Sun Hung Kai & Co. Limited (86) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen of [indiscernible] Sun Hung Kai & Co. Limited. I would like to welcome all of you to the company's 2021 interim results investor presentation. This presentation will be conducted in English. Alternatively, you may switch to the Chinese channel and mute the original audio if you need translation. By default, your microphone is muted. There will be an opportunity for you to ask questions after the presentation. It is my pleasure to introduce to you the senior executives from the company. Mr. Brendan McGraw, Group Chief Financial Officer; Ms. Elsy Li, Group Treasurer and Head of Corporate Development and Investor Relations; and Ms. Lindsay Wright, Chief Executive Officer, Funds Management. In today's meeting, the management will talk about the company's business development, business performance in the first half of 2021 as well as investments in highlights and future strategies. After the presentation, the management will take questions from participants. Now may I invite Brendan to start the presentation. Please.

Thank you. I'd like to start today's presentation by highlighting our journey of transformation. As many of you know, the Sun Hung Kai heritage goes back to 1969 with the start of our brokerage business. Through our listing in 1983, through the acquisition of the majority stake by Allied Properties in 1996, we have continued to grow and expand our footprint and financial services. The establishment of the UA Finance business in Hong Kong and eventually China brought us into the consumer finance business as we expanded our operations in Hong Kong to include wealth management. Starting from 2015, we began the next phase of our evolution by partnering with Everbright wealth management business, [Audio Gap] business and [Audio Gap] In 2020, we completed our [Audio Gap] Management vehicle, Sun Hung Kai Capital Partners Limited the Type 1 [indiscernible] we have built over the past few decades. And this is what is enabling Sun Hung Kai & Co. to successfully transform to a leading alternative investment firm. Next, moving on to the company overview. The group has 3 core businesses: Financing, investment management and funds management. Our lending business, through consumer finance, UAF; our mortgage business through Sun Hung Kai Credit; and Specialty Finance provides steady cash flow and organic growth. [Audio Gap] Investment management business, open public markets, alternatives and real assets. Last year, we started to develop and extend the investment management business by [indiscernible], our funds management platform, which will manage external capital and bring additional revenue streams to the group. Moving on to the investment highlights for the first half of 2021. Our financing business has provided pretax profits of $919 million and continues to be a stable cash inflow that supports the group investment and funds management businesses. Our investment business has grown to over $20 billion in assets and was well positioned to capitalize on opportunities that arose in the first half of the year. The division recorded very strong profits in the period. Since early this year, our Funds Management business, Sun Hung Kai Capital Partners, is acting as a catalyst for future growth, and we look forward to rolling out this further diversification in our business. The group has a very consistent track record on dividends and buybacks, which has returned significant amounts of [indiscernible] to shareholders over the past 15 years. Moving to interim results highlights. For 2021 interim results, we have delivered strong performance despite the continued volatility in global financial markets for a long impact from COVID-19 and the changing regulatory environment. Overall, for the group, we've seen a strong increase in profit to $2.7 billion, up by 287%, and our earnings per share have increased by 290% to $1.362, our book has also increased by 20%. We will only [Audio Gap] steady dividend of 12% for the interim period of 2021 with [Audio Gap] progress on economic recovery, we will be on liquidity and be well positioned for business expansion opportunities. Focusing now on the track record of performance. Putting the first half 2021 results in comparison in the previous year, we see [Audio Gap] group strategic transformation from a leading brokerage and wealth management firm to a leading alternative in bank [Audio Gap] both attributable profits and EPS are almost 4x the level of the period last year. Gearing has reduced, and liquidity has remained healthy. Our ROE has been very strong due to the increased earnings from our businesses. We will continue, however, to improve capital efficiency, and this is [Audio Gap] risk management. Focusing further on our earnings drivers and our segment assets. Consumer finance recorded a recovery in profitability due to the higher loan demand and lower credit impairments in the first half of the year. It contributed $872 million of pretax profits. Specialty Finance, has reduced -- has recorded a loss due to the increased impairment revision caused by the continued impact of COVID-19 on the leisure and hospitality sectors. As a result, it has a small loss of $11.4 million. Mortgage loans continued a steady performance and contributed to a pretax profit of $58.9 million. Also, its gross loan balance increased by 6.8% to around $3.4 billion. Our investing business contributed $2.3 billion to the pretax profit, and this was mainly due to the successful completed exits from several flagship investments. For the group [Audio Gap] the pretax loss was [Audio Gap] by 83% to a small loss of $15.9 million. Focusing further on the balance sheet. Our balance sheet remains stable and strong. On the asset side, our long-term loans and investment assets are well matched on the liability side by equity and long-term funding. Our short-term loans are funded by bank loans and short-term facilities. Our interest cover in the first half was very strong at 10x. This was due to increased earnings and a reduction in market interest rates. We continually monitor and ensure that we maintain a strong liquidity position. Moving on to our capital structure and funding. In terms of our funding structure, our total borrowings were $15.7 billion as of the end of June 2021, which slips down to $8.6 billion coming from bank facilities and $7.1 million from notes and paper. The net gearing ratio at the end of the first half was healthy and reduced from 41.4% at the end of December to 39.2% [indiscernible] the end of June in '21. [Audio Gap] our capital and funding markets and challenges in the economy. This also gives us the flexibility to take packages of [indiscernible] when they rise. These are our financial and business highlights. Next, I'll let Lindsay give you more details on our investment management and funds management business. Lindsay, please.

