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

And the cohort achieved returns ranging from 13.5% to 32% in 2024, exceeding expectations. Scout managers tend to run with higher volatility, aiming for higher returns and deliver performance ranging from minus 4.5% to plus 49%. Moving on to special situations and structured credit. Our special situations and structured credit strategy focuses on unique opportunities arising from market dislocations and specific events to achieve favorable returns with robust defensive characteristics. The portfolio has further expanded our geographical reach across Western Europe, North America and Asia while integrating the residual term loans from private credit. During 2024, there were no major revaluations in the portfolio as many investments are working through their initial phases. Finally, moving on to real estate. Our real estate portfolio primarily consists of Hong Kong commercial properties, private credit investments and select international hospitality investments. The portfolio recorded a gain of 3% in 2024, mainly driven by our investments in the hospitality sector in Europe, which recorded a strong performance, offsetting the weakness in Hong Kong. In the last few years, we have been focusing on rebalancing the portfolio away from stabilized lower-yielding equity investments towards more opportunistic projects that deliver credit-like downside protection with equity-like risk-adjusted returns. We will continue the strategic alignment in 2025. Next, I will hand over to Tony, who will guide you through the development of our fund management business.

Thank you, Brendan. Our fund management business has evolved into the 3 business lines: FOS and SHKCP funds, Fund Partnerships as well as Strategic Alliances. SHKCP funds include Sun Hung Kai Latitude Alpha Fund, the global fund of hedge fund strategy and MCIP and Asia Pac real estate loan strategy. Our FOS business, the multifamily office platform, made solid progress in expanding its client base and AUM in 2024. Our fund partnerships are mainly established with emerging managers, providing them with seeding or acceleration capital. The diversified partnership cohort to date include ActusRayPartners, Kernel and Scalar, E15VC as well as Point King. Among them, the equity market neutral strategy, ActusRayPartners, hit a significant milestone with AUM reaching USD 1.1 billion in 2024. It also launched its third fund, ActusRayJapan Alpha Fund, building on the success of its European and Asian strategies. In the digital asset sector, the market neutral strategy, Kernel and the quantitative directional strategy, Scalar effectively capitalized on the recovery of the market. In 2024, we established a strategic alliance with GAM, driving the distribution and servicing of their funds across Greater China. We also formed a strategic partnership with Wentworth Capital to capitalize on the burgeoning opportunities in Australia's rapidly growing real estate private credit sector. Now let's move our focus to the segment's key operating metrics. In line with the continuous evolution of our business, we introduced 2 additional categories for calculating AUM, which are distribution of external funds and ownership adjusted AUM, respectively. At the end of 2024, our total AUM reached USD 2 billion. Fund partnerships grew their AUM to USD 1.3 billion. FOS and Sun Hung Kai CP funds contributed USD 249 million. The AUM we distribute and service for external funds was USD 341 million, while the ownership adjusted AUM amounted to USD 118 million. To ensure a clear and comparable understanding, the analysis of our AUM movement and AUM comparison focuses solely on our funds partnership and FOS and SHKCP funds, providing a consistent basis for evaluation. During the year, we recorded net cash inflows of USD 384 million and saw favorable market performances of USD 211 million with contributions from nearly all strategies. To further look into the composition of Sun Hung Kai & Co., capital and external capital contribution from external capital increased to 80% at the end of 2024, reflecting the market's recognition of our strategy and the ability to deliver attractive risk-adjusted returns. Turning to the segment's financial returns. Fee income increased by 56% year-on-year to $57 million. Other income of $24 million was mainly recognized from the partial repurchase of our seeding capital revenue share by ActusRayPartners. Operating expenses increased by 10% to $32 million, reflecting our continued investment in scaling the platform. Pretax contribution increased to $49 million from $17 million in 2023. Our FOS business serves as an alternative investment platform for like-minded family offices and ultra-high net worth individuals, offering them curated investment opportunities ranging from private equity, special situations, structured credit and hedge funds. Key differentiators of our service include access, alignment, expertise and governance. Firstly, we leverage our extensive networks to gain unique access to alternative investments and cherry pick high-quality opportunities for clients. Secondly, our own balance sheet commitments enable alignment of interests between FOS' clients and the group. Thirdly, the deep knowledge and expertise accumulated in the alternative space positions us as a very creditable partner. Finally, our institutional grade investment governance and infrastructure help enhance performance, risk management and operational efficiency. The strategic alliance we established with GAM further diversified our product offerings and expanded our footprint globally by broadening the collaboration to wealth management in the sector, allowing us to cross-sell alternatives and wealth services between Sun Hung Kai Capital Partners and GAM's clients. GAM's existing strategies mainly include high conviction equity, specialist fixed income, multi-strategy and alternative investment solutions. The partnership has been successful as we continue to grow the GAM fund assets in Greater China during the year. Another strategic alliance we forged during the year was Wentworth, which is a real estate private equity and private credit firm dedicated to the Australian market. Wentworth employs a differentiated approach to navigate complex situations in sourcing, acquiring, managing and repositioning real estate investments. It offers competitive risk-adjusted returns in the Australian market where there is increasing demand for capital and less competition with traditional banks. This partnership allows us to collaborate with a disciplined institutional-grade platform to connect high-quality opportunities in the real estate sector. Now I'll pass to Shirley to talk about our credit business.

