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

Good evening, ladies and gentlemen. Welcome to Shui On Land 2022 Interim Results Analyst Briefing. Thank you very much for joining us online this evening. We are pleased to have 5 members of the senior management team with us today: Mr. Vincent Lo, our Chairman; Ms. Stephanie Lo, Executive Director of Shui On Land and Vice Chairman of Shui On Xintiandi; Mr. Douglas Sung, Chief Financial Officer and Chief Investment Officer of Shui On Land; Ms. Jessica Wang, Chief Executive Officer of Shui On Land; and Mr. Allan Zhang, Chief Executive Officer of Shui On Xintiandi. We will start with the presentation by the management followed by Q&A. [Operator Instructions]. Without further ado, may I invite Mr. Lo to start with some opening remarks. Mr. Lo, please?

Good evening. Thank you for joining our briefing session. It hasn't been easy in the past 6 months because of the COVID situation in China, and also the world situation is not very promising. The Russia, Ukraine war, when is it going to end and its impact on the rest of the world. And then the worsening relationship between U.S.-China, inflation hitting the world and stagflation is very much likely scenario going forward. And then I mentioned about the COVID situation, the lockdown in Shanghai a few months ago, it's really hitting the economy and business hard. And then, of course, the not so good situation in the property sector, declining sales, the debt problem. It's actually bringing forward major correction in the property business and our industry. And I think it's a very exciting time. I would not say too much, I'll leave it for my colleagues to give you all the details.

Thanks, Chairman. So just as an introduction to our results, we have been greatly impacted by the COVID outbreak in the first half this year. But overall, our performance remained very solid as supported by a strong balance sheet. Our redemption -- we redeemed USD 600 million perpetual with internal resources in June this year. Because of the redemption of the perpetual, our gearing ratio increased by 13%. And now currently, our net gearing ratio is at 48%, which is still a very healthy state. We have cash and bank deposits of over RMB 12 billion. In terms of operational performance, our property sales and rental remained very stable despite the impact of COVID. Our contracted property sales increased 15% year-on-year. Our locked-in sales of -- we achieved a locked-in sales of RMB 43 billion. And our rental and related income increased 8% year-on-year. Despite the impact from COVID, Douglas will talk a little bit more about the reason why our profit has been adversely impacted this year. And it was decided at the Board this morning that we will have a dividend payout of $0.036 per share for the first half of this year, which is the same as the first half in 2021. In terms of market outlook, as the Chairman mentioned, in the short term, we remain very cautious on the outlook of the property sector. Due to COVID outbreaks and various lockdowns across different cities in China and the ongoing liquidity prices in China's real estate sector, we have seen GDP growth and retail consumption contract drastically in the second quarter. But having said that, you are seeing policy relaxation on home purchase restrictions being more relaxed across over 100 cities in China. The PBOC cut, the 5-year loan prime rate in May. And the government, in general, we believe, will not allow for hard lending. However, we do believe that it will be a more protracted resolution of this real estate crisis over the next couple of years. So just a couple of words about Shanghai, given we have a very heavy concentration of projects and investments in Shanghai. Despite the lockdown that persisted for close to 3 months, retail and office naturally were very impacted, but we are seeing a very steady recovery and stable recovery. So in terms of retail, the foot traffic and sales are close to 2021 records. And in terms of residential sales, in fact, we've seen very strong residential sales at our properties, especially after lockdown. Jessica will share more about our Rainbow City project later. And in terms of the Shanghai land market, the land market remains very resilient. Post lockdown landing auctions charted a very strong performance. And I think this is a flight to safety and a flight to quality. And the first tier cities, we do believe, especially in Shanghai, will continue to remain resilient in the medium and long term. In terms of our strategic focus, we are very well positioned, we feel, to capture new opportunities that are arising from the dislocation in the real estate sector to deliver quality growth over the long term. Our solid balance sheet and liquidity situation included with our prime locations across Shanghai, in particular, allow us to be very resilient in being able to weather the storm. We also have a very iconic brand known for urban regeneration, which is becoming increasingly a very important runway for growth in terms of development, especially in first-tier cities, where a lot of the development has been quite saturated over the last 2 decades. And just a point here to note about the rising importance of high quality. I think right now, whether it is investment or whether it is in terms of consumer, there is a flight to quality. And we believe that our persistent and long-term view on strengthening and having strong corporate governance and integrity at our business has been paying off. And therefore, we hope we can continue to develop Shui On as a very trusted partner to all stakeholders. And lastly, just a word about our sustainability because I think you all must have seen a lot in the news lately about historic heat waves across the world, forest fires and droughts. So in China, in particular, there have been record number of hot days, over 40 degrees. And this has really highlighted the need to reduce our energy consumption and focus on our reduction of our carbon emissions. And this is why in July, we actually submitted an upgraded set of commitments and targets to the SBTi to align to 1.5 degrees in the near term in 2030. And also I would like to highlight the fact that we're 1 of 3 China companies that were included in the Bloomberg Gender-Equality Index in 2021. And we will continue to strengthen our disclosures across our sustainability, including TCFD, and our recently published climate change policy. So with that, I'll hand over to Douglas.

