Singapore Technologies Engineering Ltd (S63) Earnings Call Transcript & Summary

Welcome to ST Engineering's full year 2019 results briefing. To begin today's briefing, Mr. Cedric Foo, Group CFO, will present the group's performance for the financial year ended 31 December 2019. Following that, we will invite our management for a Q&A session. Without further delay, I'll hand over to Cedric. Cedric, please?

A very good morning. Welcome to ST Engineering's financial year 2019 results discussions. Let me bring your attention to the first slide. In 4Q 2019, the group delivered a revenue of $2.29 billion. This is an increase of 29% year-on-year. And net profit was recorded at $169.5 million, a 36% increase over the same period last year. Now let's turn on to the full year results. For full year 2019, the group recorded a revenue of $7.87 billion and a net profit of $577.9 million, both at an increase of 17% year-on-year. This is a strong set of results. Next slide. For revenue change, the group ended financial year 2019 with a growth of 17%. So that's the bar chart on your left, with aerospace contributing 12 percentage points or $803 million, and other sectors registered a growth of 5 percentage point. Now on your right, for net profit change. Net profit for financial year 2018 was $494 million. Now in that year, we had onetime losses, and if we take that out, the absence of the onetime losses from portfolio rationalization would account to 8 percentage point. So in other words, we do not expect this 8 percentage point to recur again in 2019. And excluding marine arbitration outcome of 2 percentage point and transaction and integration costs for Newtec and Glowlink of another 2 percentage point, the effective grow rate, absent of these onetime factors in net profits would have been 14 basis point -- percentage point rather than 17 percentage point. Still a very healthy 14% increase in net profit year-on-year. The next slide focusing on 4Q 2019 revenue and profit growth. On the left, for revenue change in 4Q 2019, the group's revenue growth was 29%, and this is largely contributed by aerospace, 17 percentage points, and other sectors registered a growth of 12 percentage point. On your right, for net profit change, net profit for 4Q 2018 was $124 million. With the absence of onetime losses in 4Q 2018 from portfolio rationalization of 24 basis point, and excluding transaction integration costs for Newtec and Glowlink of 6 basis point -- 6 percentage points, the effective growth in net profit is 19 percentage point instead of 36 percentage point. So still a very healthy 19% growth quarter-on-quarter. Let's now look at the revenue by sector. For 2019, aerospace revenue increased to $3.45 billion or 30% -- 30%, and this is mainly contributed by MRAS. Electronics revenue increased by 6% to end the year with $2.28 billion, contributed by all business groups within the electric sector. And this also include income stream from iDirect Europe, which is the new name for Newtec and Glowlink. Land systems revenue growth was 11% or -- to $1.43 billion and were higher because of more project deliveries. For Marine, the revenue increased by 13% to $647 million, from higher revenue generated by our U.S. operations and also our environmental engineering projects. Next, let's look at the breakdown of revenue. Aerospace grew as a result of MRAS acquisition. The group's revenue growth was contributed also by our commercial businesses with 3 acquisitions during the year to $5.7 billion. Defense recorded $2.3 billion. Now on the geographical split. With 3 acquisitions of overseas entities, MRAS based in the U.S., Newtec in Belgium and Glowlink also in the U.S., our Asia revenue has dropped and U.S. and Europe revenue has grown. And this is in line with our midterm investor day target of having 2/3 of the revenue growth from outside Singapore. Next chart talks to group net profit by sector. Aerospace contributed a net profit of $268.9 million for the full year 2019. Now despite the 30% increase in revenue we saw just now, the net profit increases by 10%, and this is due to an unfavorable sales mix, largely contributed by some weaknesses in some of the hangars, and we will talk a little bit more about that. Also in 2019, we took some impairment of assets, which we will also elaborate later. Electronics sector recorded a 2% increase in the net profit to $190.7 million which was lower than its revenue growth as we continue to make investments in new growth areas like SPTel and Geo-Insights. We also incurred transaction and integration costs for the elec sector last year. Land systems net profit of $77.3 million was 46% higher year-on-year, and this was attributable to its higher revenue but also because of the absence of portfolio rationalization losses which we incurred in 4Q last year. Marine net profit of $51.5 million was 14% higher year-on-year. And others incurred lower losses this year from the absence of the one-off MTN early redemption interest expense and also the absence of interest expense incurred prior to the MTN