New World Development Company Limited (17) Earnings Call Transcript & Summary

Good afternoon. Welcome to New World Development's FY 2020 Full Year Results Presentation Analyst Meeting. I'm [ Carrie ], Head of the Investors Relations Department. Let me now introduce to you the management in attendance. We have our Executive Vice Chairman and CEO, Mr. Adrian Cheng; Deputy CFO, Mr. Edward Lau; Director, Finance and Accounts, Mr. Jim Lam. If you have questions, please type your questions in the text box of webcast. We will select some questions for answering. Now may I pass the floor to Adrian and the management to present our full year results.

Thank you. Thank you for joining this briefing. In this FY, the group faced a lot of challenges. And we have shown to everyone our ability to face up to change and our growth potential. First, why New World? K11 has projects all over the country. In the future, we will start 25 new projects to increase our recurring rental income. In the coming 5 years, our GFA will be 3x that of now. For revenue, there will be a double-digit CAGR. And then for Mainland China, for K11, for rental income, CAGR will be 25% to 30%. So this is going to be a big recurring income and rental income growth engine in the future. The second point is GBA. New World is the earliest Hong Kong property developer entering the GBA. And in the area, we are a main leader. First, we have pricing power. Later on, you'll be able to see why our GP margin is so high in the Greater Bay Area. That's because we have good brand effect, we have pricing power and brand premium. So in the future, average contracted sale in Hong Kong will remain stable. For Mainland China, we expect to see a double-digit CAGR in contracted sale. Number three, we make good use of our cash flow. We continue to sell our noncore assets to increase cash flow and to recover capital. So in FY 2020, we sold almost HKD 10 billion of noncore assets. In FY 2021, our target is to sell HKD 13 billion to HKD 15 billion. This is for the whole group. And we have a very big group CRM ecosystem. It is -- well, we have intra-group synergy and customer spending is growing in multiples. This ecosystem can increase synergy and also customer value. So customer consumption or spending will increase in multiples. For example, for those who have bought our properties, will they also buy from our retail outlets? And for those who have bought our insurance, will they also buy our properties as well as retail products? So we have used our new IT and digital to create our group ecosystem. And finally, we have an undertaking to our investors and that is, well, that doesn't change. We adopt a sustainable and progressive dividend policy. And there is high stability for investments. So for FY 2020, we keep dividend at HKD 2.04 per share, and this is more or less the same as in 2019. So this is a sustainable and progressive dividend promise, and we will continue this promise. All right, our results. In FY 2020, in the first half, that was the pandemic and various other reasons. So the business environment was full of challenge. In FY 2020, our consolidated revenue was HKD 59 billion; segmental results, HKD 13.9 billion; underlying profit, HKD 6.589 billion. However, well, despite all the challenges, we adopted a lot of defensive measures. We're very resilient in this perfect storm. First, we are stringent in cost control in order to ride out the challenges. So you can see that our recurring G&A expenses was down 8%. Overall speaking, for cash flow, we had saved HKD 1.2 billion. This is the total amount. But for booking, only 500-odd million was booked this year. Next year, more will be booked. So that means our recurring expenses were down 8%. How are we doing that? So from rental restructuring, our business restructuring, HR organization chart restructuring, spans and layers restructuring, relocation of offices, travel expense reduction, procurements, bulk purchase and so on, we have done a big exercise in the past year, and we had saved HKD 1 billion and more cash flow. So this is very good. As such as now, even though there were other challenges, K11 MUSEA and K11 ATELIER King's Road were opened in FY 2020. So our IP segment revenue was up 19% year-on-year. This gave strong support to our business. And for development properties, GP margin, 57%, up 18 percentage points year-on-year. This shows our brand premium and pricing power. For dividend as such as now, final dividend, HKD 1.48 per share; for full year dividend, HKD 2.04 per share, more or less the same as in FY 2019. Usable capital, HKD 106.7 billion; and cash and bank balance, HKD 67.4 billion; usable bank credit line, HKD 39.3 billion. So how come we have HKD 106.7 billion? Because we actively manage our finances and we sold noncore assets to recycle capital. Net gearing, at the end of December 2019, it was 42.2%. It fell to 41.6%. So in terms of financials, capital restructuring, we did a lot of work. Just now I talked about cost control. And for noncore assets, we sold HKD 10.6 billion, and we exceeded the target. And we used the cash to invest in projects with higher ROE, ROA. We recycled the capital. And for noncore business or