Hongkong Land Holdings Limited (H78) Earnings Call Transcript & Summary

Good morning. Thank you for joining us to review Hongkong Land 2019 results. This year results presentation will only be given via webcast to minimize health and safety risks to everyone amidst the COVID-19 outbreak. I'm Robert Wong, the Chief Executive of Hongkong Land; and with me is Simon Dixon, our Chief Financial Officer. Following our presentation, there will be an opportunity for questions to be submitted electronically. Please send us your questions through the website, and we will include them in the Q&A session. Before we begin the presentation, I would like to take this opportunity to thank all of our staff for the ongoing dedication and professionalism they have shown during both the recent social unrest in Hong Kong and the COVID-19 outbreak. Today, I'll take you through an overview of our results, investment properties and development properties before turning over to Simon to cover financial highlights. I will then conclude with our outlook followed by Q&A. Turning to the result highlights. I'm pleased to announce that the group produced a solid performance despite challenges during the year. The group had another year of record underlying profits of close to USD 1.1 billion, up 4% when compared to last year. The operating profit contribution from the group's investment properties improved marginally, whilst a high contribution from development properties in the Chinese Mainland was partially offset by lower contributions from other markets. The profit attributable to shareholders was USD 198 million after accounting for net loss of USD 878 million, arising from the revaluation of the group's investment properties. In terms of underlying earnings per share, the group generated $0.46, while the overall earnings per share was $0.08 after the impact of nontrading items. The net asset value per share at 31st of December 2019, was $16.39. The Board has declared a final dividend of $0.16 per share, which brings the dividend for the full year to $0.22 per share unchanged from the prior year. During 2019, the group successfully secured 6 new development properties projects, of which 5 are in the Chinese Mainland and one is in Bangkok. Our total new investment, which includes the group equities contributions and share of project-level debt, amounts to approximately USD 1.2 billion, of which 87% was in China. The group is also very pleased to have been successful at the auction of a very large, predominantly commercial site in Shanghai for USD 4.4 billion in February this year. I will provide further details on these new investments later on in the presentation. I shall now turn to investment properties. The group currently has an attributable interest in over 9 million square feet of investment properties effectively unchanged from the prior year. The group's Central Hong Kong portfolio is our most significant investment. It comprises some 4.9 million square feet of office, retail and hotel space and is valued at approximately USD 31 billion. This is followed by our Singapore portfolio, which accounts for some 1.8 million square feet and is valued at nearly USD 4 billion. Not included in this slide are projects under development. These primarily include the British Embassy site in Bangkok, which is progressing within expectation as well as the newly acquired site in Shanghai. Turning to our Hong Kong office portfolio that forms the heart of core Central Hong Kong. Given the prime CBD location, there is naturally high concentration of financial services, legal and accounting firms. They account for 79% of the portfolio, largely in line with last year. Office rental reversions were positive despite a slowdown in leasing inquiries compared to the prior years. During 2019, our average office rent was HKD 118 per square foot per month, up 4% from $113 in 2018. Vacancy at the end of the year was 2.9% on both a physical and committed basis. At the end of 2018, office vacancy was 1.4%. By comparison, we can see based on existing lease commitments across the Hong Kong Central Grade A office market was 3.6% at the end of 2019 compared to 1.8% at the end of 2018. The weighted average lease expiry at the end of 2019 increased to 4.7 years compared to 4 years at the end of 2018. This is a result of our efforts over recent years to extend the leases of a number of our key tenants to durations ranging from 6 to 10 years. At the end of 2019, 20% of our Hong Kong office portfolio is subject to expiration or rent revisions in 2020. Including concluded leases and rent reviews subsequent to year-end, this has decreased to 15% of our portfolio, of which 9% relates to expiration and 6% to rent revisions. Our retail portfolio is the preeminent luxury shopping and fine dining destination in Hong Kong, as demonstrated by the number of prestigious luxury houses and Michelin-starred restaurants we have as tenants. Fashion and accessories continue to account for a significant portion of our portfolio at 48% followed by food and beverages, which account for 32%. Base rental revisions were positive although average net rent was negatively impacted by temporary rent relief from August to December as well as a decline in turnover rent. Our average net rent decreased by 5% to HKD 222 per square foot per month in 2019. Excluding the impact of temporary rent relief, average net rent was $236 per square foot per month. At the end of 2019, the portfolio remained effectively fully occupied with a 0.3% vacancy on both a physical and committed basis. Turning to our Singapore portfolio, which is centered around the Marina Bay area. Similar to our tenant profile in Hong Kong, our Singapore office portfolio contains a high proportion of financial services firms due to its prime location and high quality of our developments. Average gross rent across our Singapore portfolio was SGD 9.7 per square foot