redemption in July 2018. So for the first half of 2018, there were interest expenses, as the MTN was still effective. Now let's move on to group net profit margin. The group net profit margin for the quarter and the year have remained stable at 7%. Next, balance sheet. For the first item I'd like to talk about is the $484 million right-of-use assets. The group applied, in accounting lingo, modified retrospective approach on the adoption of SFRS(I) 16 for leases. And what it meant is that we do not restate the prior year numbers, therefore you see a dash under right-of-use assets for 31st December 2018. And for the year that we started adopting this, in 2019, right-of-use assets from leases will be capitalized, and it shows $484 million. The next number, intangible assets at $1.98 billion. This has grown largely because of the intangibles associated with the acquisition of MRAS, Newtec and Glowlink. Next, the current assets, that has also grown because of higher contract assets. Under current liabilities, $5.4 billion, that has also grown. This is because we have replaced longer-term bank loans with the U.S. commercial paper which is short-term in nature. And this -- proceeds from this U.S. commercial paper were used to finance the acquisitions of MRAS and Newtec. Of course, we are planning to issue a longer-term bond to term out this U.S. CP sometime this year. Then for noncurrent liabilities of $1.58 billion, this is largely due to SFRS 16 lease liability as well as MRAS pension liability. So I move on to cash flow. The lower net cash from operating activities was due to a less favorable working capital movements and partially offset by higher EBITDA. Now before I move on to the outlook, let me just explain a little bit about the engine-backed securitization project, which we finalized last week. We have told you some time ago that for our asset-heavy businesses like aircraft leasing, where we owned it and then leased it out, or engine leasing where we have to owned it and then leased it out, this naturally has a burden on our balance sheet, and we have said some months ago that we are working actively to see how we can deleverage. We can basically securitize some of these assets and let it be owned by other vehicles so that we will only manage and service them. And this is the first illustration of how we have done that. So just for clarity, let me refer you to the left. TEAM is a joint venture company, 50-50 owned between ST Engineering and Marubeni. So of course, it has some start-up equity. It then raises loans from external banks to finance its purchase of engines. So TEAM actually owns maybe around 47 engines, 30 of which is placed under this securitization program. Then, of course, it leases out the engines to engine lessees, airlines and so forth. So in terms of cash flow, if you look at the dotted lines, the airline or engine lessees would pay lease income as well as maintenance reserves, and this will flow up to TEAM and TEAM will use the proceeds either as profits or payment of -- to service the principal and debt payment. Now when we securitize it, what it meant is that we created a securitization special purpose vehicle, and this vehicle will raise money through equity and debt. There are 3 tranches of debt, which are fixed rate notes, basically, of different subordination. Some are higher risk, some are lower risk, but of course, the higher risk pays higher return, and the company crew has done a cash flow simulation of the different tranches of debt. And so there are 3 tranches of debt. So this have been successfully and fully placed out, actually at a rate lower than we had initially expected. So the fixed coupon was of course quite attractive, from our point of view. Then it issues equity or e-notes, which ranks after all the debt, and it carries higher risk, and of course higher return. And 90% is placed to outside of TEAM and TEAM retains 10% as anchor stake. From these proceeds of debt and equity, the securitization SPV will then buy over all the 30 engines from TEAM and TEAM will receive R1, which is the proceeds from the sale of engines. So it's a big chunk of money, and this allows us to reduce the capital employed and to repay all the debt going to the banks, and therefore improves our economic value added. So with lower economic value added, we are still able to enjoy service fees and service fees come in this form. The engine leases are novated to this SPV, and it receives the lease income and maintenance reserves. It then went to service the fixed rate note holders and any remaining services the unit holders. And at the same time, we will receive as asset manager, the servicer fee and very importantly, although in a little footnote here, potential MRO work for the aerospace group, yes. So with less capital employed, we get this stream of income and lower risk of course. The obsolescence we saw are passed on. So with that, let me just leave you with the President and CEO's outlook, which I think you can read it from the slide. Now that ends the presentation. Thank you.

