Hysan Development Company Limited (0014.HK) Earnings Call Transcript & Summary

Thank you for coming to Hysan Development 2023 Interim Results Announcement Session. Let me introduce our panel for this afternoon. our Executive Directors and Chief Operating Officer, Mr. Ricky Lui; and our Chief Financial Officer and Company Secretary, Mr. Roger Hao. We will start today's session with a presentation from Ricky and Roger. [Operator Instructions] Before that, let's invite Ricky to start. Rick, please.

Good afternoon. Let's start with the overall market situation, the global economic uncertainties. There's ongoing geopolitical tensions, declining world trade and tighter monetary and fiscal policies, rising concern about the stability of the international banking system, persistently high core inflation and growing geoeconomic fragmentation. The IMF revised the global economic growth to 2.8% to reflect their lack of confidence in a strong economic rebound. About Hong Kong, there's a sign of improvement. Year-on-year GDP growth resumed, labor market continued to improve, unemployment rate dropped to 2.9%. Hong Kong retail sales in the first half increased by 20.7% year-on-year. The increasing inbound tourism number and the further resumption of economic activities will help to revive Hong Kong relevance and competitive status. Our business. For the first half of 2023, our total revenue is HKD 1.611 billion, and our retail occupancy is 98%. Office is 89%, residential 61%. Here, we have approximately 11% of our retail area were taken off for major enhancement, which affect retail revenue. And for office and residential sectors, they're still under pressure. Our Dual-engine business model continue to serve its balancing function. Retail. We see the recovery of retail sales at Hysan, surpassed that of Hong Kong. And we also see our turnover rent increased by 67% year-on-year. Our rental reversion rate on renewal and rent reviews and new lettings was predominantly positive. Further recovery of tourist arrival numbers and their spending to add momentum to the revival of the retail sectors. About our Lee Gardens rejuvenation, we are curating -- we try to curate content for the Lee Gardens community to cater the needs of different customers, making Lee Gardens our value led player that cover a full range of customer from the trendsetter about Hysan Place and Lee visit areas, and also the Leighton Centre, being the home of luxurious and flagship for the high spender. And the upcoming young family and friend class looking for lifestyle, we will cover by our future Lee Gardens eight, which will form a lifestyle part together with our Lee Gardens three. The progress of the rejuvenations, Lee Gardens One, we have started our renovation at February of this year. And we are seeing this to finish and reopen by the second quarter to the end of the next year. And the temporary new concept store of the luxury anchor tenants continue to attract strong support from members. At the same time, for Hysan Place, the transformation made good progress in first half, we unveiled the Urban Park, which is the first -- last year indoor skateboard park in the city of -- in the center of the city, which draw a lot of attention and which also provide venue for us to hold a lot of very chill and cool event just for the first few months. And then we also reopened the fourth floor and the fifth floor, while the sixth floor is undergoing renovations. And this will also be -- over to the seventh floor and the third floor. So as a pattern of the urban culture shown, which has been drawing a lot of good attention from the tenants and the customers. We are also doing the ground floor and the basement floor renovations, which will be a metropolitan train station, thematic dining and shopping experience, which will start coming to the market by end of this year to the early next year. Our marketing initiative and the loyalty programs, our loyalty club members continue to provide strong support to our retail sales. Other than the thematic campaigns, which cover different interest and needs of the customers, to welcome all the coming back of the tourists, we have a lot of tourism promotion campaign to stimulate their sales as well. Office occupancy, as stated before, is 89%. We are offering the full range offering office to our tenants from a size to even the quality of the building. This helped to capture different needs of different customers. At the same time, because we have a fair vibrant integrated community, which is our Community business model, we attract and capture the demand of semi-retails and service trade like we see the good growth of the banking, wealth management & finance sectors as well as medical and health sectors. And because of our -- the nature and the character of the space of the Lee Garden communities is help us to be able to convert the use of space between retail and office seamlessly. And this also become quite a good buffer to help to maintain certain occupancy for the office. Residential, we obtain the CC for the VILLA LUCCA in the first quarter. And you can see recently, we have completion -- we have transactions of a house and also some apartments, which gave a -- matter of fact good price from unit rate to the total lump sum. And for To Kwa Wan, the development plan was approved in the first quarter by the government. And the project will develop into 3 blocks of 24-storey buildings, residential building, on top of 120,000 square feet of Hysan retails. Hysan is responsible to oversee the design and operation of the retail portion. Sustainability commitment. We have established our board-level Sustainability Committee in 2020. We try to have our own sustainability model, which we call a Community Business Model, which helped -- emphasized to have outcome -- good outcome on inclusivity, positive economic impacts, social well-being, climate change preparedness as well as liveabilities. We emphasize on doing innovation and partnership being -- to enable the whole program of sustainabilities. And of course, this is under the good governance of the company, including the board. We adopted United Nations Sustainable Development Goals. We have 4 key areas to emphasize. First is the good health and well-being, and second, decent work and economic growth. Thirdly, the sustainable city and community, and the fourth one is a partnership for the goals. We set different targets and make certain achievement from governance, environment, community and people. All these goals has been achieved, and we keep revising all this goal and trying to shift better in response to the community need. We also obtained certain awards from different associations as well as having good rating from all those ESG associations. I think this is what I want to update today. May I pass it to Roger?

