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

Good evening, ladies and gentlemen. Welcome to Shui On Land's 2024 for 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, our Vice Chairman; 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 Land CMD. We will first start with a presentation by the management, 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 please invite Mr. Lo to start with some opening remarks. Mr. Lo, please.

Good evening, everybody. Last year hasn't been easy at all for everybody including ourselves. We all have to face economic transition, geopolitical uncertainties and subdued consumer confidence in the mainland. But nevertheless, we have been able to maintain profitability. Shui On Land reported a profit of RMB 810 million for the year, with profit attributable to shareholders of RMB 180 million. And the directors have recommended that the final dividend is HKD 0.036 per share. We have basically met all our financial obligations last year. And actually, since 2021, we have repaid RMB 45.2 billion in foreign loans. And we have been relentless in our efforts to control our capital and our liquidity. But last year, we've also seen to our pleasant surprise, strong sales at Lakeville 6. And later on, Jessica will give you more information on this. And then, of course, our quality commercial portfolio still generating increases for us. The China property market is undergoing a structural correction. Of course, I think after the past two and three years of correction, I think we are coming to the bottom. But there's two factors that will continue to impact on the property market. One is uncertainty facing the world with Trump's tariff policy. It could drive the world into a recession. And then the other thing is the indebted developers, how will they deal with their debt issues. There's still uncertainties faced by corporations and individuals. Particularly the financing market is still not back to normal. I think mainland banks are focused on making sure that the developers will deliver their flats and foreign banks, I think, are all very cautious on the China property market. But Shanghai is high-end residential market, continues to perform well. And again, Jessica will give you more details on that. And we will continue to prioritize on our asset-light strategy going forward. Let me stop there, and my colleagues will give you more information.

Thanks, Mr. Chairman. Hi, everyone. This is Stephanie. Thanks for joining our analyst briefing. As the Chairman already shared a little bit more about our profit in 2024, I won't repeat that. But here, I'd just like to highlight a couple of initiatives in 2024. Firstly, the successful sales launch of Lakeville 6, in Shanghai Xintiandi, was a very pleasant and happy surprise for all of us. This is naturally based on years of work, decades of building up our Lakeville brand in Shanghai. So we sold the first phase of Lakeville 6. There were 108 units that were sold through in one day. And this delivered a contract sales of basically close to RMB 12 billion in one day. And this set a new ceiling for sales in Shanghai. Secondly, we are going to expand our urban retreat community. We will -- have confirmed that we will proceed and commence construction of our Zhaojialou project by phase starting this year. Secondly, we've also signed two large-scale mixed-use development community management contracts in Shanghai, namely Yong Nian Li behind Lakeville 6 in Shanghai as well as Feng Xian nan Qiao, expanding our asset-light strategy and maintaining very prudent capital management. From a commercial portfolio point of view, our commercial portfolio yielded very solid rental growth. Our total rental and related income increased by 9% year-on-year despite the market downturn and decrease in consumption sentiment. This was supported largely by additional contributions by our new projects opened in 2023, Panlong Tiandi as well as Hong Shou Fang in Shanghai. These actually represent a very new and very differentiated, more lifestyle-driven and experiential-driven type of retail projects that we are very confident about. Lastly about prudent capital management. This has always been the same tone for us in the past several years. We have fully repaid the $493.5 million senior notes in August 2024 and as well as the USD 490 million senior notes due this year on the third of March. Our net gearing ratio remains very stable at 52%. Our cash and bank deposits totaled RMB 7.7 billion. And as of the 27th of March, as the Chairman mentioned, we have repaid a total of RMB 45.2 billion of offshore debts. And this has been a very big effort by the management team to ensure the strong liquidity of the company and maintaining very prudent capital management. Secondly, just a few quick highlights on sustainability. Despite the market downturn, we continue to push forward on our sustainability efforts towards our 2030 goals. We achieved a 51.3% reduction in Scope 1 and 2 carbon emissions intensity and a 23.3% reduction in tenant emissions which are Scope 3 emissions from the 2019 base year. Shanghai Taipingqiao's community has transitioned to a 100% renewable electricity since July 1 last year. And this is the first commercial complex in district in Shanghai to do so, paving the way for us to fully achieve a net zero district and community in Shanghai City Center. Also worth mentioning is that we've received a high recognition for sustainability efforts in the Climate Leadership Award from CDP and inclusion on the Fortune China ESG impact list. Just a few words about the continuing market challenges. Naturally, 2024 was an