Thank you, Cedric. Can I invite the rest of the management team onstage for the Q&A session, please? Let me do a quick introduction of the team. From your left, Mr. Lim Serh Ghee, representing Aerospace sector; Mr. Vincent Chong, President and CEO of ST Engineering; you have met Cedric; and Mr. Ng Sing Chan from Marine. As part of BCP's split team arrangement, Mr. Ravinder Singh, President of Electronics Sector; and Dr. Lee Shiang Long, President of the Land Systems Sector, are dialing in for this discussion. With that, I'll hand over to Mr. Vincent Chong. Vincent, please.

Good morning, and thank you for joining our full year 2019 results briefing. Our results, as Cedric has represented or presented, was a strong set for the fourth quarter as well as for the full year. And as Cedric mentioned, we have higher weightage of revenues generated by customers outside of Asia, and that's in line with our objective to further expand our business globally. 4Q 2019 results were strong, as you saw. Revenue was $2.3 billion, up 29% from a year ago with all sectors posting double-digit year-on-year growth except for Land Systems which saw a 3% increase. PBT grew 24% year-on-year to $198.8 million, and net profit grew 36% to $169.5 million as all 4 business sectors delivered strong earnings. On a full year basis for 2019 versus 2018, revenue was up 17% to $7.9 billion. PBT grew 12% to $695 million and net profit rose 17% to $578 million. Excluding the marine arbitration settlement impact in third quarter of 2019, full year PBT and net profit would have been higher at 14% and 19% respectively. Now all our 4 business sectors posted revenue growth for 2019. Revenue for Aerospace was 30% higher, largely contributed by MRAS and various end of program reviews in third Q of 2019. Revenue for Electronics grew 6%; Land Systems, 11%; and Marine, 13%. At the net profit level, Aerospace registered 10% growth from the year before. Its net profit would have been high if not for these key factors affecting the AMM business group; namely, the impact of flight school impairment and higher staff costs incurred in the U.S. Electronic sector posted a modest 2% growth in net profit as we incurred transaction and integration costs for the acquisition of Newtec and Glowlink. Net profit would have been 9% higher if the expenses for M&A were excluded. Net profit for Land Systems grew 46% in the absence of portfolio rationalization loss incurred in fourth quarter of 2018, and Marine's net profit grew 14% despite the arbitration settlement impact, helped by improved U.S. operations and sale of ROPAX, which was completed in October 2019. At this point, I'd like to turn to our Smart City business, which we target for it to be a $2 billion revenue business in 2022 as part of the group's 5-year plan. I'm pleased to share that we are tracking well and have made good progress. Our Smart City revenue in 2019 was $1.4 billion, an increase of about 40% from the $1 billion revenue posted in 2017. The number of Smart City-related projects completed now stands at 700 projects across 130 cities. Our Electronics sector is still the key driver of these projects. We'll continue to apply our innovative solutions to help cities transform as they face increasing pressures in managing public transportation systems, securing critical infrastructure and ensuring environmental sustainability. Next, I would like to summarize our results with several key highlights. We achieved our strongest revenue and profit growth in 5 years since 2015, in absolute dollars and percentage growth. All sectors registered growth, with Aerospace & Electronics sectors posting their highest revenue and net profit in history. New contracts momentum remained good. We announced $8 billion worth of new wins, which is a robust level against an uncertain market environment. The traction we have with our customers, many of whom are long-standing customers, is reflected in our order book which stood strong at 13 -- $15.3 billion as of end 2019. We expect to deliver $5.9 billion of our order book in 2020. Our focus on portfolio rationalization, including divestments and streamlining of underperforming business and assets in the last few years has resulted in a stronger business portfolio. We'll continue to develop new businesses if we assess that they are able to strengthen our business portfolio and create long-term value for our stakeholders. We delivered an attractive shareholder return for 2019. Our 2019 year-end market capitalization increased by $1.4 billion or 13% to $12.3 billion from $10.9 billion a year ago, so I'm talking about year-end market capitalization at the end of 2019. Shareholders will receive a final dividend of $0.10 per share upon shareholders' approval at the April AGM. Together with the $0.05 interim dividend, total dividend for 2019 will be $0.15 per share. This translates to a dividend yield of about 4%. Our talented people, technology and innovation, as well as continuous drive for operational and financial performance across the whole organization, enable us to achieve this set of good results. But we know that there are still challenges in the global economy and that our operating environment and competitors do not stand still, which is why we continually strengthen and develop distinctive capabilities. We will build our business organically, and where the right opportunities present themselves we will acquire, like we did in 2019 with 3 acquisitions; namely MRAS, Newtec and Glowlink. MRAS enables us to scale up our aerospace capabilities by moving us further upstream into the OEM business. The business has contributed positively to both revenue and profit as we had expected. In the same way that MRAS has propelled us into the OE business, we are building a global differentiated satcom business with Newtec, now known as iDirect Europe, by combining it with our U.S.