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

Good evening, ladies and gentlemen. Welcome to Shui On Land's 2025 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, 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 Xintiandi. We will start with the 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. We all know the macro picture is not very attractive. And with geopolitical uncertainties and then Donald Trump's trade war, tariffs, and then because of the uncertain economic outlook for the world and for China, consumer confidence has been affected. And for our industry, I think the liquidity concern is a major consideration for ourselves because basically, the finance market is almost shut. And then also the undergoing property sector adjustment is not finished yet. And so in the first half, I think it's quite remarkable that we can maintain our profitability. And we have really committed ourselves to the strong capital management. And then we have fully met all our financial obligations in the past 2, 3 years. And then our investment portfolio, both the office and the retail sector have shown encouraging performance. And we have made good progress in our asset-light strategy, which my colleagues will share in more detail with you later on.

Thank you, Chairman, for the opening remarks. Thanks for joining, everyone. This is Stephanie. I can start with just giving you a highlight of the first half results in 2025. Despite a very turbulent market landscape, the group secured a profit of RMB 81 million in the first 6 months with profit attributable to shareholders of RMB 51 million. Excluding the decrease in fair value of investment properties, the group's core earnings rose by 144% year-on-year to RMB 263 million, reflecting our strong operations and strong strategic focus. In terms of our commercial portfolio, our total rental and related income increased slightly to RMB 1.7 billion. Our retail portfolio showed very strong shopper traffic and retail sales growth, both at 10.5%, which considering the market backdrop is a real challenge and feat to our operational team. In terms of our capital management, -- we continue to be very prudent in our capital management strategy. We fully repaid our USD 490 million senior notes in March earlier this year. Our net gearing ratio stands very stable at 51%. In terms of a new project acquisition, we partnered with Tian An to acquire a site that was owned by Yong Ye right next to Greater Xintiandi Community right next to Lakeville VI. This is a great new addition to our high-end residential landbank and will continue to allow us to further develop our Lakeville brand across Shanghai. In terms of sustainability, despite the market conditions, we continue to plow forward in our efforts there. We were named CDP's 2024 Climate Change A list, one of the only real estate Mainland companies on that list. Panlong Tiandi won the 2025 ULI Asia Pacific Award for Excellence, honored for its outstanding innovation, community impact and excellence in architecture planning and sustainability. And lastly, CXCC, which is actually a new commercial project that will open later this year within Shanghai Xintiandi's Greater Xintiandi Community, T1 and T2, which is our 2 large office buildings achieved LEED Core & Shell Platinum and CA5 (sic) [ 5CA ] neighboring that achieved LEED Operations & Maintenance Platinum. So we continue to push forward in all of our sustainability efforts. So a few points about the China property market. As the Chairman mentioned, the macroeconomic and geopolitical environment remains very turbulent. The property market continues to remain very challenging. Despite -- with a weakened consumer confidence, national property sales volume and value both decreased by 3.5% and 5.5% year-on-year, respectively, showing quite a fundamental shift in the housing market supply and demand dynamics. While this is worrying, there are still some bright spots. For instance, within Shanghai, the luxury property segment, residential property segment remains strong. Demand remains extremely resilient. And this is an area where we think that we can continue to further develop and continue to landbank. The central government's meeting in July underscored the goal of high-quality housing with a focus on urban renewal, urban village redevelopment as well as building green infrastructure in smart cities. Again, I think this is actually playing into our competitive advantage. We are very much known for our urban renewal expertise and the ability to develop a sustainable premium urban communities. So I hope that this will continue to be able to help us in terms of developing our future land bank and expanding within first-tier cities in China. From a retail market perspective, new supply within most key cities that we're in continue to create more challenges in terms of retail leasing. But having said that, especially in Shanghai, leasing activity showed signs of stronger recovery, especially in the second quarter, with net absorption of retail space increasing and reversing some of the contraction seen in the first quarter. So what -- some of the observations that we're seeing is actually quite a fundamental shift in consumer spending behavior. So consumers now are no longer coming out just to shop. It's really about social gatherings -- they want to have new experiences. So whether it is in outdoor clothing, athleisure, more immersive retail and entertainment experiences, these are seeing strong areas of growth and including collectibles such as what Pop Mart is doing, these are categories that are actually growing quite strongly. Again, these are areas that we're pushing forward with along our retail portfolio, which is why I think Allan will share more later. We're seeing strong sales and traffic growth. From an office perspective, it continues to be a very soft market, both from increased -- continuous increased supply as well as contracting demand. So for this, from our office portfolio, occupancy -- maintaining a very high occupancy in our portfolio remains our top priority. Going forward, liquidity management continues to be our first and foremost goal. The market continues to be extremely choppy. The offshore financing market remains closed. But having said that, we will continue to leverage on our brands, both our community brand, Xintiandi as well as our luxury residential brand, Lakeville. We will continue to use these brands to strengthen our leadership position in Shanghai and to continue to expand hopefully into first-tier cities within the GBA. Lastly, just to give everyone a quick preview. On September 12, we plan to do a brand refresh or a brand launch of our Xintiandi Community brand. We hope that we will continue to be able to bring new experiences into the market, leveraging our experience in creating cultural and retail destinations. We hope that this will continue to help us continue our land bank in the future. So with that, I'll hand it over to Douglas.

