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

Good evening, ladies and gentlemen. Welcome to Shui On Land's 2022 Annual 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 first start with a presentation by the management, then followed by Q&A. During the course of the webcast, you may submit your questions via the webcast portal, and they will be conveyed to our management during the Q&A session. Without further ado, may I invite Mr. Lo to start with some opening remarks, please. Mr. Lo, please?

Good evening, everybody. I'll just maybe talk a little bit about the big picture, the macro conditions last year, it was a very difficult year. As we all know, the world was hit by a perfect storm with the geopolitical tensions, Russia-Ukraine war, not seeing an end to it, inflation and then interest rate hike, which -- it's something that a lot of people are not used to, right, after almost 20 years of low interest rate. And then, of course, COVID outbreak, particularly affecting the Chinese Mainland with all the lockdowns and everything. So in this difficult operating environment, my colleagues will share with you the details, but the market sentiment is still relatively weak because of the overall economy and then particularly in the real estate sector, I think a lot of people are still concerned about the trouble real estate developers, how is it going to end? What will happen next. And then challenges in financing, refinancing. And then, as I was mentioning, the correction in the property market has a rich bottom. Maybe later on, my colleagues and I will share more with you. Maybe I'll just stop there.

Hi, everyone. Let me just give a quick business review and outlook for this coming year. In 2022, it was an unprecedented operating environment in terms of COVID-19 lockdowns and the real estate liquidity crisis. But despite these challenging operating environments, our profit was satisfactory. Our profit was of RMB, about RMB 1.5 billion and profit attributable to shareholders totaled RMB 906 million.Our property sales remained strong despite delays in construction and handover and our contracted sales hit RMB 27.2 billion. Our total rental income decreased a little bit by about 4%, reflecting the tenant support and the market conditions. Our fundamentals and balance sheet remains strong and stable. Our net gearing ratio stayed at a healthy level of 45%. We also redeemed a senior perpetual of about USD 600 million with internal resources, and this is what resulted in our gearing increasing by 13%. And our cash and bank deposits stood at RMB 13.4 billion. So we are declaring a final dividend of the year of HKD 0.064 per share together with an interim dividend of HKD 0.036 per share, the full year dividend for 2022 amounted to HKD 0.10 per share. We also had a share buyback plan that was approved by the Board of up to HKD 500 million, and a total of 35 million shares was already bought back during the last year. So just a quick recap of the market conditions last year. We take a very cautious outlook and seeing a gradual recovery already. Last year, GDP in China dropped to 3%. But what we're seeing now is that the lifting of the 0 COVID policy and border reopening, we're seeing a moderate recovery and a rebound. In terms of the residential market, this is obviously the deepest downturn since the start of the housing reform in 1998. Property market control policies have been eased in multiple cities. Home purchase restrictions have been relaxed and mortgage rates have been cut in most cities. First-tier cities have remained stable, and therefore, mortgage cuts have been less, relaxation of the policies have been less. But generally speaking, there is still a crisis of confidence at the moment. Buyers remain generally cautious and therefore, we are cautious about the market operating environment this year. In terms of the retail sector, because of the lockdown specifically in Shanghai, Shanghai retail sales suffered a very deep contraction of 9.1%. And prime retail rental projected to remain flat this year. But we do see bright spots because post relaxation of the COVID policies, we are seeing consumer spending recovering. Allan can share a little bit more about that later. In terms of the office sector, it is a bit of a perfect storm as well because of the downturn in the economy and in terms of COVID policies and as well as oversupply, the general office take-up rate and vacancy rate has increased. So therefore, we do think that the office market will continue to face some challenges for some time to come. So a little bit about what we're focusing on this year in terms of our strategy. Quick observations. In terms of market recovery, the recovery is very K-shaped. In terms of both consumer spending and the real estate recovery. The first tier and strong second-tier city remained very robust, with stable demand, especially in the luxury residential market, namely in Shanghai, we see very strong demand. And you'll see that through our sell-through rates that Jessica will share more about later. In terms of the quality retail facilities, it's much more of a winner-takes-all market. And so these luxury retail facilities are taking up much more market share than before. And in terms of demand for Grade A premium office, we do think that in core locations in grade A premium buildings with sustainable office space and quality asset management services. The demand for these offices remain extremely resilient and strong. So therefore, we're thinking about our year ahead, being very prudent in terms of our capital management, maintaining strong liquidity. We will continue to utilize our brand and our track record in the market to capture upper to mid-high-end spending and also utilize our strong brand and track record to look at new land acquisitions, namely in first-tier cities. And also, we will continue to expand and deliver our best-in-class service and products. And you'll see some of our new land acquisitions will start to reflect that. In terms of sustainability, let me just briefly share what we've achieved in 2022. So in terms of Scope 1 and 2 carbon emissions, we achieved a 27.5% decrease in terms of carbon emissions intensity. We achieved a 12.2% decrease in energy intensity and a 25% decrease in water intensity compared to 2021. We also submitted our 1.5-degree aligned SBTI targets and waiting for approval. In terms of our green pledges that we've signed with our tenants, our coverage has increased significantly last year. Our green pledges have covered 96% of our F&B tenants, 77% of our retail tenants and 48% of our office tenants. And these pledges are an agreement that we have with the tenants to reduced energy consumption, water consumption and operate in a more sustainable manner. We're also very happy to announce that we signed the industry's first green lease in the office space with the UN Green Building Council, who is our tenant, and this includes financial incentives to actually incentivize tenants to reduce their energy consumption and create a win-win solution. Lastly, in terms of our sustainability certifications, 95% of our commercial properties have now at least a minimum of 1 green rating. And so we continue to focus a lot on delivering the most sustainable and high-quality products in the market. With that, I'll hand it over to Douglas.