Thank you, Ricky, and hello, everyone. Let me give you a very brief update, and then we can jump right into the Q&A., so that we can discuss the matters that you are obviously interested in. On the financial and capital management side, as you can see from this slide, just a few key figures, which you can also find from the announcement this afternoon. Shareholders fund at HKD 68.7 billion and NAV per share HKD 67. So both of which represent approximately 2% drop from 6 months ago. First, interim dividend, as you all know, by now, HKD 0.27, which is same as the last interim period. On the next page, again, this may be a topic of particular interest recently. On the left, you can see our overall debt maturity profile. And I think a few key observations that I want to highlight to you all is, in particular, from a liquidity point of view. First of all, as we mentioned in the first point, of this total debt portfolio only less than 5% coming due in the next 18 months. And secondly, as you can see from the balance sheet at the end of 30th of June, we had about HKD 4.3 billion, HKD 4.4 billion cash on hand. So this level of cash is actually sufficient to cover all the maturing debt coming due in the next 3 years, meaning from 2023 all the way to end of 2025. So you can see that we do not have any pressure on the short-term to medium-term basis that we have some liquidity pressure. And of course, as part of the conservative financial management, we also line up some committed banking facilities. As you can see here, at the end of the interim period, Hysan had roughly HKD 10 billion committed banking facilities. So that -- obviously as a good buffer for any unanticipated urgent liquidity needs. So next, I'll just wrap up with certain key financial metrics. As you can see from the list here, effective interest rate for the debt portfolio 3.9%, average debt maturity close to 5 years. Net gearing, that is netting the total debt with our cash on hand is about 26%. And one last ratio, particularly, I want to mention is the fixed float ratio. So that -- you can see that our fixed rate debt portfolio account for approximately 3/4 of our total debt. So in a rising interest rate environment, actually that sort of like, help us to mitigate some of the exposure due to the interest rate increase. So that is also a defensive point from our overall portfolio, I mean, debt portfolio perspective. Credit rating wise, again, remained the same as 6 months ago. Moody's BAA1, while Fitch maintain the A- credit rating. So that basically is the key update from me. So back to you, Sandy.

[Operator Instructions]

Fan Tso from Bank of America. So I have a couple of questions maybe if you don't mind, I will ask one by one. First of all, is on the overall tenant sales. If you can comment a little bit on maybe doing some adjustment for those areas under AEI, how is the recovery compared to pre-COVID level? And how is the momentum you're seeing, for example, in July?