extremely challenging year. China's residential market downturn continued to persist. But the rate of decline has slowed in the second half, and I think largely due to many supportive measures announced by the central government that were shoring up confidence. And in recent days, actually, you've seen many successful land bids, land sold at premium, whether in Shanghai or Hangzhou. So you can see the market confidence slowly building up. Specifically in Shanghai's high-end luxury market in residential, that market continues to outperform and has strong demand. Versus 2023, the high-end transactions increased by 150% year-on-year. So that is actually a very encouraging signal and lots of opportunities for a company and a brand like ours. From a retail perspective, because the consumer confidence has been quite dampened, consumption, I think, is shifting actually. We're seeing some new trends in consumer consumption spend. A lot more spend is occurring on more experiential based, and sports kind of culture and leisure-based experiences. So for us, projects like Panlong Tiandi and Hong Shou Fang, where we can integrate cultural heritage, as well as natural heritage into one large project where you can come and play. You can do sports, you can experience art museums like these types of projects, we really think are green shoots going forward and is a new type of consumer spending pattern. From an office perspective, this continues to be somewhat of the perfect storm. There's still a very large supply overhang paired with a paring back of demand because of the macroeconomic environment. So from that point of view, we continue to see very strong downward pressure on our office portfolio. But having said that, looking forward, as I mentioned earlier, we are undertaking some large-scale new asset-light projects. I think this will be a new way of operation for us, where we can land bank and continue to enlarge our portfolio without putting huge pressure on our financial balance sheet. So from that point of view, we will continue to expand our Xintiandi communities as well as our Lakeville brand and leverage this brand upside in the market upswing going forward. With that, I'll hand over to Douglas.

Let me just run through our 2024 financial results quickly. Here on this page, you can see the key KPIs, revenue, RMB 8.1 billion, net profit RMB 810 million. Property sales is on the consolidated level, RMB 4.3 billion. Our total rental income, including the JVs and associates, was RMB 3.54 billion. Profit attributable to shareholders, RMB 180 million. And as the Chairman mentioned, our Board recommends to pay a final dividend of HKD 0.036 per share. A couple of points here. One is on the decline in revenue and profit is primarily driven by lower level of residential completion and handover in 2024 compared to '23. And secondly, on the rental income side, we actually had a very, very strong performing year last year. I'm sure Allan will talk a little bit more later on, but if we include all our project under management, including the JVs and associate investments, we recorded a 9% year-on-year increase on rental. So we think that was a very, very strong year last year despite the challenge in the commercial market. On the P&L next page, I won't go through all the line items, just a few highlights. Overall revenue, RMB 8.1 billion we already discussed, including property sales, rental income. Rental income on just the consolidated level is RMB 2.45 billion. And then gross profit RMB 5.2 billion with a GP margin of 64%, which was higher than 2023, mainly because of the composition of the revenue was more driven by rental last year compared to 2023. Other income was generally interest income. And then the expenses -- operating expenses were all quite typical and in line with prior year's amount. I'll talk a little bit more about IP valuation. Overall, we had a RMB 200 million decrease in the valuation of our portfolio. And then I think the other line items are pretty straightforward. On finance costs, overall, it's RMB 2 billion, a 6% year-on-year reduction but if we exclude the net exchange loss, the net interest cost was only RMB 1.9 billion, which was about a 10% decline from the prior year. And in the footnote, you can see that our average cost of debt actually came down quite a bit in '24, average of 4.9%, excluding fees and costs compared to 5.7% a in 2023. So we did have quite a bit of cost savings on the overall financing, mainly because we repaid a lot of more expensive offshore debt and replaced with onshore financing. Next page. So profit before tax is RMB 3.15 billion and then after tax is RMB 810 million, attributable to shareholders is RMB 180 million. Next page. So on the balance sheet matrix, just a few key things. Total assets is about RMB 92 billion with total debt of roughly about RMB 30 billion. We have cash -- we had cash on hand of about RMB 7.7 billion. So our net debt is just over RMB 22 billion last year, which was slightly down from 2023, while maintaining the gearing ratio of 52%. Next page. So you can see the total asset at RMB 92 billion at the end of last year. You will see that it's declined a little bit more from the year before. This is primarily because of the consolidation of the KIC project which we completed at the end of last year. So it's no longer accounted in -- we no longer consolidate that project, which had a value of about RMB 8.5 billion, and our share of that project is about 46%. So that accounts for a lot of the decline in total assets. If we look at the overall book value of our net assets of the company, it was quite stable, in 2023, the