per month, a 5% increase from $9.2 in 2018. Rental revisions remained positive throughout 2019. Physical vacancies across the portfolio increased to 5% compared to 2.5% at the end of 2018. On a committed basis, vacancy was 0.7% compared to 1% at the end of 2018. This compare to the overall vacancy across the entire Grade A central business district market of 4.2% and reflects again the activeness of our portfolio despite a highly competitive market environment. At the end of 2019, 16% of our share of the portfolio is subject to expiration and rental revisions in 2020. Including concluded leases and rent reviews subsequent to year-end, this has decreased to 15% of our portfolio, of which 8% relates to expiration and 7% relates to rent revisions. Turning to other parts of Asia. In Beijing, WF CENTRAL is performing within expectations. At the end of 2019, the property was 88% let. The 73-room Mandarin Oriental hotel has established itself as one of the most exclusive hotels in Beijing since its opening in March 2019 and has indeed received overwhelmingly positive reviews to date. In Indonesia, Jakarta Land, our 50% owned joint venture, continues to perform well despite challenging market conditions. Office occupancy at the end of 2019 was 77% compared to an average occupancy of 67% in the Jakarta CBD office market. At the end of February 2020, the office portfolio was 89% occupied on a committed basis. In Phnom Penh, the office space of our prime mixed-use complex, EXCHANGE SQUARE, was 91% occupied at year-end. In other parts of Southeast Asia, the performance of the group's assets remained within expectations. In February, this year, we acquired a predominantly commercial site in the Huangpu River South Extension area of Xuhui District in Shanghai. This new acquisition represents a rare and attractive opportunities to develop and operate a commercial complex of scale in a prime location in Shanghai, the predominant commercial hub of the Chinese Mainland. The site is located along the Huangpu River towards the east of the traditional commercial area of Xujiahui in Xuhui District. This is adjacent to the inner-ring road and benefits from mature residential communities as well as commercial and cultural amenities nearby. The site has direct access to 2 existing metro lines and is approximately 500 meters from 2 other metro stations on a third line. The scale of the project is significant, including 60,000 square meters of underground retail. This developable gross floor area will cover 1.1 million square meter, of which 78% will be held for long-term investment. Once developed, the net lettable area of office and retail spaces for long-term lease will be approximately 450,000 square meter around the same size as our Central portfolio in Hong Kong. The project will comprise not only Grade A offices and a retail mall but also luxury hotels, residences, a convention center as well as cultural spots and other facilities. This transaction is in line with our long-standing strategy to acquire prime sites in key gateway cities across Asia. Given the prime location of the site, we are confident that the project, once completed, will become new landmark development in Shanghai. Upon its completion, the group will own and manage commercial portfolios of scale in 3 of the leading financial and commercial hubs in the region, namely Hong Kong, Shanghai and Singapore. The site's land cost amounts to approximately USD 4.4 billion and will be paid in installments during 2020. The group is considering a range of funding options without recourse to shareholders, including internal resources and external funding. For the part of external funding, this include, but not limited to, presales, cooperation with strategic partners and debt subject of course to any applicable regulatory approval. Subject to analyzation of the design schemes and approval from the relevant authorities, the project is expected to complete progressively from 2023 to 2027. I shall now turn to development properties. This slide summarizes our current development properties projects under construction and to be developed. They are primarily residential-led, but some of them also feature sizable office, retail and hotel components particularly in the Chinese Mainland. In total, they amount to some 5.7 million square meters of developable GFA at the end of 2019, down slightly from 5.9 million square meters at the end of 2018 as GFA completed, exceeded that of a newly acquired site during 2019. The Chinese Mainland continues to be our key market, accounting for 55% of the total. In the Chinese Mainland, Chongqing remains our largest market and accounts for 67% of our Chinese Mainland business by attributable developable area. We currently have 11 projects in Chongqing, with an attributable developable area of 4.1 million square meters. Chongqing is our largest market in the Chinese Mainland and accounts for 40% of our exposure in the portfolio, followed by Nanjing and Shanghai, which accounts for 19% and 15%, respectively. During 2019, we secured 5 new projects in the Chinese Mainland, of which there are 2 in Chongqing and 1 in Shanghai, Hangzhou and Wuhan. These projects are discussed in more detail later in the presentation. During the year, the group's share of development properties revenue recognized in the Chinese Mainland, including its subsidiaries and share of joint ventures, was USD 1.3 billion. This represented a 12% increase from last year due to timing of completions. In terms of sales performance, the group's share of contracted sales was USD 1.9 billion, an 18% increase from last year, reflecting a change in sales location mix and continued positive recession of Hongkong Land's products in the market. At the end of December 2019, the group's share of sold but unrecognized contracted sales in its developments in Chinese Mainland was USD 1.9 billion. This compares to USD 1.4 billion