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

Good afternoon. Thank you all for coming to Hysan Development's 2025 Interim Results Announcement Analyst briefing session. Let me introduce our panel for this afternoon. Our Chairman, Ms. Irene Lee; our Executive Director and COO, Mr. Ricky Lui; our CFO, Mr. Andy Choi. We will start with the presentation from Irene, Ricky and Andy and then we will take questions from the on-site first. Now I would invite Irene to start first. Irene, please.

Thank you. Welcome to the analyst briefing on Hysan's 2025 interim results. Thank you very much for coming in this weather. And I know we have some competing results as well. Thank you. Hysan has been at the forefront of Hong Kong's development for over a century. Our legacy is built not only on tradition, but also on continued reinvention. It reflects our commitment to anticipating societies, constantly changing needs and responding to generational shifts from Baby boomers to Generation Alpha. Our holistic reimagination of the Lee Gardens precinct, in particular, is a testament to Hysan's forward-looking vision and the continuation of our century old legacy. For the first half of 2025, Hysan delivered solid results that outperformed the market. Our key metrics registered positive growth including turnover and recurring underlying profits that grew by 2.2% and 1.2% year-on-year, respectively. Our turnover of the retail, office and residential portfolio increased by 2.1%, 0.8% and 12.4%, respectively. We also saw an increase for our Hong Kong market retail and office occupancy compared to last December, demonstrating the strength of our core portfolio. Based on our century-long curation and community business model, Lee Gardens is one of its kind, allowing us to achieve such solid results. The unique essence of Lee Gardens is the coexistence of luxury and trend-setting elements, as well as authentic culture and original experiences that meet the needs of both the older and the younger generations. In the first half of 2025, traffic at Lee Gardens area saw a 19% year-on-year increase, while tenant sales grew by 4% year-on-year, outperforming the market. Hysan's long-term growth is guided by our core and pillars strategy. The core is focused on reinforcing and expanding the Lee Gardens precinct, to maintain its position as a vibrant commercial and cultural destination hub by investing in continuous dynamic curation, which includes place-making, unique experience offerings and asset enhancement, we are committed to meeting the evolving needs of the community. The pillars underpin our diversified growth model, which complements asset-heavy developments with asset-light investments for our comprehensive business model. This is a model of diversification, which is executed according to prudent financial principles and was reflected in the financial contributions that have begun to materialize. We have now entered the harvest phase of our ongoing transformation journey. The unveiling of the new Lee Gardens in 2024 marked a significant milestone in this journey.With more than 10 newly renovated and expanded flagship Maisons for luxury brands, including the reopened Hermès, Dior and Cartier, Maisons for new in-store experience. This positive momentum continued into the first half of 2025 as we welcome the renovated Chanel Maison, at Lee Garden One. The development of other luxury flagships across our Lee Gardens portfolio made good progress, and our precinct was further enhanced by the addition of curated lifestyle brands. We look forward to unveiling more flagships and new retail concepts in the second half of 2025, complementing Lee Gardens leadership as the city's premier luxury destination. We saw the arrival of strategic additions to the tenant mix at Lee Garden's precept included curated lifestyle brands alongside fine dining restaurants. Notable arrivals included Hong Kong's first Michelin Green Star certified restaurants and renown overseas F&B outlets, making their debut in Hong Kong. These additions complement the luxury flagship stores at Lee Gardens to deliver a holistic high-end retail and culinary experience. The contrast between the authentic experiences found at Lee Gardens area and our diversified brand mix is highly attractive to the locals and tourists. This is why Lee Garden has become the preferred choice for brands from Mainland China and from overseas opening their first store in Hong Kong. Among the brands include renowned Japanese lifestyle store, Japanese restaurant with over 90 years of history, popular dining brands from Mainland China and fashion label that is sweeping the Korean fashion scene. These are all first. They have all chosen to make the Hong Kong debut here at Lee Gardens, a proven recognition of our appeal to the market. The guidance is a favorite of this destination in the heart of commercial Hong Kong, leveraging a number of key strengths. Our full range of offerings, which combine traditional office space with flexible co-working solutions offer both stability and agility, ensuring we remain responsive to the changing needs of businesses and tenants. Our flagship Lee Garden Eight project, a 1 million square foot premium commercial development is on track for completion in 2026 next year. The project will expand our Lee Gardens leasable portfolio by about 30% and will bring an estimated increase of 20% in daily footfall in our area. Designed in partnership with the world-renowned architectural firm, Foster + Partners, Lee Garden is distinguished by the largest commercial floor plate in Hong Kong Island, complemented by a green indoor and outdoor concept. Serving as a focal point for community interaction, the 60,000 square foot open green space will embody our vision of a next-generation workplace and retail center piece that promotes a sense of community. This is an urban oasis. Superstructure works for the project made satisfactory progress out -- is expected to be carried out by the end of this year. Connectivity is central to our vision. Scheduled for company in 2026 also, an integrated pedestrian walkway system will seamlessly connect the Lee Gardens area to the Causeway Bay MTR Station within 5 to 7 minutes, depending on how fast you walk, transforming the Lee Gardens precinct into a walkable neighborhood. The new pedestrian walkway system will offer expansive retail space beyond the street level and traditional floors. By blending work, leisure, living and entertainment, the Lee Gardens area will set a new standard for placemaking in Hong Kong. It also exemplifies Hysan's ongoing commitment to creating a human-centric community. Having shared with you our major achievements and progress, I would like to invite you to watch a short video together showing the new integrated pedestrian walkway system unveiled -- to be unveiled in 2026. [Presentation]