-based iDirect as 1 global business. The addition of Glowlink, which we bought for its advanced satcom anti-jamming technologies, will enhance our competitiveness in satcom. Going into 2020, while we remain confident in the positive underlying fundamentals of our business, there are a few near-term uncertainties, including, obviously, impact from COVID-19 outbreak which we are monitoring closely. It's premature to discuss the potential full impact of COVID-19 on the group, but if the virus outbreak takes a toll on global growth, we will not be immune to a near-term slowdown in the global economy. By our estimates, if the COVID-19 outbreak continues at the current level through midyear, the overall impact on the group is not expected to be material, and our growth momentum is expected to continue. So let me just say it 1 more time. If the COVID-19 outbreak continues at current level through middle of this year, the overall impact on the group is not expected to be material, and our growth momentum is expected to continue. Having said that, COVID-19 is still rapidly evolving across the world. Thus, we will have to reassess if the situation changes. Around half of the COVID-19 impact will be felt at our aerospace sector. Contributing factors include customer demand reduction, supply chain and workforce redistribution. For example, if airlines continue to scale back their flight schedule, it will affect our aerospace MRO business as more airlines -- airline customers adjust or delay maintenance cycle. As it is now, we are working with our affected airline customers to reschedule maintenance around changes to the operations. In manpower, in terms of manpower, although we have some workforce disruption, we are currently managing our operations quite well. Despite these near-term challenges, longer-term growth prospects remain positive as evidenced by the rebounds following global crises like September 11 in 2001, SARS outbreak in 2003 and global financial crisis in 2008-2009 timeframe. Therefore, our investment plans, including building talent pipeline, continue. For example, our aerospace sector is exploring with Vietnam Airlines to set up an airframe MRO facility in Vietnam, now that our JV business and component MRO facilities in Hanoi and Ho Chi Minh City are operational. We expect the aerospace sector to perform well, although we may see some softness in the AMM business for reasons which I've just highlighted, the impact of the virus outbreak as well as the talent constraints resulting in higher staff costs in the U.S. Now moving away from the topic of COVID-19. Related to MRAS, there were questions in the potential of the U.S. Air Force B-52 re-engining program. At this time, we will say that MRAS is well-positioned as an OEM of nacelle components for the 4 engine variations that have been reported to be under considerations. However, there is at this time no RFP as yet. So it is too early to discuss the scope and potential of the program. Next, we have recently announced the sale of 30 aircraft engines through TEAM, as Cedric briefly described just now, our engine leasing JV with Marubeni using securitization structure with positive P&L contribution. As we know it, the deal is the first engine-backed securitization originated by a lessor headquartered in Asia Pacific. With it, we have effectively freed up our capital requirements for this business while retaining TEAM's asset manager role to create value for lessors through our innovative asset management solutions. In this way, we are -- the note holders of this securitization program will be able to leverage on TEAM's asset management expertise as well. We are pleased with the outcome of this securitization, which will be included in our first quarter 2020 financial results. We will pursue opportunities to scale up our engine leasing business post the successful securitization which we have just announced and described. Another piece of positive news is that we have just obtained the EASA STC for the A321 P2F program after successful flight tests. I will end with the message that in spite of headwinds caused by the COVID-19 outbreak and the looming uncertainty in world trade, we remain confident of our ability and agility to drive progress to achieve sustainable long-term growth. Before I open the floor for Q&A, I should talk about our position on quarterly reporting. In line with the long-term nature of our business, we will publish financial results on a half yearly basis. When appropriate, we'll augment our half yearly financial results with relevant operation information on a quarterly basis. We do value our engagements with you, investors and analysts alike, and we remain committed to have open discussions with you like we have always been practicing, within the confine of the SGX listing disclosure rules. So on that note, we will now take questions.