at the end of 2018 As at the end of 2019, 57% of the sold but unrecognized contracted sales are scheduled to be handed over and recognized during 2020. Although, this excludes the potential impact of the COVID-19 outbreak, which will result in delays in construction and consequently sales recognition. The group recorded gross margins of 44% in 2019, up from 40% in the prior year due to contributions from Yorkville South and Landmark Riverside, which both benefited from lower land cost. Going forward, the gross margin is expected to trend lower. Turning now to Singapore. This slide shows a total of 4 development projects, including Lake Grande, which was completed in 2019. Leedon Green, formerly named Tulip Garden, was launched for sale in January 2020, and the sales performance has been within expectations. During the year, the group's development property's revenue recognized in Singapore was USD 516 million compared to USD 953 million in 2018, which benefited from the completion of the Sol Acres executive condominium project. In terms of sales performance, contracted sales in 2019 was USD 669 million compared to USD 368 million in 2018. This increase was mainly driven by sales at Parc Esta, which commenced in November 2018. At the 2019 year-end, sold but unrecognized contracted sales in Singapore was USD 573 million, 36% higher than last year. As at the end of 2019, 52% of the sold but unrecognized contracted sales are scheduled to be recognized during 2020 under the percentage of completion method. However, this excludes the potential impact of the COVID-19 outbreak. This slide provides a brief summary of the status of our development properties outside of Mainland China and Singapore, which have been launched for sale. In general, our projects are on track and are performing within expectations. Two Roxas Triangle in the Philippines was completed during the year. During the year, we secured 6 new development properties projects. In the Chinese Mainland, there are 5 new projects, all of which are residential. This includes 2 projects in Chongqing and 1 each in Shanghai, Wuhan and Hangzhou. In total, the group's shares of developable area of these new projects amounted to 547,000 square meters. Outside of China, the group secured one new project in Thailand. The residential project is located in Bangkok CBD and it's opposite the group's existing British Embassy site. The group's share of developable area is 31,000 square meters. This concludes the review of our investment and development properties portfolio. I will now pass over to Simon to take you through the financial results.

Thank you, Robert. The group's consolidated profit and loss account is summarized here on this slide. As you can see, underlying profit has increased by some 4% year-on-year to USD 1.1 billion. Just turning to each major line item and just commenting briefly. Consolidated revenue, you can see, has decreased from USD 2.7 billion to USD 2.3 billion as the 2018 results benefited from the completion of the wholly owned Sol Acres project in Singapore, partially offset by increased revenue recognized in 2019 from other wholly owned development properties projects, including Parc Esta in Singapore and Yorkville South in Chongqing. These are also the main reasons for the decrease in net operating costs compared to the prior year. The share of results of joint ventures has increased by some 3% to USD 273 million, reflecting higher sales completions in joint venture development properties in the Chinese Mainland during the year with stable contributions from the group's joint venture investment properties assets. Net financing charges have increased by 6% to USD 121 million, reflecting increased average net borrowings and a marginal increase in averaging interest costs during the year. The tax line represents the tax charge for the company and subsidiaries. Tax on joint ventures is recorded within the share of results of joint ventures. The increase in tax cost is mainly a result of higher land appreciation tax paid on wholly owned development properties projects in the Chinese Mainland. Including tax on joint ventures, the effective tax rate in 2019 was broadly the same as that in 2018. Non-trading items mainly represents investment property revaluations. Turning to the next slide, the movement in underlying profit. So this slide shows the year-on-year movement by major component. The investment properties and development properties components include their share of the group's pretax operating profits derived from joint ventures and associates. Given the significant -- significance of the group's joint ventures, this presentation of our results provides a clearer summary of our performance during the year. Operating profits from investment properties increased by some USD 20 million primarily due to increased contributions from WF CENTRAL in Beijing and our portfolio in Southeast Asia. Operating profits from development properties increased by some USD 93 million due to higher sales completions in the Chinese Mainland. This was partially offset by a lower contribution from Singapore. The group recognized higher net financing charges on higher average interest costs and net debt levels, as previously mentioned, higher taxes on higher operating profit and increased corporate expenses during the year. Moving on. This slide shows the operating profit by business activity and by region, including again the group's share of joint ventures and associates. The contribution from investment properties was USD 1.1 billion, 2% higher than last year due to higher contributions from WF CENTRAL and our portfolio in Southeast Asia. In Hong Kong, the increasing contribution from higher average rents was largely offset by temporary rent relief provided to retail tenants. The contribution from development properties was USD 675 million, 16% higher than last year. This was principally