Thank you, Stephanie. Let me give everyone a review of our financial performance in the first half. So on this page, you'll see the highlights. So we recorded revenue of just over RMB 2 billion, total net profit of RMB 81 million and profit attributable to shareholders RMB 51 million, of which our total rental income, including JV and associate investments were 1.78 billion. So it's a slight increase from the same period in 2024. So for the financial performance in the first half, maybe I can summarize in a couple of key points. One is that, as mentioned by the Chairman, we are still operating in a very challenging environment in the China property sector. So having the ability to record a profit in the first half, we think, is quite remarkable. And secondly, as I mentioned, our total rental income continues to grow overall. And this is beneficial to the company because it will provide a stable and solid recurring income base, particularly in the current business environment. Next page. So on the P&L income statement, I'll just highlight a few key points. As mentioned, revenue is just over RMB 2 billion, of which you can see property sales level was relatively low. This actually was similar to the same period last year in 2024 because in both periods, we did not have new residential completion or handover. So this -- as a result, this is quite a low level. The sales are primarily on inventories and also car park space. Rental income in the period was about RMB 965 million. There is a more noticeable decline from same period '24, primarily because of the reorganization of our KIC project completed at the beginning of this year. So from here on, KIC is no longer consolidated in our balance sheet. So the revenue was not counted in the first half as compared to this first half of 2024. Property management income dropped a little bit as well. Again, a similar reason. We have property management income from KIC, which is no longer consolidated in the first half. And then hotel construction income, et cetera, is pretty standard from prior years. So our gross profit is RMB 1.37 billion. Our group GP margin is stable at about 66%. Other income is primarily interest income. There has been a more noticeable decline in interest rates in China. So this category of income also dropped quite a bit for the group in the first half of the year. Expenses are pretty typical on selling, marketing and general and administrative. I will talk a little bit more about the fair value of our IPs later on. And other gains and losses is basically comprised of various different categories of one-off items. So it's not a huge amount overall. We do not -- similar to our consolidated level, we do not have major residential completion within all our JV and associate companies. So that's why you see the JV contribution is a slight loss of RMB 73 million. Overall, our finance costs continue to come down. If we look at just the interest -- net interest cost itself, it's down by almost 22% from same period last year. This is a combination -- resulting from a combination of a further reduction in our total debt and also our pivot towards onshore financing and repayment of our offshore financing in the past year. Next page. So you can see that at the bottom line, after-tax profit for the period is RMB 81 million, as mentioned, attributable to shareholders is RMB 51 million. Next page. So some of the balance sheet metrics, we currently have total assets of about RMB 83 billion with total debt of RMB 25.7 billion. So as compared to the end of 2024, our total debt was just about RMB 30 billion . So there is a decline of about 14% in total debt during first half of this year. So we continue to reduce our overall debt, including repayment of our U.S. dollar bond in March -- earlier in March this year. Total cash on hand is about RMB 5.5 billion, and net debt also declined from end of last year by about 9% to just over RMB 20 billion. Our gearing is stable at about 51% compared to the end of last year. If we look at our asset base, the -- currently, our book value is about -- sorry, next page. So currently, our total net asset, our book value is about RMB 40 billion. So this is a slight decline from the last couple of years, but you can see it still remained at a fairly stable level compared to the last 5 years. And all of our total net assets, about 65% IP related in both consolidated and also JV associated investments. Next page. So I mentioned about our IP valuation. Overall, if you look at the end of the table, you can see grand total value is at RMB 98 billion, of which the group's share is about RMB 62 billion. we have about a 0.4% decline in the overall value of our investment properties. The decline is primarily on our office exposure. As you all know, the office market in China are still undergoing very severe pressure, which I'm sure Allan will mention a bit more later on. So the decline in valuation is primarily relating to our office properties in the portfolio. Next page. This 2 charts just give you a reference to changes in our net gearing and net debt over the past 10 years. And you can see that currently, our net debt at just over RMB 20 billion is at a relatively low level over the past 10 years and also a more noticeable decline from '23 and '24. So as I mentioned, we continue to try to reduce our overall debt in order to ensure that we have sufficient liquidity. Next page. So our maturity wall, we believe, has peaked. You can see graphically on the first chart compared to '23 and '24 in the coming 2 years, 