Running through high-level financial results for the audience. So let's go to Page 12, here are some of the key financial results from last year. We recorded revenue of RMB 15.5 billion, property sales of RMB 11.7 billion. Net profit, RMB 1.47 billion, and profit to shareholders about RMB 906 million. Rental income, excluding the share of JV Associates, is slightly over RMB 2 billion. And as Stephanie mentioned, the Board recommends a final dividend of HKD 0.64 per share, which brings the full year dividend to HKD 0.10 per share. So obviously, we have recorded some year-on-year decline on the results partly due to the impact of COVID-19 outbreak in China, particularly in Shanghai in 2022. Particularly rental income has a more direct impact because of the rental concession we've made with some of the tenants. On the next page is the property sales breakdown. You can see the RMB 11.7 billion of property sales came primarily from 2 Shanghai projects, Taipingqiao, a virtual Phase 5; and the Panlong Tiandi project, which together accounted for over RMB 10 billion of property sales last year. On the rental side, you can see on the right-hand side, excluding the JV and associate income, we recorded an 8% decline year-on-year, but including our share of the JDs, the overall decline is only -- was only 4% to about RMB 2.8 billion total rental income. So the portfolio remains very, very resilient, and Allan can share with you more about the performances. Next page. So on the P&L, I will just highlight a few key figures. We've already talked about the revenue side. So after cost of sales, gross profit was RMB 6.65 billion, down about 7% year-on-year. The GP margin remains very stable at 43%. So this is in line with our historical GP margin. Other income, primarily interest income from our cash on hand. And then we have some regular operating expenses and sales selling expenses, et cetera. I will talk a little bit more about the fair value of our investment properties later on. Other gains and losses that we can test some miscellaneous costs and expenses is a relatively small item. And then on the finance side, the financing costs in total in the P&L is RMB 2.1 billion, comprising an exchange loss of almost RMB 500 million because of the weakness of the RMB last year. And the net interest cost, excluding the change in was about RMB 1.6 billion in R&D compared to RMB 1.1 billion. The increase here is not only because we have rising interest rate in 2022, but also as a result of -- we have now more JV associated companies, which is not consolidated in our balance sheet. Therefore, some of the group level interest costs are also not pushed down, not capitalized in the JV projects. So the capitalized interest amount was less in 2022 compared to 2021. So that also accounts for some of the difference as well. So profit before tax, RMB 2.4 billion. And then after tax, the profit was RMB 1.47 billion. And excluding the minority interest attributable to shareholders, this is RMB 116 million. So this is the key financial P&L focus. On the balance sheet side, you can see that cash on hand at the end of last year is about RMB 13.3 billion with total debt of about RMB 33 billion. So we have a net debt position of about RMB 20 billion and net gearing ratio of 45%. You may remember that we repaid the USD 600 million perpetual notes in June last year because the perpetual was accounted as an equity in our balance sheet. This repayment by cash resulted in a 15% increase in our net gearing ratio. So the increase in 2022 was largely because of this repayment of the perpetual. On the next page, on the total asset side, has been quite stable in the last 5, 6 years, somewhere around RMB 105 million to RMB 110 million in total assets, of which about 60% now is investment properties, including JV and associate investments. So our investment property portfolio has continued to grow in the last few years. Next page is the evaluation of the IP or fairly stable valuation in 2022. First part of the table, you can see the completed income-producing IP portfolio under SXTD. You can see that the year-on-year change was -- is basically flat at 0.2% last year. And then the lower part is some of the JV projects not included in SXTD and also some project under construction, commercial property project under construction. We have made some slight provision on some of the PUD. These are primarily office related property under construction because of the decline in office rents in the past year. When the value were calculated the terminal value of these properties, there is some negative impact on the valuation. But overall, you can see the grand total value of RMB 96 billion on a 100% basis attributable to us is about RMB 63 billion, the change was only minus 0.6%. So overall, it's still very resilient stable portfolio. Next page is the giving ratio. You can look at the trend last few years. So as of 2022, our leverage at 45% remains fairly low and healthy. Next page is the maturity profile of our debt. We have about RMB 5.9 billion maturity in the first half of this year for bank financing bank loans. And then in the second half of this year, we have another RMB 5.6 billion maturity. So all of the first half maturity, we have already repaid or refinanced about RMB 3.3 billion. So we have about RMB 2.5 billion of maturity left in the first half that we are working on right now, some of which we intend to repay by cash. So we don't have a position any major issue on the retiring set in the next few months. Next page is just for your information, the maturity of our U.S. dollar note. And finally, some of the financing activities, we're working on right now on the next page. First of all, of course, we are very focused on sustainability for the whole group. Financing is a big part of it. So we have continued to sign sustainability-linked loan and green loans in 2022 and also sign a number of ESG-related MOUs with banks. And we are also looking at various onshore financing initiatives, some of which we are proceeding at various stage. So some of these involve regulators approval. So it's not at a stage where we can share with the audience today. But the direction, of course, from our perspective is to try to increase onshore financing, and reduce the reliance of offshore financing going forward. So we will certainly continue to do more onshore where possible. So I'll stop here and pass over to Jessica on the development business.

