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

Friends from the investment sector. Good afternoon. Welcome to New World Development's FY 2022 Annual Results Presentation online Analyst Presentation. I am from the Investors & Stakeholders Relation Department, Christy, the moderator for today. Let me introduce to you our management. New World Development Executive Vice President and CEO, Dr. Adrian Cheng; New World Development CFO, Mr. Edward Lau. If you have any questions, you may submit your questions in the webcast chat box. We will spend some time to answer some of the questions. We will now invite Mr. Edward Lau to go through the Group's FY 2022 annual results. Thank you.

Thank you, Christy. Since the outbreak of COVID-19 in 2020 until now, global macro economy was under serious challenge. The pandemic has not subsided yet, social distancing restrictions are still there. So this is a challenge to many enterprises. However, for our group, under such very -- under such big storm, we are still able to ride out the difficulties and achieved stable performance. In the past 2 fiscal years, our revenue was stable. For 2 consecutive years, our profit achieved positive growth. Very few developers could do that. In FY 2022, our profit attributable to shareholders was up 8%. We continued to strictly control costs, administrative expenses came down 5% year-on-year. As of the end of June 2022, available capital resources amounted to HKD 105 billion. Net gearing ratio continued to be at low 40% level. So the same as the guidance given to the market earlier on. In face of continuing risk regarding FY 2023, we will be relatively conservative. We expect that underlying profit will be flat or there may be a slight decline. In FY 2022, our financial performance was very stable regarding development of properties. At a very early stage, we started to invest in Greater Bay Area, so we acquired land at a cheap price. We're able to have high profit margin. Overall gross margin increased from 41% to 52%. This year, 85% of contracted sales was from GBA and Tier 1 cities of Yangtze River Delta. For investment properties, this year, we continue to achieve very outstanding performance. So we are among a very few developers which could achieve positive growth. For K11 in particular, segment results was up 17% year-on-year. Since FY 2015, we progressively have increased dividend payout to pay back to investors for their support. So as we said in our guidance earlier, for this FY, our dividend will be at HKD 2.06 per share. For the whole year, dividend yield will reach 9.4%. Looking into FY '23, we have four main themes in our business. First of all, arrival quarantine policies are being relaxed. This Monday, the government changed from 3 plus 4 to 0 plus 3. So it is expected that quarantine measures will be relaxed very soon. And sooner or later, the border with the Mainland will be reopened. Our investment properties and our hotels will benefit. In FY '23, there will be an additional HKD 150 million sales to our shopping mall. In October last year, the government announced the development strategy of Northern Metropolis. And since then, farmland conversion has been faster. In Northern Metropolis, we have 12 million square feet of GFA of farmland, which we are actively deliberating with the government. Number three, in Mainland China, we will continue a stable contracted sales. We work with the SOEs, and we very carefully select projects at good locations. Some time ago, we collaborated with China merchants to invest in Shenzhen Prince Bay and Shanghai Putuo projects. And with Guangzhou Metro, we worked together in the Guangzhou Hanxi project. Number four, we will actively examine how to improve organizational structure to maximize shareholders' return. For example, we will continue to dispose of non-core assets and preserve cash. We will consider corporate actions to release value. Regarding property development, overall revenue has decreased. However, segment result is still stable. In Mainland China, property developments, segment result was up 11% year-on-year. This is mainly because of more bookings of Greater Bay Area projects accounting for 70% of total segment result. Gross profit margin was as high as 70%. We started to invest in GBA at an early stage. So that's why we enjoyed very low land price. We'll continue to be skewed towards Tier 1 cities in China, especially in GBA and Yangtze River Delta. In Hong Kong this year, project booked is mainly 888 Lai Chi Kok Road commercial building. In Hong Kong and Mainland China, we have a very good portfolio of property development. So we can very flexibly select those projects with the best return. In the coming two fiscal years, we will continue the balanced development and even development between the two places. In FY '23, there will be a contribution of HKD 30 billion contracted sales. In FY '24, there will be a contribution of HKD 35 billion to HKD 40 billion contracted sales. In Mainland China, this year, the economy was affected by macro factors. Our contracted sales were still at RMB 17.1 billion, more or less the same as our estimate. We will continue to focus on Tier 1 cities in GBA and Yangtze River Delta, especially Hangzhou, Shanghai, Guangzhou, Shenzhen, where there is rigid housing demand. Last year, in these regions, our contracted sales accounted for 85% of the total. Let me give an example. On the right, you can see the Wangjiang Shangcheng project in Hangzhou. On the first day of presale there was oversubscription of 10x. The subscription sales was HKD 7 billion. So this broke the record of high-end residential subscription in Hangzhou, all the capital has been recovered and can be invested into other projects. In the future, we will use different channels to replenish our landbank. We have created a strategic cooperation arrangement with many SOEs so we can make good use of the resources and connections in China. For example, we work with China merchants in Shanghai Putuo project with total saleable resources of RMB 14 billion and presale can take place in FY '24. Besides, we have a quick win strategy. Some time ago, in Shenzhen and Guangzhou, we acquired three projects at very attractive price. So this will accelerate our sales and cash recovery. In Hong Kong, last year in October, in the policy address, the concept of Northern Metropolis was introduced. After that, the government put in place many new measures. Number one, acceleration of farmland conversion. So on the left, you can see standard rates, land premium for farmland exchange. In March, the government announced