Perhaps maybe before taking questions, I just want to add a few remarks to what Cedric and Vincent have said on the ABS. We start the engine leasing business in 2011 to grow an adjacent business to our MRO business. One main objective is to secure MRO from the lease engine portfolio. We have been able to realize that over the years. However, with a relatively young and small portfolio, the rising is slow. Hence, we develop this process to securitize the engine lease. With this capability, we are able to work with the institutional investor to grow our engine portfolio at a much faster rate. This is a win-win for the investor and ST Engineering. For the investor, we can tap into -- for the investor, they can tap into our expertise and innovative asset management solution to enhance the value of this asset, as demonstrated by the fact that our debt notes were oversubscribed across our tranche. For ST Engineering, we'll be able to access a much larger and bigger pool of assets to create value across the different value chain, including the potential for MRO synergies. And also a slight correction: for the B-52, we are the nacelle system manufacturer for 2 of the 4 engine being considered.

Not all the 4 currently. But if the RFP is out, we can eventually bid for all 4.

Yes. Yes.

I think that's what I meant. Two of them are, of course, in our portfolio. Of course, we will be more familiar with them, but we have the capabilities to bid for all 4 if the RFP is out.

Yes, that's correct.

Yes, okay. Serh Ghee, Thank you for the embellishment on the securitization program. Okay. Let me just open the floor for questions. You can direct to Ravi and Shiang Long as they're dialing in, yes? So if you have questions, you can direct to Shiang Long and Ravi, and they will address them through the teleconference facility. For those of you who are joining us via webcast, you can also send your questions. If you want to direct them to Shiang Long and Serh Ghee, we will make sure that they get a version of your questions and address them accordingly.

Zhiwei from Macquarie. I have 3 questions, one for Vincent and 2 for Serh Ghee. Congrats on your very good 2019 results. I think when I look at your dividend payout ratio, it could have been higher. But since you've saved about $0.01 or $0.02 in your dividend payout, could you like, share with us what you intend to do with the additional capital, like your M&A plans? Do you want me to go on the second question?

You can finish all questions.

And then the second question and third question for Serh Ghee, could you take us through a little bit on your CERO business? I mean, the margins were a bit elevated for the quarter. And then also a bit -- talk about what's going on in the EMS sector. I think there was a Q-on-Q pickup on the PBT margins.