Okay. Thanks. Good bless. Yes. With regards to the property sales and development, Firstly, I would like to highlight on our growth strategy and strategic focus in currently changing markets. In terms of the property market, here are some of our key observations. The economic downturn and ongoing property sector correction did pose many challenges to the developers, but we can see divergent sales performance among cities, companies and projects and the market of Tier 1 and the leading Tier 2 cities and the quality products outperformed in this challenged environment. This reflects the solid demand better living standards and the quality life in key top-tier cities. We are glad to see the government has implemented various measures to restore market confidence and the market momentum is gradually recovery is observed at better private-owned developers, and SOE developers benefit more from easing of control policy. It's worth to mention that property financing is still challenging and more and more developers starting to monetize project or assets for cash and market consolidation in property sector is accelerating. In the meantime, the pace of over regeneration has been accelerated in top-tier cities, especially in Shanghai. This has brought more development opportunities to developers. In response to the changing market, Shui On Land will focus on selective market cities for future growth and strive for a leading position in these markets. And our business development focus are as follows: in terms of the market selection, we will keep replenishing our land bank in Shanghai, Tier 1 cities and other leading Tier 2 cities in Yangtze River Delta and Greater Bay Area. We focus more on resilient markets with relatively strong fundamentals. Regarding the project sourcing, our investment focus is to capture the rising opportunities of urban regeneration in Shanghai with kicker turnover and cash payback. We will also closely monitor market window and actively explore M&A opportunities from the market correction. Finally, we will continue to implement our asset life strategy and keep expanding our partnerships with various business partners, including financial investors and selected developers, such as SOEs with shared vision and values. Next. So in addition to the business development, here, I'd like to further share a bit more on our residential product and the branding strategy. Going forward, we would keep a solid buying our branding of being the best-in-class for residential business and further enhance our leading position in luxury sector where we are in, especially in Shanghai. And there are several key considerations for this strategy. And first of all, if you look at Shanghai, primary high-end residential market, as highlighted on the slide. Obviously, the market fundamental is very strong with a CAGR of 20% since 2017, even though they were up and down the economic growth and the property market. Secondly, based on survey to SOL residential buyers and the target clientele group in middle of 2022, the market has a deep understanding and the strongest desire on quality card in well-planned mixed-use community with heavier environment and the human center service in the post-COVID new time. There are right SOS gens in development. Firstly, with Shanghai announced to accelerate its urban regeneration, especially in urban village development in 2022, there would be more opportunities from the open regeneration runway for SOL to develop and offer high-quality products. The acquisition of Yangpu Binjiang project in 2022 is a typical example. Next. For the property sales performance in 2022, our sales performance will, despite the impact and the downward pressure in market from COVID-19 outbreak, which demonstrates buyers confidence in our projects. For the year, our total contract property sales amounted to RMB 27.2 billion, exceeding our sales target RMB 25 billion. It comprised residential property sales