Much better, wasn't it. You will soon be experiencing it by midyear next year. Our strategic pillars contribute to both business and geographic diversification. Our quality assets Lee Garden Shanghai has secured high-quality tenancies, solidifying an office tenant mix that spans reputable financial institutions and multinational corporations. The project also offers a diversified retail mix to create enhanced experience for tenants and for visitors. The performance of our flex office business in our joint venture with the world's leading flex operator, IWG, continue to yield steady growth across the Greater Bay Area. New Frontier Group, our health care investment, also maintained steady business growth momentum. I'll now pass the floor to Ricky who will share with you more of the Hysan's business operations for the first half. Thank you, Ricky.

Thanks, Irene. Let me share with you more of our Hysan business performance for the first half of the year. Our interim results. Our group's turnover grew by 2.2% year-on-year, supported by solid performance across core business segments. Turnover of our Hong Kong retail portfolio increased by 0.8% to HKD 831 million. Occupancy rate increased to 94%. Rental reversion rate on renewals, rent review and new lettings was predominantly positive. For our Hong Kong office portfolio, turnover declined by 2.4% to HKD 703 million. Despite market headwinds, occupancy rate of our Hong Kong office portfolio increased to 92%. Our full range of office offerings, which combine traditional office space with flexible co-working solutions, offer both stability and agility entering we remain responsive to the changing needs of business and tenants. Hong Kong Luxury's residential leasing market made a steady recovery in the first half of 2025. Our residential leasing portfolio saw a 12.4% increase in turnover to HKD 118 million. Occupancy rate was at 70% and average rental reversion was positive. As for Lee Garden Shanghai, it continued to benefit from strong occupancy ramp-up last year and delivered a new stream of recurring earnings for our group. About our retail tenant sales of our Hong Kong retail portfolio increased by 8% in the second quarter, with occupancy growing to 94%. We have been addressing the evolving demands of customers by refreshing our brand mix with a variety of exciting new offerings, including some first in Hong Kong brands. The turnover of our Hong Kong retail portfolio consistently outperformed Hong Kong retail market sales powered by our innovative marketing and our strong loyalty programs. The curated in-store experience from the expanded Maison for luxury brands and the strategic addition of a vibrant mix of new and renowned F&B outlets and the introduction of a series of high-profile of store and events in Hysan Place all attributed to the increase in sales. We also strategically leveraging the digital agent to attract a more diverse customer base. Talking about our loyalty program. We have been receiving long-term support from our low members. Member spending at Lee Gardens have increased by 20%, while the number of transactions Club Avenue members has increased significantly by 31%. The average annual spending of our top TM member is expected to surpass HKD 1.6 million. We identified our target customer through AI analytics and adoption of big data from our data lake. Of Hong Kong old and new generation to those who enjoy life and value well-beings, our All-tier Member Base ensure a balanced contribution to enhance our resilience instead of over reliance on those super high spending members. Customer trend and digital engagement. As our marketing effort, we implement more than 110 campaigns in the first half of the year to engage the community. Driving over 4 million footfall, making Lee Garden a driving destination for locals and tourist. Partnership is another key for the performance. We collaborate with more