Thank you, Stephanie. Let me give the audience the financial highlights for the interim period. So this next page is just a snapshot on some of the key financial indicators. Obviously, first half 2022 was extremely challenging for the property industry in China. And Shui On obviously cannot be immune to that huge challenge, in particular, because we have a large proportion of our business and our assets based in Shanghai. The lockdown in Shanghai in the second quarter has definitely materially impact our financial performance as well. So for the first half period, there were basically 3 main factors affecting us. One is delay in some of our residential construction and delivery to buyers. So some of the revenue recognition has slipped into second half of the year. This is particularly on the Tai Ping Qiao Lakeville Phase 5 units, which we originally intended to complete and hand over to the buyers before June. But because of the lockdown, it has slipped into second half of the year. Secondly is, of course, impact to rental income and related income from the Shanghai lockdown. And the third major item would be the impact from the RMB depreciation in the first half, and we did suffer a noncash exchange loss of about CNY 470 million in the interim period. So on the next page, I'll just highlight, particularly on the revenue side, property sales and rental income. So you can see that in the interim period, property sales revenue was only roughly about RMB 2.5 billion. So there was -- this is not a large amount. And you can see that in the Shanghai Tai Ping Qiao area, we did not have any major handover or profit recognition because of the construction slippage due to the lockdown. So this is one major impact on the revenue side. On the rental income side, the performance was actually very, very good considering what happened in China and in Shanghai in the first half of the year. So in terms of our rental revenue, it increased 1% year-on-year. But if we increase our JV and associate projects, actually increased by 8% year-on-year. So that was, I think, a good testimony on the strength of our mutual properties in core locations. Next page is the breakdown of the income statement. I won't go for all the line items, just highlight a few things. So we talked about property sales revenue. So you can see it's a large year-on-year decline. So in addition to the delay of handover of Lakeville Phase 5 this year, in the first half last year, we actually had a lot of residential completion and delivery to buyers. So that's why you can see that it was a relatively large decline year-on-year compared to first half 2021. Rental income, I mentioned, was up slightly from a year ago. And cost of sales, of course, because of the relatively low volume of residential property delivery and recognition, the cost of sales figure also have dropped a lot compared to a year ago. Gross profit margin at 64%. This is higher than usual. Last year was 41%. This is just purely because of the composition of revenue. We have much lower property sales revenue in this half compared to last year. And as a result, the percentage of proportion of rental income is actually quite substantial. And typically, rental income has a much higher gross profit margin compared to the property sales. So this is the main reason. Other income is generally interest income. And then I'll talk a little bit more about the fair value increase of our IP at CNY 64 million. Other gains and loss include a variety of things, including some of the hedging costs, which we hedge a percentage of our non-RMB debt. And you can see the results of the RMB depreciation and the net exchange loss of CNY 477 million. So including this, the overall finance cost is about CNY 1.17 billion in the first half of the year. So before profit before tax, it's just slightly over CNY 1 billion. And on the next page, you see profit after tax, total profit is about CNY 779 million. And then if we net out minority interest is about RMB 450 million attributable to shareholders. As Stephanie mentioned earlier, the Board has recommended to pay interim dividend of HKD 0.036 per share, which is the same level as of interim 2021. So next page, our financial positions. So on the net gearing level, as of June, is 48%. So this is mainly a function of us repaying the USD 600 million perpetual securities in June because the perpetual securities were accounted for as shareholders' equity in the balance sheet, and we use cash -- internal cash to repaid. So the overall impact to net gearing was about 15%. So this is really the main reason why you see an increase from the end of last year of 30% net gearing to currently about 48%. So we have about CNY 13 billion cash on hand at the interim level. And I think the other point to highlight is on the financing we've done in the first half. Of course, we know that many in this sector -- many developers in this sector have a lot of financial challenges and have difficulty securing financing. So for Shui On Land, in the first half, we repaid or refinanced over USD 1.1 billion of our debt, including the USD 600 million perpetual. So again, we still are able to secure financing from various channels. And I think this is also a reflection of our very prudent and conservative balance sheet management over the last few years. We have also bought back some shares in the first half of the year, not a significant amount because the stock -- our stock is not very liquid in the market. But we hope that in the coming future there will continue to be opportunity for us to buy back more shares. Next page. The total asset is pretty much been stable the last few years at about RMB 110 billion or so. So no significant changes over the last couple of years. Next page. You can see that on the IP valuation, the overall valuation is basically flat from same period last year. Obviously, in some individual properties, there were some ups and downs in valuation. But you can see in most cases, the changes in valuation is less than [ 0.3% ]. So very, very minor movements in the value of our property. So again, I think it's a testimony that the colocation properties that we own are very, very stable despite the impact of COVID and the lockdown in Shanghai in the first half of the year. It has not made any significant impact to the value of our properties. Next page. That position has already explained the increase in gearing because of the redemption of the perpetual. And then the overall net debt, you can see that the net debt amount was also very stable at about RMB 21 billion. So this is pretty much at a very stable level compared to the last 3 to 4 years. So the increase in the gearing, again, is not because we ramp up our debt, is simply because of the accounting treatment on the perpetual. Next page. So this is just for your reference, the debt profile maturity profile. We don't have any additional U.S. dollar senior notes maturing until November next year. So in the next 12 to 18 months, most of the maturity will be on bank financing that we have both onshore and offshore. And the last page is again for you reference, the maturity profile of our U.S. dollar notes. So with that, I'll hand over to Jessica to talk about the development business.

