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

Good evening, ladies and gentlemen. Welcome to Shui On Land's 2021 Interim Results Analyst Briefing. Thank you very much for joining us online this evening. Today, we are very pleased to have 4 members of the senior management team with us. Mr. Vincent Lo, Chairman of the Group; Ms. Stephanie Lo, Executive Director of the group; Mr. Douglas Sung, Executive Director, Chief Financial Officer and Chief Investment Officer of the group; and Ms. Jessica Wang, Managing Director of Shui On Management Limited. We will start with the presentation by the management, followed by Q&A. [Operator Instructions] Without further ado, may I invite Mr. Lo to kickstart our presentation. Mr. Lo, please?

Okay. Thank you, [ Luna ]. I'm pleased to report that for the first half of this year, profit attributable to shareholders totaled RMB 1,082 million. This is a very sharp recovery versus the first half of last year when we were reporting a net loss due to the COVID-19 outbreak. And this strong performance was underpinned by robust residential sales and strong growth in our rental income. Property sales increased by 62x to RMB 10,214 million due to the contribution from Lakeville 5 and Wuhan Tiandi's La Villa II. There's a very strong recovery also in the commercial portfolio. Total rental and related income was RMB 1,570 million, representing a robust growth of 32% year-on-year. The overall sales have also significantly recovered since the third quarter of last year. And in June of 2021, overall sales reached 149% of the 2020 level. And for the office portfolio, our average occupancy rate is 90%. And we have continued to maintain a very strong balance sheet. The net gearing ratio is 45%, similar to the end of last year. And cash and bank deposits totaled RMB 14,367 million. And we will expect to maintain this prudent approach in managing our balance sheet. The Board has recommended interim dividend of RMB 0.036 per share to -- for our interim dividend. And the government has actually introduced very stringent purchases, restriction and also the 3 red line on the leverage of the developers. That hasn't really curbed our sales, and our property sales for the first half return -- increased by 95% to RMB 12,115 million compared to RMB 6,200 million for the same period in 2020. Our commercial portfolio has also been performing very strong, increased by 32% year-on-year; the rental and associated income to RMB 1,570 million in the first half of this year. Footfall in revenue have also recovered, and I won't go into detail because my colleagues will give you details. And in the first half of this year, we made 2 purchases in joint venture with partners. The first one is the purchase of the IFC in Nanjing, CBD through a 50-50 joint venture with Grosvenor Asia Pacific. And then in June of this year, we signed an agreement with Yongye, which is an enterprise under the Huangpu district in Shanghai to develop Lot 122 of the Taipingqiao project. This is a mixed-use development comprising of residential, commercial and ancillary facilities with a gross floor area to be close to 100,000 square meters. Maybe I'll just stop there and let my colleagues take you through the details.

Thank you, Chairman. Let me pick up the financials, I'm just going to give the audience a high-level summary of the financials. You can find the detail in our interim result announcement, which is already posted on our website. So the highlights are a few key points. As the Chairman mentioned, revenue increased by 7x to almost RMB 12 billion in the first half, driven mainly by strong property sales recognition. We handed over units in the Taipingqiao Lakeville Phase 5 and also in Wuhan Tiandi La Riva Phase II. So this contributed to the strong property sales recognition. On the investment property income, we have rental and related income up 26% year-on-year to about RMB 1.24 billion. This, of course, compared to a low base of first because of the impact from COVID-19 last year. In particular, we want to highlight the rental income at Shanghai Xintiandi, our flagship property, including the Style I renovation, which we completed last year. In Shanghai Xintiandi, during the first half of this year, income -- rental income increased by almost 90%. And this is quite a remarkable achievement given the fact that this year marks the 20th anniversary of Shanghai Xintiandi. So after managing this property for 20 years, we're still seeing very, very strong growth, and we are very happy to see the strong results during the first half. On the -- on our balance sheet and our capital