than 60 strategic partners in a series of exclusive pop-up stores and joint campaigns to engage the community. These events generated a robust increase in traffic and sales and gained widespread media exposure. Nowadays industry players need to be creative and delivering more engaging experience that resonates with the customer changing preferences. At Hysan, we have been addressing the evolving demand of customers by refreshing our brand mix to exciting innovative new offering. All this effort has made Lee Gardens the go-to area that attracts quality and repeat visitors, which amount to over 100,000 daily traffic. Talking about office. For our Hong Kong office portfolio, tenants' retention exist. Occupancy increased to 92% supported by our ongoing effort to diversify tenant mix by leveraging our unique positioning and offering. Our diversified tenant base helped our office portfolio remain resilient. As mentioned, we have full range of office offering, combining traditional office space with co-working solutions so that we can respond quickly to given mix of tenants. Lastly, I want to report about our capital recycling plan for our noncore asset. As a prudent financial discipline, we have to kick-start the capital recycling plan, covering strategic sales of our noncore mature asset, including 2 blocks of Bamboo Groove and the build-to-sell projects of Villa Lucca and To Kwa Wan residential development. We target for $8 billion in capital recycling over the next 5 years, which will help us unlock value from mature residential assets, optimize our capital structure through deleveraging and provide capital for strategic needs. I will now pass the floor to Andy, who will share with you more about Hysan financial performance for the first half of 2025.

Thank you, Ricky. As Irene and Ricky both mentioned, prudent financial management remain our top priority. And for the first half, we have delivered a solid improvement in our turnover and also our operating cash flow. And we continue to deliver sustainable return to our shareholders. Hence, we have kept our DPS HKD 0.27 for the first half and shareholders on an NAV this is like the kind of 1.2%, mainly reflecting the RUP improvement of 1.2%, offset by the noncash fair value change of investment property. And on financial and capital management, as we continue to maintain a very strong liquidity and a strong balance sheet. So for net gearing, as of June 30, the lag gearing was at 33%. There's a slight increase of around 1.5% from last year-end. This is consistent with our own budget and as our capital project continued on track and within budget. The effective interest rate has reduced from 4.3% in 2024 to 3.8% during the period, thanks to a drop in HIBOR in Q2, mainly. We continue to maintain a healthy mix of fixed rate and floating rate debt. Our fixed rate debt ratio is around 56% as of June. And for average debt maturity is around 3.2 years. So they continue to be very healthy and staggered. And for undrawn committed facility in cash, we continue to keep around HKD 15.3 billion of a joint committed facility and together with cash, and that's more than enough to meet our refinancing over the next 3 years. We have 42% of green finance and that is ahead of our -- the target we set for the group. So in the first half, we have also completed -- successfully completed the refinancing of USD 750 million support. So that gives us a stability and good access to the that capital market. And we are also actively using different financial instruments to manage our interest rate. And so some of our U.S. dollar notes has been converted into Hong Kong dollar to minimize FX risk and also to optimize the interest exposure. So that's -- next will be on cap rate. So we have, again, kept cap rates stable. The February change was mainly due to rental change during the period. That's all there is from me. I will pass it back now to Irene.