Thanks, Douglas. With regards to the property as [indiscernible], I would like to highlight our key observations on [indiscernible] market and the company's growth strategy going forward. The economy downturn in the ongoing property sector correction puts many challenges to the developers, but we also see opportunities during the transition and [indiscernible] COVID lockdown. We can see the divergent sales performance among cities, companies and projects. And the Tier-1 and leading Tier-2 cities, developers with prudent financial position and quality products outperformed in this challenging environment, with an urbanization rate of nearly 65% in China. Urban regeneration play an increasing important role in future development of top-tier cities. Demands on mixed-use community based quality residential products with better service becomes stronger post COVID lockdown. In views of this backdrop, we are well positioned to ride on our strength in urban regeneration, our proven track record in mass plan and cultural preservation and our strong presence in Shanghai and the key cities for future growth. In response to the changing market and the demand, we strive to provide the best suitable solution in developing sustainable premium urban communities in China and in long-term opportunities. Our disciplined capital management strategy and a solid balance sheet enable us to grow the business, and we will continue to look for opportunities in Shanghai and the first tier cities as well as strategic locations within the Yangtze River Delta and the Greater Bay Area. We will focus on high-quality mixed-use community development and also actively explore new product innovation for long-term growth. Our current investment focus is to increase our landbank and look for investment opportunities with quicker turnover and we will also explore potential merger and acquisition opportunities from the market correction. Next, despite macro challenges in the COVID outbreak, we have still achieved very strong residential sales in the first half of 2022, which demonstrates buyers confidence in our projects. In this period, our contracted sales increased by 55% year-on-year to CNY 18.75 billion, which with residential property sales accounting for 99% and remainder contributed by the sales of our commercial units. The increase was mainly from strong sales performance in Shanghai Rui Hong Xin Cheng lot 7 and the Shanghai Rui Hong Xin Cheng lot 167A. As for 30 June 2022, total subscribed sales of CNY 1.8 billion were recorded. These sales will be converted to contracted sales in the coming months. Next. For the second half, we have 147,300 square meter of residential GFA available for sales, of which about 58% are from projects in Shanghai. A big portion is coming from Panlong Tiandi, which had a total of 71,900 square meter of GFA for sales in July. It received overwhelming response from the market, and I will give you a detailed introduction in the later part. The rest mainly comes from Wuhan. Next. The first part I'd like to highlight is Rui Hong Xin Cheng Park Vera Lot 167A. This is the last residential project of Rui Hong Xin Cheng. The estimated residential GFA is around 86,000 square meter due to the COVID [ update ] and the lockdown, the sales launch was deferred to June 8 from March. It is the first residential in the downtown area and the second one in Shanghai that were permitted to launch sales after the lockdown. Buyers' sentiment remained very strong. The project is significantly oversubscribed, and it was -- it has 609 units in total and received a deposit from 1,940 potential buyers. All units were sold on the launch day and the average selling price is CNY 119,800 per square meter. It contributed CNY 10 billion to contracted and subscribed sales in the first half. Next, the other project I'd like to highlight is Panlong Tiandi. Panlong Tiandi is strategically located in the [ Hongqiao ] area. It is one of the first batch of urban village regeneration project in Shanghai. Leveraging our experience in urban regeneration and culture preservation, we revitalized the urban village into a world-class sustainable urban community. Upholding the philosophy of culture, nature, future, our mass plan concept and the quality development has received a greater recognition from the public and the government. The third phase of Panlong Tiandi was launched in July. The newly developed low-rise residential project also received an overwhelming market response. We received over 2,000 subscription for the 571 units to be launched. And the 3.5x over subscription reflects the strong demand for our project. According to the government policy, 1,062 customers entered into the final lucky job process with record high interest score at 91.22 in Shanghai. With the successfully launched, we are confident in achieving the full year contracted sales target. Next. This slide has summarized our residential development landbank and saleable resources in the future. The total saleable amount, yes, CNY 76 billion as of the end of June 2022, with attributable value at CNY 42.6 billion. CNY 26.3 billion sellable resources are in Shanghai and the rest are in Wuhan and Chongqing, of which CNY 38.2 billion come from Wuhan Shipyard project. Next, besides the residential development landbank, we also have a strong commercial development portfolio in Shanghai and other high-growth cities. It will drive for further rental growth and capital recycling in the future. This slide shows the list of commercial properties already under development and in the pipeline. The total size of our commercial property portfolio was 2.938 million square meter, of which 60% were our core office and 40% for retail. In Shanghai, we have 426,000 square meter of commercial properties, of which 66% GFA for office use and 34% are for retail. That concludes my part. I'd like to hand over to Allan, please.