So let me take the first question on dividend. I've mentioned this on numerous occasions. We look at returning value to shareholders on a long-term basis. So if you look at our track record in the last 6, 7 years, we've been quite consistent in how we return value to our shareholders through dividend payout. As we look at our business, the stronger the business gets in terms of bottom line contribution, the better we are able to return value. When we return value through dividend payout, we also need to consider how much investments we require to plow back into our business, again creating value for our shareholders. So I think rest assured, be rest assured that as our business strengthen, our ability to reward or return value to shareholders via various means, including dividend payout continues to be better. So I put it as debt. But we have got to look at all our various investment needs when considering dividend payout. But our track record has been quite, I think, good. And going forward, I think as the business strengthens, we would like to do more of that returning of value, be it by dividend or other means. Okay?

Sorry, as a follow-up on that, can you just enlighten me on what is your current debt headroom for further acquisitions this year?

So I'll pass to Cedric.

As you know, we are rated AAA by S&P and Moody's, despite the acquisition of MRAS, Glowlink and Newtec. So the company's balance sheet is still very strong. And obviously we have capacity to borrow more to make meaningful accretive investments going forward. So I would say that even if we borrow another SGD 2 billion, SGD 3 billion, we will still remain A or better, yes. We cannot be specific as to the level of borrowings. It all depends on opportunities of investments and acquisitions.

For CERO, the higher margin is due to program mix as well as some end of program true-up, as what we have said during the quarter. But it was our intention to actually move the margin up from our 2018 level. For EMS, the low margin is due to program mix as well as, if you remember, the disruption to the 4 paneled manufacturing in [ E Ops ] was due to a fire at one of the material vendors. Maybe I can talk about AMM as well, because I presume there will be some question on AMM. For AMM, there's a drop in the margin, again due in part to program mix as well as some operational losses due to the flight school and its subsequent divestment impairment. And the challenges also, which Vincent talked about in AMM due to labor shortages, which I also mentioned in last quarter. The impact on labor shortages impact more of our operation in Mobile -- Mobile, Alabama. We have a facility in Mobile, Alabama, because we have a very friendly neighbor called Airbus which took a liking to our people.

Well, I guess it's in a location where we have several aerospace establishment, competition for talent becomes quite keen. And you know there's this final assembly line that Airbus has and, of course, competition for talent does end up with certain manpower constraints, be it Airbus or someone else. But competition for talent in that part of the world continues to be keen, which gives us some staff cost pressure.

Patrick here from Citi. So I have a question on the SPV arrangement on the sale of the engines. So I mean the disclosure didn't -- can you -- first question's actually of the $257 million notes. Can we assume the same for reduction in borrowings, or is this just the 50% that's due to the -- your share of the venture? First one. Second one is that in other industries, right, when this [ type arrangers ] are strong, the fee is around, say 1%. So what kind of fees should we be thinking about in terms of the longer-term earnings from these new type of structures? And thirdly, right, what happens to the rest of the engines that's not part of the first view?

First of all, the loan is about USD 257 million or so. It doesn't tie directly to the financing that [ Jim ] does today, yes? So generally speaking, debt loan-to-value for engine and the team today before the securitization is something around 60%, 70%. Whereas after the securitization, actually our loan to total value of the asset is actually higher. So actually, we get quite a lot of proceeds back. On the second question it's very interesting because the arranger is Citibank, and Mr. Patrick is from Citibank. So clearly the China war is working very, very well. He doesn't know what the fees his investment bankers are getting, which is very good, yes. And also, I don't think I should -- I'm not at liberty to talk about specific fees. But I think suffice to say that post the transaction, we would receive a big chunk of money that we can repay his loan and [ the credit double now the team is now ]. And secondly, I think the reduction in capital employed really enhances the value of participating in such structure. No different as, say, a REIT structure, where the manager or the REIT and all that gets to manage it, maintain it sometimes and continue to pump the managed funds even and then the proceeds of which will get invested into properties. So as the economies of scale, this business grow and without us holding it on our balance sheet by securitizing the lease higher out, you will find it as a percentage of service fee and MRO opportunities, so the capital employed, it will be greatly enhanced. And that's the direction we are aiming at.