due to higher sales completions in the Chinese Mainland. Overall, Hong Kong and the Chinese Mainland continue to generate the bulk of the group's operating profits, as you can see clearly from this slide. I will now turn to the group's consolidated cash flows. The group continues to generate strong and stable operating cash flows. During the year, the group generated some USD 1.2 billion of cash from its operating activities. This compares to USD 604 million last year. The increase is primarily due to land payments for wholly owned development properties projects being USD 456 million lower in 2019, and dividends received from joint ventures being USD 281 million higher compared to the prior year. These were partially offset by sales proceeds being USD 185 million lower and development expenditure being USD 167 million higher at the group's wholly owned development properties projects. Under investing activities, the group had net outflows of USD 658 million compared to USD 1.1 billion in 2018. This includes a gross investment of USD 1.6 billion in joint ventures predominantly to fund that development expenditure, partially offset by USD 916 million of repayments and advances from joint ventures. Major renovations CapEx was mainly in respect to the Hong Kong Central portfolio and amounted to USD 116 million compared to USD 93 million in the prior year. Under financing activities, the company paid dividends of USD 510 million compared to USD 467 million in 2018, reflecting last year's 10% increase in the final dividend. The group also had a net drawdown of borrowings of USD 25 million compared to USD 838 million in 2018. Net debt at the end of December 2019 was USD 3.6 billion, marginally higher than the 2018 year-end figure. This slide breaks down the carrying values of our investment properties and development properties by region. The value of our investment properties are based on independent valuations. The value marginally decreased from USD 38.5 billion at the end of last year to USD 37.8 billion at the end of December 2019. This was predominantly due to lower valuations of our Hong Kong Central portfolio. The value of our development properties are net of presale proceeds and therefore shows our effective net investment. The net investment in development properties increased from USD 5.2 billion at the end of 2018 to USD 6.3 billion at the end of 2019, mainly due to development CapEx spent, partially offset by higher contracted sales during the year. This slide further summarizes our net investment in development properties by geography at the end of 2019. Out of a total net investment of USD 6.3 billion, some 27% or USD 1.7 billion are invested in assets that are held for medium-term lease in the Chinese Mainland compared to 24% at the end of 2018. These assets are commercial assets that are initially held for rental and subsequently exited once rents stabilized. To date, only 2 medium-term lease assets have been completed and are in operation. These are the retail components of Landmark Riverside in Chongqing and LCM, the retail component of Parkville in Shanghai, which commenced operation in 2016 and 2018, respectively. At the end of 2019, occupancy at Landmark Riverside in Chongqing was 90% on both a physical and committed basis. In Shanghai, LCM was 96% occupied on a physical basis and 99% occupied on a committed basis. The remaining medium-term lease assets are currently under development with completion dates ranging from this year through to 2025. The group's share of the total remaining cost to complete is expected to be about USD 1 billion. The next significant medium-term lease asset to complete is the retail component of Yorkville North in Chongqing with completion scheduled later this year, although this may be delayed to early 2021 due to the impact of the COVID-19 outbreak. This is a retail mall which will have a net leasable area of some 80,000 square meters. Moving on to capital management. As you can see from the graph on the left-hand side, the group's net debt at year-end is largely unchanged from 2018, as previously noted, although interest cover has decreased due to an increase in average net borrowings during the year and marginally higher interest costs. Net debt will increase in 2020 as payments for committed land purchases are made particularly in relation to the West Bund site in Shanghai, of which the land cost will be paid during 2020. The group has sufficient liquidity to fund the land cost. As Robert mentioned earlier during the presentation, the group does not intend to seek funding from shareholders. We continue to consider a range of funding options, including but not limited to presales, cooperation with strategic partners and debt subject to any applicable regulatory approvals. Following the acquisition of the West Bund side, the pace of new investments is expected to be slower for the remainder of 2020. On dividends, the group continues to align its dividends with its underlying earnings with an intention to steadily increase its dividend per share over time as earnings increase. Since 2016, the dividend per share has increased by 16% with a dividend payout ratio broadly steady at around 50%. Regarding treasury management, the group's financial position and liquidity remains strong. Net debt was USD 3.6 billion, and net gearing was 9% in line with the end of last year. The average tenant of our drawn debt is 6.1 years, broadly unchanged from the prior year. The average interest cost, 3.8%, is up slightly from 3.5% in 2018. Our credit ratings by S&P and Moody's remained unchanged at A and A3, respectively. The maturity profile of the group's committed lines is shown on the right-hand side. The debt maturities are well staggered over a number of years and well diversified between both banks and debt capital markets. I will now turn back over to Robert, who will discuss the group's outlook.