book value was about RMB 44 billion. And at the end of last year, it's about RMB 42.6 billion. So overall, it did not have a lot of impact on the NAV of the company. Next page. So on the IP valuation, you can see the grand total at the bottom of the table is the total value of our portfolio is just over RMB 100 billion. The company's share is about RMB 63 billion -- RMB 62.5 billion. So that represented a 0.6% decline year-on-year. If you look through the list, you will see both increase and decrease in the fair value of the individual properties. Most of the more notable decrease last year was due to larger component of office space in that project due to the pressure in the office market. We also had some pretty decent increase in valuations such as Panlong Tiandi and Hong Shou Fang because of the strong performance of these two newly opened projects, which Allan will highlight later on. Next page. So this is just graphically showing you the net gearing and net debt change over the years. I wanted to just highlight on the lower chart, the net debt. At the end of last year, we were at RMB 22 billion, which basically brings us back to the level at 2020 before the crisis hit the China property sector. So despite all the volatility and liquidity pressure that we have witnessed in the past 3.5 years, it actually did not have a material impact to the overall debt on the company. So we thought that was a point to note. Next page. So as the Chairman and Stephanie mentioned, obviously, we all know that last few years was extremely challenging for China property industry, including for Shui On, but I'm happy to say that we have actually successfully steered past our company's debt maturity wall. You can see on the chart on the left-hand side that going forward, the rest of '25 and 2026, 2027, our debt maturity will progressively become less and less compared to last couple of years. And out of the RMB 8.3 billion of debt maturity this year in 2025, we already repaid about 70% or about RMB 5.6 billion. So what is remaining is not significant. On the right-hand side chart, we refer the breakdown between first half and second half. All of the RMB 7 billion, first half maturity, we already repaid RMB 5.6 billion. So it's about 80% of first half maturity. So we think that we do have a bit of breathing room in the coming 6 to 9 months at least, given that the overall maturity is relatively light, and we should have a good handle on or liquidity in the near future. Next page. So overall, let me just close by saying, of course, the management's focus has been very prudently manage our capital structure and our liquidity in the last few years. That will continue to be the case. I think of note on the chart in the lower right-hand side, you will see that we have successfully reduced reliance on offshore financing quite a bit. At the end of last year, our FX debt ratio was about 38% of total debt. After the repayment of our March bond this year, that ratio will come down to below 30%. So a vast majority of our financing now is onshore. So hopefully, that will protect us from a lot of the volatility we have witnessed in the offshore market in the future. So with that, I'll hand over to Jessica on the residential sector.

Okay. Thanks, Douglas. I'm glad to share our latest update on property sales and development. And our contract sales for 2024 have increased by 32%, reaching RMB 15.055 billion. This figure includes residential property sales of RMB 14.55 billion and commercial property sales of RMB 502 million. The standout performance, as mentioned by Stephanie, Lakeville 6 was launched just last September. All of 108 units of its super high-rise tower were sold out on launching day, generating nearly RMB 12 billion in country sales, setting a new record for Shanghai's residential market with an average selling price of RMB 10,200 per square meter. In addition to our country sales, we've also secured RMB 795 million in subscriber sales, which we expect to convert to contract sales in the coming months. Overall, we've locked in total sales of RMB 15.394 billion, ready for delivery to customers and the recognition in 2025 and beyond. Next, looking ahead, we have about 176,300 square meter of residential GFA available for sale and for sale in 2025 and beyond. This includes villas and townhouses in Lakeville 6, Riverville and other three residential projects in Wuhan. Next. Now let's take a look at our existing residential development land bank and the future sellable resources. By the end of 2024, our total sellable amount stands at RMB 51.2 billion, with an attributable value of RMB 26.9 billion. Notably, RMB 11 billion of these sellable resources are located in Shanghai, while RMB 40.2 billion are primarily in Wuhan. Next. But this is not all, our commercial development portfolio is also thriving in high-growth cities, which will drive further rental growth in the future. The total GFA of our commercial property portfolio is 1.95 million square meters, with 54% for office use and 46% for retail. Next. Now let me share with you about our market observation and the development strategy. Firstly, we are seeing some encouraging signals from the recent two sessions, regarding the property sector. The latest government work report emphasized stabilization that declined by easing restrictions and accelerating urban regeneration to boost real estate demand. While it may take time for these effects to fully materialize, they are certainly positive signs for market stabilization. Second, although the national real estate market continues to contract, top-tier cities are showing early signs of