this mechanism. So in Fanling and also Ma Shi Po, our farmland benefited. So the premium was around HKD 5,000 per square feet comparing with the tender price of HKD 7,000 to HKD 8,000 per square feet. The premium is much lower. So an increase of 20% in plot ratio. On last Friday, the Town Planning Board approved the Kwu Tung North and Fanling North residential plot ratio increase. And for residential property, there will be an increase by 20%. Our project GFA will go up around 110,000 square feet. So assuming $3,000 per square foot of profit, then we can already have an additional HKD 300 million profit. So now the process is being expedited. In the past, rezoning applications will take a few years, and now the pace is much faster. In the past year, we already submitted six rezoning applications involving 6 million square feet of GFA. And then there are also two land exchange applications involving 800,000 square feet of GFA. These are in active processing. And then the government has the intention to introduce technology and research industries into the northern metropolis in Santin and Lokmachau loop area to attract more Mainland experts. So in this way, in the short run, the short-term leasing market can be supported and the overall sentiment in the property market can be improved. In the long run, housing demand can also be boosted. We expect that in mid October, the government will announce more favorable policies during policy address. Now we have around 15 million square feet of farmland in Northern Metropolis and 12 million square feet of GFA is in active deliberation with the government authorities. So here, if you refer to the white so-called parts, these are areas where we have projects. And the scale is 3x that of the existing Hong Kong development properties landbank. In July, the government announced the setting up of the land and housing supply coordination group to expedite further farmland conversion. Here, you can see the government's infrastructure development blueprint. So there is the Northern Link connecting the Northern Metropolis and then in Santin, Lokmachau, Hong Kong, Shenzhen technology part will be built in order to attract industries and increase employment opportunities to attract more talents. So in this way, there will be bigger housing demand. In the coming 3 years, there will be 6 to 7 farmland, where land exchange will be completed and will be injected into the landbank. And in the past 1 year, we have already submitted to Town Planning Board six rezoning applications. In the future, our land reserve, our landbank will focus on conversion of farmland to lower overall land price or cost. Regarding Pavilia Farm, latest progress, the progress of Phases I and II was satisfactory. So completion is on track and booking will be in FY '23. For Phase III demolition work, it is almost completed. The authorized person has done assessment of the project, and it is confirmed that the latest estimated material date for Phase III will be 31st March 2025. For investment properties, in the past few years, we achieved very good growth. For revenue, 3-year CAGR was 10%, thanks to improvement of operating efficiency, segment results recorded almost 20% growth. Gross profit margin continued to rise. Recently, the government has been doing a good job in arrival quarantine policy. And on Monday, they changed 3 plus 4 to 0 plus 3. So if there is further relaxation, then in FY 2023, there will be an additional 150 million sales in shopping mall. So I think in whole Hong Kong, we have more than 10 retail hotspots and 7 hotels, and we are going to be the biggest beneficiary of border reopening, especially 11 SKIES. There's almost 3.8 million square feet. They will be opened in phases. 11 SKIES is just adjacent to the airport, and it will benefit a lot from the recovery of the tourism industry. With relaxation in the immigration and arrival policy, we believe K11 projects will perform even better. You can see that in the past few years, even though there was a big impact from COVID-19, K11 still performed very well because of four main strengths. First, K11's brand value; number two, our very unique ecosystem with more than 21 million members. So from our other businesses, customer traffic can be diverted to our shopping mall for consumption. They can use our K Dollar and also K11. We have strong CRM system. By means of precise marketing, we are able to interact with customers to stimulate their spending. Member spending now accounted for more than half of our total consumption or spending. Finally, we have mature operation team. They realize operational excellence including the enhancement of our brand mix. Recently, in Guangzhou K11, they conducted brand upgrading. They have brought in a number of Tier 1 international brands. So this is a testimony of tenants recognition of our operational capability. So by all these strengths, we're able to grab more market share. Now if you look at financials, you can see the strength of K11. In Hong Kong, segment results was up 14% for Victoria Dockside; and ATELIER King's Road, they are up 19% and 35%, respectively. If there is across the border reopening in Hong Kong, we believe that we can benefit from even more significant growth. In Mainland China, K11 projects achieved significant growth. So this can offset the impact of COVID-19 in K11 Shanghai because of lockdown, overall segment results were still up 29% year-on-year. This year is our 11 SKIES' milestone. In July, there was opening in phases. The Hong Kong government attaches much importance to the tourism sector. And recently, The Culture, Sports and Tourism Bureau was established to promote tourism development. 