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

Good morning, ladies and gentlemen. Welcome to Sun Hung Kai & Co. 2022 Annual Results Investor Presentation. This presentation will be conducted in English. Alternatively, you may switch to the Chinese channel and mute original audio if you need translation. I'm Shirley Zhang, the Investor Relations Vice President of Sun Hung Kai & Co. The senior executives here with me today are Mr. Brendan McGraw, Group CFO; Ms. Lindsay Wright, CEO of Funds Management. In today's meeting, we will talk about the company's business performance in 2022, the outlook for the coming year and our future plans. [Operator Instructions] Before we start, I would like to remind you that in today's meeting, we will talk about the company's business performance in the past year and also the outlook for the coming year. We would like to take the opportunity to remind you that today's discussion will contain forward-looking statements, which are based on assumptions and factors that are beyond the control of the group and are not necessarily indicative of the group's future performance nor are the guarantees of our future performance. Now I'd like to pass to Brendan to start the presentation. Brendan, please?

Thank you, Shirley. Good morning, everybody. First of all, I'd like to touch upon our key milestones. In recent years, we have transformed from a retail brokerage and wealth management firm to a leading alternative investment platform. Following the complete disposal of Sun Hung Kai Financial in 2020. We have continued to strengthen our Investment Management and Financing businesses and launched the Funds Management platform. In the past 2 years, we have established 5 partnership funds and 3 Sun Hung Kai Capital funds within the Funds Management platform. We have obtained full Type 1, 4 and 9 SFC licenses, which allow us to offer all-around financial services. In 2022, our funds management platform raised external capital totaling USD 318 million, bringing its total AUM to over USD 975 million. In Q4 2022, we launched the Family Office Solutions within Funds Management, which will provide one-stop financial services for high net worth individuals and family offices. Moving on to our business overview. Our core business is built around 3 pillars: Financing, Investment Management and Funds Management. Our lending business conducted through UAF, Sun Hung Kai Credit and Private Credit provides us with resilient cash flow and organic growth. Our Investment Management business leverages the group's internal expertise, external network and strong financial position to seek attractive risk-adjusted returns across diversified asset classes, sectors and geographies. Our newly developed Funds Management business is fully licensed to manage external capital, including through the new Family Office Solutions, which aims at diversifying and enhancing the group's revenue streams. I'll now discuss how we plan to optimize our capital allocation to deliver strong shareholder value and drive sustainable business growth going forward. In our financing business, we will expand our loan product offerings, diversify our funding channels and strengthen technology development to service clients unmet demand and contribute steady cash flow. Within Investment Management, we will strengthen our risk management capabilities and explore new opportunities emerging in the dislocated markets and improving the risk-adjusted return and laying the foundation for our business transformation. For Funds Management, we will focus on building out our client reach to the Family Office Solution, expanding distribution efforts to raise third-party capital and promoting our own Sun Hung Kai Capital Partners funds. We're aiming to solidify our transformation into a leading Asia-based alternative investment platform. We will maintain our strong financial position and focus on long-term sustainable business growth. We will also maintain our proactive capital management strategies through a consistent dividend policy and continued share buybacks. Moving on to the 2022 annual results. In 2022, the regional COVID-driven economic slowdown, the extreme volatility across all asset classes globally and rising finance costs caused by Central Bank's aggressive rate hikes have all adversely impacted our results. We are well positioned to navigate these challenging conditions by leveraging our diversified businesses, strong balance sheet, ample liquidity, risk management and disciplined cost control. Revenue was HKD 4.1 billion in 2022, mainly consisting of interest income from the financing business. Our attributable loss was HKD 1.5 billion and our ROE was minus 6.5%, largely the result of mark-to-market losses recorded in our investment management business. Our book value per share and gearing ratio remained healthy at 11.4% and 43.7%, respectively, demonstrating our robust financial position and ample liquidity. The cost-to-income ratio improved to 38.6%, reflecting our improvement in operational