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

Investors, good afternoon. Welcome to New World Development's FY 2023 Interim Results Presentation Analyst Briefing. I am from the Investor Relations Department, General Manager Christy, the MC for today. Let me introduce the management in attendance. New World Development executive Deputy Chairman and CEO, Dr. Adrian Cheng; CFO, Mr. Edward Lau. [Operator Instructions] I will now defer to Mr. Edward Lau to go through the group's interim results for FY 2023.

Thank you, Christy. Before I talk about results for first half 2023, I would like to emphasize that this time, we have 3 key points. First, we will not do any rights issue. There won't be any rights issue or any equity fundraising. Number two, our net gearing ratio has already seen the peak. We are confident that the group will continue our deleveraging plan. In June 2024, it will come down to low 40% level. Number three, you can see here from our announcement of our results, now the group is conducting an overall strategic review of all business lines. We are looking into how we can improve each group company's strategic focus and unlock the value of the BUs. At different times through corporate actions, we will further enhance shareholder return. Now let me start my presentation of our first half FY '23 results. As we all know, the macro environment is very challenging. With Mainland lockdown and pandemic control, the border between Hong Kong and Mainland is still not fully reopened. RMB depreciation and interest hike have affected our business. In terms of financial performance, our revenue was up 13% year-on-year. This year, Pavilia I has booked revenue of HKD 5.1 billion. Just now I mentioned a number of headwinds. As a result, financial performance was dampened, first of all, Mainland pandemic control and Hong Kong, Mainland lockdown. In the Mainland, property development was affected. Because of the pandemic, some property delivery was delayed. And then because of lockdown and pandemic control, people's mobility and spending was affected, so this dampened investment of properties. In Hong Kong, basically, the impact was on property investment. And also, border closure affected the retail market and office demand. With RMB depreciation, because the scale of our Mainland business was very big, so the RMB depreciation cost FX translation impact. So our net gearing ratio increased and profit has come down. And then interest hike had also caused an increase of HKD 900 million in net interest expenditure. And then all these factors has affected or has lowered our profit attributable to shareholders and underlying profit for first half this year. We mentioned that in our guidance. As of the end of December, we have usable capital of HKD 92 billion, net gearing ratio of 46.9%. This is in line with our guidance given to the market earlier. We have already seen the peak, and it is coming down. Our interim dividend is HKD 0.46 per share, down 18% year-on-year. We are full of confidence in the prospect after border reopening. We believe that the worst has been over. In first half FY, the overall business environment has not improved yet. However, a few of our businesses have performed satisfactorily. For property development in Hong Kong, there was booking of Pavilia Farm I this year. As a result, Hong Kong property development revenue rose 6x significantly, segment results up 68%. Pavilia Farm II will be booked in the second half FY in Mainland China. In recent years, we focused on core areas in Tier 1 cities. That's our strategy. Together with New World Development's brand effect, in half year, our contracted sales had reached 60% of our yearly target of RMB 15 billion, regarding property investment, in Hong Kong and China, there was still impact from the pandemic. However, K11 results still showed resilience. Revenue and segment results were up 4% and 8%, respectively. This is just the opposite of the overall market trend. In Hong Kong, revenue was up 4%; segment results, up 9%. Number three, noncore disposals we successfully disposed of HKD 5.6 billion worth of noncore assets. We are confident that we can achieve or complete the yearly target of HKD 10 billion. In the first half FY, and also in the past 3 years, business environment was very difficult. We are still full of confidence in the prospect because we are seeing some light already. Since the social incident in 2019, together with a 3-year pandemic period, in the past 4 years, there was not a normal environment for us to operate our business in Hong Kong and Mainland China. So there was direct impact on most of our business performance. Into 2023, there are 3 main tailwinds: first, full relaxation of pandemic control policy in the Mainland; number two, full border reopening between China and Hong Kong; number three, interest hike