Shui On Land Limited (272) Earnings Call Transcript & Summary

Hi, good evening, ladies and gentlemen. Welcome to Shui On Land Limited 2020 Annual Results Analyst Webcast Meeting. Thank you very much for joining this evening. With us this evening are our 4 leaders in the company. Mr. Vincent Lo, Chairman of the Group; Ms. Stephanie Lo, Executive Director of Shui On Land. In Shanghai joining us, Mr. Douglas Sung, Managing Director, Chief Financial Officer and Chief Investment Officer of Shui On Land; as well as Ms. Jessica Wang, Managing Director of Shui On Management Limited. Welcome, 4 leaders. Thank you very much for being here. Mr. Lo, can I ask you to kickstart the presentation this evening? Thank you.

Okay. Thank you, Sandra. Thank you for joining our results announcement. Well, last year, basically, it's very contrasting 2 halves. In the first half of the year, I think we were all very, very much impacted by COVID-19, our health and our nervousness and also our business. But in the second half, I think with the very stringent measures introduced by the government inside the mainland, things improved very, very fast. And then we were seeing a major improvement in all our operations and everything. So in the first half, we have reported a net loss of RMB 1.62 billion. But in the second half, I think we are starting to see some significant improvement. So the loss attributable to shareholders for the whole year it's RMB 740 million. And as I've said, the second half, I think we see very significant improvement in the retail side. And actually, in December, the overall sales reached 110% of the 2019 level, and our total rental and related income recorded RMB 2.528 billion, only 2% decline from 2019. And then we had very robust residential sales, RMB 21.2 billion, representing a 69% increase year-on-year. And we have maintained a very strong financial position. Now our net gearing ratio is 45%, which is 7 percentage point down from December 31, 2019. Our cash and bank balances is RMB 15.79 billion. And we continue to take a prudent approach in all our new investment because we believe COVID-19 is not over yet. And then also, I think we believe that the geopolitical situation and Sino-U.S. relations are all going to be impacting the economy. And in 2020, we have developed a new 10-year sustainable development strategy to be rolled out this year. And later on, Stephanie will share with you what we're doing in those areas. Let me now share with you our market and strategic outlook. As I've said, we believe COVID-19 is not over yet. Of course, the vaccines are going to help, but the economic structure and a lot of problems that's been faced by a lot of small- and medium-sized enterprises haven't been dealt with. I also have friends who are still suffering despite the fact that things are slowly getting back to normal. And of course, I think China is on track to achieve a very substantial growth this year. And also, the 14th Five-Year Plan, I think, is very encouraging. It's emphasizing on indigenous innovation and industrial upgrade during the 14th Five-Year Plan. The residential market has shown very strong resilience last year with growth in areas sold and also revenue. But in the 14th Five-Year Plan, I think the government will continue to manage the property sector, especially the residential side, because it's very clear that they are concerned that prices might shoot through the roof and beyond the affordability of the people. And so I think government will continue to have very strong administration on pricing and everything. But we are very encouraged with the city cluster development strategy. And basically, it's always a regional economy that we have to look at because that is going to be the focal point of China's economic development strategy going forward. So the regional hub cities will be very much beneficial, and we are very bullish on the Yangtze Delta unification and also the Greater Bay Area. Office market is going to be going through a difficult adjustment period because of the supply overhang, and I think it's going to be challenging this year because the occupier demand is dampened by the cautious business sentiment after the COVID-19 and also the macroeconomic situation. But China is going to continue to grow, and it should surpass the U.S. economy in the not-too-distant future. And we believe that Shanghai will be positioned as the international finance center like New York and London, playing a very leading role in Asia. Because if you look around, there's not really the likes of New York, London in Asia. And with the growing influence of Asia, I think Shanghai will be playing a very major role there. And office demand in Shanghai will likely increase in line with the city's growing economic and financial importance. Prime commercial retail vacancies in Shanghai has jumped from 8.6% in 2019 to 11% in 2020. And also the retail rents have also dropped 2.4%. But JLL's projection is that retail rent is bottoming up and they're expecting a slight uptick this year. Overall, we remain bullish on the China property market, as the push for domestic consumption will create a lot of opportunities for the retail sector. Residential demand have been and will continue to be robust, driven by the desire to improve and upgrade on their living environment, particularly in the key cities. Office sector will be more challenging for the average player. But for ourselves, we believe we have a bit of visioning, and we are very emphasis -- heavy emphasis on quality. I think this period may present very good investment opportunities for us because we believe we can be at the right place and at the right time. Let me stop there. Thank you.