Thank you, Simon. Since the start of 2019, the group has performed well despite challenging local and macroeconomic conditions, which affected in particular our office and retail portfolios in Hong Kong. The local office market have shown signs of a brief rebound in January 2020, and we managed to secure a number of lease commitments with positive rent revisions. However, following the onset of the COVID-19 outbreak, market conditions once again became subdued. Looking ahead, the group's office portfolio, which contributes the bulk of our revenues in Hong Kong, is expected to remain resilient despite global economic uncertainties and the COVID-19 outbreak. Due to our active lease management over recent years, areas subject to expiration up to the end of 2022 amounts to just over 30% of the Central office portfolio's total net leasable area. As these expiries are spread relatively evenly, the potential for significant fluctuations in vacancy is likely to be limited. However, our retail portfolio, particularly the Landmark, will be impacted by further rent relief. The extent of the rent relief will depend on the length and severity of the COVID-19 outbreak and any further social unrest in Hong Kong. For the group's development properties business, some planned sales completions in the Chinese Mainland will be delayed to 2021 due to temporary suspension of construction activities in all key markets as a result of the COVID-19 outbreak. The COVID-19 outbreak may put some pressure on selling price in the short term. However, given the quality of Hongkong Land's product and the healthy underlying supply and demand dynamics of the property markets in which we have a presence, we remain positive on the market outlook over the medium term. The relatively high gross margins achieved in the Chinese Mainland in recent years was partly a result of sales completions at multi-phased projects, which were acquired a number of years ago and benefit from a lower land cost. Margin going forward are likely to trend lower. So overall, the group's underlying earnings in 2020 are expected to be lower compared to 2019 due to the COVID-19 outbreak. The extent of the negative impact on earnings will be dependent on the duration and geographic extent of the outbreak. In Hong Kong, the group successfully launched CENTRICITY, a suite of market-leading digital and physical services exclusively available to the group's tenants in Hong Kong. In addition, the group also launched a new 5,000-square-feet salon, which provides its BESPOKE loyalty program members with personalized experience and services. In Singapore, the launch of the By The Bay app provides tenants and customers access to exclusive events, discounts and rewards. We expect these initiatives to enhance the services which we have been offering to our tenants in Hong Kong and the region. Over the past 14 months, we have secured a total of 7 new projects, including our newly acquired predominantly commercial site in the West Bund area of Shanghai. Going forward, the group will continue to look for new investments on an opportunistic basis, and we'll maintain a disciplined approach in assessing new opportunities. Given the substantial sum invested in the West Bund side, the pace of new developments or investments in the remainder of the year is expected to be lower. This concludes my remarks, and we are pleased to take your questions. If you would like to ask questions, could you please raise it through our webcast stating your name and company? Thank you.