Thank you. We remain committed to pursuing sustainable growth and value creation. We recognize that the outlook for the remainder of 2025 is shaped by considerable uncertainties in the global economic environment. We are very mindful of these complex market conditions, which require ongoing vigilance and prudent risk management. Nonetheless, we are confident in Hong Kong's enduring position as the leading global financial center and its vital role as an important hub of activities within the Greater Bay Area. Our continued investment in the Lee Gardens precinct and our diversified growth strategy ensure that we are well prepared to capitalize on emerging opportunities. Hysan's forward-looking vision is transforming the Lee Gardens neighborhood with an emphasis on inclusivity and sustainability. Our strategic direction is a continuation of Hysan's century old legacy built on trust, harmony and shared values. Our strategy has played a pivotal role in the growth of Causeway Bay as a vibrant hub with the Lee Gardens area serving as a beacon of distinctive offerings and cultural vitality. Together, these have contributed to Hong Kong's ongoing development as an international city. With a positive outlook for our rejuvenated lead guidance, we are confident in Hysan's ability to continue delivering a rust business performance. Our vision transformation initiatives and proven track record serve as a strong foundation for long-term growth. We will remain steadfast in our commitment to financial discipline and risk management. Our strong and disciplined execution of our core and pillars strategy will continue to deliver sustainable long-term value for our stakeholders. With optimism determination and a strong competitive edge, we will continue to shape the future of Lee Gardens and contribute to Hong Kong's sustainable development. Thank you.

Thank you, management. It is the Q&A session now. We will take questions from the analysts on site, and then we will take questions from the online platform. So maybe Fan Tso first, please take the mic.

Fan Tso from Bank of America. Thank you for the capital recycling commitment, I think investors would like it. But my question is more on the retail. So I want to get your sense about retail in July and early August. I think the weather doesn't help last year is still a relatively low base. So just want to see if it is still in the positive territory? And second, on the turnover rent, I see a decline year-over-year. But this year, we should have more AI space reopened compared to last year. So I wanted to know the reason behind and how would you comment on the performance of those luxury tenants. And lastly, a question for Andy. I wanted to know your appetite for convertible bond.

Another sales pitch. Andy, maybe you can answer this question.

So first of all, on the retail side, we are seeing very strong -- of course, the market is still very difficult. We understand it, but we have delivered a very solid performance in terms of tenant sales in the first half. We have mentioned about -- around mid-single-digit percentage increase for the first half. And in particular, for Q2, we have recorded 8% increase year-on-year. So we are seeing a very healthy improvement in particular in the watch and jewelry sector and also the cosmetic and personal care sector as well. So it may be a bit early to talk about the sales rate in August or July because we are still collecting the information from tenants. But we do see an improve member sales spendings. So we think we are on track to that. But of course, the weather doesn't help us. That's true. So I think all this is -- the backdrop is really consolidations. So the market is difficult, but we want to help our tenants to really perform and have a better business. And for the -- the second question is on AI, right? On turnover rent, right? On turnover rent, of course, we have reported improved rental level, so that's positive rental reversion. That means a high base brand. So I think it takes time. The sales is growing. But in the meantime, the turnover rent might be affected by these higher thresholds. And also, the third question is on convertible bond. Again, we have -- of course, there's a lot of -- the market has become more active in the first half. But again, we are mindful of the dilutive impact of such instruments. And so I think we will continue to monitor the situations and balance the interest of different stakeholders.

I might add a few words on the retail atmosphere. No question, it is difficult. But we -- there's so much talk about how dilutive it is to go north and so forth. We actually look at it quite differently. We just want to focus on the attraction of our area, why people should come to us and why they should stay longer and spend more and that is really very important. Therefore, offering a wider spectrum of experience as well as ways to spend money from F&B all the way to -- we can be on the high end. But all the way, everyone always buys high and low and low and high. So there has to be a very, very broad offering. So you can also see how we look at our memberships as well. We pursue a broader and broader base of membership. Of course, our high spending members are very, very key to us. And we value our Club Avenue very, very much. But they cannot be our sole reliant. We need to not just broaden the base of diversification purpose. But through the diversification and through our AI, we actually can harvest a lot more effectively and channel them up the value chain as well. So this is what we work on a lot. So yes, it's very, very difficult. Yes, people don't have to spend in Hong Kong, but I actually think that people do want to spend for the right area for the right things. So we're not saying, retail is dead, not in the slightest. Now specifically in our area, apart from all the good things we're doing because we're still doing it. You can see that there's a lot of holdings. Hysan Place is almost all wrapped up in the front. So this has to be difficult to attract. But we actually have done quite well. So we focus -- or Hysan Place, we focus on curating very, very powerful events and people don't seem to care about all the holdings and all the costs. They still come in. So we're not denying, so it's very difficult. But I think Andy's point on an increased lower base will always take away your turnover rent initially. But I think in today's climate is very important to continue to build your assured rent because turnover is turnover. But we also must do our best to help our tenants do well. This is really our strategy, always help up tenants in every way to do well because if they do well, we do well. So I think our results show resilience. Can it be better? Of course. But I think there are so many factors that can improve, including and finish our rejuvenation and we are entering the final, final stages. That would be quite magnificent.