Okay. Ricky, maybe I share some information about the overall tenant sales in terms of like-for-like, accounting and Ricky can definitely share with you some of the most recent angle from a business perspective. For tenant sales, as you can see, we have a year-on-year increase, obviously. In terms of pre-COVID, let's say, if you look at the first half of 2019, overall, we still see a good progress. But on that, I need to refer to a more detailed breakdown because different segment has slightly different performance. On the luxury part, let's say, our like our top 8, 10 luxury tenants. Altogether, their tenant sales as compared to between first half this year versus first half of 2019. Actually, we see a close to 30% increase. So that is even better than the pre-COVID level defined as first half of 2019. That is also before the social unrest. F&B, for example, another major contributor from our tenant. Again, the sales from all our F&B account is already back to the 2019 first half level. So these 2 are the bright spots, especially when you look at it from a pre-COVID '19 perspective. These 2 together account for roughly 60% -- 55%, 60% of our total tenant sales. And the remaining 40%, I think you will see that a lot of these are also related to the 11% area that we've been working on for the AEI. So primarily, it will be the luxury area downstairs, I mean, at the Lee Gardens area as well as Hysan Place. So it is quite an interesting thing to note that with even the AEI, so the luxury top 8, 10 tenants with the AEI impact, they're still performing quite well as compared to the pre-COVID level. But at the same time, we do see some of our tenants. They are still working very hard to get to that. So all in all, I think the other part, non-top 10 luxury, non F&B, roughly, we see that they are back to like 80% of the pre-COVID level. So I think that ties in also to our strategy of refreshing our -- a good portion of our retail area. Maybe Ricky can also share with...

I will try to echo what Roger had just said. We don't do the renovation for -- just for renovations. When we do the renovation, we're summarizing the experience from the last few years, seeing the structural change. What we see is as to -- it's polarized about the consumptions, about retail sales. First, the top lux, which becomes -- show resilience even growth during the COVID time and also the 2019 situations. It also -- we can through that process, we identify the strength of Hysan customer base, being the old rich and new rich in Hong Kong, are very concentrated. And this also drives the decisions of those high brands to do expansion in Lee Gardens, which is why we start our renovation, starting some last year and this year. And from the rental level that the same area, the new rental and the old rental have about -- have over 10% increase between the old and new for those renovated area, mostly. And then for -- at the same time, when you talk about try, Hysan Place, that's another [ problem ]. We all know that we talk about the general commodity. It's a mass market place commodities -- is having some pressure but for tourists come to Hong Kong, who come for the Hong Kong culture, come to see -- some new experience as well as the local people, they come other than -- they do the online shopping, but they also come to the off-line store for experience. That's why for Hysan Place, we are trying to do a real trendsetting, positioning to cover the 2 identified area of consumptions. And of course, we also know that the families -- young families are also big consumption sectors, which will be covered by the future Lee Garden eight, with the big piece of green. So basically, what I want to explain is that we do our renovation with our target customer in mind to capture this -- [ speeding ] the sales, which will in return support the rental.

Sorry. My second question is Roger and Ricky, could you comment about the latest occupancy costs. And since your comment, you mentioned those top luxury, their outperformance is so meaningful compared to other trades, do you feel that their bargaining power versus landlord like you, is getting higher and higher in the medium term? Do you expect the occupancy cost could go back to, for example, low 20s in 2016, '17, that kind of level?

Fan, let me take the easy one first. The occupancy cost. Overall, our retail portfolio for the first half, I mean, blending all trade together for Hysan as a whole is 15%, 15%. So historically, you know that we tend to have a slightly higher. But again, it has to be looked into individual tenant by tenant. But the overall remarks you made about the good performance of the luxury tenant versus the ongoing discussion this time. Actually, we had quite an interesting experience actually during the COVID period and the most recent discussions. So maybe can I ask Ricky to share part of it with you?

Yes. I think we all know that about -- seems to be the retail economy situation over the last few years is not good. But it will be strange to say why this high brand do expansion. But at the same time, we also see consolidation for those lux brands, right. I think it's a choice of location where to consolidate, okay. I just -- in my first -- when answering your first question, it's about the strong customer base of Hysan, particularly the Club Avenue been like the one of the oldest royalty club with high spending. And also we have a strong base of Lee Gardens Club, which have more than 300,000 members. So all this contribute a very important percentage of sales of Lee Gardens. And these are the major factors why this -- the brands choose Hysan to -- for expansion. And similar -- and because they are doing expansion, they become a kind of positive effect to other high brands to come to Lee Gardens, and make us the home of lux. Interestingly, once the news about our renovation out with the high brands expansion announced, other high brands, they don't have the expansion plan at the day 1, now they're all looking for space. So in a way, I think the things that we have done seems to be meeting their need. And so your question is about whether they are squeezing us, I think it's more about, like a choice of each others. We choose each other to work together as a partner here. And Roger said, the 15% OC is very sexy in a way. And so if they continue their sales growth with us after we open up the flagship store, then there will be -- I think the rental will get a good support. I mean that explains about our partnership, relationship with those brands and also that attract as a magnet to attract new content into the area.