Okay. So maybe just on my second question, which is more interested to get a color in terms of the fees that ST Engineering will be able to so-called earn from the SPV going forward, now that you've got this structure in place.

You mean the service fee and the MRO fees?

The service fee payable to ST is the manager...

Yes. I think these are details that we prefer not to discuss. But I think, as I said, the service fees is attractive, the MRO opportunities are great. And if you can do both of this and scale it up without the capital employed, I think this is actually the structure. I mean, that is why business trusts and REITs are thriving these days, yes.

And just to add on to what Cedric have said, I think one of main objective is actually to grow the MRO synergy, okay? It's not just a service fee. I mean, it's part of the value chain. If you are able to securitize another lot of 30 and [ in 30 ] then the pool will be big, and I said, the rising will be a lot more. And I mean, based on what we have materialized over the years, we've got a small portfolio. I think it'll be good.

There's -- sorry, there's a question about how much would your net profit grow -- this from the public, James [ Shaw ] -- how much would your net profit growth be without MRAS acquisition. So if you were to strip out the MRAS acquisition, the net profit for the group will still grow by 8%. 8%, yes.

Siew Khee from CIMB. Can I just address the question to Serh Ghee in terms of the tax credit that you mentioned? Which division actually recognized tax credit? Is it this quarter with any major tax credit that was recognized this quarter or any one-off in your Aerospace division profit?

Just on the tax question. Actually, our effective tax rate this year is quite low, it's 15%. The current tax, there's a current tax favorable variance as well as a deferred tax favorable variance. The current tax is due to, say, things like PIC, where we have received -- we usually conservatively record the tax provision. And when we receive PIC approval, then we recognize it to reduce the current tax. On a deferred tax, there was a merger between STA rotables. And the -- one more you need, which is the supplies, STA supplies and the carryforward losses, deferred tax assets of STA rotables were not usable because it was not projected to be profitable. But subsequent to the amalgamation, STA suppliers could use it because it's profitable, and therefore, we recognize the deferred taxes.

Okay. There are 2 questions from, sent in from participants of the webcast. I'll just maybe talk a little bit about the question regarding the COVID-19 outbreak, and then I'll hand over the floor to Serh Ghee to give more color. So the question is, why is there little impact? Let me just read it to you. Can you explain why the coronavirus will have little impact on the MRO business based on the assumption that the coronavirus continues at its current pace through the middle of the year? I'll let Serh Ghee give more color from MRO Aerospace, MRO standpoint. There is negative impact, but it's not material level to the group, if the situation continues as it is until middle of the year. If it changes, we have to reassess. But there is right near-term MRO negative impact for Aerospace. I also said that despite that, if it remains at this level through middle of the year, while the impact is not material, we -- because the impact is not material, we expect our growth momentum to continue as a group, okay.

Maybe just give a backdrop. If you take reference to the SARS in 2003, the drop in our PK revenue is -- in Asia Pacific is 35% at the height of SARS. And currently, the Chinese aviation market is much larger, and we expect the impact to the coronavirus to be higher. But however, we look back over the years, the aviation industry is very resilient. It will bounce back and will continue to grow. The fundamentals of the industry mid to long term has always been strong. Again, taking reference from SARS, the industry bounced back to pre-crisis level within 9 months from the start of SARS. So the mid to long term is -- the industry is -- prospect is good. But short term for summer operation, there will be some impact rising from a drop in the demand from the customer. There'll be less flying, less aircraft utilization. There will be a drop. There are also 1 or 2 -- okay, I say 1 or 2 only, aircraft that drop off coming into Singapore. The customer decided that maybe they would like to defer it. And there's also a manpower disruption, okay? We do have Chinese worker, okay, so there will be some disruption. And we also have our BCP, we are doing some cohorting. And so there will be some inefficiency. So there will be impact, but at this point in time, it's still too early to assess the impact. First is the [ surge is strictly evolving but will ] continue to keep a close watch on the situation.