Thank you very much, Brendan, and good morning, everyone. Here's the Investment Management division. The Investment Management division leverages the group's internal expertise, external network and strong financial position to seek attractive risk-adjusted investment returns. During the period, the segment contributed $2.3 billion to pretax profit, a substantial increase of 430% compared to $436 million for the same period last year. The total realized gain and interest income was $1.6 billion, up 89%. The teams within the investment management unit navigated the challenges and uncertainties in the public markets, and the group completed several successful exits of private investments. In addition and importantly, all subsegments within Investment Management recorded positive returns. We remain very committed to a cautious and disciplined approach to the management of our investment and extra rigor has been applied to our comprehensive risk management and monitoring gross releases. Now turning to the investment assets and returns. Our portfolio of investment management continues its track record of delivering net gains with an overall return of 14.2%. The strong performance in the first half was from 2 segments: Corporate Holdings with a 6-month return of 35.3%; and private equity with a combined return of 17.7%. Let me give you a little bit more color on that. Firstly, our credit book. The public credit portfolio consists of the actively managed global credit strategy. As we're aware, the global fixed income market started the year of 2021 on quite a firm note, but with the increased spread of the Delta variants and the regulatory changes over certain key sectors and increasing inflationary pressures, market sentiment, turn more cautionary and conservative in the second quarter. Despite such market volatility, the public credit portfolio performed well and delivered strong returns through its sound credit selection, portfolio of diversification and [indiscernible] strategies. Secondly, to corporate holdings. The corporate holdings portfolio delivered a strong performance of a 6-month return of 35.3%. It significantly outperformed the 14% gain in the S&P, the 13% gain in the NASDAQ and 12% gain in the MSCI World Index over the same period. Our largest position, a Chinese pharmaceutical stock, returned 38% for the first half and contributed to a significant portion of the gains. We also had a position in the consumer finance company that returned 3.6x during the first half. Our investment approach is based on deep fundamental research and analysis. We are looking to understand structural long-term stories that will deliver strong risk-adjusted returns. As the markets remain elevated and risk is increasing driven by the ongoing continuous outbreak of COVID-19 variants, regulatory environment development and inflationary pressures, we remain cautious about the potential volatility in the market and will prudently monitor our risk position. Our current positioning and focus remains unchanged. However, we have reduced risk in some sectors and also have looked to implement shorter-term hedging strategies, mainly through option structures to reduce risk and volatility in the portfolio. [ Third ], going to the alternatives book. Each segment of alternatives has had a. [Audio Gap] First half of 2021, this pretty much reflects the [indiscernible] of our network. The private equity portfolio recorded a strong combined return of 17.7%, mainly contributed by successful exits from several flagship investments such as Fairstone Holdings and other exits in health care and the TMT sector. Future focus will continue on TMT and healthcare. [Audio Gap] generated a strong return. The [indiscernible] nature with an Asian bias and well diversified. It's a strategic [indiscernible] to the management activity, the majority of $330 million of the hedge fund portfolio was transferred to a fund structure on the 1st of July 2021. This [ product ] has further strengthened overall risk management, research and asset allocation in [indiscernible] future particularly given the expectation of greater market volatility. And finally, turning to our real assets portfolio. This portfolio includes all the group's real estate holdings and had a valuation of HKD 2.4 billion as at 30 June 2021 and reported a gain of 1.5%. The portfolio includes the group's interest in Hong Kong commercial real estate as well as hotels in global markets. During the period, the group completed the exit of the investment in Parmaco, a Finnish modular housing company. We continue to prudently manage the existing portfolio and judiciously look for opportunities to diversify our overall exposure. And now I will [indiscernible] to switch to the funds business. I've presented to you all at our 2020 year-end results, the establishment of the Funds Management business here at Sun Hung Kai & Co. We believe that this establishment and build-out of the funds business will be a key driver of growth over the medium term for SHK. This will be driven by growth in the respective funds AUM and the revenue share of management fees and performance fees from our ceded partnership funds. I'm pleased to report that we're making strong progress on the builder, and we'd like to share this with you. So firstly, we established the platform of the establishment of Sun Hung Kai Capital Partners with a type 1 and 9 license with the SFC. This was received on March [ 20 ]. We have also just submitted an application for a Type O license, which will further enhance our ability to offer advice. In addition, we're submitting applications for licenses in Australia and Singapore. Secondly, over the last 6 months, we've established and launched 5 partnerships and funds, 3 of which are external and 2 internal funds, and I'll talk about these in a moment. And thirdly, our strategic approach here in the funds business is based on executing on our core objective, which is to build a leading Asian alternatives platform. We believe we're building a very. [Audio Gap] And has the following our funds focus is across the entire alternatives spectrum, both public and private equity and debt. Secondly, our model is flexible in approach. We're able to interact with managers and groups in a variety of ways depending on where readiness to go to market. Thirdly, our capital is patient. We're not required to recycle and therefore, value and support very long-term partnership; and fourth and finally, we're to offer support to managers through our lines and warehousing facilities. And just moving to give you some more insight into our funds and partnerships. As noted, we've been very busy since the establishment of our business. We've completed the establishment and launch of 5 partnerships and funds. In particular, I draw your attention to our ceded partner -- partnerships East Point, which is an equity, an APAC equity long/short fund which was launched at the beginning of the year with support from [indiscernible] of USD 150 million. ActusRayPartners, a discretion probabilistic investing fund; and E15VC, a venture fund focused on deep technology. In addition, we've launched our own -- we've launched 2 of our own funds, Multiple Capital Investment Partners, a real estate loan funds, the support on this closed by Sun Hung Kai of USD 100 million. And as mentioned previously, our hedge fund of fund portfolio, which was a transfer of our interest on the balance sheet to the product that occurred on the 1st of July of USD 330 million. In summary, I'd stress again, our model has significant advantage. It has strong financial backing. Our capital is patient, and our approach flexible. Early indication of investor support is encouraging with an expectation that we will raise over USD 200 million in the -- and third-party capital by year-end. This is in addition to the capital provided by SHK at this time of approximately USD 615 million. We have a strong pipeline and look forward to announcing new seeding partnerships and the launch of funds over the course of second half 2021. All of this fulfills our long-term objective to build out a diversified leading Asian alternative investment business. And I'll pass over to Elsy to talk through our financing business.