of RMB 25.8 billion and commercial sales of RMB 1.4 billion. And by the end of 2022, total subscribed sales of RMB 1.4 billion were recorded, and these sales will be converted to country sales in the coming months. For the presale in 2022, the first project I'd like to highlight is really Rui Hong Xin Cheng 167A. It is the last residential project within our Rui Hong Xin Cheng master plan. The estimated residential GFA is around 86,000 square meter. Due to the COVID outbreak and lockdown, the sales launch was deferred June 8 from March. And it is the first essential project in downtown area and the second one in Shanghai City that were permitted to launch sales after lockdown. As segment remains very strong. The project is significantly oversubscribed, and it has 609 units in total and received deposits from 1,940 (sic) [ 1,904 ] potential buyers. All units were sold on the launch day and the average selling price is RMB 119,800 per square meter. It contributed RMB 10.3 billion contracted and subscribed sales in the first half. The second project is Panlong Tiandi, which is strategically located in the Hongquao core area. It is one of the first batch of village-in-city regeneration projects in Shanghai. Leveraging our experience in urban regeneration and a culture preservation, we revitalized the urban villaging 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 products also received well overwhelming market response. We received over 2,000 subscription for the 571 units to be launched and 3.5x over subscription, reflects the strong demand of our project with an entry score at 91.22, which is the record high in Shanghai. The project contributed RMB 5.1 billion contracted sales for the company. Next. Wuhan Tiandi B12 launched 65 units with total GFA of 17,000 square meter in November. Without sales office offshore room, all the units have been subscribed on the day of launch through online than over RMB 1 billion property sales were achieved, and the average selling price keeps the highest in Wuhan market, which is around 58,000 per square meter. Next. The group's competitive advantages and the long track record in over regeneration has helped us to acquire new sites as a trusted partners. The latest example is Yangpu in Shanghai, as I mentioned earlier, where we have recently won the right to develop in partnership with Shanghai Yangshupu City Development Core Limited. The project is our heritage preservation and the development project that involves the development of high-end low-density residential community. Situated in the Yangpu Riverside zone, which is positioned as the pilot area for Internet industry development, the development will appeal to high-net-worth individuals, and the demand for the high-end residential development is expected to be on the rise. Next. The group has approximated 291,000 square meter of residential GFA, spending 6 projects available for sale and presale in 2023. A big portion is coming from Wuhan. Next. This slide has summarized our residential development lending and the saleable resources in the future. The total sellable amount is RMB 75.3 billion by the end of last year with attributable value at RMB 41.3 billion, RMB 22.5 billion saleable resources are in Shanghai and the rest RMB 15.8 billion are in Wuhan [indiscernible] of which RMB 40.1 billion come from Wuhan Chanjiang Tiandi. This project provides a strong residential sales pipeline for the company in the Wuhan market in the coming years. The total salable residential GFA is around 1.15 million square meters. Next. Besides the residential development land bank, we also have a strong commercial development portfolio in Shanghai and other high-growth cities. It will drive for future 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 commercial property portfolio was 2.73 million square meter, of which 59% were for office and 41% for retail. This is on my part, and I now will hand over to Allan, please.