Thank you very much, Chairman. Can I ask Douglas now to please take us through the financial highlights, please?

Yes, thank you, Sandra. Thank you, Mr. Chairman. Let me just give a quick highlight first before I go into the detailed figures. So some of these points I think the Chairman also mentioned earlier. If you look at 2020, our group's revenue was about RMB 4.6 billion. It was down obviously quite a bit from 2019. There were 2 main reasons, one was we took about a 4% downward revaluation. On our investment properties and other property assets, primarily because of the impact of COVID. And I'll walk you through the breakdowns later on. And the second reason, also COVID-related, was the impact on some of our construction in the first half of the year. Some of our residential projects which were due for completion and revenue recognition in 2020 was affected by COVID in the first half, and they had to stop construction. And a couple of these projects will not be able to make up the lost time. So there were some delays in the profit recognition from 2020 to 2021. And this has also impacted the overall revenue as well. If you look at total rental income, Chairman mentioned earlier, if we include the JVs and associate projects, it was only down 2% year-on-year. So the overall impact from COVID actually was relatively modest. Again, all -- pretty much all our operations, our business lines, have recovered in the second half of the year. And if we look at just only the second half, the group would have reported a net profit of about RMB 882 million. So again, it's just a sign that there's a big contrast between first half and second half. And then I want to highlight the last point here, is obviously the loss in 2020 was primarily driven by the revaluation losses in our property assets. We believe these are really one-off, primarily because of the impact on COVID. And we -- based on the current operation of our business lines and also the market conditions, we are quite hopeful that the revaluation losses will be limited to only 2020, and we don't need to have -- see another markdown in the value of our assets in 2021. So if I go into the detailed figures on the P&L -- sorry. Here in this first table, so we highlighted the contrast between first half and second half. So you can see quite clearly, pretty much all the financial KPIs in terms of revenue, gross profit, in terms of -- for the full year, the bottom line. There's a very, very big improvement between second half and first half. In particular, I want to highlight the last row in the table, the core earnings. So this is excluding the impact on property revaluation. You can see that if we look at core earnings, both first half and second half, the group would have reported net profit. So I think it's just a way to show you that the net losses in 2020 was really primarily a one-off and a noncash effect from the impact from COVID. So on the P&L on the next page, I will just highlight a few figures. So you can see the decline in revenue of about 56%. This is in particular driven by a larger decline in property sales, which I mentioned was because of the delays in some of our residential projects, that the handover and revenue recognition was pushed from 2020 to 2021. And then the rental income, down 7% year-on-year. This is on a consolidated level. So if we include the JV and associate projects, the decline will be 2%, which I will show you the figures later. And gross profit, RMB 2.35 billion. And the margin was relatively stable at 51%, same as 2019. Other income is primarily interest income from our cash on hand. And the slight increase in selling and marketing expenses were just a function of our residential presales because we had a pretty big presale year last year, so the expenses related to that also increased a bit as well. And then on the decrease in the fair value of investment properties, RMB 1.78 billion, I'll give you the breakdown later on. And other gains and losses also include some write-down on some of our -- on the land bank. So if you look at the 2 together, it's about RMB 2.2 billion of decrease in fair value of our real estate assets. Other than that, our finance costs. And if you look at the breakdown, you will see that because of the rebound in RMB second half last year, we recorded a net gain in the FX of about RMB 863 million. And the overall net interest cost is down 17% from the prior year to just over 1 billion. And then on the next page, on tax, you will see a positive tax credit. This is really just a function of us reporting a net loss last year and also on the decline in fair value in the investment property. So accordingly, there is a deferred tax asset being recorded. So if we take into consideration the noncontrolling shareholders of the listed company and the owners of the perpetual securities, so the net loss attributable to shareholders is