Lady on the first row.

This is Percy from DBS. Congratulations on the results. My first question will be on the capital recycling initiative. You mentioned that you aim to recycle around HKD 8 billion capital in the next 5 years. Can we have a sense in terms of the pace, whether -- when we will gradually see this HKD 8 billion coming back? And in terms of the priorities for using this capital, are we prioritizing for debt reduction investments or even what we consider to reward to shareholders like a buyback or even special dividend? Secondly, would be another follow-up questions in terms of the retail portfolio. Of course, your portfolio definitely outperformed the market. But one of your peers also mentioned that given the outlook among retailers are quite cautious, and they are now talking about negative in the second half. What would be your outlook in the second half as well? And finally, I will have a question on the office side. Given that the capital market has improved recently, do you see any improvement in terms of the inquiry? And does this translate into stabilization in terms of the spot rates? And how many percentage of the leases are we having to be renewed in the second half? And how many of them has been committed?

A lot of questions. Maybe I'll just answer the order of the recycling. The order recycling is somewhat dictated for instance, To Kwa Wan, by achieving OP. So that is towards the end of the year.

That's pre-sales.

That's pre-sales, the consent. That's towards the end of this year, right?

Yes.

Villa Lucca, in Tai Po has been an ongoing sales process, and we are very happy to see quite an optimistic and the speed of interested buyers coming through in the last 6 months. For Bamboo Groove, it is a new -- it's not a new initiative because we have been planning it for a while, but it will be a new launch. So we will update you when we have the numbers. So maybe Ricky or Andy, you want to talk about the retail environment?

When we talk of the retail environment and as we all are aligned, is that the market is still tough. But at the same time, if we look at the sales of our individual tenants is quite related to the reversion or even attracting on new tenants. We always try to talk about, let's say, Hysan Place. We -- since we've completed the B1B2 renovations and then the project, we are so actively curating the space. Now you see the frequency, you see the expand is lower, and you can see -- you can find a seat in the food cart during the day or over the weekends. So I think our formula is a bit different from the general -- our peers is that we got a piece of land that we hold it for 100 years, and we've spent decades to curate it. And when we could talk about half, its not half something we plan 6 months ago. It helped something that we plan in 10 years, 5 years for example, you see the transformation of the -- kind of we call the low-rise area, the Pak Sha Road, Lan Fong Road, from nobody to now, the body stood, see -- like the audit. So this from a very good base for organic growth to counter a little bit of the overall environment. I think that's the part of our permanent. Of course, we still need to work together with our tenant. Not -- there are always some people who will not perform. But so far, we find the tenants that work together with really a win-win situation. They perform quite well and that support the rental on renewal or even attract new tenants.

Okay. And a bit on the land work, Percy. First of all, for retail rental reversion for the first half, of course, Ricky mentioned about predominantly positive and in terms of percentage level, we are still talking about a high single-digit percentage increase in terms of rental reversion. But of course, a lot of those is attributed to go to several key anchor tenants opening in the first half. So this is a lot of questions, there's -- some of these major players who's driving the rental reversion. But overall, as Ricky mentioned, with our improved tenant sales, we are seeing improvement in our overall portfolio as well. So I think that's the outlook. And for office activity, yes, indeed, we are seeing increase increasing viewing activity, more interest on corporate and maybe they're trying to -- of course, from a market angle, we are seeing positive lag ticked up in Q2. So I think there's a lot more activity in terms of office leasing. And also, our occupancy improved from 90% or 92%. And for rental reversion, our office rental reversion is still in mid-teens negative, but it has improved 3 percentage from last year.