11 SKIES will play an important role to help the tourism sector to take off in Hong Kong. 11 SKIES is the biggest, newest and most popular tourism landmark. The retail portion will be opened in 2024. At that time, we believe that there will be overall reopening of border. And the tourism industry will become very resilient. And at that time, our retail leasing will be expedited. For example, in Korea, there is the very popular digital art gallery, art museum. They will set up a permanent gallery in 11 SKIES with an area of 28,000 square feet. So right now, occupancy rate of K11 ATELIER is satisfactory. Our goal is to reach a 65% occupancy rate by the end of the year. 11 SKIES is at the intersection point of the airport and Hong Kong-Macao-Zhuhai bridge covering a 1.5-hour living circle of the GBA and 46 million tourists. So in this way, we can cease endless tourism opportunities. Right now, in Hong Kong and China, we operate 17 K11 projects, altogether in the coming 4 years there will be 21 more altogether 38 reaching 2.8 million square meters. In Hong Kong and Mainland China, 11 project -- K11 projects. Rental income from 2022 FY to FY '26 will show a 30% CAGR. This year, for the macro economy, it was affected by many negative factors. So let's talk about interest rate risk. The U.S. Federal Reserve in June accelerated interest hike. Right now they have increased to 3% to 3.25%. And it is expected by the market, that next year in March, it will reach 4.75% to 5%. Internally, we have done the stress test. So for every 1% increase in interest rate, that means there will be an additional HKD 600 million interest expenses. We expect that in FY 2023, our average financing cost will be at around 4.5% equivalent to an additional HKD 1.2 billion of interest expenses. In order to reduce interest rate risk, we have in advance entered into many interest rate hedging contract in the coming 12 to 18 months. Our fixed rate portion will be at mid- to high 40% level. Interest expenses will increase. However, for FY 2023, we will have more than HKD 8 billion property development profit to be booked. Together with our recurrent revenue increase, we are confident that it will be enough to offset the increase in interest expenses. In terms of exchange rate risk, all along, we regularly buy forward FX hedging contracts to lock in RMB FX rate. So at regular intervals, we do stress test to assess the impact of RMB exchange rate on us. Our strategy is to continue to hedge more than half of our RMB profit in the coming 12 months. And every quarter, we will conduct that or implement that with discipline. Many official medias emphasized that it is important to maintain the stability in exchange rates. So we believe that there will be a lot of measures to reduce the pressure on depreciation. A few days ago, we saw 7.25 and after that, in one single day, there was a rise back to 7.15. We believe that exchange rates will be at around 7.2. According to major institutions projection, RMB exchange rate in 2023 will rise back to below 7. So we don't need to worry too much about depreciation pressure on us. In the future, we'll continue to face macroeconomic risk, including interest hike and inflation. So we will actively manage our net gearing ratio. First, we'll continue to sell non-core assets to preserve capital. In FY '21 and '22, the group exceeded this target of selling non-core assets. This year, we sold HKD 13.9 billion. Criteria of sale of assets included the following: first, assets at low IRR; number two, minority stake projects; number three, projects with synergy to our ecosystem. So we expect that in FY '23, we will sell HKD 10 billion of non-core assets, and we will expedite contracted sales. Last night, we announced the sale of Cheung Sha Wan Wing Hong Street's commercial building project, 50% stake to a Singapore fund, and we recovered HKD 3 billion. For FY 2024, we will sell non-core assets, and the target will go up to HKD 15 billion. Regarding CapEx, in FY 2021, or starting FY '21, we have successfully controlled CapEx to below our budget. This year, our expense is HKD 7 billion less than budget. In FY 2023, we successfully came down from the original HKD 50 billion budget to HKD 36 billion. So we will continue to very prudently evaluate our land purchase and other CapEx project in the coming 3 to 6 months. In FY '24, we expect that CapEx will even be lower than FY '23. How are we able to successfully control CapEx? First, in terms of replenishing landbank, we will be even more prudent and cautious. And number two, we will work actively with strategic partners. Just now we said, we announced the Wing Hong Street sale. That is an example. Number three, we will finalize the design direction as soon as possible, so that we are able to reduce the need of alteration and to reduce wastage in time and materials. Number four, we will adopt, we will use building materials with the highest cost effectiveness. Number five, through collective procurement, we are able to get the best price. And number six, we will reduce the alteration in design in the construction process. So we expect that in the next FY, our net gearing ratio will be at mid- to high 40% level. So the risk is controllable. Apart from development business, so we actively pay back to society. In December last year, we announced the first non-profit-making private subsidized housing project in Hong Kong, and we sell quality housing projects at cost. Now the progress of this program is very good. And next month, we will go to Town Planning Board for vetting. If everything goes smoothly, in 2025, we will start to presell and complete that flats and completion will be in 2027. When the fifth wave of COVID-19 was very severe, we're the first property developer to take the lead of pandemic control work. And we introduced 10 measures. For example, we gave out RAT packs and heaters. And then we introduced the first large-scale donation matching platform, Share for Good. So far, 60 NGOs have participated, and we have raised more than [ HKD 15 million ] worth of donations and also materials. In the past few years, we have done a lot in ESG. For example, we are the third company in Asia to get from SBTi and approval of our 1.5-degree science-based reduction short-term target. And we promised that we will go according to the net -- net zero standard of SBTi. Besides, we introduced the first creation of shared value lease. More than 60% of lease area of K11 ATELIER Victoria Dockside has joined our program. And we are the first enterprise issuing a USD-denominated social responsibility and Green Dual Tranche Bond. And then we have one more than 40 sustainable development awards and accolades, including the Pioneer Award, top level green Building Leadership Category Developer. We will continue to enhance our performance in international ESG rating. Diversity and inclusion is a priority area at NWD. With the recent board news announced last week, we will achieve 35.3% female Board by December 1, the effective date, which would make our board the most gender diverse among Hong Kong real estate developers. We are committed to building a people-oriented culture and prioritizing the well-being of our talent. We are piloting a 4.5-day work week and 1 work-from-home day a week this summer, with an aim to improve the work-life balance and work experience of our employees. We strongly believe that these initiatives will help motivate our talent and boost business efficiency and overall productivity. Thank you.