management, our net debt for the period is -- was 45%. So basically the same as of end of last year. Our net debt was about RMB 21 billion, so also at the same level as of December 2020. So if I just give a few highlights on the financials, the P&L. First of all, on revenue, you can see that for the first half period, it's about RMB 11.9 billion, comprised of primarily property sales, over RMB 10 billion, and the rental income of about RMB 1.25 billion. Gross profit was almost RMB 5 billion. So quite a sharp increase from last year. And the gross profit margin at 41%, you can see that it was a bit lower from first half 2020, but last year's figure was somewhat distorted by the fact that most of the revenue came from rental income, which traditionally has a higher margin compared to property sales. Our first half of 41% gross profit margin was actually quite in line with our historical average. So far, we have not seen any significant compression in margin in our business. Other income is primarily interest income from our cash on hand and then a slight increase in selling and marketing expenses. This is directly correlated to increasing property sales activities during the past year. And then administrative expenses more or less the same from same period last year. I will talk a little bit more about the revaluation of our investment properties, but you can see the figure there, which is basically flat from the end of the year. So we have held the value of our investment properties fairly stable during the first half. And other gains and loss include mainly costs associated to hedging our ForEx exposure, which is classified as other gain and losses. And then on the share of associate and JV's income, RMB 200 million comprise majority from our joint venture with COFCO in Rainbow City, Ruihong Tiandi Lot 1 and 7, which we handed over units of Lot 1 during first half. Hence, the revenue -- the income recognition. On the finance costs, you can see that it's approximately RMB 500 million in the first half of this year compared to RMB 800 million same period last year. The difference is mainly on net exchange gain and loss. You can see that we had a slight gain of RMB 74 million because of the strength of the RMB in the first half compared to a loss of RMB 275 million same period last year. So this accounts for mainly -- most of the differences in the total finance cost during the 2 periods. On the next page, you can see before tax profit was about RMB 4 billion for the interim period and then the taxation of almost RMB 2.7 billion. This is obviously quite a large figure. And a large portion of that comprised of [ LAT ] from the 2 residential projects we handed over in the Taipingqiao Lakeville Phase 5 and also in Wuhan. So if you take out the tax, so after-tax profit is RMB 1.28 billion and that attributable to our shareholders is RMB 1.08 billion, translates to per share earnings of RMB 0.135. And as the Chairman mentioned, our Board recommend to pay income dividend of HKD 0.036 per share, which is the same amount for interim dividend for 2019. On the next page, on to the revenue breakdown. This is for your reference. You can see clearly that most of the property sales revenue came from Taipingqiao and Wuhan. And then the lower table, the associated revenue on property sales, it came mainly from the COFCO joint venture of Ruihong Tiandi Lot 1, which we handed over some of the units to buy it. On the next page, you see investment property income. You can see that on a consolidated level, it's up 26% to RMB 1.24 billion. And then including our JVs and associates, the increase is -- was 32% year-on-year. So it's a very, very strong rental growth. In particular, you can see that in the last couple of years, we have added investments at the JV level. So in 5 Corporate Avenue and earlier this year, [ Nanjing IFC ], so all these have contributed to the total income. And then you can also see in the table that pretty much across the board, we have seen double-digit rental growth with the exception of Xintiandi Style II, which actually will be undergoing AEI renovation starting in October. So starting from late last year, we have been gradually vacating tenants to make room for the AEI. So that's why you have seen a drop in the overall rental income. On the IP valuation on the next page, I mentioned that we held it flat in the first half of this year. And you can see that across all the properties, the movement was very, very little, on average less than 0.5% movement from the end of last year. So the overall valuation on a 100% basis currently is slightly over RMB 50 billion, and