2026 and 2027, we have relatively low level of debt maturity. If we look at this year's maturity as of the end of August, we have basically repaid or refinanced about 87%, 88% of this year's maturity. So we can say that the maturity repayment for 2025 is pretty much done, and our focus will be on 2026. As you can see, the total is about just over RMB 6 billion. Next page. So you can also see the change in our capital structure over the last few years. As of August, since 2021 and as of August, we have repaid in gross amount of RMB 46 billion of our offshore debt. In net amount, that's RMB 26 billion. So clearly, because of the shutdown in the offshore market, we continue to use our internal resources to repay our offshore liabilities. And this is done through pivoting the group's financing from offshore to onshore. So in the middle chart, you can see that from about 80% offshore financing, we have now reduced that reliance to just about 20%. So we think that the pivot towards onshore financing is pretty much done. We don't expect the offshore financing ratio will go to 0. So I think from here on, it's really just probably maintaining or slightly reducing further our offshore exposure. And then the average cost of debt also has come down to a more attractive level over the last 5 years. Our current average cost of debt, excluding fees and other one-off expenses is just at 4.3%. And this is a combination of reducing our overall debt and also particularly reducing the offshore debt. Next page. So finally, just on our capital management strategy going forward. As Stephanie mentioned, ensuring liquidity continues to be our #1 priority. So that hasn't changed, and we will continue to focus on that. In terms of our business, which Jessica and Allan will talk a bit more, we will continue to launch new sales in Shanghai and Wuhan in the coming months. And also, we do have new commercial properties completing and contributing more rental income. So this hopefully will continue to give us a good solid recurring income base going forward. So I'll stop here and pass over to Jessica.

Thanks, Douglas. So I'm glad to share our latest update on property sales and development. Let's start from our property sales performance. For the first half of 2025, our contract sales have increased by 457% to RMB 3,473 million. This includes residential property sales of RMB 3,290 million and commercial property sales of RMB 183 million. The substantial increase was mainly from the presale of townhouse with a GFA of 6,124 square meters in Shanghai Taipingqiao Lakeville VI. In addition to our contract sales, we've also secured RMB 699 million in subscribed sales, which will be converted into contract sales in the coming months. Overall, we've locked in total sales of RMB 17.521 billion ready for delivery to customers and revenue booking in the second half of 2025 and beyond. Next. Going forward, we have about 131,000 square meters of residential gross floor area available for sale and presale in the second half of 2025. This includes villas and townhouses in Lakeville VI and Riverville and the other 3 residential projects in Wuhan Next. So now let's have a look on our existing residential development landbank and the major saleable resources in the future. By June 2025, our total saleable resources stands at RMB 48.6 billion with an attributable value of RMB 24.9 billion. Notably, RMB 10.4 billion of these saleable resources are located in Shanghai, while the rest are primarily in Wuhan. Next. So besides the residential land bank, we've also maintained a considerable commercial development in major high-growth cities, which will drive further growth in the group's rental and related recurring income in the future. The total GFA of this commercial development portfolio is 1.9 million square meters with 55% of office use and the rest of 45% for retail. Next. So now let's move to the property market and the policy side, and I'd like to share some of our observations and the company business development strategy going forward. Let's look at the policy landscape first. Since early this year, the central and the local governments have been vigorously promoting urban renewal and the development of high-quality housing while facilitating the transformation and advancement of new development model for real estate sector. In the first half of this year, especially since July, a series of meetings of the central government have continuously emphasized these 2 priorities. The state council and the relevant ministries have also successively issued a range of implementation guidelines. Moreover, the once a decade Central Urban Worker Conference has further clarified the directions and priorities of urban development in the coming years. At a local level, various governments across the country have been stepping up efforts to advance urban renewal and to stabilize the property market. Shanghai is at the forefront and has announced a new 3-year urban renewal plan while launching extensive initiatives to expedite urban village renewals starting in 2026, aiming to accelerate the high-quality development of the city. We believe that SOL's brand and expertise in urban regeneration and high-quality property development will enable us to continue seizing attractive business opportunities in the new development cycle. Now let's update you on our observation regarding Shanghai's residential market in this year. In terms of the economy, Shanghai's GDP still grew by 5.1% in the first half of the year despite various external