RMB 740 million. And on a per share basis, it's RMB 0.092. Because of the net loss, the Board has recommended that we do not declare and do not pay a final dividend for 2020. So on property sales, I already mentioned that it was relatively low in 2020. The main new projects that were completed and handed over to buyers was Foshan Lingnan Tiandi Lot 13a, which contribute about RMB 10 billion -- sorry, RMB 1 billion, in sales. But if you look at the lower part of the table, we actually had a lot of sales in the associate and JV level, particularly coming from Rainbow City Lot 1 joint venture with COFCO. So that accounted for RMB 8.7 billion of sales which is not reflected on the top line. So altogether, the total property sales was about 10 billion, which is only slightly off from 2019's level. And the rental impact, I already mentioned that on the consolidated level, is 7% down. But if we include the JV projects, particularly Corporate Avenue 5, which we purchased together with Manulife and China Life in 2019, the overall rental income was only down 2% year-on-year. If you look at it across the portfolio, so basically, you can see pretty much all the properties have slight decline in rental because mainly for -- in the first half because of COVID. I want to point out, in particularly the second property, Xintiandi Style 2, where you see a larger decline and also lower occupancy rates at the end of 2020. That's because we are going through -- we will be going through a major renovation at AEI for Xintiandi Style 2. And in the second half last year, we actually proactively terminated some of the leases in that property in preparation for the AEI. So that's why you have seen a higher vacancy in that property. Next page. So on the revaluation of the IP, so you can see the total write-down is about RMB 1.8 billion. Now if you look at the breakdown, the first 5 properties on the list are the Shanghai investment properties. So each of them have some increase and decrease in their value. But overall, the Shanghai portfolio is pretty much flat from the year before. Clearly, the write-down on valuation has been on non-Shanghai properties, particularly in Wuhan Tiandi, in Chongqing and also some of the development -- to-be-developed sites in Foshan. So these were the ones that we have actually taken a larger downward revaluation as compared to the overall portfolio. But the overall decline is about 3.6%. So in percentage terms, it's actually not that much. But because of the total carrying value of our properties is about RMB 50 billion, that 2.6% actually translate to a relatively large figure in the P&L. Next page is our financial position. These are pretty straightforward. We've increased our cash holding. We have further reduced our net debt. So at the end of the year, net gearing is 45% compared to 52% the year before. And also, you can note at the footnote, if we exclude financing fees and bank fees, the actual interest cost last year is 4.8% compared to 5.4%. So we have seen actually very attractive cost of funding in the market in 2020. This is just graphically showing you the net gearing and net debt. The next page, debt profile on the table, you will see a maturity profile. 1 year, it basically means 2021; 1 to 2 years, 2022. So out of the RMB 13.2 billion maturity this year, as of last week, we already paid down roughly half, about RMB 6.5 billion. So the remaining -- for the remaining 9 months of this year, it is about RMB 6.5 billion left of maturity. The next senior note due is in November of this year. And then looking into 2022, we also do not have a lot of maturity. So we feel that our liquidity position is relatively healthy at this stage. And we're not, certainly not, in any stress for refinancing in the short term. Our next page is just showing you the maturity table. Now I would point out that starting from second half this year, we have actually a pretty well spread out maturity profile. So you can see that basically, we have 1 main senior note due each of the next 4 years. So I mentioned in November, we have 1 note maturing, about RMB 350 million. And then next year, we have the perpetual, which the first call date is in June of next year. And then from '23, '24, '25, we basically have 1 senior note due for repayment. So on average, it's about RMB 500 million per year, not a significant amount. So I think we are -- we have a fairly healthy refinancing profile looking into the next few years and also give us a bit more flexibility if we decided to either to leverage more for investment or to further manage our capital structure. And then lastly, on just the total asset is about RMB 115 billion, which has been fairly stable in the last 4, 5 years. And you can see on the right-hand side, roughly about 55% or more of our assets are now related to commercial real estate. So I'll stop there and I'll turn it over to Stephanie.