efficiency. We remain firmly committed to returning value to our shareholders. The Board declared the second interim dividend of HKD 0.14 per share, together with the interim dividend of HKD 0.12, the total dividend for 2022 is HKD 0.26 per share. We repurchased 5.9 million shares for a total consideration of HKD 18.3 million in 2022. We have returned a total of HKD 13.4 billion to our shareholders since 2007. Looking at our balance sheet and capital structure. Our balance sheet remains solid, with total assets standing at HKD 42.9 billion as at the end of 2022. We maintained an ample cash balance of HKD 5.9 billion. Total loans were HKD 14.4 billion, primarily funded by our borrowings with 43% in notes and paper at fixed rates and 57% from bank lines at floating rates. We continue to fund our investment assets by our own equity. In March 2022, we did a tap issue of USD 75 million MTN just before the beginning of a rapid federal rate reserve hikes. We repurchased an aggregate principal amount of $59.8 million from the 3 existing MTNs in 2022. We redeemed the outstanding principal and accrued interest of the $443 million, 4.65% MTN upon its maturity in September 2022. Focusing now upon the Investment Management division. Total assets of our Investment Management business were [ HKD 17.6 billion ] as at the end of 2022 with alternatives, public markets and real estate comprising 74%, 13% and 13%, respectively. Amidst the short fall in asset prices, we proactively adopted various hedging strategies and rebalanced certain investments in a timely manner to protect our portfolio relative to benchmark indices. We were not fully exempt from market volatility, and we have felt the impact in 2022. The Investment Management business recorded a pretax loss of HKD 2.4 billion in 2022 mainly as a result of short-term mark-to-market losses and alternatives and real estate segments. Our alternatives and real estate portfolios mainly consist of long-term investments and generate strong return over a long-term horizon. The 3-year total return of the Investment Management business was 20.5% and cumulative realized gains on alternatives and real estate were HKD 5.3 billion over the 3 years. We continue to optimize our team enhanced risk management systems and improve our infrastructure to facilitate the development of the business. Going forward, we will continue to proactively manage our investments. We will work closely with the Funds Management division to explore further synergies across the group. Looking at the investment assets and return. We represent the subsegments in the Investment Management business in this earnings to provide a more granular disclosure of the portfolio performance. The blended return of the business was minus 8.3% in 2022. For the subsegments, we have returns of minus 6.1% for public markets, minus 9.8% for alternatives and minus 1.5% for real estate. Corporate Holdings mainly represents a mix of long-term and shorter-term equity positions. We strengthened our investment and portfolio management capabilities in 2022 striving to achieve sustainable risk-adjusted returns. The performance of the strategy outperformed both the HSCEI and the S&P 500 by 11 percentage points for 2022. In the Corporate Holdings portfolio, we employed hedging strategies to reduce overall market exposure against our U.S. positions and our China strategic listed positions. The strategic holdings consist of the group's strategic positions, which we believe will create synergies with other business units and deliver shareholder value in the long term. Looking at the alternative private equity segment. The headwinds from global interest rates, geopolitical tensions and China's regulatory tightening drove mark-to-market losses on listed portfolio companies held by external funds. The portfolio benefited from diversification across vintages, stages, geographies and sectors. The portfolio generated meaningful distributions and contributed positive cash flow during 2022. We exercised extra prudence in capital deployment and focus on portfolio management efforts with our direct portfolio companies in 2022. Our hedge fund investments. We strive to contain losses in 2022, while maintaining investments to prepare for market normalization. The portfolio benefited from attractive market opportunities, which began to materialize in November and December. We will constantly monitor the portfolio to optimize its risk and return. Finally, on real estate. For real estate portfolio, the year-end valuation stood at HKD 2.3 billion. In 2022, our investments in the hospitality sector saw their business recover to pre-pandemic levels. We continue to take a cautious approach to new investment and are working to minimize the impact of broad macro conditions and consumer preference to shifts on valuations and cash flow in the market. Our near-term focus will be on new origination in the credit space that takes advantage of market dislocations. Next, I'll pass to Lindsay, who will walk you through the Funds Management business.