challenges. Meanwhile, Shanghai's land market remained active with land prices continue to rise. In addition, it's also observed that Shanghai's high-end residential market continues to attract high net worth buyers and the continuous inflow of returned overseas talents and high-end professionals has also provided strong support for the demand for high-quality housing. Most notably, Shanghai's luxury housing market continued to outperform. And in the first half of 2025, 313,000 square meters of housing priced above RMB 30 million per unit were sold, which accounts for 58% of all luxury housing sales in China top-tier cities. Against such a policy and the market backdrop, we will continue to steadily advance our key business strategies as follows. Firstly, we will continue to focus on top-tier cities with priority in Shanghai. With ongoing headwind in current market, the company will continue to capture suitable opportunities in a selective manner while maintaining financial prudence. Secondly, we will continue to advance and implement our best-in-class product strategy anchored by the Lakeville brand by leveraging the Xintiandi community and our differentiated competitive advantages, we will seize opportunities in the high-end market arising from the development of high-quality housing and continuously strengthen the company's brand influence in core markets. Thirdly, we will continue to explore external capital and expand strategic partnerships to grow the business through the SLI model until the market correction comes to an end. We believe this strategy will help drive the company's sustainable development and growth towards the market new normal. Next page. So among those major residential development pipeline projects, I'd like to highlight 2 scheduled for sales in the second half of this year. The first one is Lakeville VI, the first launch and its strong sales of those units in the super high-rise tower in September 2024 reaffirmed the Lakeville brand's leadership position in the luxury housing market. The upcoming villas and townhouses blended traditional Chinese elegance with [ Taipingqiao ] living in our primary city co location. The first batch of these products have attracted significant interest from high net worth buyers against and within a week of obtaining the presale permit in Q2 this year, all the 9 units have been sold. We will try to update further presale application procedures for those rest units, and we aim to complete construction by Q2 2027 with handovers beginning in Q4 2027. The second one is the final phase of the residential development in Wuhan Tiandi, which is a mature integrated community with high-end residential, high-quality commercial and office. After 2 decades of development, it becomes a landmark in the city. The final phase remains attractive in the market and will be launched in Q4 this year. Project completion is expected by Q3 2027 with handovers in Q4 2027. So lastly, next page. So lastly, I'd like to update you on our latest asset-light business development and major projects. The success of Lakeville development, along with recent well-known projects like Panlong Tiandi and Hong Shou Fang have further demonstrated SOL strength in urban regeneration and community building and operation, which has also attracted many potential partners to engage in discussion with us on various asset-light cooperations. Currently, we have confirmed 3 major asset-light development projects as presented here. Two of them are high-end residential projects located in Great Xintiandi Community, which will be developed and operated under the Lakeville brand. The first one, Yong Nian Li project is a newly acquired high-quality project through partnerships with Yong Ye Group and our new partner, Tian An Group. This project has a total GFA of approximately 217,000 square meters including 159,000 square meters of high-end residential space and 58,000 square meters of commercial properties. We hold a 15% interest in the project with the relocation fully completed. The project construction is set to commence in Q1 2026 with completion expected by 2030. The second one is Yong Xin Li project, which is an asset-light project where SOL provides management service to the owner Yong Ye Group, featuring an estimated 105,000 square meters of residential space and 57,000 square meters of commercial areas. The project is under preparation with completion by 2031. These 2 projects will further enhance the attractiveness of Great Xintiandi Community, allowing us to strategically expand the Lakeville brand and products in the city core area while driving further growth of the business in Shanghai. The third project is an urban village renewal project in partnership with the Shanghai Fengxian District government. This mixed-use community encompasses about 326,000 square meters of residential space and 95,000 square meters of commercial area. This project will started in January and acquired its first residential land parcel in April this year. SOL hold a 5% interest in this project and will provide a management service across the project development, sales, marketing and asset management. We believe these pipeline projects are good examples on how SOL could best leverage our brand and expertise to grow the business in current market, and we will continue to explore potential collaboration opportunities with more business partners while keeping involving the models. We will share more on this in the future. That's all my sharing today, and thanks to you all. Now I will hand over to Allan.