the attributable to the group is RMB 44.6 billion. Financial position. I've already covered some of these figures. We have cash and bank deposit of above RMB 14.3 billion, slightly down from the end of last year, but similarly, the total debt at RMB 35.6 billion, also slightly down from the end of last year. So you can see that the net impact is -- net gearing is basically the same as of the end of last year at 45%. Of note is that our cost effect has continued to fall to an average of 4.5%, excluding bank fees and arrangement fees. So we have been enjoying pretty good cost of financing in the past year. And also, it's a reflection of the strength in our balance sheet, where we have been able to continue to reduce our overall cost of financing. And the next page, this is just for reference, the movement in our net gearing over the past few years. You can see that last 4, 5 years, we've been basically holding up about 45% to 50% net gearing level. And on the next page, our debt profile for the coming 1 year, second half of this year and first half next year, you can see that we do not have a lot of debt maturity. It's roughly about RMB 4 billion of each of the next half year. The next senior notes due would be in -- at the end of November. So it's about USD 350 million outstanding balance left in that note, which is equivalent to about RMB 2.3 billion. So about RMB 14 billion of cash on hand, we feel reasonably comfortable of our liquidity in the foreseeable future. Next page would be the -- just for your reference, we see the maturity profile. Again, you can see from the table that we have pretty well spread out maturity over the next 3, 4 years. So basically, we have about 1 senior note maturing per year in the next 4 years. So I think this is a fairly good and even profile and does not put a lot of pressure on the group to have [ mid-time ] refinancing. Last -- the next page, I want to highlight our effort in green financing. We have been doing more in the last couple of years. And as the Chairman mentioned, in June, we issued our first sustainability-linked bond, SLB. And we are pleased to say that SOL was the first China-based corporation to issue an SLB. So we think this is a good achievement. We have a very good demand from investor base, particularly investors focusing on ESG. Approximately 1/3 of the allocation went into the hands of ESG-focused investors. So we think this is a good balance and also the book was 3.75x it was subscribed. Again, a pretty indication of the demand for this product. I think the particular -- of particular interest is one of the key features of the bond would be the sustainability performance targets, which is tied into our efforts to reduce greenhouse gas emission in our portfolio by additional 25% by 2024. So this will be the main effort that our group and our colleagues will be focusing on in the next 3 years to further reduce the carbon emission within our portfolios. And then the last page, which is again for your reference, the balance sheet and total asset base of the group. You can see again, it has been very steady and stable in the last few years. Our total asset base have been stabilized at around RMB 110 billion level, of which about 46% is completed investment properties and then about 10% is commercial properties underdevelopment. So on that, now I'll turn it over to Stephanie to talk about the commercial business.

Thanks, Douglas. Here, let me give you all an update on our commercial portfolio. So we have a leading commercial portfolio in Shanghai. We're one of the largest portfolios -- commercial portfolios in Shanghai right now in terms of scale. And the asset value of this portfolio is RMB 79 billion. In the next chart, you will see that the asset value attributable to the group from that RMB 79 billion is RMB 46 billion. And about 60% of these assets are already completed and generating rental income. And on an attributable basis, our attributable interest is about 58%. Our rental and related income actually did very well. This first half, it increased by 32% to RMB 1.6 billion. Some of the key drivers for that, as Douglas mentioned, is the AEI that was completed and reopened last November at Shanghai Xintiandi. Our rental income increased 89% year-on-year, and we are really encouraged by this, and we will continue to embark on an AEI for Style II coming this year. And the idea here is to actually enlarge the portfolio of Shanghai Xintiandi. So the total asset will be about 80,000 square meters of total GFA from North and South Block plus Style II. And this is actually a very sizable portfolio in a city