Thank you, Jessica. Good evening. In this section, I will briefly introduce the performance of Changjiang Tiandi. And as you can see on the next slide, our total management commercial assets went up to RMB 82 billion. And most of the projects were located in prime locations in Shanghai. And though some of the properties were a little bit affected by the COVID impact. This year, we will have 3 new projects entering market 2 retail projects, including the Palong Tiandi and Hong Shou Fang, which we are open for business in mid this year, and we have the first office tower in our CPIC Xintiandi Commercial Center will be handed over to our buyers in mid this year. So the total portfolio went up a little bit comparing to last year. The next slide is a bit more introduction about our business segments. So among the 3 big segments, our biggest revenue contributor was the property investment, meaning the investment and ownership and operation of commercial properties. Right now, we have more than 75% of our revenue were from this property investment sector. And the number 2 is the property management sector, which is 19%. And the smallest one, also the fastest-growing one is the real estate assets management sector, which will into be more later on. So despite the heavy and the serious impact from the COVID last year. Next slide, we shared a bit more about our resilient portfolio and their stable performance. The total revenue was RMB 2.7 billion. And the profit, including the gross profit, operating profit and underlying profit were RMB 1.9 billion, RMB 1.4 billion and RMB 575 million, respectively. And our net assets went up to RMB 34 billion. And as Douglas mentioned before, our GEAR ratio has been maintained at a very low and very healthy figure, which is only 11.5% last year. Next slide, we will share a bit more about our business segment. Due to the COVID impact, our retail revenue dropped a little bit, which is actually 8%. But comparing to retail, our office and the other sectors remain at a quite stable growth rate. Our office revenue went up by 2%. And the real assets management went up by 40%. Our fee income from this sector actually already achieved RMB 130 million, and the total management AUM already reached RMB 30.3 billion. Next slide, we will introduce a bit more about the rental income. Right now, we have 2 major rental income source, which is the retail and office. As you can see, the portfolio actually has been maintained at a quite balanced percentage. Retail basically contribute around 60% of our rental income. As I mentioned before, due to the COVID impact, the rental retail dropped by 9%. But the office has been maintained at a very stable performance. The rental income went up by 4% last year. And as for the geographic distribution, more than 70% of our revenue came from our portfolios in Shanghai. And the second biggest city for us, it's the Wuhan, we have been strategically growing the portfolio in Wuhan in the past 5 years. Right now, we have more than 14% of our revenue were from -- was from Wuhan. Next slide is a bit more introduction about the recovering as we all know that in 2020 due to the serious impact from COVID, our average occupancy rate actually dropped a little bit to 89% as of December last year. And starting from last year until now, we have been adopted a lot of very supportive innovative marketing event and also very flexible rental and others other measures to help our talents to recover the business. We are very happy to see that in the first 2 months of this year, our talent sales and shopper traffic already recovered to over 19%, especially in February this year, our overall traffic for actually increased to a full recovery, which is 102%. And our non-Shanghai project already recovered to 110%. Office, actually, the average occupancy rate dropped a little bit to 89% as of end of last year, and we're happy to see that it's already went up to more than 90%. Next slide is a bit more about our operation, especially from the occupancy rate numbers. So as you can see from this chart, most of our portfolios were maintained at a quite high occupancy rate, mostly above 90%. There are only 2 special projects in this list. We have 1 project under renovation under AEI process now and which is the Xintiandi [indiscernible] 2. As you can see, the occupancy rate was only 60% at the end of last year. But we have already sold opened this project. Right now, their opening rate already went up to more than 87%. And the other property under process, it's the Nanjing IFC. So you can see from this list, our occupancy rate was 73% last year. So most of the rest of properties had a very stable occupancy rate. Last slide a bit more about our property management business sector and also our assets management sector. For the property management sector, we have a total portfolio under management slightly above 9 million square meter. And I think it's around 500,000 square meters more than last year. And for the Real Estate assess management, as mentioned before, the total management area already went up to RMB 30.3 billion, with a total GFA above 886,000 square meter. So as you can see from the pictures, for most of the strategic projects we have formed a very healthy and the long-term relationship with the big insurance company, including Manulife, China Life and CPIC and Governor. Well, the last slide into be more about our sustainable growth for next year. Well, the first strategy will be we will keep -- continue focusing on the premium clientele and unleash our brand as a lifestyle brand, the value to help our talent to achieve greater, higher sales. And the second one will be continued to build our customer-centric and also thriving communities. And number 3 is to leverage on the good relationship. We will continue to have our talents to capture the opportunities from the business recovery post the COVID where the last one is to leverage our competitive advantage in asset management to leverage also the assess line model to unlock the long-term investment potential and keep growing our asset management business in the long run. Thank you. This is all from me.