And our retention rate is over 70%. And I think that is quite key in our resilience because we have to both retain, you have to defend and attack because there is still an oversupply, and there's still a sluggish demand. So it's -- you just have to be the best. And not by price, I mentioned, yes, that's very important.

And if you look at the portfolio, the financial part or the wealth management actually -- quite clear that we do attract a lot of potential new tenants because we already have that. We have the tenant, we have the HSBC, AIA or this well, even the [indiscernible]. It seems that we have already attracted position about quite a good wealth management center in Hong Kong. So that's why we attract new management center projects.

Yes. So we -- for office, because of the lack of demand and the oversupply, you have to be more creative is one word, but you have to be more agile in attracting other potential tenants for instance, the service trade, the medical trade, and we have a very, very big effort in attracting the wealth space. I mean, you all come from the banks and every single bank talks about wealth as the growth sector. And we are a very, very attractive place for wealth. And then once we attract the world sector also drive spending and eating. So we have to make sure we drive the ecosystem. And as they succeed, then the retail people succeed. I think it's all about getting the engine revving more policy. So we used to have to focus on not just -- or we must maintain the same type of segments. We were very, very -- were thoughtful about how we can attract other trades.

Okay. We have questions from online platform. It is from [ Stephen of Fortran Investments]. Could the management share more thought about the financing strategy of the debt profile, especially for the 2027 maturity which is peak of the maturity profile given the times of the headline news this day?

Andy?

Thank you for the questions. First of all, Hysan continued to have very strong banking assets. That's why we have a HKD 15.3 billion in joint computer facility. It's right that we have a debt maturing in 2027 in relation to the construction of Lee Garden Eight. And it's common practice for our industry to refinance it as a secured operational, and this is our base case expectation at the moment.

Due to the time constraint, we will take one last question from the online platform. It is from [ Ming Jiang of simple way]. Could the management share the dividend policy for the coming years?

What dividend policy is always dictated by the operating environment, our capital needs, our growth needs and of course, first and foremost, to make sure we look after our shareholders. So we don't give forecast. We don't give guidance. But you can see we are paying HKD 0.27, again, which is flat, which I think is quite a good indication of our confidence in making sure we maintain a stable environment, which I think is the best gift for our shareholders.

Yes. Sure.

So just a follow-up on the bond maturity and dividend policy. Would you consider launching a scrip dividend in the coming years to proceed your cash and deal with the bond maturity? And also, you have newly issued a new perpetual capital security that carries quite high interest rate is 7.3%, right? So why would you willing to issue such a high interest rate PCs? Is it difficult to get access to the bank borrowing and how would you manage to do the refinancing strategy to lower your net gearing and give more buffer to the bond maturity?

Andy.

Thank you for the questions. I think first on scrip dividend. Again, it's this dilutive impact of potential -- any potential scrip dividend issue. So I think in the meantime, first of all, the group has strong access to committed facilities and we have our debt profile well managed. So I think we -- we will continue to monitor, but there is no immediate plan on doing any of those. And for perpetuals, again, for financing strategy, I think it's very important that we think long term. So we always focus on building a balanced capital structure, what are different kinds of instruments. So there are a few factors that we have to really balance. First of all, of course, spending cost is important. Cost of capital is important. But there's also -- it's also so important to maintain long-term access to the bond market as well. So we have to adjust bondholders' expectations and also credit rating agencies we use on our credit situations. So I think balancing all these factors the potential issue, our biggest benefit of equity treatment. And in terms of the price, is actually on par with -- if we reset the previous instrument, it would be in line at a similar level of cost. So I think the perpetual remains a very strategic part of our capital structure. But as we talked about the capital recycling plan, we have also initiated this HKD 8 billion capital recycling plan of over the next 5 years. So we will continue to optimize our capital structure and refine it over time.

Thank you, management. We can conclude the session today. Thank you all for coming to our session.