center directly linked to the subway in a very iconic location that we continue to develop and upgrade. And from an office portfolio point of view, 2020 due to COVID was a very challenging year. But we see, in the first half, very strong pickup in terms of our occupancy. Our office portfolio has an average occupancy now of 90%. But actually, to date, in Shanghai, our office portfolio is about 90 -- over 95% leased. And so I think we've seen a strong pickup in terms of demand and shows the resilience of these core locations that we have within our office portfolio, especially in Shanghai. So on -- including JV and associates, our rental income has increased by 32% in total to RMB 1.5 billion. And 73% of the rental income actually comes from our Shanghai portfolio. From a retail basis, actually, our portfolio has seen strong growth relative to even 2019 in terms of rent and sales. And we continue to push our First in China, First in City flagship strategy. So we're happy to report that we've signed on a couple of new tenants. So Valentino Beauty is opening their global first store in Shanghai Xintiandi, and we have a number of new additions to the Xintiandi family, including Creed, Tom Dixon, 3CE, Maison Kitsuné and lululemon's new flagship store. All of these were increased in our portfolio, and we've seen very strong improvement on our sales as a result. Xintiandi, as we always think of it as a cultural and social destination, we continue to actively program the properties to stimulate the vitality of our destinations. So we continue to run all of our IP portfolio events. And as part of our portfolio, the software as we have a CRM program called iTiandi, it's an app. And our total member take-up has increased significantly. And in terms of member sales generated from these members of iTiandi, it increased 141% year-on-year reaching about RMB 1 billion in sales this year. As part of the 20th anniversary of Xintiandi, we've launched a campaign this year, that's multiple events and programs that's spread throughout the year. As part of the first part of this campaign in the first half, we launched a Creative Shanghai Future City Forum in conjunction with Bloomberg. This was very well received, and the forms -- our focus was on the future of cities and the challenges that it -- they will face. And as the second part of our campaign, we also launched what we call the CREATORS 100. And the focus here is to promote local Chinese designers and creative talent. So -- and 5 key areas of focus are fashion, design, architecture, art and social impact. And these creators will be awarded with a special prize, and we hope that we can continue to spotlight these creative talents and give them more room to grow within our portfolio and within the China market. In the next page, you'll see, we have a major opening of our mall, Hall of the Sun. This project is situated in Shanghai within the inner ring. It's part of our Rui Hong Xin Cheng project. It started construction in 2017, and we're really happy and excited for the opening on September 19. The mall, which is opening, having a soft opening is 180,000 square meters. And there are 2 office buildings that are also part of that site that are 147,000 square meters of premium Grade A office, and the name of that is Corporate Avenue, Rui Hong Tiandi. So we have some new tenants coming to the site, including Muji's new supermarket concept that was launched, and this is the China first flagship store that will be launched here in Hall of the Sun. We also have a new kids' floor called Kids Social, and this is the largest one-stop kids' location in Shanghai. The total area is 25,000 square meters. It includes Hamleys first shop in Shanghai, a massive toy store, as part of this anchor location as well as Meland. So we have a number of new concepts coming in. Sports Social is also a new concept that will be on the 6th to 7th floor of this mall. It includes trampolining, indoor skiing, equestrian activities, et cetera, et cetera. And there are these new sports and activity lifestyle centers that will be created. And pets is a new trend or it's very much part of the lifestyle of these younger, high-spending consumers. So we actually created a zone called Pet Social that will bring in new pet services. It has a special zone where it has a Mr. Zoo, as one of the anchor tenants, and there's a -- it's almost a petting zoo concept. And so this will actually drive, we hope, a lot of family spend and a lot more interest-based spending to our site. So I might pause there, and I'll hand it over to Jessica to share more about our development projects.