redundant business, we had disposed of them. Now let me very quickly turn to segments results. HKD 13.9 billion for core businesses. We have property development, property investment, hotel management, hotels, roads, buildings, architecture, aviation, insurance under NWS. So they all made contribution. They are our core businesses. For other businesses, they had been disposed of, for example, bus, ferry noncore assets. They are being gradually disposed of so our core business can be clearer. Property development. Contribution from Hong Kong was smaller. So this is mainly about booking. And in FY 2020, we have booked HKD 4.5 billion of revenue only. Last year, in FY 2019, HKD 23 billion, so you can see a big decline mainly because there is no new project to sell. And for FY 2020, we only sold inventory mainly. In Mainland China, under the pandemic, we made use of different ways, including online sale, and we were able to sell property units. And our segment results was up 19%. I would like to emphasize GBA. Within Greater Bay Area, we started to see some results. Why? On this page, you can see that our GBA revenue and GBA segment results were up 45% and 73%, respectively. Besides, in Hong Kong, we did 57%, in China, also 57%, up 23 and 11 percentage points, respectively. For GBA gross margin, it reached 70%. This shows our brand premium and our pricing power in GBA. So in 2016, we accumulated 1.5 million square meters of land in GBA. And now in GBA, there's 3 million square meters of land. And in terms of Hong Kong developers, we are the biggest. And we are increasing the pace, and we are moving into the harvest stage. For Hong Kong this year, contracted sales was HKD 13 billion. Guidance for Hong Kong, future contracted sales from 2021 to 2023 FY, for each of these years, we hope to exceed HKD 20 billion in contracted sale. Saleable resources will exceed 3 million or 4 million square meter -- square feet. On June 30, 2020, that is for this fiscal year, our total land bank GFA was around 9.1 million square feet. That is attributable GFA. Key upcoming projects: On the left side, Sha Tin - Tai Wai Station project, 3,000 residential units. They will be launched in phases: Phase 1 and phase 2 together will offer 2,200 units for pre-sale consent. Well, it was already issued. And in West Kowloon, there's the Cheung Shun Street, Wing Hong Street projects and also a 900,000 square feet Grade A office building, and they will be launched according to plan. In Mainland China, contracted sale -- gross contracted sales, RMB 18.2 billion for this FY 2020. GBA made the biggest contribution, more than 60%. Residential contracted sale, ASP, RMB 38,000, up 23% year-on-year. GP margin, 57%, up 11 percentage points year-on-year. We hope that this year, well, HKD 18.2 billion. What about FY 2021? We will see a double-digit CAGR growth for the next -- that is for 2021, 2022 and 2023. Our land bank. In China, 6.5 million square meters; core GFA, 5.7 million square meters. Out of the 5.7 million square meters, half is in GBA, around 3 million square meters. Just now, you saw our results, and you can see that investment properties rose significantly. If you look at Hong Kong, gross rental income growth, 33% for FY 2020. Segment results for Hong Kong for 2020, 50% segment results. K11 MUSEA, K11 ATELIER King's Road were gradually commissioned. For China investment property, HKD 1.76 billion, up 2%, mainly K11 and Guangzhou New World and NEW PARK. So for investment property in the future, recurring income and cash flow growth will see accelerated growth. In the coming 5 years, CAGR will be a mid- to high double-digit rate. Then if we focus on K11 property investments in the future, Hong Kong and Mainland K11 investment property flagship portfolio GFA will increase 3x. The GFA will increase 3x. For Hong Kong, you can see Victoria Dockside and SKYCITY, Kai Tak Sports Park, West Kowloon office and so on in Hong Kong. There was an increase of 800,000 square meters, so asset value will be further enhanced. And from this year onward, from 2020 to 2025, there will be 2.5x of 800,000. So in other words, there is an increase of 2.5x in GFA. So in other words, 810,000 square meters. In Mainland China, even more amazing. GFA will increase 3.4x. In Wuhan Hankou, GBA Prince Bay, the operation will be under K11 and D. PARK brand. In 2025, there will be more than 1.46 million square meters. This is the core investment property flagship in Mainland China, the increase in GFA. Most will be under K11. At that time, K11 will have 38 projects in operation. There are 25 new projects. Now there are 13. In the future, there will be 25 new ones that will be completed gradually. For K11 in Mainland China, rental CAGR will be around 25% to 30% in the coming 5 years. Okay. This page shows more details. So you can see the coming 25 projects. So when will they be completed? What's their size and so on? These details are shown here. So in other words, New World Group has already put up a plan for future 5 years earning visibility. We actively and prudently manage our finances for debt at fixed rates and also at variable rates, they account for 32% and 68% of total debt, respectively, 68% floating, 