All right. The first question on the lease is about -- can you discuss about Hongkong Land's retail sales performance in second half of '19? The overall retail sales of last year is about a 19% drop in the sales level. Of course, the major 4 happened in the second half of 2019. In the height of the social unrest in Hong Kong, actually, the sales drop is almost in the 40% to 50% level. When the social unrest seems to reduce a bit later half of the -- I mean latter half of the quarter, especially in December, the sales drop is actually narrowed to about 30%. So that's why the overall sales level of 2019 is a drop of about 19% in the Landmark. The next question is about -- also from Bank of America Securities. The question is what kind of rental concessions has Hongkong Land provided so far in 2020 due to the virus outbreak. If you refer to our announcement, during the period from August to December, you would not -- you would be able to work out our average rent concessions average to our portfolio in Central is about 15% during that period, where the social unrest happened in the year. Of course, the -- for the social unrest component, it's improved in December and also following January. And unfortunately, we faced the COVID-19 situation. During the February, we generally, as a general guidelines, the -- of course, it's also on a case-by-case basis and depends on the severity of the impact of individual tenants, we generally gave 50% rental concession in February. What about going forward? Of course, I mean, it would be hard either to really give a figure at the moment. It really depends on how impactful the COVID-19 and how long it will last. So I think as a guideline, you'll find that the 15% given in the period of -- in the second half of last year. But one, I would like to highlight, the -- we are not simply giving rental concessions purely because of the bad business that they face. Where at the same time, we are keen to maintain a healthy mix of our portfolio. So we also take the opportunities to renew leases, enter into longer-term commitments with our strategic tenants. So part of this 15% rental concessions also is as a result of extra concessions granted to strategic brands, the -- who are prepared to enter into longer lease commitments with us. As you recall, in our office portfolio, we have done over a number of years of extending leases of key tenants. We, in fact, are doing the same for our retail tenants. So the 15% is not entirely just to reflect the bad business but also as a strategy in order to cover the long-term health of the retail mix of our central portfolio. Next question also from Bank of America Securities, is the -- would Hongkong Land be interested in the Central Commercial's land site that will be tendered out in this year? Now Hongkong Land is already investing in Lujiazui in Shanghai. In fact, quite a number of analysts or friends are asking the same questions. Are we interested in the commercial site? I think it's -- in general, we don't comment on whether we pursue a certain opportunities. As you aware in the past, that we won't comment on it. For this particular site, of course, it's in our doorstep. The -- it is certainly too early for us to conclude one way or the other whether we -- because the government hasn't really announced the details of the -- even though they have announced the intention to tender the site, but without the details of the site and the conditions of the sale, it's certainly hard to really say whether we're definitely interested. We generally comment on new opportunities when we secure that. All right. The next question is about -- from CLSA, from Alvin Huang. He asked about the details of the Shanghai project, i.e., how much is retail office and apartments, et cetera. I think I will refer, Alvin, to the page -- I mean, the Slide 10 of our presentation, which really clearly outlines the mix -- development mix in that slide. In general, the for-sale component accounts to about 22% and the rest is for long-term hold. The specific split of the retail office, et cetera, you can find that in the slide that we provide to everyone. So the next question is for Simon. Simon, would you like to take that?

Yes. The next question is do we expect to capitalize the extra borrowing costs for the land premium and CapEx of the Shanghai commercial side. Certainly, to the extent that we are required by the account standards. It's a qualifying asset. We will be capitalizing extra debt that we're taking on. I think the simple way to think about this is if it's a -- it remains a subsidiary, then virtually all debt will be capitalized in relation to the site. If it becomes a joint venture, then the project level debt will be capitalized and debt held one level above the corporate level will not be. I can perhaps take the next one as well, Robert. What caused the revaluation loss? Is it on Central office or retail? The revaluation loss is largely due to the Central portfolio in Hong Kong. Cap rates have remained stable and steady. The revaluation loss is therefore caused by a decline in open market rents marginal decline, and that's actually equally across both office and retail. The next question is from a shareholder in Singapore. In view of the large discount to book value of the shares and the capital requirement to develop the Shanghai site, is the company considering securitizing the Hong Kong portfolio in the Singapore REIT market to unlock shareholder value and recycling capital? And the short answer to that is no. We are not considering putting our Hong Kong portfolio into a Singapore REIT.