Thank you, Lindsay. Our Consumer Finance business is operated under UAF branding in Hong Kong and China. UAF has been a leading franchise and a household name in the region for about 30 years. It's also a consistent contributor of our group's revenue. As of first half 2021, UAF's total loan balance was $11.8 billion, a 16% increase from first half 2020. Of which, about 73% come from Hong Kong and about 27% come from Mainland China. Total revenue was $1.7 billion, up 7%; and pretax profit was $872 million, increased by 68% compared to first half 2020. Our net impairment loss was about $207 million, reduced by 53%, due to decrease in delinquency and charge-offs as a result of the recovery in economic conditions in the region and improvement in employment situation in the first half 2020 compared to the same period in 2021, compared to the same period in 2020. Our overall cost-to-income ratio remained quite steady at around 32%. On this page, we will illustrate a bit more of the respective performance of our UAF business in China and Hong Kong. For Hong Kong, the total gross loans increased by about 5% compared to first half 2020, mainly led by the rebound in economic conditions in Hong Kong. Overall loan yield remained stable at 30%. Charge-offs and impairment loss improved to 4.2% and 3.6%, respectively, as the job market recovered and employment rate reducing from peak of 7.2% to 5.5%. In first half 2021, UA Hong Kong also implemented a credit risk score card that utilized our provider statistical modeling with a multidimensional data set to further enhance our risk assessment and capabilities. We also increased our online marketing spending to enhance our efficiency in direct marketing as well as new customer acquisitions. For our China business, we saw a rebound in profitability as COVID pandemic impact being contained and economic conditions continued to improve in the first half of 2021. Our total gross loan balance increased by more than 60%, mainly due to customer demand and the launch of a secured lending product. Our new secured property loan product was put into pilot program in late 2020 and gained traction in the market during the first half of 2021. Charge-off and impairment ratio improved to 6.8% and 3.6%, respectively, as a result of improving employment situation and our new customer base, which is of higher credit quality. Overall, loan yields reduced as the borrower's credit profile improves. Now Specialty Finance. Our performance continues to impact by COVID, as illustrated by Brendan earlier on. In the first half 2021, we booked additional provisioning against certain loans with exposure to the leisure and hospitality sector, which continue to suffer from travel and social restriction and outbreaks of COVID variants. While we remain open to new business opportunities, we continue to focus on actively managing our existing portfolio. In addition to our structural loan specialty finance also post our LSS leasing, which is a B2B and B2C auto leasing business in Mainland China. Lastly, this segment also included the group's holding of preferred shares we obtained as a part of consideration from the put option we executed in late 2020. In June 2021, the coverage has been fully redeemed. As a result, the group does not hold any equity interest or preferential interest in enterprise and multi securities at the end of the period. Lastly is our mortgage business in Hong Kong, which is operated under Sun Hung Kai Credit brand. The gross loan balance increased by 6.8% as the local economy and property markets sector recovered in the first half 2021 and recorded pretax profit of $59 million. Revenue decreased by 11.8%, primarily due to the lack of a one-off recovery of interest during the period compared to last year. The quality of the loan book remains very strong and impairment losses decreased [indiscernible] by 48.1% to only HKD 12.5 million. Financing costs for the period went down by 12.4% year-to-year as we diversify our funding channel. Now I'll pass to Brendan to talk about our risk matrix, ESG efforts and future plans. Brendan, please.