is decelerating. All these will mean that the government or the economy will go back to the right track. New World has a very large ecosystem covering many different businesses, covering both the Mainland and Hong Kong. There are a number of direct beneficiaries, including property development, property investment, hotels, infrastructure, insurance and health care. Now let me talk about Hong Kong. Since gradual border reopening in early January, the number of Mainland tourists has risen a lot. According to immigration department's information, since full border reopening on 6th of February, the number of daily visitors had reached 52,000 on average. And visitors from the Mainland reached 40,000 per day. But in December, before border reopening, Mainland visitors only amounted to 2,200, which means we have seen 18x of increase. With the management's efforts and our operation capability, together with our brand value and our brand portfolio in our shopping mall, strong CRM system, well, we are able to deliver different and unique customer experience. As a result, our business has benefited a lot. Let me talk about the benefits. First, K11 MUSEA, we will comment on the next slide. K11 Art Mall, since border reopening in February, sales rose 80% year-on-year. Footfall was up 85% year-on-year. We expect that the full year sales would be higher than budget by 20%. K11 Artist, since border reopening in February, revenue was up 50% year-on-year. And for the number of Mainland occupants, the number is 5 x that of the same period last year. Occupancy rates exceeded 70%. For hotels, there is very big improvement, especially hotels in Southeast Asia. They benefited from overall tourism recovery globally, and they achieved a turnaround for offices. During CNY, we received many leasing inquiries from Mainland customers. In January, the number of inquiries was 3x that in December, and there were even more inquiries in February. And for other businesses, there is significant improvement. For FTLife, during CNY, APE was up 30% year-on-year. The number of Mainland customers signing policies was also up 60%. HUMANSA, during CNY, revenue was 5x that of the same period last year. Mainland business contribution is about 80%. Free Duty, current revenue is 20% that of the pre-pandemic level. We believe that it will go back to the pre-pandemic level very soon. Next slide, we'll focus on K11 MUSEA. Since opening in 2019, it has been well received in the market. All along, it is not able to benefit from the individual business scheme before the pandemic. Many tourists would like to visit K11 MUSEA. This is a new attraction. Into 2023, we have waited for 3 years, there is gradual relaxation of arrival conditions for tourists. So since early February till now, sales was 2x that of same period last year, footfall also 2x. We expect that the whole year sales will be more than our projection or our budget by 15%. We have been enhancing our brand portfolio. In first half FY '23, there are 50 brand-new stores coming into our mall. And some of them are entering Hong Kong market for the first time as an exclusive door. They achieved good sales. For K Dollar, our member reward scheme, it successfully promoted more spending among members. For a number of gold cards and black cards, there is an increase by 30% and 16%, respectively. Average spending by members achieved double-digit growth. After border reopening, the figures will be even more outstanding. We will launch different campaigns and different events to attract local customers and overseas tourist spending. Yesterday, in the budget speech, the financial secretary said that the government and the airport authority will promote the airport city development with full force. So Hong Kong International Airport will be developed into a hub for different economic activities. Our largest flagship project, 11 SKIES, will benefit significantly. 11 SKIES is an integrated development project combining retail, F&B and entertainment. GFA is 3.8 million square feet. It is at the intersection of the airport and Hong Kong-Zhuhai-Macau Bridge. It covers 86 million population in GBA within the 2-hour living circle. We won the bid of the project in 2018 and construction started in 2019. The office portion is commissioned in July. Our target is to lock in 70% commitment rate by June. And for the whole project, it will be commissioned in phases at the end of 2023 to 2025. So this ties in with the recovery of the retail and tourism market. We believe that inbound visitors will resume to the pre-pandemic level, and 11 SKIES will benefit from this large business opportunity. The market has been very concerned about our net gearing. First of all, at the end of December last year, our net gearing ratio saw the peak already. And in June this year, it will come down to a medium to low 40% level. And