Okay. The next question is about -- is from Justin Kwok of Goldman Sachs. It's about the Shanghai acquisitions, asking about whether we can share the return profiles of the project, IRR, year-end cost, et cetera. I'm afraid, Justin, it is hard for us to do that. Generally, we do not comment on the return of individual projects. The next question is with the -- also from Justin is with Shanghai site. What is your target asset allocation? Would you sell China DP faster to recycle cash? I think in the past, we mentioned about generally the -- there's the -- our balance sheet allocations to long-term investment hold versus DP assets is -- in the very long run, we talk about 20%, 80%, i.e., the 80% is long-term hold, 20% is DP. At the moment, we are more in the mid-teens, rising from the low teens and also single-digit some years ago. Of course, there is no -- it's not really a fixed target. We need to really look at the market conditions. Even though in the long run, we may like to have this sort of split, we are not going to force ourselves to really meet the target for the sake of meeting that despite the market, it's not correct. A lot of them is very opportunity -- opportunities driven. If you can find like the Shanghai site, it's not going to be available every year anyway. These are opportunities. But once it's really available, you better scratch your head hard and then try to acquire that. So I think in the long run, we will do that. Whether we will sell the DP assets faster, I think, again, it's all -- it's all about the individual assets, whether we think that the full value has been realized. I think you will be referring to 2 types of assets in the DP categories. One is the residential part of it and the other is the medium -- the assets that we are holding for lease for some time before we consider whether we sell or not. That is more referring to the retail portfolio in the DP category. For the residential component of it, whether we will try to sell that faster, it's a -- every developers would like to -- for trading business, every developer would like to really have a quick turn in order to maximize the margin. I don't think we are different from any other developers. I don't think the -- because of the Shanghai site, I would particularly want to push it even faster than we could. So as a general rule, we would like to -- the work on our capital efficiency, i.e., the speed of sales as much as we can, as always, despite whether we acquire the Shanghai site or not, it doesn't make really a difference. For the medium term, the assets like the retail malls, the key is to -- for the time being, is to really get it up to maximize the value by active lease management, et cetera. Of course, at the right market conditions and the right price, of course, we will think about selling. So next question is about DPS. Simon, would you like to...

Sure. Comment on why dividends per share were flat despite a 4% higher earnings. And would you be more conservative on capital management with more CapEx driven out? I think it's -- as alluded to earlier, the -- our dividend sort of guidance is around 50% in terms of paying out underlying earnings. We fell just shy of that in 2019, noting that we have increased the dividend sort of 5% and 10% in prior years. I think the way to think about the dividend here is that holding the dividend steady was really in part a reaction to conditions that we're currently seeing at the moment and the impact of COVID-19 and wanting to take a wait-and-see approach. Clearly, we want to maintain a steady dividend, i.e., no decrease in dividend, and we want to see that increase over time as earnings increase. So maintaining the dividend where it was last year was really a reaction to COVID-19 despite the 4% increase in underlying earnings and in no part was it a reaction to future capital commitments, particularly in relation to the West Bund site. The next question comes from UBS from Mark Leung. Do you expect revaluation losses in 2020? Who knows? I mean the revaluations are done by independent valuers. So they will be independently valued at the half year and at year-end and then booked. That will be a function of 2 elements. One is the capitalization rates used and secondly is where the open market rents are on that. The second question is on pro forma gearing level after the acquisitions of Shanghai, the West Bund and what is our comfortable gearing level. What I would say on this is, I mean, gearing is very much, obviously, a function of net debt and also where our net assets and equity is sitting. The net assets and equity in our business is largely a function of where the investment property valuation sit. We very much focus on our cash flows when they're sizing comfortable levels of net debt, which we've given guidance in the past. We focus very much on interest cover in terms of our ability to service ongoing debt. So it's -- that's really what we look to. Clearly, debt -- net debt levels will rise because of the requirement to fund, the land acquisition for the West Bund in 2020. And then absent any further commitments, net debt will then move down quite steadily given the strong operating cash flows and free cash flow of the group. Perhaps, Robert, you want to take the next one.