This is Calvin Leung from Jefferies. I got 2 questions, one for retail and other for payout. On retail as a follow-up, because some of our peers are placing more emphasis on local spending with the tourist arrival train appears losing the steam. So how do we see the overall competitive landscape, for example, in Causeway Bay or the overall Hong Kong retail market? This is the first one. The second one is on payout. AEI and some headwinds in the office market somehow plays a short-term tool to our topline. So wondering if there is any impact on our payout policy?

The first one, maybe, Ricky.

I think it's come to the point that I understand that it seems to be a natural response when tourists not here, we emphasize on local. But for Hysan, there are traditions, local is always strong as I reflect our strong old rich new rich customer base. And also, we have spent time on our overall loyalty program, starting few years ago, even in the non-lux or not the extreme high spender. But at the same time, if you look at tourists and the local customer, the behavior start having a lot of similarity, particularly for those tourist who come to Hong Kong not for shopping only. They come to Hong Kong for experiencing Hong Kong culture, experiencing from food to workshop to about knowing the culture, art and everything. We understand this is a need. That's why you see when we do -- we don't just emphasize on the lux. We put money and put effort into Hysan place, the skateboard park, which is chill and cool. Tourists really go there and visit it. And then -- and how to -- how to create those low rise, the Pak Sha road, the bizhouse, all this area, how we create the characters of it. It brings the uniqueness of our community versus just another mall. I think this is -- that's why in my presentation, I emphasized a few time, we have a community business model. Where this is something that we want to offer, people come here, they can experience different things. The kind of offering to local and the tourists are quite unique compared with the other places. So far, we find this formula work, and we will carry on to push harder on making our whole community have a lot of choices and a lot of surprise together with the hardcore spending tenants.

Right. Thank you, Ricky. And on the second part of the question is about payout. I think let me reiterate, first of all, in terms of our dividend policy, per se, it is still our policy to provide on a long-term basis, a stable dividend path. And of course, each year, like I probably explained to some of you before in previous sessions, when we present the dividend proposal to the board for considerations, there are 3 main factors that we'll consider. First, that is the operating performance for that particular period or year. And secondly, the CapEx requirement, especially in the short-to-medium term. And thirdly, it's about the economic outlook in the sense, it help us to manage on a more stable financial positioning. So I would expect we continue to look at these -- all of these 3 factors, and like, for example, this year, so far, the question is about retail and payout. But obviously, office, we, as we mentioned in our announcement, continue to have pressure on our portfolio. And you see that from our announcement, office is having a negative rental reversions. It's like early teens negative. And in terms of the office lease that will expire next year 2024, the expiring rent that is the rent related to those -- these [ tenants ] going to expire next year is actually at a level similar to what we are seeing this year in 2023. So if the spot rent maintain, we probably will still continue to see a negative reversion situation. So on the overall portfolio, we used to tell you or share with you guys that we are a dual-engine business in a sense that office and retail, sometimes they help each other out. And in the past few years, especially when retail is under particular pressure from COVID, for example, office does provide some medication. And this time around why we see exciting improvement in terms of retail sales and all that, we continue to see pressure, downside pressure from office. And in a sense next year, we don't have a particular high concentration of lease expiring. And we had about 1/4 of our lease, 25% of our total office space coming to expiry with similar expiring rents. So if you look forward to that, I mean, you're looking on a -- if you look at it from a forward basis, next 6 to 12 months, office, we still have a lot of work to do. And obviously, this is a difficult operating environment, one of our key objective is trying to defend the occupancy so that while observed for the further recovery on the retail side. So all in all, that is the landscape that we are seeing, and of course, we still have another half year or 6 months to go to see how our operation fare. But if you just -- I mean, this is the kind of like thought process that we employ, and we continue to employ when we look our overall position.