in June 2024, it will be down to low 40% level. We believe that the high interest environment may continue, so we will accelerate deleveraging to increase investors' confidence. As said just now, the management will not do any rights issue, and we will not raise funds by means of any equity financing project because, within our group, we are able to use different ways to deleverage. And these measures include CapEx optimization, active noncore disposals, dividend resets. So on one hand, there will be additional buffer during the high-interest environment, besides, there will be more capital flexibility so that we can seize opportunities for higher return. Finally, through treasury management, we will lower the risk caused to our balance sheet and net gearing ratio by RMB depreciation. Just now I mentioned a number of favorable macro factors. Our operational capability and performance will definitely be enhanced, and this can help lower net gearing. I just mentioned some corporate actions to release business value. I believe all these will further lower net gearing. And our goal is to lower net gearing ratio to 30-odd percent. Now let me talk about how we will optimize our CapEx. As we all know, in the past few years, we strictly controlled our CapEx. And this year, the actual expenditure all along is lower than the budgeted number. As of first half FY, we only spent HKD 12 billion. So this is only around 1/3 of the yearly budget. Besides, we further lowered our yearly budget. In October last year, we gave the market a guidance of HKD 36 billion. This will be lowered further to HKD 32 billion. In terms of replenishment of the land bank, we benefit from the decrease in standard agricultural land premium. So we are able to further lower CapEx. As you see from the slide, in the past 2 fiscal years, our actual CapEx is smaller than the budgeted amount. The same will happen this year. In FY '24, our budget is even lower than FY '23. This is because, first of all, land acquisition expense or cost will come down. In face of the high-interest environment, we will have a stricter requirement on project return. We will assess investment return of each project in a more stringent way. For construction expenses, many large-scale projects have entered the final stage, for example, 11 SKIES. In the past, every year, there is expenses of HKD 5 billion. In 2024, this will decrease significantly. There are other initiatives to lower CapEx. For example, we work actively together with our strategic partners. We will finalize design as soon as possible so as to minimize revisions and amendments during construction. And this can reduce additional time and also construction material wastage. We will make use of collective or centralized procurement to get the best price, and we will put in place or use cost-effective building materials. Noncore disposals. Noncore disposal is another important tool to do deleveraging. In first half FY, we already sold HKD 5.6 billion of noncore assets. This is more than half of the yearly target of HKD 10 billion. These include KOHO, HKD 2.1 billion; Penta Hotel, HKD 2 billion. There are other potential disposal targets which we are deliberating with the buyer. We expect that in -- well, actually, the group FY '21 and '22 exceeded our target in noncore disposals. We are confident that this year, we will also exceed our yearly target. In FY '24, the amount of noncore disposals will be even bigger than in FY '23. Now we hope to recover capital to do deleveraging. At the same time, we can retain enough dry powder to wait for the right opportunity to achieve the best return. And then dividend reset. Well, our dividend policy is packed to our underlying profit. In the first half FY, underlying profit per share came down 13% year-on-year. So we decided to reduce interim dividend by 18% at HKD 0.46 per share. In the long run, we hope to maintain a sustainable and healthy dividend policy. We will continue to pack it with our underlying profit. When underlying profit grows, dividend will also increase. Well, for this dividend reset, we are able to offer additional buffer during the high-interest environment. The saved capital can offer more capital flexibility to our company. And we can use it in higher-return investment opportunities. As you know, we are offering a clear signal to the market, and that is, we are very determined to accelerate our pace of deleveraging. What are some high return plans? In December, we successfully bought back our bonds and perpetual bonds. At that time, very often, there is deep discounts in bond market price. So that's why we bought back USD 820 million of loans. At that time, there is a price discount by 10% to 20%. And the market understands that we have strong financial strength. And there is already a HKD 270 million of gain that we can book. So all these