Thank you, Edward. It is now Q&A session. So through the webcast platform, you can submit your questions in writing. I will relay your questions to the management for them to answer. Thank you. Here's the first question. Interest hike, what would be the impact of interest hike on the property market many people talked about reducing macro control measures. What do you think? And what will be the outlook of the housing market or property market this year?

I'm Adrian. Now we are subject to the interest rate hike influence. And in the short run, the property market has actually softened. We believe that very soon, there will be time to digest the interest hike news. And I think the impact on the property market will be a short-term one. Hong Kong MA has reduced the requirement on stress test. And then for richer demand and for self occupation demand, this will be helpful. And then in the future, we hope there will be new measures. It is good to reduce the very strict macro control measures. And then the government has relaxed quarantine measures to 0 plus 3. And I do think that the government will gradually enable society to regain strength. And there will be a good direction for the property market to recover. Right now, the market is supported by rigid demand. Recently, and I asked my hotels, I have so many hotels and for all of them, the wedding banquets are already fully booked for the whole year. So what does this mean? This means many people will need to buy properties for the first time, especially the young people. Based on my past experience, when young people buy properties, well, sometimes the parents will pay the down payments and then the young people themselves will pay mortgage. In Hong Kong, I think the wealth foundation is rather sound. So in the future, there is still a lot of so-called new blood and support in terms of richer demand. Right now, for like 1 to 2 months, 2 to 3 months for a short period of time, many people adopt a wait-and-see approach. However, this is going to be short lived because after 1 to 2 months, you can see the pace of interest hike, and I think there will be better visibility. Hong Kong -- after Hong Kong announced the 0 plus 3 policy, many Hong Kong people rushed to travel abroad. And the border with the Mainland is still not fully reopened. Within the short term, I think it won't be favorable to local consumption.