Thank you, Jessica. Good evening, everyone. In this section, I will briefly review the performance of our commercial assets. So as mentioned before, we have been strategically focused on the Shanghai market. Because of this strategic focus, our commercial assets located in prime locations has been growing. So the total valuation of the completed commercial assets already reached RMB 79 billion. And with the progress of the asset-light strategy, the new adding of the 3 strategic projects in Shanghai further increased our recurring income base, at the same time, further strengthened our leading role in the Shanghai market. My next slide is about the commercial property performances. So despite the very challenging market environment, the group's investment property, including the JVs and associates demonstrated resilience with total rental and related income modestly increased by 1% to RMB 1.781 billion in first half of this year, among which our retail performance has been proven very resilient. The average occupancy rate remained at a very stable 94%. And besides the occupancy rate, the overall sales and shopper traffic increased year-on-year by double-digit, 10.5%, which is a very, very challenging and a very outstanding performance in first half of this year. At the same time, the recent opened project, Panlong Tiandi and Hong Shou Fang continued to demonstrate a very strong performance. I will introduce a little bit more about this one. For the office sectors, our mature Shanghai office portfolio maintained a very high average occupancy rate at 90% because of the differentiation of our refined office leasing strategy and also the quality services. As mentioned, we have new -- we have 2 new opened project, which is the Panlong Tiandi and Hong Shou Fang. So both projects entered the second open year. And as you can see from the slides, next slide, please. The total talent sales increased by 16% last year for Panlong Tiandi. And besides the increase of the talent sales, we recognized a lot of recognition and also award from third parties. Besides the ULI Asia Pacific Award for Excellence, we also received an award. This project was named as the National Tourism Leisure Street blocks by Ministry of Culture and Tourism. And for Hong Shou Fang, talent sales also increased by more than 12%, and we also received a lot of good recognition in the media, especially for the social media. Well, in second half of this year, we have 2 POD projects under preparation for open. The first one will be the CXCC retail. We plan to soft open this project in September this year. So this project will provide a very interesting and very unique open street style with all weather protected by the biggest Skylight canopy in Shanghai. And hopefully, we will add wellness and City Pulse and the cultural content to the Greater Xintiandi area. And hopefully, we can activate both the East and the West side of the Greater Xintiandi community, as mentioned before. And so far, we have secured 60% of the GFA. And we plan to soft open in September this year and the grand open will be December this year. The next [ BOD ] project is the KIC Park in Wuhan. And located in the business district, we hope this project will bring the first park tiandi open street style project in the whole Wuhan. And so far, we have already secured 70% of the retail areas. And among all of the secured tenants, we have more than 40% 1st in store in Wuhan or Optical Valley area. And we -- at the same time, we have close to 30% high-quality customer stores. So this year has been not easy, very challenging. Later on in second half of this year, we will continue to focus on the strategies in retail and office. So for retail, we will keep stabilizing the healthy operations, all of the measures we initiated in the first half has been proven effective, and we have already seen very good results. So we will continue to drive shopper traffic and also to boost the talent sales through focus on talent-centered operation synergy and refined operation management, innovative market event and own branded IP and also strengthen the customer perception of the Xintiandi style service and experience. So hopefully, like I mentioned before, the 2 new openings in second half will further add to our new income stream. Office market has been proven very challenging. We will maintain occupancy rate as the top priority. So second half of this year, we will continue to push up the occupancy rate through very flexible pricing strategy and also a very holistic offering strategy that offers sustainable work solution by providing value-added service on top of the high-quality spaces. And the number three strategy will be focusing on the anchor tenants renewal and new leases.