can help us reduce future interest expenses, and we are able to reduce net gearing ratio. Such as now, we will make active use of treasury management and risk management methods to strengthen our net gearing ratio management. You are all worried about RMB FX risk. We have large business scale in Mainland China. And if you refer to our results, we have many different policies to hedge RMB FX risk. At the end of November, RMB started to rise quite significantly. So there is some volatility risk in RMB. On 2 fronts, we have our strategies to face up to the risk. Number one, regarding profit or earnings volatility, well, all along, we have been regularly buying forward FX hedging contracts. We believe that for RMB, the medium- to long-term trend will be that it will at around 7. So whenever it rises to around 6.7, we will seize the opportunities to increase hedging ratio. Our target is that we will hedge from 50% of RMB profit in the coming 12 months and raise it to 75%. And then the next risk is risk on our balance sheet. RMB is depreciating, so our RMB-denominated assets will also depreciate. The best hedging method is to increase RMB debts because debt or loans will also depreciate, so this will reduce the impact on our net assets by RMB depreciation. Besides, as we all know, RMB lending rate has come down a lot. So this can help us lower financing costs. So for example, we will issue Panda bonds, that is onshore RMB bonds, and we will also convert our Hong Kong dollar debt into RMB debt. All these measures will further alleviate the pressure on our net gearing ratio brought about by RMB depreciation. Then in terms of interest rate risk, in order to reduce risk from further interest rate increase, we have decided that fixed rate debt will account for a higher percentage, from 44% to 60%, according to market changes. What are some of our strategies? First of all, we will seize the opportunity. When HIBOR is relatively cheap, we will buy in IRS interest [ swap ] contracts in phases. So we will convert floating HIBOR debt to fixed rate. And then for HIBOR-linked Hong Kong dollar floating rate debt, they will be converted into RMB fixed rate debt or we will issue onshore RMB bonds, that is, Panda bonds. For the 1-month HIBOR, it already rose to over 5% in December last year, and it came down to 2.8% level right now. So we expect that for FY '23, the average financing cost will come down from the projected 4.9% to 4.4%. So this can reduce our interest expenses. By taking corporate actions, we can release different business value to further enhance shareholder return. We can also take the opportunity to do deleveraging. In the past 20 years, our group undertook different corporate actions. In 2003 and 2006, there was infrastructure-related business reorganization. In 2015, we brought in a Middle East consortium for our hotel assets. In 2016, we privatized New World China. We successfully created shareholder long-term value and optimized our business structure or corporate structure. Now you have heard our current plan. Starting FY 2020, we said to the market that we will actively dispose of noncore assets to speed up capital recovery and strengthen our core value and to streamline our structure. Since FY 2020, we have already sold noncore assets amounting to HKD 42 billion. Now the next step, for different business lines, we will conduct overall strategic review to see how we can perfect each company's strategic focus and release their value. And by phases, at different times, we will take corrections to further enhance shareholder return. As we all know, sustainable development is in the core of our business. In terms of sustainable development, we have made a number of achievements. Now we are actively working towards SBTi. And the short-term goal approved, that is 1.5-degree science-based target. At K11 ATELIER, Victoria Dockside, more than 60% rented-out floors have signed CSV lease. So in this way, tenants' Scope 3 greenhouse gas emission will further decrease. And we already have plans to expand the scheme to cover other offices in Hong Kong. We have completed the amendment to our climate resilience guideline, and this is going to be part of our property portfolio policy standardization. As of first December, 35.3% of our Board seats are held by women. Among main property developers in Hong Kong, this ratio is the highest. Regarding our ESG integration, it is also recognized by international ESG rating organizations. For GRESB, in 2022, we are rated regional sector leading among all Asia diversified companies. And regarding Dow Jones Sustainability Indices, for the first time, we're listed on Dow Jones Sustainability World Index. And we are one of the 20 global property companies in the world rated in this way. We'll continue to incorporate sustainable development into our business. Thank you.