Thanks, Douglas. So let me give everyone a quick overview of our commercial property portfolio. The group currently manages a total of 1.7 million square meters of retail and office space in Shanghai, which 52% of the GFA is already rental income-producing and the remainder is under development. And our existing office and retail portfolio is amongst one of the largest privately held ones in Shanghai already. There's 3 PUD products to note, Shanghai Taipingqiao has Lot 123, 124 and 132, which is a JV with CPIC. We hold 25% of this project. And we expect that the site will complete between 2022 to 2023. And it's 3 Grade A office towers of 192,000 square meters and an open mall retail underneath that is 84,000 square meters GFA. And this has a large glass roof, so it's a galleria-like structure. This will be really special and something that we're really looking forward to and in the planning. The second project will be Shanghai Rui Hong Xin Cheng's Ruihong Tiandi Lot 10, Hall of the Sun. We completed relocation on the site in 2017, and we're opening part of the retail mall at the end of this year. So this project comprises of 2 Grade A office towers called Ruihong Corporate Avenue, that's 147,000 square meters of GFA, and a large shopping mall called Hall of the Sun, and that is 183,000 square meters. And we are currently over 50% leased already. And this is -- given the very challenging retail environment in the first half of last year, a lot of the retail tenants have been quite conservative, even though there's been quite good recovery. So I think our leasing progress is still very stable and going well. The last slide I'd like to highlight is Shanghai Hong Shou Fang. This is a commercial site that's in Putuo [ Qu ] in Shanghai. It's mainly an office site, a GFA of 48,000 square meters of office and 14,000 square meters of retail. And part of the retail actually has -- incorporates cultural heritage, which plays to our strength. So the construction work commenced in the second half of 2020, and it's planned for completion in 2022, and we hold 100% effective interest in this site. So in terms of asset value, the total asset value of our Shanghai portfolio is approximately RMB 77 billion. Attributable value to the group is approximately RMB 45 billion, representing effective interest of 58% in the portfolio. And in the next slide, you'll see that, as Douglas mentioned, our rental income declined moderately due to COVID-19. It really was a year of 2 halves, as mentioned. The first half impacted our rental income, but as a whole, our rental income of the group decreased by 7% to close to RMB 2 billion, and in 2020 -- in 2020, sorry. And in 2019, it was RMB 2.2 billion. This is mainly due to a lot of rental concessions and reliefs that we offered to our retail tenants and the natural impact of COVID-19 on the operations and traffic across our portfolio. If you actually include the JV and associates, our total rental income actually only declined by 2%. And of this portfolio, 77% of our rental income is attributable to Shanghai. But I'd like to make a note here that in the second half, actually, our -- we saw a big rebound and recovery from our retail properties. And so starting from the third quarter, there was a very marked recovery. And in December 2020, our overall sales versus 2019 levels has reached over 110%. In the next slide, we reopened Xintiandi Style 1, which is actually what we had previously been calling the South Block of Xintiandi. It's the small mall located at the end. And the reason why we named it Xintiandi Style 1 is because we wanted to fully integrate it with the larger shopping mall towards the back that we've always called Xintiandi Style. And the positioning of this is really about capturing a newer, younger luxury clientele, the Gen Zs within China who have a very large spending power, who are into newer luxury concepts where it's more about showing their own style, their individuality and having a much more personalized approach to luxury than -- rather than the traditional luxury brands. So we're very excited about this location. And so far, the traffic and the take-up has been quite positive. Part of which, you can see a new concept that we launched called Foodie Social on the next page. And Foodie Social's positioning is really about offering our consumers a healthy and sustainable lifestyle and promoting this in conjunction with our sustainability concept and plan that I can share more with you later. So Foodie Social is a location in Xintiandi that has a lot of both different types of food concepts, street concept included, where we have food labs and pop-up restaurants. We've brought in different Michelin chefs to do pop-up restaurants with us to great, rave reviews. We have what's called a Foodie Lab, where you can test different food products; a food theater, where you can do different types of food events and lectures and such. And so the idea here is to build a different type of lifestyle and a new experience offering outside of the traditional restaurant offer. Next -- actually, one more point to highlight is that Foodie Social as an example of our healthy lifestyle. We are -- 95% of the tenants there now have committed to not use MSG in any of their cooking. And secondly, before the end of the year, we hope to allow our consumers