[Operator Instructions] The first question is regarding the sales targets, so I may invite Jessica to answer the question. So the first question is related, what is the contracted sales target for financial year 2023? And can you share a bit on the schedule of the presale of the launch of Taipingqiao lot 122, please?

Our sales target for this year is RMB 13 billion because although we have 291,000 square meter of residential GFA available for sales and presales this year, but 80% are from Wuhan. That's why the total sales volume will have a decrease. And for the lot Taipingqiao 112, and just having 122 does a prolonged presales?

Yes, that was the question. Yes.

Yes. The Taipingqiao 122 project has started construction just in this month. And according to the latest presale [indiscernible] policies, we plan to launch the project by the end of next year.

Thank you, Jessica. Next question is maybe of interest of a lot of the investors and analysts regarding refinancing. So I'll have to invite Douglas to answer, please. What are your plans to refinance the U.S. dollar senior notes due in second half of 2023? And do you -- will you look to issue offshore U.S. dollar bonds for refinancing or will you be focusing more on onshore issuance? And also what is the company's target leverage ratio and the target LTV for investment properties? Thank you, Douglas.

Thank you. So I -- maybe I will just answer by -- from a high level first. So the strategy for us moving forward is to focus more on onshore financing and reduce the amount on offshore financing for obvious reasons, cost onshore is cheaper. Liquidity is obviously much better than the offshore market. So we will continue to work to rebalance our financing to gear more towards onshore financing versus offshore. But this is rebalancing, of course, it will take time. We can't just switch everything overnight. So that's the direction. On the refinancing of the bond coming to this end of this year or other offshore maturity, we are working on with various banks on new financing and new financing packages. I think as of now, it's unlikely we will -- we issue a new U.S. dollar bond given the cost is so high. It's really just not feasible to try to issue a new bond. So I think unless the debt market improved significantly from here, I would not envisage that we will go out to the market to do a U.S. dollar bond anytime soon. So that's the overall direction that the company is moving.

Thank you, Douglas. One more question for you maybe, and there is a question about the JV partners. Because we're working with a lot of JV partners, is there any off-balance sheet liability that we need to be aware?

All our JV partners are substantial companies, majority of them, if not all of them, are they on enterprises OEs. So they have very, very good credit. We do not have any liability issues on any of our joint venture projects.