Okay. So there's 1 question. And before I go on to the next question, I just want to acknowledge that it was Kevin Lim from Nikkei NewsRise who asked the question on coronavirus impact on our MRO business. So thank you for that question, Kevin. I have a question from Shawn Ng from JPMorgan. The question is, can you offer any guidance for Smart City revenue in 2020? I think it's safe to say that we are on track to achieving our 5-year plan targets. We say that in 2019, our Smart City revenue is SGD 1.4 billion. If you recall, we say that we want it to reach $2 billion of revenue by 2022. We're still on track. We obviously will keep you updated at appropriate junctures. We'll not go into the specifics of 2020 at this time. But thank you for asking that question, Shawn.

Okay. There's 1 question from [ James Shaw ]. Could you quantify the contribution coming out of China operation in terms of revenue earnings in man-hours? First of all, we have -- for Aero, we have 3 operations in China. Two of them are actually associated company. So there's no contribution as far as the top line is concerned. So you only consolidate at the bottom line. Having said that, I would say that the contribution are not that high. I would say to the group it's not material. There's a question from Lorraine Tan, Morningstar. Following up on the labor shortage challenge, can the group mitigate the rising cost going forward, either by raising prices or finding other efficiency elsewhere? I would say that over the years, okay, we are definitely cognizant that there's labor shortages, and we have various strategies that we have put in place to mitigate the cost. One area is in terms of automation. We are actually accelerating the leverage of technology in our operation, to give you example. We have actually talked about it, the guiding of the plates using robotic arms, removing [ blade bars ] from an engine fan case, also using robotic arms, and achieve -- be able to reduce the hours that is clocked onto the job by 30%, 40%. Likewise, we have also been piloting the use of unmanned system to inspect aircraft, okay? Typically, let's say, to inspect an aircraft, it takes about 9 hours manually, okay? And we can actually halve it. So these are the steps that we are taking to mitigate the rising cost. The other one, obviously, back to the U.S. side is that we are also cognizant of the Airbus is next to us. Actually, that's the reason why we actually start up operation in Pensacola. And now we start our operation in Pensacola is because, yes, a good catchment of retired military personnel, okay? And in fact, looking at the manpower state, I would say that we have been able to attract and retain people in Pensacola. The other one, could we raise cost -- raise price, obviously, our left tool, but the customer will always -- but getting some traction, I would say, because the customer in U.S. recognized it, okay? Because if they want good quality, reliable, MRAS service provider, they have to help sustain the ecosystem. So you will see that it will be reflected in some of the rates going up.

Yes. I mean, at the end, the market will have its own dynamics. It's a competitive market. We also need to be cognizant of that, so we'll see how the dynamics evolve over time. Obviously, a very competitive market, both in terms of -- at the customer level and at the talent level, okay, at this time.

This is Rachael from UBS. I have a question on the impairment of receivables. There was quite a big jump, and in the comments, it was attributed to Aerospace and Land Systems. Which was the primary division where this was recorded? And was this mainly due to 1 customer or multiple customers?

It's mainly Aerospace, heavier on Aerospace than Land Systems, but it's part of, it's end of program review so the net impact to the group is not a negative one, all things considered at the end of the program. But the receivables impairment is largely Aerospace, although we have some in Land Systems.

Okay. The next question will be on Electronics. Are you able to elaborate on the higher costs incurred by SPTel? And could I check if you would incur these costs under your SSG segment?

Ravi, you got a question. Can you elaborate more on the higher cost incurred by SPTel, and Rachael wants a follow on. There's another question.