Is there any other question from the floor? Maybe let's take 1 question from online. It's about our Caroline Hill Road project, how much CapEx will be incurred in the next few years? Would it require further refinancing?

Right. For Caroline Hill project, it is a 60-40 joint venture with Chinachem, and the project is going well. And as you all know, obviously, we had a upfront premium payment for the land premium, which actually we pay once we get the land. So that accounts for a big chunk of the cost and then the construction. Now we are -- I think we are now getting into the final main contract tender stage. Like a lot of the other development projects, the construction costs will be incurred like a hockey stick type of thing. So in a sense, the construction costs will be incurred like, I would say, back-end loaded. And the initial phase is primarily the cost for taking further down on the -- for the car park. So overall -- first of all, we had the project financing with 5 banks and that also followed the Hong Kong MA requirements about like 40% on land, 80% on construction with the overall LTV cap at 50%. Right now, I think you can see from our financials there are a lot of these investments related to the land. And as and when construction costs are incurred towards the later half of the project, which I think on a calendar year basis, I think a lot of them will start to get into our book towards the end of 2024, 2025 and early part of 2026. As and when we incur that, we will finance 80% of it by project loan. So the 2 shareholders, joint venture partner will contribute the other 20%. So I don't see a major issue in terms of funding the project because there's a project financing arranged. As to the other debt of Hysan, as I explained before, we don't see any major refinancing issue in the short-to-medium term.

So as we are running out of time, let's leave if there's any further questions from the floor.

It's Alvin from CLSA. Maybe 2 questions. One is could you give a bit more color on the rental reversion of retail in the first half and your outlook for second half and then maybe on the office, particularly on the co-working space, we noticed actually recently our co-working company commonly have quite difficult situations. And how is it operating in Hong Kong or in your portfolio? And how do you try to defend the occupancy of our co-working space?

Why don't I share some information about reversion first and invite Ricky to share with you some of our views on the co-working space. On rental reversion, overall is negative. But in fact, we do see an encouraging sign because as you know, there are certain areas that's under AEI, the 11% on average because we started the renovation work in February. So for the first 6 months, we had about 5 months with those areas under renovation. So the total growth for area, effect is about 13% at the end of the interim period. We expect by end of this year, we should finish 10% of it. So we should go into 2024, which is a much normalized base in terms of the retail space generating revenue. On the reversion, part of it is related to this overall restructuring. Some of them while their space are under renovation, they still have a reduced scale operations. So -- but the thing I want to share with you guys is in terms of the number of tenants that we dealt with in the renewal and reversion case, over 75% of them in terms of number of tenant, we see a positive rental reversion. And in terms of area, it's roughly 75%. So that's why if you exclude certain major trade mix renovation or change. The ratio is even as high as 90%. So we see the underlying health of the operation of our retail tenant. And so that, I think, is part of the reason you see that our turnover rent increased quite a lot comparing to last year first half or even from a historical point of view is quite high. That is primarily because we see the general health of the tenant in terms of rental reversions. And on the co-working space, Ricky?

Okay, maybe I can give some colors on the overall business performance of the co-working business. I think compared with last year, we do see obvious increase in occupancy in general for all the centers, both Hong Kong and GBA. While we don't have seen much increase in the unit rate. I think that's the general situation. And when you talk about the demand, I think the demand for co-working space, Flex is still valid and strong. What we see at the same time because of the -- some occupancy -- vacancy issue of some of the lender of building, sometimes they do offer good rental terms for co-working operators because right now, we all know that landlords start changing their mindset to look at co-working space as part of their offering -- of the building offering. So that -- I think, that's become -- we strongly believe that the co-working will stay in the office ecosystem. This is also the move why we have done the 50-50 joint venture with IWG for the GB area.

Thank you, Ricky and Roger. And of course, thank you, everyone, for joining us today. We hope to see you again when we have our next results announcement session. See you then. Thank you.

Thank you.

Thank you.