to have the choice to say, I hope, to reduce the amount of sugar or reduce the amount of oil that's being used in the food that they're eating. So I think this is a growing trend in terms of leading a more well and healthy lifestyle going forward. And so continuing with our First-in-China and First-in-the-City flagship leasing strategy. As part of the South Block opening, we brought in new concepts in stores. So Tom Dixon's first flagship store in China; United Tokyo from Japan; Lenôtre, which is a pastry shop from Paris; [ Chua Lam ], which is dim sum shop that's done very well, and IT completely renovated their whole store and is a brand-new flagship store concept that has been doing very good sales so far. In Xintiandi, we've always prided ourselves on building a cultural and social destination, and this year is no exception. We've continued, despite COVID, with a lot of our IP events, whether it's the music festival, the performing arts festival in the summer, our lighting festivals through Christmas and Chinese New Year, Shanghai fashion week and such. And a lot of this has drawn a lot more customer flow that reached more than 1 million last year. And we gained a media value of over 1.6 billion based on a lot of the events and the promotions that we've done there. iTiandi, our online consumer loyalty platform, has also seen very steady uptake and helping us create a more sticky ecosystem for our consumers going forward. So I'll hand over the development aspect to Jessica.

Thanks, Stephanie. Next page. Okay. Overall speaking, we had very strong residential sales in 2020. We are pleased our performance were much better than expected. Our contract sales increased by 69% year-on-year to RMB 21.18 billion, ahead of our target. All our projects launched are very profitable the market. They were sold out in 1 or 2 days. Next, please. By the end of last year, the total subscribed sales of RMB 4.9 billion were recorded, among which RMB 2.84 billion were from Shanghai Panlong Tiandi and RMB 925 million from Taipingqiao Ville 5. These sales will be converted to contract styles in 2021 end of the year. Next. Here, I would like to highlight Panlong Tiandi. It contributed over RMB 5.8 billion contract and subscribed sales last year. As you may recall, we acquired Panlong sites in 2019 and it started to contribute to our sales in 2020, just a year since acquisition. The project is in the core area of Greater Hongqiao. It is one of the most successful urban village renewal projects in Shanghai. Our expertise in urban regeneration and cultural heritage preservation were continuously supporting the transformation and upgrading growth of Greater Hongqiao area. People are confident that we will create Panlong Tiandi as a world-class urban, sustainable landmark community in the Western Shanghai. So when we launched the first batch of 948 units in October last year, with almost 3,800 subscription received, it is the highest participation rate in luxury process in Shanghai, and almost all the units were sold out on the first day. And the average sale price was at RMB 61,500 per square meter, and it is the highest among peers nearby. All these reflect Shui On's strong brand value and reputation. We also give some analysis of buyers, which shows us some insights on the latest trends. In terms of the geography, 41% of the buyers are from the core city area of Shanghai, only 19% are from Quingpu area. We believe the buyers from the core city area are attracted much by the quality in our brand. 75% of the buyers are aged 40 or below, which shows our property is appealing to the younger generation. In terms of the purchase purpose, 88% are for self use with reasons including leverage, improvement of living conditions. Next, please. So looking forward, we have a strong pipeline for 2021. There's a total of 562,000 square meters residential available for sale with about 61% GFA from Shanghai projects. Our attributable GFA is 303,500 square meters. In 2021, our residential sales target is RMB 24 billion. Next page, please. This shows the renderings of Rui Hong Xin Cheng Lot 167 A. Nearly 300 units will be launched in the second half of this year. Next, please. And here are some photos of another landmark project, Lake Ville V Phase 2 at Taipingqiao. The rest of 112 units are ready for sale in this year. Next. So in short, we have strong residential development saleable resources in the future. We can see, based on the current valuation of our land bank, the total amount was RMB 64.2 billion with SOL attributable value at RMB 14.9 billion. Within these salable resources, RMB 48.7 billion were in Shanghai. Next, please. For commercial development, we also have a strong portfolio in Shanghai and other cities. It will drive for future rental growth and capital recycling. This slide shows the list of commercial properties under development and for future development. In Shanghai, we own and manage 835,000 square meters of commercial properties for other cities, which include Wuhan, Chongqing and Foshan. The total GFA of our commercial properties was 200 -- sorry, 2,297,000 square meter. The total size of our commercial property portfolio was 3,132,000 square meters, in which 61% were for office and 39% for retail. That concludes my part. Now I would like to hand over to Stephanie for the ESG part.

