So at some point, I think that will go one way or the other. For the time being, sales are still strong. And so we feel quite comfortable with the direction that, that's moving in. If you look at Westlake in Hangzhou for -- as a proxy, I mean, it's been quite some time since the new project has opened with so much fanfare. I mean, foot traffic of over 120,000 a day is really quite extreme, especially since it's not such a big project. And that really shows the vibrancy and the hunger for Chinese consumers for compelling spaces for good malls, for good offerings, and that's what we've provided. So I actually feel quite comfortable with the direction that retail sales in China are moving in, even though sentiment and when you -- what you hear on the street may not sound as positive.

I think to answer strictly your question about bimonthly, maybe I will not do it bimonthly, but biquarterly. Q1, I think if you really zoom in, everyone benefit, doing really well. But the gold rush make a difference, which I'm sure you all know. Second quarter, without the gold rush. Also the luxury brands somehow weakening a little bit, but we still achieved 9%. That means the F&B, the non-luxury are doing really well. So in the future, I think I would suggest, yes, we are one of the proxy for luxury. It doesn't mean that we are only doing luxury. So you should also take into account of ANTA how they are doing, POP MART how they are doing because we are a lot of friends with them as well. So I think overall, if I look at the numbers in first half, luxury, including the top gold one, are growing at 15%, but the general are growing at 20%. So we are a lot more diversified compared to the past because of the higher traffic, because of higher occupancy, our F&B grew 16%. So 16% compared to the 17% means they are more or less the same. Our non-luxury F&A, the fashion and accessories up by 25%. So those athleisure of those other brands are doing pretty well. Also, the non-luxury jewelry and watches are up by 30-something percent. So that means first half across the board is doing well. Second quarter, non-luxury continues to do well, but the gold rush and luxury is a little bit slowdown. So that don't mean -- that doesn't mean that the whole engine has gone, right? -- because F&B, the people still need to come out to eat. They still need to come out to hang out. So that's why I would say we are still believing in the second half, it will be high single-digit up in terms of sales. So this is really our expectation based on what we see. But the good thing is the luxury brand seems like the tone and is a little bit more positive now, but they are still very cautious. So that's why I will not say suddenly, they will change their strategy by opening a lot more store. Rather, I think in our shopping center, in our retail business, we need all trades to do well. If we can do that, hopefully, that diversify the concentration risk.

Cindy from Citi.

I have 2 questions. The first is on the dividend. So it's great to see a resumption of the cash dividend. I think it might be still early, but what metrics will guide the potential dividend uplift in the future? Do we need to actually wait for the Hangzhou Mall Phase 2 to open? Or is there any other operational trigger that you might be able to flag? And second is more specifically on Westlake 66. You mentioned foot traffic is amazing, but how about tenant sales performance? How is it tracking, say, against your internal target? And what are some key improvements that might be planned in the, say, coming 12 months to further lift the malls competitiveness ahead of the Phase 2 opening? And are you planning to bring in more luxury concept in the mall? Or how do you see the mall's overall tenant mix in the near future?

The first question, we do not have a policy to say by hitting whatever percentage because we are paying at a very high payout now. What we believe that when all the headwinds behind us, for example, the capitalized interest, which we know before we opened Hangzhou, some of the provision that we made, if some of those are behind us, it is purely organic by looking at some of our business organically growing. We believe that this will not be too far away. We need to let Hangzhou to grow. But based on what we see, the mall should be itself breakeven in Q4. Office will be a little bit longer by end of 2027 because of the high RET. But otherwise, they track according to what we set for ourselves. In terms of sales, it was a surprise. It exceeds all our budget. I asked the team why we exceed our budget because maybe we set the budget too low. But we still believe that more to come because we will have luxury brands coming in, in Q4. We will have 3, 4 luxury brands comes in. We, hopefully, will welcome more and more. And with the Phase 2 coming in, we can accommodate everyone because that will be increasing our GFA to 150,000, which is exactly like Grand Gateway size. So hopefully, then we could be able to attract everyone, not missing out anyone. So I think it's a journey. Of course, it's not as quick as other malls. But I just want to remind also internally, I remind everyone that we open Heartland the best way with all the brands comes in on day 1. But today, of course, I don't want to repeat. So opening well in the first 12 months doesn't mean that you will end up well. We just need to get the best out of whatever you have today. The market today is that you get the traffic, you get the people used to come to your mall, you upgrade yourself gradually. Maybe that will be more sustainable way than competing with all your competition with the pricing. Because when you get and steal the tenant from opposite side, the only thing they will do is to cut the price. Then you have to cut the price too, and then it will not be benefit to anyone. So I think maybe this is the better way. I don't know. Time will tell. But we look at Westlake. We did not -- it did not disappoint us from the matrix wise. But of course, we would like to open some of the brand earlier. Therefore, we can really set the stage and really firm up our positioning. So I think that takes a bit of 1 year or 2. Hopefully, we can do that and show it to the market.

This is [ Vera ] from UBS. And I have 2 questions. First is to just follow up on the previous question. You mentioned that for the second half, you expect high single digit for the sales. Does that exclude Hangzhou or include Hangzhou Westlake 66?

Exclude or include doesn't make a difference, maybe 1%, 2% difference. So it's still higher than 5%, lower than 10%. So then -- so if you want to be having a single digit digit-wise, maybe 1%, 2% is because of Westlake.

Okay. And also for the Westlake 66, so we already recorded the rental income of RMB 37 million. If we annualize that, it's only around RMB 200-something million. Can I do the math in that way? And what is the normalized rental that you expect to achieve for Westlake?

No, I think there is not -- okay, you can do the math this way to get the rough numbers. But when your trading and your opening rates going up, that will have a multiplier effect. Some brands will sell more, and then therefore, they can afford to pay more rent. So I think -- and also every lease will be renewed in 3 years. So it will give us opportunities to revise up. So I don't do a -- okay, in the bank, I always do this way. Divided by 2 weeks times 52 weeks, then I can know what is the number. But unfortunately, our business is not that way. It will take a bit of the pacing up. But hopefully, this will be definitely more than $200 million that would be discussed in the long run.