Thank you very much, Brendan, and good morning, everyone. I want to just talk very briefly about our Funds Management business. The build-out of our Funds Management platform, Sun Hung Kai Capital Partners commenced in 2021. I'm pleased to report we've made some solid progress in 2022 following the startup year of 2021. Our Funds Management business is organized into 3 groups. Firstly, the funds partnerships. Secondly, SHK Capital Partners Funds and Investment Solutions; and thirdly, our new business Family Office Solutions. Our Fund Partnership business provides patient seed or acceleration capital from Sun Hung Kai & Co. to early-stage managers. Sun Hung Kai Capital Partners works with the managers to develop business infrastructure and support distribution capabilities given the alignment of interest. For the group, the Fund Partnership business has enabled an attractive and complementary asymmetric return stream to both our hedge fund and private equity portfolios. Our own funds and investment solutions business is managed by Sun Hung Kai Capital partners. In addition to our own investment professionals, SHK Capital Partners, collaborate with SHK & Co's Investment Management team to target specific alternative investment opportunities for our clients. Throughout 2022, we have added further partnerships and funds to the platform, culminating in 8 partnerships and funds as at year-end 2022. In quarter 4, we entered into distribution agreements with high-quality hedge funds that are well known to capital partners. This activity will enhance revenue growth and diversification over time. As noted, I'm very pleased to report we launched a new business in Q4 2022 Family Office Solutions. Overall, we work with clients on both a discretionary and non-discretionary basis to help them achieve their investment objectives, resulting in clients experiencing stronger financial well-being. Our core focus is to deliver and structure best-in-class alternative solutions whether through direct investments, independent strategies or strategies provided by our partners, SHKCP Funds. Now looking at our business growth. We achieved encouraging AUM growth in 2022 increasing external capital by USD 318 million raised collectively by our partner funds, our own funds and through Family Office Solutions. This brings our total AUM at year-end 2022 to approximately USD 975 million. Importantly, the share of external capital increased to 46.5% of our total AUM as at the end of 2022, up from 16.8% a year ago. Total revenue in 2022 was impacted by a reduction in performance fees received compared to 2021. Expenses were well controlled and the increase of 15.2% year-over-year was principally due to increased headcount to support the growth of the business. The expansion of funds and partnerships in '22 included the launch of E15VC Fund III with a USD 61 million raised at first close and the launch of the Private Access Fund. As noted, we are pleased to report the establishment and launch of the Family Office Solutions business. The new Family Office Solutions provides customized alternative investment solutions that creates long-term value for a limited number of private clients, family offices and institutions, leveraging our experienced in-house team and internal investment capabilities. Specifically for hedge funds, Family Office Solutions provides bespoke advisory and discretionary management portfolios of hedge funds to clients. The approach is dedicated to selecting best-in-class fund managers with a focus on generating idiosyncratic sources of alpha and employing strategies uncorrelated to broader risk assets. Family Office Solutions also provides access to exclusive direct market investments across regions, industries and capital structure either on a deal-by-deal basis, funds or co-investment basis. This flexible approach allows for innovative deal structuring that capitalizes on prevailing market and deal dynamics. I'll pass you to Shirley to talk about our financing business. Thank you very much.