Thank you, Elsy. Okay. Corporate risk management. Our group adopts a comprehensive risk management framework. The Risk Management Committee, a standing committee of reporting to the Board, acts to oversee the group's risk management and monitors our internal control systems. We see risk management and compliance as a responsibility of every member of the fund, and we expect everyone to take ownership of the process. The management team and the Risk Committee regularly update procedures and policies to adapt to emerging risks such as those that have arisen from COVID and the need for a remote work environment. As you would expect, with the pivot to funds management and the required licenses to operate, risk management will continue to be enhanced and expanded to meet the respective regulatory requirements. Overall, our risk management framework is designed to enable us to achieve a strong financial performance and to deliver our strategy within the group's risk appetite. We will remain focused and vigilant on emerging risks and will proactively enhance our framework to address these risks. I'd now like to give you an update on ESG. We believe that ESG investing is an essential part to achieving a sustainable future. In recent years, Sun Hung Kai & Co. has invested in a number of next-generation technology projects, which are ESG-related and provide solutions to global issues, such as Parmaco's modular buildings, which offered strong ESG characteristics. These buildings have a greenhouse gas footprint 54% more than traditional concrete-framed schools over the whole building life taking. Also, Sun Hung Kai & Co. has co-invested in a new global education project, an e-learning platform for students in Africa and emerging countries. This project is also backed by investors, including Bill Gates and Mark Zuckerberg. For corporate governance, in the first half of 2021, Sun Hung Kai & Co. has undergone a Board renewal process with the addition of 2 independent nonexecutive directors. The new composition has enhanced the Board diversity in terms of gender, nationality, skills, experience and age. One of the INEDs is an accomplished global risk professional, having extensive experience in the banking and finance industry. With this addition, we believe our risk management will be further strengthened. Our other new INED brings a wealth of commercial experience to the group across various sectors of the economy. Finally, moving on to business outlook and future plans. The first half of 2021 has been a challenging yet rewarding period for Sun Hung Kai & Co. The strategic plan that we previously communicated and our transformation to a leading Asian alternatives investments firm is well underway. Our core business of finance continues to perform well. As we move forward into the second half of 2021, we are optimistic about the prospects for our lending business, confident about the investment business and excited about the development of our fund management business. Also, we remain cautious about risk and uncertainty related to COVID-19 resurgence, inflationary pressure, changes in the regulatory landscape as well as continuous geopolitical tension, and we will continue to apply prudence in all of our business endeavors. A particular focus for each of our 3 business lines in the second half is as follows: For funds management is to execute and build upon our current partnerships and to prepare for future pipeline projects and expand our distribution partnership options. For Investment Management, we will continue to focus our investments in TMT and health care with a particular attention on the impact of innovations such as blockchain and emerging technologies. For financing, in our core business of financing, we remain open to new business opportunities. However, we retain a cautious approach. In addition, we continue to invest in people, technology and infrastructure to drive the growth and efficiency. I'd like to thank you very much for your time today, and we look forward to your continuing support.