32% fixed. Average funding cost, 4.6%. In FY 2021, this average cost will come down because we will do a lot more. First, interest rate is lower. Second, we will put in place some big measures to further lower the cost. So interest expense will come down. Besides, 1.5 years ago, we started refinancing exercise. So in 2021, FY 2021, the refinancing has been all taken care of. There is no more need -- no more further need. Every -- everything has been taken care of. So in the foreseeable future, our company does not have any intention and will not issue new shares for fundraising. So there is no equity financing need at all. Noncore disposals, mainly 2 things. Cash is king, I want money. Number two, we want to optimize our businesses. So for noncore businesses, they should be disposed of. We want to enhance our property portfolio to increase return. We want to create better value for shareholders. For FY 2020, noncore disposals amounted to HKD 10.6 billion for the whole group. We exceeded the targets. For FY 2021, noncore disposals will be around HKD 13 billion to HKD 15 billion for the whole group. And right now, progress has been good. For NWS, in August, they sold the bus business and got back HKD 3.2 billion. Many people asked, how do you define noncore? For example, minority interest, JVs, low growth sectors, low ROE, low ROA projects, those will be disposed of. Regarding dividends. We will fulfill our promise to investors. More or less the same as in 2019 FY, we will maintain a sustainable and progressive dividend payout. Besides, we will pay attention to opportunity of buyback. In the past, we have been doing buyback to show our confidence in the company. In FY 2020, we did buy back of our shares. We spent more than HKD 600 million to buy back 72 million shares. So we will continue to implement this plan. Besides, we have done share merger. We hope to optimize our shareholder bases to enhance the attractiveness to investors. For operations, we have some defensive and resilient strategies, as explained just now. At the same time, we are grabbing market share from others. So we're not only defensive. We took this opportunity. Okay, you see crisis, we see opportunities. So where are our opportunities? We want to consolidate the market and grab market share. For example, for K11 MUSEA, it was opened for 1 year. Within 10 months -- within the past 10 months, the number of members increased more than 13x. Now we have 58,000 members. And for our CRM system, it uses many AI and IT to understand consumers' preferences and habits. For VIP customers, they account for 60% of the total in K11 MUSEA. This is the highest in Hong Kong. So VIP is spending 60%. All are local customers. And we are up 11% from Q1, and we have black card. We have gold card and black card. 40% of the members went to K11 MUSEA to spend 2 weeks after receiving a call from us. We attach much importance to IT. So our mobile phone app activity increased 39%, that is the MAU, number of MAU. In Q2, the Q-on-Q increase in Q2 this year, while the market fell 7%, K11 MUSEA grew 35%. For Mainland China. In Q2, on a quarter-on-quarter basis, the growth in China was 19%. K11 in China rose 85%. So this means that we outperformed the market. Because we had to fight the pandemic, and so we used some online and technology, new retail, smart retail measures. For instance, we use different ways to grab market share, for example, e-shop, live streaming, Facebook, social media, and so on, food delivery and so on. They account for 15% of our total mall sales. So online, offline, a seamless digital experience can enable us to grab the market. Regarding market share in September, we organized a shopping festival. Within 10-odd days, we got more than HKD 300 million of retail sales. So this is only in K11 MUSEA. In September and in August, for K11 MUSEA, our growth was more than 200%. So the growth was more than 100% comparing with the same period of last year. So you can see very, very big footfall. In only 10-odd days in September, we got HKD 300-odd million of retail sales. As such as now, our CRM system, well, apart from strong brand effect, our portfolio also outperformed the market. So we have new channels, social, retail, unique shopping experience. All these have made our CRM system very strong. For Klub 11, number of members was up 56% year-on-year and member sales increased more than 100%. As such as now, in Q2, when the market fell 7%, we were up 35% quarter-on-quarter. In Mainland China, it's even more amazing. In Q2, we were up 85% quarter-on-quarter, and we actually outperformed the market because the market only grew 19%. In the future, in China, there would be country-wide layouts for K11. Such as now, China K11 recurring income CAGR would be 25% to 30%. This will be in 2020 to 2025. And now our total K11 members amounted to 2.3 million; social media fans in China, 5.3 million. We have designed a new K11 Go mobile phone app to integrate online and offline. For this K11 Go, well, the 2.3 million members can be absorbed online. When they shop online, well, they can also see exhibition online or they can read all contents online. And there is online member service. There is