Thank you, Lindsay. Our consumer finance business, which is operated under UAF in Hong Kong and Mainland China remains a key and steady revenue contributor to the group. The total gross loan balance was HKD 11.6 billion as of end of 2022, down by 8% year-over-year, which is because we conducted a prudent new loan and underwriting loan policy amid the economic slowdown in the Greater China area. Loans from Hong Kong and Mainland China accounted for 75% and 25% of total loans respectively. Total revenue of UAF remained flat at HKD 3.5 billion for the year. Cost-to-income ratio added up to around 35%, given our increased investment in technology infrastructure, enhanced loan collection efforts and the marketing and promotional activities. Net impairment loss increased by 38% year-over-year to HKD 702 million, mainly reflecting a reduction in the written back of impairment allowance compared to 2021. As a result, UAF's pretax profit was HKD 1.2 billion, down by 28% year-over-year compared to 2021. 2021, we reported an all-time high pretax profit, but largely for 2022, the pretax profit was largely flat compared to 2020. Now let's look at the performance of Hong Kong business and Mainland China, respectively. UAF's Hong Kong business remained resilient in 2022, with the gross loan balance and loan yields remained stable at HKD 8.7 billion and 30%, respectively. Net charge-off ratio was 5.1%, similar to the level in 2021 despite the challenging macro environment. During the year, UAF tightened credit approval criteria to minimize the negative impact of economic slowdown. In Hong Kong, we launched a series of promotion and advertising campaigns to grow our customer base, especially among the younger demographic. In addition, we are pleased to report that UAF has successfully completed the development of a credit card branded as SIM card. SIM card is scheduled to be launched in the first half of this year. For Mainland China's business, both loan origination and delinquency were impacted by the nationwide zero policy -- Zero COVID policy last year. We kept monitoring the credit risks closely. At the same time, we continue to pursue cost savings in the Mainland. Our secured loan product in the Mainland helped mitigate credit risks and contributed a stable source of profit. The performance of our mortgage loans, which is operated under Sun Hung Kai Credit remained sound last year. It contributed a pretax profit of HKD 122 million, which is the highest since the business started in 2015, mainly driven by the [ benign ] asset quality and improved cost efficiency. The gross loan balance decreased by 12% year-over-year to HKD 3.1 billion, reflecting our prudent loan underwriting policy in the market down cycle. Over 90% of the loan balance was first mortgage loans and LTV ratio was around 70%, which is manageable level and within our expectation. Revenue decreased by 7% year-over-year to HKD 285 million, mainly due to the smaller loan book. Our finance costs decreased by 0.5% to HKD 101 million despite the aggressive rate hikes in 2022. This is partly driven by our increasingly diversified funding channels. Moving to our private credit business, same as consumer finance and mortgage loans, we were prudent in capital deployment in 2022. At the same time, we focused on managing existing loan portfolio. Our gross loan balance was reduced by 30% year-over-year to HKD 1 billion. The smaller loan book was due to our strategic reallocation of capital to MCIP, which is an APAC real estate loan fund on our Funds Management platform. The reallocation is in line with our corporate strategy of developing a leading alternative and investment platform. Hence, revenue decreased by 68% year-over-year to HKD 84 million. As existing loans continue to be repaid, net impairment loss declined by 62% year-over-year to HKD 70 million. Next, I will pass to Brendan to give you an update on our risk management, ESG efforts and future plans.