Thank you, Brendan. We will now proceed to our question-and-answer session. [Operator Instructions] The first question [indiscernible]. Do you see a significant increase in the consumer finance business from China going forward as a recovery in all assets have been very sharp.

Perhaps, I'll take the question first and leave Brendan to say something. With regard to our consumer finance business in China, our overall outlook has been promising because as Chinese economy continue to track well on the recovery and the growth momentum has been healthy. Our overall business environment from market demand, customer demand and regulatory perspective has been relatively stable for us. We own a micro lender license in China, which is one of the traditional license. And we have 15 presence in [ 52 ] province. As the momentum -- as the growth momentum in China continues, we do expect to see our delinquency impairment ratios continue to improve. And I think our top line growth, getting the new -- the drive for the new product, we are seeing a lot of traction in the market. So yes, in general, we are pretty optimistic and confident about the progress in China.

Yes. Yes. Just to supplement that, I think what Elsy said is completely correct. We continue to have our focus on the China market for consumer finance. We're making good developments there. We understand how the market offering and online is working, and we're developing to adjust to that also. And as Elsy also mentioned, we're also introducing new products. So we're confident on that market, and we would like to participate in the growth.

Due to that, a follow-up question. Is there any time line you could share for the second half of the funds management business?

I'll take that question. Well, firstly, as I've articulated, we've done 5 seeded partnerships at all funds. So what we're focusing on right now is really growing and developing those respective 5 funds. So that's first focus. Secondly, as I mentioned, we've got a strong pipeline. In terms of seeded partnerships, we have already signed 1 additional, which is in the crypto space, and we'll be able to share that in more detail at a later date, and we are in advanced discussions on [ super logos. ] And we are targeted, which has been already communicated, to spin off our internal credit strategy at the end of the year. And so that process is well underway.

The next question is from Mr. Eric Tai. How will the volatile regulatory environment in China affect private equity exposure of SHK?

Okay. I can take that one. I think the first thing to say is that, obviously, our private equity exposure is diversified. So it is also added exposure to the other parts of the world. We are aware of regulatory changes, which are happening in this part of the world. But I also would emphasize that we have also been operating in this part of the world for a long time. So we have good experience of managing changes and regulations. And obviously, we will be monitoring our portfolio carefully, and we'll be rebalancing where necessary. Some of the exposures to things like the education sector, we have a very limited exposure. So that is positive from that perspective.

[Operator Instructions] If you have questions, you can also reach out to us for a one on one session later. I think the management has answered most of the questions. Thank you for the management for taking the time to present this morning. While the management had made an effort response to questions received, due to the time constraint, if you have other questions and haven't been answered, please contact Shirley Zhang, Vice President, Investor Relations of Sun Hung Kai & Co.; or their PR agency, Hill+Knowlton Strategies. The contact information is on the last slide of the deck. Please get in touch with us, we'll be happy to follow up. This concludes the investor presentation. Thank you, everyone, for tuning in today.