So what will be the impact on Hong Kong K11's business? There are sounds outside that, that should be overall cancellation of the quarantine arrangement. What do you think?

In the past few years, the Hong Kong economy was under the COVID-19 impact, we are happy that the government has change quarantine measure into 0 plus 3. This is the first step towards normal. And then there is a relaxation to 12 people per table and maximum capacity of 240 people. Now the government is assessing the risk of COVID-19. We hope that pandemic control measures can be relaxed, more large-scale events can be organized so that more tourists and businessmen can be attracted to come. In the past 2 years, there was negative growth to many of our peers in the industry, and we have been working hard. In Hong Kong and China, sales has increased quite significantly. In K11 Hong Kong, up 8%; in China K11, up 15% year-on-year. So we actually outperformed the markets under the pandemic. Now we are under interest rates hike cycle.

Interest expenses are going up. Net gearing ratio is going up in the coming few years. Is the group able to maintain the progressive dividend payout policy?

Right. In controlling debts, and liabilities, we can see that under the macro environment, we control our CapEx. We continue to sell non-core assets to recover capital, we will control our CapEx. And you can see that in our budget, in FY 2022, compared with budget, we spent around HKD 7 billion in FY 2023, we believe to reduce it to HKD 14 billion, so down to HKD 36 billion instead of HKD 50 billion. So we have been doing a good job in this management. For sale of non-core assets in 2022, we achieved HKD 13.9 billion this year in 2023 FY, we hope to achieve HKD 10 billion. So you can see, we have just announced that we are going to sell Wing Hong Street equity to Singapore fund, and we have recovered HKD 3 billion. So our progress has been very good in terms of dividend, it will be sustainable and progressive dividend policy. At this time, our dividend is $2.06 per share for the whole year dividend. And over the years, we followed our profit and our cash flow in progressively and sustainably paying out dividend. So our net gearing, this year, is 43.2%. So we will maintain a 43.2% to 45% level. I think this is really controllable. I think you can rest assured. For RMB, well, it has been falling fast. However, I think we have seen some return to stability. So actually, the RMB exchange rate has risen. And then after some time, I think it will be down to below 7%, like 6.8% or 6.9%. So I think RMB is stabilizing. You don't need to worry too much.

For Pavilia Farm Phase III, what is the progress of redevelopment? When will you resell the canceled units?

For Pavilion Farm Phases I and II progress has been satisfactory. Completion will be in schedule and booking will be in '23 -- 2023. And then we have already sent letters to the buyers, the critical material days will be 31st March 2025. For the canceled units, there are 250 roughly. The impact is around HKD 3.8 billion and we will focus on construction progress and also the property delivery. And for resale at appropriate time, we will discuss with MTRC. Since last year policy address, when the Northern Metropolis concept was introduced by the government in the past year, different policies were introduced about farmland conversion.