Thank you, Jessica. And in this section, I would like to introduce the results of Shui On Xintiandi. But first of all, I would like to highlight that the Shui On Xintiandi is one of the largest commercial property owner with a very iconic presence in Shanghai. So far, our portfolio has been reached 1.72 million square meters. So if you look at the list of the major listed companies that we are still ranked number one. And the next slide is a list of some pictures about our major properties in Shanghai. So on one way, our [ mature ] property has been growing to a larger scale. At the same time, we have been successfully acquiring new pipelines. So as you can see from these slides, we have 2 new pipeline, which are under preparation for open next year. The first one is the lower left hand, which is the Panlong Tiandi, and the second one is the higher right-hand, Hong Shou Fang. These 2 projects will open for business in next year. And because of the strategic locations and also the quality and also the unique position in our commercial value, the valuation actually has been going up all the way up to 81 billion totally in Shanghai and other properties. Well, next slide, it's a bit about -- introduction about the 3 business segments. So we usually divide the business in the 3 sectors. The first one is the Property Investment, which is basically our majority investment and ownership into the commercial properties. Right now, the PI industry basically contributes around 76% of our revenue. The second sector is the Property Management business. Right now, it's contributed around 18% of our revenue. The most younger one is the Real Estate Asset Manager. We basically initiated this sector around 4 years ago. Right now, it contributes around 5%, but the growth rate has been record-quite high, which I will introduce a bit more later. Then next slide, it's very quick summary about our business P&L figures and the balance sheet. As you can see, our revenue actually has been growing up by 3% year-on-year to CNY 1.4 billion last year for the first half of this year comparing to last year. And I'm not going to touch base on all of the profit data, but I just want to highlight the underlying profit, which is actually increased by more than 23% year-on-year. And for the balance sheet, right now, our net assets basically achieved CNY 33 billion this year, and our net gearing ratio has been maintained at a very healthy level, which is 15% now. Well, next slide, I will go into a bit more details about our different business segments. So as we have discussed before, due to the COVID impact, the Shanghai PI revenue basically has been impacted significantly. But due to the compensation from our other projects, specifically Wuhan and Chongqing, our revenue in Wuhan basically increased by more than 20%. Our Chongqing revenue increased by 35%. So the contribution from the other cities basically compensates a lot for us to fill the gap from Shanghai. And so our PI -- our rental revenue basically a record quite modest growth rate. The only exception in the revenue part is from our Asset Management business. So as mentioned before, this business segment has been growing at a double digit. Well, this year, the growth rate is more than 39%. And our AUM scale basically goes up all the way to RMB 26 billion now. Next slide is a bit more about the introduction according to the asset type and also the geographic distribution. So if you look at the left-hand chart, we have been strategically and protectively -- proactively maintain a quite balanced office in the retail portfolio. So first half, the retail part basically contribute to CNY 674 million revenue. And the office basically contributes around CNY 449 million rental income. So as you can see, the relationship is quite balanced. And also, if you look at the geographic distribution right now, our portfolio is in Shanghai basically contributes more than 71% of our revenue. And the second largest one is Wuhan, contributed 14% of our revenue. And the rest of the revenue are coming from the other cities, Foshan, Chongqing and Nanjing. Next slide, it's a bit more introduction about the COVID impact. I think which is -- the COVID impact