Right. It is now Q&A session. [Operator Instructions] I will forward your questions to the management for them to answer. First question. In the market, there are always rumors that there is the chance that you will do rights issues to raise funds. So what is your response?

I am Adrian. As such, now, our CFO, Edward, said already that we will not do any rights issue. And we do not have any plan or need to raise funds from shareholders.

Okay. Next question. Regarding your gearing ratio, right now, how much is your gearing ratio? In the future, are you going to increase your liabilities or debt? How are you going to control your liabilities?

In my presentation, I said already that the group is actively managing our financial position. Now our net gearing ratio is 46.9%, the same as our previous guidance. Let me emphasize that our net gearing ratio has already seen the peak, and it is to come down. At the end of the FY, it will be lower than now. In '24 FY, it will even be lower. If you refer to the graph, actually, at the middle of this year and next year, in the middle of next year and thereafter, it will go down to a low 40% or even below 40% level. So you can see our deleveraging plan, we have a lot of confidence to lower our gearing ratio and also our liabilities.

Right. This question is related to property sale. Some time ago, some property developers reduced price to boost sales. What is your property sale plan this year? Are you going to reduce price to sell your properties? And how will be your property sale profit this year?

For this year, we plan to launch 6 new projects in phases. There will be more than 5,000 units altogether. From this year till 31st of December this year, they are all good projects in the urban areas. After border reopening, there will be positive boost to the property market. As of 31st December 2022, in Hong Kong, for sold and unbooked property profit, HKD 18.5 billion. That is unbooked revenue, sold but unbooked revenue. And it will be booked in the second half of the FY. And HKD 4.3 billion will be booked in FY '24. For Mainland China, sold but unbooked, RMB 1.3 billion. It will be booked in second half of FY '23. Besides, RMB 860 million is sold but unbooked. It will be booked in FY '24.

This question is about Mainland property market. The Hong Kong property market is recovering. But for Mainland property markets, because of the pandemic and adjustment measures, turnover is still weak. So is there any impact on your property sale revenue and profits? What are your plans to sell properties in the Mainland this year? Which important projects will be launched?

Let me talk about our group. In first half FY, our property sale was very good. In Hangzhou and Shanghai, all units were sold out. Actually, all units were sold out on the first day of presale, and we have broken records in those cities. And we got back RMB 9.6 billion (sic) [ RMB 9.2 billion ]. This exceeded our expectation. Why? Well, in Mainland China that was locked down and the pandemic impact, how come we are able to achieve good property sales? Because a few years ago, we made plans in Yangtze River Delta, Hangzhou, Shanghai, Shenzhen, Guangzhou. And in fact, the economic recovery is very fast. In Hangzhou, it has not been greatly affected by lockdown. Shenzhen was locked down for 1 week. After that, recovery was fast. Lockdown lasted a longer period in Shanghai, but we have our positive brand effect. Our quality is good. We do not really have any competitor. So for mid- to high end and high-end demand, we are the only company with such demand. And in Hangzhou, there is no supply really in our segment. So in the first half year, we sold RMB 9.6 billion, so this is very good. 95% of contracted sales is the Yangtze River Delta plus GBA. So in the future, especially now, the border is reopened, now the pandemic has eased a lot, so the situation would be even better. At the worst time in Mainland China, we're able to sell more than 65% of our budget. We sold RMB 9.6 billion. So not to mention now, we have already seized first-mover advantage. In Hangzhou on one day, we have already sold RMB 11 billion for the project in a cumulative basis. This is a new sales record in Hangzhou. So that means 1st July to 31st December. That's the period. And that was the most difficult period in China, and we broke the record. So New World management, New World brand, New World's quality are such that young buyers actually like us a lot. Well, we are going to launch some big projects. In Guangzhou, there is a project on a superstructure of MTR [Foreign Language]. And in 2023, first half, it will be launched in the market. Where is the project? Just next to Zhenlong. In Shanghai, we are working with China merchants in Putuo Phase 2. So it will be launched soon. Phase 1 was also done in December. And at that time, we sold RMB HKD 3.5 billion. And for the remaining units in Phase 2, the project name was [ Tianhuey ]. And then in this year and next year, they will be gradually launched to the market. So actually, we have broken many records. Now we are seeing recovery. We are confident that in the second half of this year, the situation would be good. We are full of confidence because they will introduce many to support the economy, especially in April, May and June. So after July, we will see realization of all the policies that they have implemented. So the situation will definitely become better and better. The worst is already over.

Next question is asked by a number of investors. It is about city renewal projects in China. So what is some progress that you can share with us?

In Shenzhen Longgang 188 industrial area city renewal project, well, construction is underway. It is the first project for our group. It is the first one in Shenzhen that is a city renewal project, which has entered the development stage. There are 2 other city renewal projects in Xili, Qianhai industrial districts and also Guangming, Guangqiao food factory projects. There is good progress. We are going into a full development phase soon. For these 3 projects, in FY '24, presale will happen. You may ask me whether or not there has been good progress. Actually, the progress is faster than expected. They are catching up after the pandemic. Approval and so on is now much faster. So in FY '24, we can do presale because actually in Shenzhen, 70-odd percent, young people average age is 32 years old. The whole government is very young. They would like to act fast. So for the 3 city renewal projects in Shenzhen, they are faster than those in Guangzhou.