recovery. By late 2024, first-tier cities began to rebound with home pricing turning positive month on month in November and the second-tier cities following in December. This trend points to a broad market stabilization. Shanghai's residential market in particularly, remains resilient and is bouncing back with supportive policies. The September 27 policy had a significant impact, leading to steady growth in new home sales since last October. The secondhand market is particularly hot with monthly sales exceeding 20,000 units from October to December 2024. This resurgence is even influencing the land market, while 2 prime plots recently sold for over 30% premiums above their starting price. Next, sorry, sorry, go back. So given these trends, our strategy is threefold. First, we will continue to focus on top-tier cities. We will prioritize opportunities in Shanghai, selectively capturing the best prospects. Secondly, we will continue with our best-in-class product strategy, leveraging our Xintiandi community and the Lakeville brand, we will strengthen our competitiveness and brand influence in the middle to high-end segment. Third, we will continue to pursue an asset-light strategy until the market correction is completed. We will innovate our business model, expand external capital and form strategic partnerships to drive sustainable growth. We are confident that this approach will allow us to capitalize our evolving market conditions and maintain our competitive edge. Next, now let's take a closer look at Shanghai's high-end residential market. In 2024, luxury new home sales in Shanghai nearly doubled. The high-end housing market experienced a robust supply and active transactions. As illustrated in the chart below, sales of units priced above RMB 30 million surged with over 2,500 units sold, accounting for more than 60% of the national market. This surge was driven by increased supply and strong demand from high net-worth individuals. Following the September 27 policy, further easing measures has bolstered consumers' confidence. High-end residential projects in core areas of first-tier cities have seen overwhelming responses recording a significant sales growth in 2024. Nationwide, sales of high-end home priced above RMB 30 million in the four first-tier cities increased by 17% year-on-year. Next, as I mentioned earlier, the Shanghai property market is demonstrating stable demand and resilience even in the face of a broader market downturn. Notably, the sales of our Lakeville 6, super high-rise have set a remarkable record in Shanghai. Looking ahead, we are excited about the next phase of Lakeville 6 which is set to launch in late 2025. This upcoming release will feature a 36 low-density heritage-inspired villas and townhouses. Many of our loyal customers are eagerly anticipating this project, and we expect it to perform exceptionally well, contributing significantly to our sales revenue. We anticipate completing construction for the whole project in Q2 2027 with handovers beginning in Q4 2027. In addition, Riverville stands out as another high-end low-density residential offering that we plan to promote steadily in 2025, located on the left bank of Huangpu River in the Yangpu riverside zone. Riverville showcases heritage preservation through its villas and townhouses beautifully integrating the Lakeville brand with the precious natural resources of the river front. This project will help extend the reach of the Lakeville brand into broader markets. We expect to complete the construction in Q3 this year with handovers starting in Q4 this year. Given the current market environment, we will adopt our prudent approach to expanding our business, maintaining our focus on first-tier cities, especially in Shanghai. Zhaojialou is another exciting Urban Retreat project following the success of Panlong Tiandi located in Minhang District, Shanghai. This urban village renovation project is a partnership between Shui On and the local government. Here, we are leveraging our expertise in urban regeneration, culture preservation and community operation to create a vibrant destination that blends cultural heritage with modern living. The project has an estimated GFA of 223,000 square meter with 150,000 square meters of residential and the 73,000 square meters of commercial and culture. We target to complete the construction and start to operate the project in the second half of 2030. Next, the Lakeville brand's strong reputation and the successes like Panlong Tiandi and the Hong Shou Fang have attracted different kind of partners to collaborate with us on asset-light projects. This presents us with opportunities to showcase our expertise in urban regeneration and the community operation. Looking ahead, the asset-light model will be a key driver of our business development. In 2024, we entered into two new partnerships as part of this strategy. One is a high-end residential project under the Lakeville brand in the Shanghai Xintiandi community collaborating with Yongye Group with an estimated 105,000 square meters of residential space and 50,000 square meters of commercial area. The other project is an urban village renovation project in partnership with Shanghai Fengxian District government, which is a mixed-use community with about 326,000 square meters of residential space and 94,600 square meters of commercial area and other facilities. This project will started -- was started in January this year. In both cases, our group will provide a professional management for development, sales and marketing as in management and operation. So thank you for your attention. Now I hand it over to Allan.