is apparently one of the biggest challenges we have been facing in first half. So in the first half, we have been trying to leverage our resource to safeguard our talents and our employees. So in first half, we -- as a company, we donated around maybe RMB 5 million support the COVID-19 screening and control and other measures. At the same time, we have been trying to leverage our resources in the retail, sourcing a lot of food and other emergency packages and also solve the logistic issues to shift all of these packages to our employees and our tenants. And for the retail tenants, we have provided rental concession and also other promotional resources and other effective support to our tenants to recover their business. So because of all of these measures after reopening in June, we observed a very stable and strong food traffic recovery. And so far, our foot traffic fall has been recovered to more than 90% and sales also more than 90%. And also, I would like to mention about our occupancy rate. And at the end of June, our occupancy rate for all of the retail and office are above 90%. Well, next slide is basically a bit more about the breakdown of all of the SXTD-owned properties. I'm not going to introduce all of the details, but there are 2 figures I would like to mention. The first one is the income growth rate. So due to the contribution from the other properties in Chongqing and Wuhan, we have record modest growth rate by 2% comparing to previous year. And as mentioned, our occupancy rates are quite stable and most of the mature properties in Shanghai had a very high occupancy rate, which is usually above 95%. And the only 2 exceptions in these slides is the second line, the Xintiandi Style II, the occupancy rate is 62%. And also the last line, the Nanjing FC 58%. We basically initiated AEI and renovation exercise from last year. So far, the occupancy rate was quite low in the first half. Well, next slide is a bit more introduction about the Property Management business and also the Asset Management business. The Property Management business has been growing. And so far, the total portfolio reached 9.4 million square meters, including all of the commercial and residential areas. And for the Asset Management business, our AUMs portfolio has been growing up to CNY 26 billion and total GFA, it was actually 680,000 square meter. And through all of these type of management portfolio, we have been formed a very healthy and the long-term relationship with all of the insurance company and also [indiscernible] company. We believe with this strong support from the established partners, we can keep growing the Asset Management business at a quite big double-digit number. So last slide, I would like to highlight about our strategy for the near term and the long term. For the near term, of course, it's very important to make sure our operations stay resilient and agile, which is very important in one way to safeguard our employee and the tenant, and on the other way, have us allowed to save their operation costs. And for the support to the tenants, we will keep using a very flexible leasing strategies to curate a win-win relationship with our tenants at the same time to provide very strong support to help them to recover their business. In the long run, we will keep leveraging on our advantage in creating thriving communities because we believe that in the long run, especially after the impact of the COVID, people actually realize the benefit of large-scale, mixed-use communities. These types of opportunity will help us a lot to achieve a sustainable growth rate. At the same time, we have been closely monitoring the trend of the market. We observed that there are a lot of new demand in the long run. We are trying to leverage on this new demand in the long run. And the last point I would like to -- as I just mentioned, the asset-light business, which is our Asset Management business, we will keep leveraging on our strong team and our competitive advantages to grow this business. And we believe that after the COVID, there are a lot of corrections, which produce a lot of opportunity for us to keep growing the business. I will stop here and hand it back to Luna.