online live streaming. They can pay right away, and it was launched in April because of the pandemic. And for this K11 Go and other new channel initiatives, we have got 15% share -- a share of the mall sales, total retail sales from these new channels. So these are new channels under the new normal. At present, for K11, there are 13 projects in 6 cities in Hong Kong and China. GFA exceeded 1.17 million square meters. In the coming 5 years, K11 projects will increase to 38. So in other words, there will be an additional 25 covering Tier 1 cities in China and high -- and strong growth Tier 2 cities. In 2025, there will be 2.82 million square meters of GFA. Now we are covering 10 cities. We are going to cover 10 cities. And CAGR growth in the future will reach 25% to 30%, and this will bring about very big recurring income for the group. For GBA, New World is the earliest Hong Kong property developer entering the GBA. As said just now, for land bank in GBA, we're close to 3 million square meters. We will focus on old city redevelopment, village redevelopment projects. And so far, we have got 6 villages already. There will be around 1.8 million square meters of GFA. In the coming 2 to 3 years, it will get into our land bank. For these 6 old city redevelopment projects, well, there are the Shenzhen Luohu; Man Kam To Economic Belt redevelopment project, that's in Shenzhen; Shenzhen Nanshan Xili Project in Nanshan. And then in Guangzhou, we have Liwan Shancun Project; and also the Guangzhou Haizhu project; Guangzhou Zengcheng Tagang project; and Guangzhou Zengcheng Licheng Jie, Xiajie Cun projects. In 2022, they will get into our land bank gradually. I mentioned just now our ecosystem. So how are we developing the whole New World Group ecosystem in Hong Kong? We have 1.8 million members who are in contact with New World; in China, 2.5 million members in K11. FTLife in Hong Kong, 300,000 people had bought FTLife products. So we have built an ecosystem with synergy. And how can we increase overall spending of customers? In the past few years, we did a lot to cross-sell and to develop the ecosystem from FTLife to Hong Kong retail, Hong Kong retail to FTLife, New World Club. About property sale or Hong Kong retail, up 3 to 4x in terms of cross-selling. When our customers consume in our ecosystem, on average, the first year spending is HKD 7,400; in the second year, HKD 23,000; CAGR, 34% every year. And you can see that there's synergy between business segments, and it is growing in multiples. So in other words, there will be a 3 to 4x increase in monetary amount. And then for IT, digital, we need to deliver our customer value. So we have both a comprehensive ecosystem by means of IT and innovation to create maximum value for customers. And we have formulated a technological reform plan centered around intelligence building. And for office buildings, retail and residential, we hope that everyone can live well, be safe, be healthy and be sustainable. And then if you read further down, there is retail iOS (sic) [ retail OS ]. Now we are making big data -- making use of big data, IoT and AI. And there will be real-time intelligence, smart analytics for us to understand customers' requests and needs, and in this way, we can operate in a very automated and personalized way. So we are using AI, IoT and big data. We have a 100-person team to work on this. For instance, for living. We try to understand customers' needs, behavior and life stage. In this way, we can offer a seamless online/offline experience. So based on products and services, we offer personalized advice for safety. On construction side, we will offer 24/7 real-time surveillance. We will provide flagging and risk mitigation measures. In case of fire or if people are injured or if people fall down, then we will give alert. For health, we will offer personalized health services, insurance products and so on. For sustainability, we hope that our supply chain partners and construction operators will reduce water consumption and energy and achieve energy savings. And we hope that by 2030, we will be able to reduce 50% of our energy and carbon consumption. Finally, let me talk about ESG. ESG to us is very important. So we have got a 2030 vision about ESG. Under Dow Jones Sustainability Asia/Pacific Index and GRESB, we are among the top few. And then when it comes to our governance and diversity of the Board, we are working on that. And we have introduced many sustainable development KPI for different BU heads under management. And by formulating and implementing policies about sustainability and also diversified culture, related international pledge, we will manage and disclose climate risk under TCFD guidance. And then our K11 ATELIER King's Road has got a triple platinum certification in terms of WELL, LEED and so on. So based on our science-based targets, we will reduce carbon and energy by 50% by 2030. So regarding sustainability, well, this will be promoted in all projects and also in Mainland China. We hope to create shared value and connect business with social progress.

Thank you, Adrian. [Statements in English on this transcript were spoken by an interpreter present on the live call.]