Okay. Thanks, Stephanie. Next. Yes. As Chairman mentioned before, we had very strong residential sales in the first half of this year. Our contract sales increased by 95% to RMB 12.11 billion on year-on-year basis. All our projects launched are very popular in the market, especially, we had very strong sales performance in Shanghai Rui Hong Xin Cheng Ocean One and Shanghai Panlong Tiandi. Next. As of 30 June 2021, total subscriber sales of RMB 1.8 billion were recorded, which will be converted to contract sales in the second half of this year. Next, Here, I would like to highlight Rui Hong Xin Cheng Ocean One. It contributed RMB 5.6 billion contracted and subscriber sales in the first half. As we all know Rui Hong Xin Cheng is located within the inner ring of Shanghai in North Bund area, it is an integrated community comprising office, shopping center, culture, entertainment spaces and residential property. With convenient transportation, rich commercial facilities and our premium brand, it received overwhelming market response. We launched the 2 batches in January and July with 450 units in total, and all the units were sold on the first day of launch. The average selling price was at RMB 115,000 per square meter. We did an analysis on our buyers. In terms of the geography, we can see 97% of our buyers are from Shanghai, only 3% are from our other cities and the provinces. In terms of the age, 41% of the buyers are aged between 36 and 45. This shows that our property is appealing to the people who are middle class elites with high income and high house purchasing scores. And the 92% of our buyers are for self use with reasons including marriage, investment, improvement of living conditions. Next. Moving forward, we have a strong pipeline for the second half of this year. We expect to launch more residential property development for sales in the second half. We have a total of 387,300 square meter residential GFA available for sales. About 73% of GFA are for Shanghai projects. Our attributable GFA is 220,000 square meter. Next. Here are some renderings and the photos of Rui Hong Xin Cheng Lot 167A, which will be newly launched in the second half of this year. This lot is just located on the -- just on the metro line block 10, will provide them lots of small units to the market. And next. These are some photos for another landmark project. Lakeville 5 Phase 2 Taipingqiao, which will have 36,800 square meter of GFA ready for sale. These projects have received a lot of purchase intentions, and we are very confident to have a good sales performance in the second half. Next. So in short, we have strong residential development, saleable resources in the future. The total amount was RMB 54 billion, with attributable value at RMB 34.9 billion. It was based on our current valuation of our land bank. More than RMB 40 billion saleable resources were in Shanghai. Next. For commercial development, we also have a strong portfolio in Shanghai and other cities. It will drive for rental growth and capital recycling in the future. The slide shows the list of commercial properties and the development -- and for future development. In Shanghai, we own and manage 640,000 square meter of commercial properties. 75% are GFA for office use and 25% are for retail. For other cities, which included Wuhan Tiandi and Foshan, the total GFA of commercial properties was 2,275,000 square meters. The total size of our commercial property portfolios were 2,915,000 square meters, of which 65% were for office and 35% were for retail. That concludes my part. I'd like to hand over to Stephanie for the next part.

Thanks, Jessica. I will share briefly here a summary about our key achievements in terms of sustainable development in ESG in the first half of this year. Our 5C sustainable development strategy targets as a summary is at the back. And if you're interested, it's the last page of our presentation. So our key achievements in the first half of this year, we're are the first China-based developer and company in the real estate sector to commit to the science-based targets. We set our emissions reduction to reduce well below 2 degrees in terms of global warming in alliance with the Paris accord. And in June, we successfully launched our first sustainability-linked bond, as Douglas mentioned, reducing our carbon emission intensity by 25% by 2024 on a 2019 basis. And we're happy to report that we've secured 100% renewable energy for our Wuhan commercial assets. And this actually totals amount of 10% of our total SOL electricity usage. So this is a big step towards our carbon-neutrality goals in the long term. We continue to find new sources of green energy to help reinforce this goal. And we have entered into a strategic partnership with Green Common earlier in the year to launch green menus. And this is part of our 5C signature initiative because we hope that through these partnerships, we can actually launch green menus across all of our restaurants in our portfolio. So that any consumer coming into Xintiandi or any of our malls can actually have the choice to eat green. And as we know, this is actually a big step towards carbon reduction in the long term. And so giving consumers that choice is actually a strong luxury. We also mentioned just now launched our CREATORS 100 program, spotlighting Chinese creative talent, and this is part of our 20th anniversary campaign. And in terms of sustainable awards and development, we're happy to report that Wuhan Tiandi Site A has won the ULI Asia Pacific Award for Excellence. And The Hub has also won the ULI Global Award for Excellence. And as part of our ongoing sustainability efforts, we continue to upgrade the performance of a lot of our existing buildings. So KIC, which is actually an over 10-year-old project, we have achieved the WELL HSR certification, health and safety rating certification, even for a relatively mature projects such as KIC. So I will stop here.