Thank you, Allan, and thank you, Mr. Lo and other management for the presentation. We will now take some questions from the audience, and please allow me to group certain questions together because some of them -- some of you are asking very similar questions. So the first one is on M&A. So would you please share a bit more on our M&A strategy. Given the current difficulty in financing, would you wait for a better time for the M&A opportunities? May I invite Mr. Lo?

Yes. So since last year, we've been closely monitoring the market to see if there's any good buys. But unfortunately, I think a lot of the trouble developers are still holding on to their prime assets because they still haven't felt the urgency yet. But I don't believe they can hold on forever, and I think there will be better projects available next year when you come to survival, I guess, you will have to sell. So we are waiting for that opportunities. And on the buying side, we want to replenish our landbank and Jessica has also mentioned that we are looking at a number of government projects that they want to invite us to participate. And with the reduced competition, we do believe that we can get attractive projects from the government. So we are focusing on that end at this point in time.

Thank you, Mr. Lo. Next question is relating to the COVID impact. So would you please discuss the COVID impact towards property sales and rental income in the first half? And what would be the possible spillover effect to the second half of the year? Maybe I invite Jessica first, then, Allan?

Okay. Let me answer the question first. As I mentioned, because of the COVID outbreak and the lockdown, our sales of Rui Hong Xin Cheng Lot 167A deferred from March to June. But still, we get a very good response from the market, and we sold all the units on the launch day. So actually, in the first half, our sales did not get any [ inference ] because of the COVID. And for the rental side from Allan.

Yes, sure. From the commercial properties, basically due to the COVID impact, we have been facing a lot of challenges, especially for the traffic for and the rental sales and as I mentioned before, we have been trying to provide a lot of effective support to our talents, including rental concession, marketing promotion and also the other effective support. And I'm quite happy to see that right now, our traffic for has been recovered to a bit more than 80% and sales are more than 90%. So we are at a quite healthy status now. And the occupancy rate is also above 90%, as I mentioned before. So for the next year, we believe that the city and also ourselves, we have mastered all of the initiative and skill sets to have a very resilient and agile operation to cater to all of the challenges from external, and we are quite confident that the recovery for the second half will be even more significant comparing to the first half of this year.

Thank you, Jessica and Allan. Next question, maybe I will invite Douglas. So the question is on the escrow account regulation. Now that the government is focusing on [indiscernible] so for the CNY 13 billion cash on hand, how much is restricted cash. May I invite Douglas, please?

Yes. So out of the CNY 13 billion, I would say around CNY 8.5 billion to CNY 9 billion would be free cash. So majority of the CNY 13 billion is cash that we can use.