Thank you, Shirley. Looking at our corporate risk management, the group manages risk across multiple categories, including strategic, credit, market, liquidity, operational, legal and compliance, external and human resources risks. Business operations are managed in line with risk appetite tolerances set by the Board. In 2022, we implemented a new enterprise risk management system working with the Big 4 to enhance risk measurement monitoring, mitigation and control. We also invested in a new portfolio management system to enhance the accuracy, accessibility and reliability of client portfolio, facilitating our investment professionals to tailor insights and conversations to each client. Moving on to ESG updates. Over the years, we have been working towards the objective of creating sustained value for all our stakeholders. Our commitment accompanied by our core values on sustainability converted to the UN SDGs, which act as the overarching objective of our business strategies. Our ESG initiatives focus on 5 areas. Namely business, employees, investors and customers, community and environment. First, for business, we have in place a full set of compliance-related policies to provide guidance and related mandatory training to our employees and we have strengthened our enterprise risk management practices and framework. Second, for employees, we have signed up to the Racial Diversity & Inclusion Charter for Employers and launched a Board diversity policy to enhance the quality of performance and functionality of the Board. Third, for investors and customers, we have adopted a group procurement policy with supplier code of conduct and sustainable procurement elements. Fourth, for community, we have sponsored the Harvard Business School's need-blind admission program since 2018. And finally, for the environment, we implemented a climate change policy, introduced Green Office Guidelines and participated in tree planting activities. The next slide is just a view of the awards that we have picked up to SHK & Co. related to ESG. Moving on to business outlook and future plans. Looking into 2023, we remain committed to exercising extra prudence and selectivity in new investments to preserve our capital. We will continue to improve liquidity across all business segments and position ourselves to capitalize on emerging growth opportunities. In the financing business, we expect UAF loan volume and customer credit profile to benefit from the improved regional economic outlook in 2023. Effective from 30th of December 2022, the maximum statutory lending rate has been cut from 60% to 48%. Certain categories of loan product will be affected. UAF will minimize the impact of the new rules. In the medium-term, we will leverage our new credit card business and technology developments to help UAF tap into a larger customer base and generate additional revenue streams. We will continue to balance within risk diversification, loan quality and profitability for our mortgage loan segment. In private credit, we will continue to manage the credit risk of our existing loan portfolio and look to originate new business that provides strong risk-adjusted returns. In the Investment Management business, we will remain cautious on capital deployment, but alert to opportunities in the dislocated markets. The Investment Management team will further cooperate with the Fund Management division to explore more synergies across the group. For the Funds Management business, the key focus for 2023 will be on distribution build-out, raising third-party capital to drive AUM growth and expanding the client reach to our family office solutions. In sum, we will strive to produce strong risk-adjusted returns through our 3 key business lines and explore new business opportunities. We are committed to achieving sustainable growth with sound governance and risk management to enhance long-term shareholder value. Thank you.

Thank you, Brendan. We will now proceed to our Q&A session. [Operator Instructions] Our first question comes from Ketan from Evaluate Research. His question is, has the mark-to-market losses increased further in the first half 2 to 3 months of 2023 for the Investment Management business of the company.

Maybe I'll take that one. So normally, we're obviously monitoring the movements in the mark-to-market on a quarterly basis. I can tell you, towards the end of 2022. Obviously, you can see that from the numbers yourself, the markdowns were considerable. We are anticipating that in 2023 as the global macro environment stabilizes, we would see those mark-to-market movements stabilize also.

Thank you, Brendan. Ketan's follow-up question is that has there been any change in the strategy in the Investment Management business to account for the increased volatility in global financial markets in 2023?

I think the answer to that would be yes. As you can see that within our public segment of the Investment Management strategy quite heavily, hedging strategy is employed in the second half of 2022, which did benefit us versus the S&P and the Hang Seng definitely, within the real estate part of Investment Management as well, we have seen ourselves exiting from some positions, but also just being very careful about how we deploy in a high interest rate environment and also within the alternative section, very carefully monitoring these platforms and adjusting where appropriate.

Thank you Brendan. Ketan has another question. The question is, what can we expect in terms of revenue growth and profitability for the consumer finance business in China in the first half of 2023. Maybe I will try to answer that and see if you have anything to add to. With the removal of COVID policy, COVID restrictions, we do see the recovery of business activities in the Greater China area not only in Mainland China, but also in Hong Kong. In the first quarter, however, is because of the Chinese New Year basically there is a but we do see the recovery from the loan demand and business activities. But we will -- we expect the business -- the volume and also our customers' credit profile will be improved in the second quarter. And we will continue to monitor the economic recovery in the region and see how will that translate into our business and also our profit and the revenue for the full year of 2023. [Operator Instructions] There is no further questions for now. So thank you, everyone, for participating in today's earnings conference. Please feel free to reach out to me Augusta for any follow-ups you may disconnect now. Thank you.