Thank you, Jessica, and good evening, everyone. In this section, I'll quickly brief the performance of our commercial sectors. Well, my first slide is about our portfolio. We have been focused on investing in the high potential gateway CTC, especially in Shanghai. With the newly adding of our CPIC Xintiandi Commercial Center, our commercial assets located in prime location in Shanghai already reached RMB 79 billion. We belive that the scale of this portfolio gives us a very unique position to leverage on our brand, our strengths and our resource to achieve a sustainable growth. Next slide is a little bit more about the growth. So the total of rental and related income of our commercial property increased by 9% to RMB 3.5 billion last year. Most of the income growth are from the retail and office sectors and thanks to every colleague's effort and contribution, our average occupancy rate remained very stable at 90% -- 94% at the end of last year. And also our overall sales and shopper traffic increased by 9% and 12%, respectively. And as mentioned before, our recently opened up Panlong Tiandi and Hong Shou Fang have been maintained at a very stable and successful opening which contribute a lot in terms of our rental growth. For the office sectors, our average occupancy rate remained at above 90% which is very helpful for us to have attracting good tenants. And also in the last year, we have been focused on a very refined office leasing strategy to allow us to focus on the big tenants through providing high-quality services in our office portfolios. Well, my next slide is about the two recently opened projects, I just mentioned, Panlong Tiandi and Hong Shou Fang. These two projects are the best showcase of Shui On Land's reputation of creating new social landmarks. Well, Panlong Tiandi has been maintained at a very strong growth and a very healthy operation. In the last year, we received more than 18 million foot traffic and also a lot of recognition from the media and from third-party authorities last year. And Hong Shou Fang even though it's a very small project, we have been successfully achieved the reputation of the unique positioning, especially in the ideal neighborhoods with a very refined atmosphere. And we also received more than 12.4 million traffic in the last year and also a recognition from the media and third-party authorities. Next slide, say, it's about the off sector. I think we all know that office has been a very, very competitive and challenging market sectors. And unlike most of the homogeneous products in the market, we initiated our breakthrough in the software services. So starting from three years ago, we already successfully launched our holistic offer, which means a package of different services in different stages of office journey. And also, we launched a very hybrid solutions for those that are companies and also the individual workers. Plus very customized office-ready solutions and a sustainable solution for our office tenants. So all of these breakthroughs in the software services have been proven very successful and allow us to keep attracting reputable tenants. So in last year, we successfully signed more than 230,000 square meters new lease, among which we have more than 90 tenants, big tenants. Meaning that they rented to like more than 2,000 square meters office spaces. Well, the next slide is about the pipeline project CPIC Xintiandi Commercial Center, which is located in the Xintiandi area. And the overall position is about the commercial complex with three office towers, plus a street style, all-weather shopping and the leisure and entertainment area. So the total area for the offices is a little bit above 190,000 square meters. The retail portion is 81,000 square meters. So far, we have completed the construction for all of these projects, and we launched the first tower in Tower 3 in 2003 (sic) 2023. And right now, the occupancy rate for this Tower 3, it's 100%. And Tower 2 was completed in 2024. Right now, I think the occupancy rate leased with anchored tenants so was already 80% at the end of last year. Right now, we are focusing on the T1 and also the retail portion which aims to be opened for operation in this year. Well, my last slide is about our strategic initiatives for this year and going forward. And we will continue to strengthening our three growth engines to achieve sustainable and profitable growth goals. Among all of the three engines, we will keep driving our steady and organic growth in the assets under management. And we will try to strive for every successful open for the new pipeline projects. At the same time, we will continue to expand our pipeline more through asset-lite strategy 2.0, as mentioned by Jessica before. And in the retail sector, after a whole year fighting for the occupancy rate, at the end of last year, our occupancy rate was already 94%. So this year, we will focus on driving the traffic and also help our tenants to boost their sales. And for the office sector, we will still -- we were trying to stick to the original -- the strategy for last year, occupancy rate as our first priority to keep pushing up our occupancy rate. So this is all my sharing.