The next question is also from Mark. What is the rental reversion outlook in 2020? Well, we have been enjoying positive rental reversion last year. In the slide, you probably may have picked up that we have concluded some 4% of our lease expiry this year. We have concluded them. And the -- of these deals concluded so far this year, all of them are generally in a positive rental reversion and so on. So what about the remaining deals of the year? Of course, it's very, very hard to put a projection at the moment. So far, we enjoy positive rental reversions for the deals that we have concluded. As you may know, the COVID-19 is really a big uncertain factor. So it's very, very hard to tell whether -- I also in my presentation also mentioned about early part of January, we have concluded quite a number of lease commitments. The -- it seems to have a bit of pent-up demand in the market and release in early part of -- in January. Of course, quickly, reduced because of COVID-19. So it's very hard to see, especially when the outbreak of the COVID-19 hasn't really settled. Even though in China and Hong Kong have showed signs of the really improvements in terms of COVID-19 outbreak, but you probably know that the rest of the world are actually -- are facing the challenges. Okay. I think the question is about the appetite for the commercial site in Central. So I think I have answered their questions. So next question is from JPMorgan, Jevon. What's the management view on the Shanghai office and retail market given the new supply nearby and downward trending rents? Well, I think the -- yes, the supply and demand -- as far as office is concerned, our market, in general, is concerned, the supply and demand outlook in the next 2 to 3 years is probably the more challenging. But in the -- I think when we look at the investments, especially in the site that we acquired, one, of course, have to look at the long-term outlook and also the specific locations. I've mentioned about attractive location of that, which we strongly believe that locations means a lot to real estate investments. In the long run, the prime developments in many key gateway cities in the world, actually, you'll find that they are doing well. Certainly, we don't have a problem with the long-term outlook of the Shanghai market. Especially the -- I would be scratching my head when will Shanghai be able to deliver similar quality of sites. It's not plentiful in terms of supply of this nature of site. So again, the -- I'm not that concerned, especially look at the development program. The major office component of the -- for the long-term investment hold of the Shanghai project, in fact, will only be completed well beyond the next 2 to 3 years' time frame when the market seems to be a bit more challenging. On the retail market, the -- you will find that actually the percentage of luxury shopping the -- a lot of the local Chinese, they -- in the past, quite a high proportion of them are shopping outside China. They spent quite a fair bit of money over the last couple of years, probably in the order of even 75% of their spending of the luxury goods were actually carried out outside China. This trend is not going to be repeated in future. They -- we do strongly believe that luxury spending in China, the proportion of luxury spending, overall pie will be getting better. The less debt -- that would naturally increase due to the increase in the economic size of the market, economic growth. Of course, the overall spending will be increasing, and the proportion of the luxury spending by the Mainland customers spending locally will also be increasing. So that would be a very strong positive factor to the retail market in China, especially when the policy in China is -- also part of the key policy is to drive local consumption, Shanghai being a key retail market for retail spending. And you'll find that the medium, long-term outlook of the retail market, especially in Shanghai, in my view, would be very, very attractive. Okay. The next question is still also about the commercial site in Central, which we have answered. Yes. Okay. The next question is the -- the next question is from CGS-CIMB Securities, Will Chu. The question is about on your newly acquired Shanghai mega site, what criteria are you looking for as strategic partners for the parcels? Will those you have had cooperation before, CIFI, Longfor, be given higher preference? It's not just for Shanghai site. In general, when we look for partners, of course, we like partners to add value to the equations and also partners of substance. Especially the larger the project, it is, of course, the financial substance of the partner will also be a key considerations. Track record in terms of the culture of the -- for those that we have already worked with, we understand -- we certainly understand the culture better. Would that culture fits with us in terms of our philosophy of running the business? Again certainly, existing partners who we really work with very nicely in the past will certainly -- will be preferred. But the -- these are the general criteria we look at partners for the Shanghai mega site that we have just acquired. We are in the review process of the -- of various opportunities. We haven't really come to any landing on the decisions. But bringing in partners is certainly one of the options we have. Next question?

The second question again is on net gearing. Will it go up on acquisition of the mega site there? Yes, clearly, the net debt levels will -- are expected to move up. I guess the extent of any increase will be dependent on how we fund that, and we don't have any additional points really to add at this stage other than what we've said during this presentation and also in our regulatory announcement at the time of making the acquisition. So that will be really a function of how it's ultimately financed. And also, we don't have a target sort of net debt, as mentioned, that we -- or net level of gearing that we manage the business to. We very much think about sort of net debt sizing by reference to interest cover and cash flows. The next question is in relation to the discount, the discount between our net asset value and where the shares are trading, which is sitting at some 70% to book value. Will you consider a share buyback again? Obviously, we did a share buyback in 2018 and no share buybacks in 2019. It's something which we will keep under review, but it's -- we don't have a formal share repurchase program. So that goes into the mix and we look at that. As we've said before, we assess share repurchases in a similar way that we will assess new investment opportunities. And we manage that all within our existing sort of capital constraints.