Thanks, Jessica. I'm really happy to share with everyone today that we, at the Board level, have approved our 10-year sustainability development strategy. And it consists of what we have coined internally as our 5 Cs. So firstly, our Clean Community, Culture, Care and Corporate Governance. And all of this is in the desire to actually better align the sustainability plan together with our business. So our business vision is to become a pioneer of sustainable and premium urban communities. And this business strategy, as I hope you can see, can actually play to our strengths. For instance, if we highlight the culture aspects, we've been very known for urban regeneration, as Jessica mentioned, and in preserving a lot of cultural heritage within our sites of development. And so we feel that this strength should also be part of our sustainability strategy, and we should be celebrating it and enhancing it to create a greater competitive advantage while doing good. And secondly, from the community standpoint, we hope that our built communities can better engage in a healthy and sustainable lifestyle. So we will be thinking about how we can impact this across our tenant network as well as our supply chain. And clean is in alignment with a lot of the world goals right now to bring down our carbon emissions and work towards carbon neutrality and mitigate the risk of climate change. So in the next page, you'll see what we have achieved in sustainable development in 2020, apart from actually launching our 5 C development strategy for 2030. We've actually decreased Scope 1 and Scope 2 carbon emissions intensity from 2019 by 15%. If we use the 2011 baseline, we've decreased it by 41%. We've actually decreased our water intensity by 30%. 24% decrease in construction waste sent to the landfill. And we actually issued our first green bond last year, and we issued our first green bond report as a result. Last year, we also got included into the Hang Seng Corporate Sustainability index and the MSCI ESG Leader Index Series. The rest, I won't go into too much detail, I think you can see. I'd like to highlight several major signature initiatives that we will be launching this year. In terms of our clean targets, the company commits to setting carbon emissions reduction goals towards 2030 using the science-based targets. We have agreed and committed to reducing our global warming limit to well below 2 degrees above preindustrial levels. And we will further use our best endeavors to set goals that limit warming to 1.5 degrees in the future. And secondly, from a community standpoint. As a first step this year, we will start to engage a lot of F&B tenants and consumers in how we can promote a healthy and low-carbon lifestyle. Firstly, by rolling out a more plant-based food initiative initiated by Foodie Social. So as I mentioned just now, Foodie Social's positioning is really about promoting a healthy and sustainable lifestyle. So by electing to eat plant-based, say, even once a week, this actually helps to reduce our carbon footprint by quite a significant amount. Green Monday is not a new concept to most. And so we want to see how we can better allow our consumers to have the option to go green when they come to Xintiandi. Secondly, we're also going to further work with different partners to see how we can actually measure the impact of this initiative in the coming years. So this is just 1 example of an initiative that we'll be rolling out through our community initiatives this year. Lastly, in terms of culture. Because this is actually the 20th anniversary of Xintiandi, we will be launching what we call the Creators 100 Campaign to showcase local Chinese creative talent. We've always believed in respecting the local culture, and we believe that the local culture should be celebrated and respected in any location that we develop in. So what we're doing here is an awards-based program where we can work with different creators within each creative pillar, such as fashion design, architecture, product design and such, to showcase their work and to find different ways to spotlight them and to work with them across our portfolio. Lastly, because this is actually the Shui On Group's 50th anniversary, we also have launched an internal campaign called Pay It Forward. Given a lot of the backdrop of the world right now and the volatility in the global environment due to COVID, we thought it would be more apt if we could actually have a more socially focused campaign to celebrate the 50th anniversary of the group. Without our people, we wouldn't be where we are today. So we thought what better way to celebrate our 50th anniversary, than to harness the power and the collective power of our staff and our colleagues. So what Pay It Forward is about is for everyone to take a pledge to live a more sustainable lifestyle and to implement a lower-carbon commitment in our work and our life. So I might stop there.