Thank you, Tony. Our Consumer Finance business is conducted through UAF. In terms of outstanding balance of unsecured lending, UAF has consistently ranked the first among all money lenders and maintained a top 5 ranking among all lenders in Hong Kong since 2017. In 2024, in response to the challenging operating environment, we adopted a cautious approach to loan underwriting, prioritizing operational and capital efficiencies. In Mainland China, we continued with our strategic transition to secured lending. As such, our total gross loan balance decreased slightly year-over-year to HKD 11.1 billion. Hong Kong and Mainland China accounted for 83% and 17%, respectively. Revenue for the period was HKD 3.1 billion, down 3% year-over-year. Operating expenses decreased by 9% to HKD 983 million. Cost-to-income ratio improved by 210 basis points to 31%. Net impairment losses were HKD 794 million, up 17% year-over-year. This mainly reflects the negative impact of the weakening economic conditions and our prudent provisioning policy. Our finance costs predominantly benchmarking against HIBOR remained stable compared to 2023. As a result, pretax contribution to the group amounted to HKD 807 million. In the Hong Kong market, we aim to strike a balance between growth and risk mitigation. Gross loan balance increased slightly to HKD 9.2 billion. The amount and the number of loan originated in the year increased by 7% and 9%, respectively. We continue to upgrade our in-house developed credit scoring system with new technological tools and updated databases to enhance credit evaluations. Loan yield remained stable at 30% level in 2024. Charge-off ratio was 8% in 2024 in Hong Kong. Considering the deterioration of economic environment during the year, we made extra provisions. Therefore, net impairment loss ratio increased to 8.8% in 2024. Our Credit Card business generated cumulative transaction volumes of over HKD 1.5 billion by end of the year. Other key operating metrics such as outstanding balance, income generation, customer and card acquisition also delivered solid results. UAF is also committed to ESG initiatives and maintain robust data security practices, aiming at supporting the Group's sustainability goals and enhancing trust with stakeholders. In the Mainland market, gross loan portfolio stood at HKD 1.9 billion, decreasing 6% year-over-year. The increase in secured loan contribution has resulted in a decline in average loan yield to 18% in 2024, but such a decrease was compensated by the net impairment reversals and a reduction in operating expenses. This helped enhance our capital productivity and profitability in 2024 and positions us well to capitalize on the future economic recovery in the Mainland. Moving to our mortgage business, which is operated by Sun Hung Kai Credit in Hong Kong since 2015. We remained cautious in loan underwriting amid the cyclical adjustments, but focus on proactively managing our existing portfolio and developing our mortgage servicing business. Gross loan balance was HKD 2.1 billion, representing a year-over-year decrease of 17%. First mortgage continued to account for over 90% of the portfolio. Revenue for the year was HKD 229 million, down by 20%. As a result of the smaller loan book, return on loans was 9.7%. Operating costs decreased 23% to HKD 45 million year-on-year, primarily due to the centralization of our operations and reduced marketing activities. Cost-to-income ratio decreased to 20%, remaining at the low end of our acceptable range. Finance cost decreased 35% year-over-year to HKD 69 million. This is primarily due to the decrease in borrowings we utilized. Net charge on impairment losses was HKD 76 million as a result of the larger provisions we took on certain loan defaults associated with the weak economy. As a result, pretax profit contributed by Sun Hung Kai Credit for the year was HKD 40 million. Next, I will pass to Brendan to give you an update on our risk management efforts.

Thank you, Shirley. We continue to enhance risk management in 2024. During the year, we've strengthened risk controls. Existing controls were reviewed and fortified, enhancing the ability to identify, assess and manage risk effectively. We continue to upgrade our risk management system, enabling more efficient information collection and reporting. On risk monitoring, our Risk Committee held regular meetings to address emerging and critical risk, enabling informed mitigation strategies. By proactively assessing and analyzing risks, we ensure a comprehensive understanding of potential challenges and implement or enhanced risk mitigation measures. We also conducted a number of risk training sessions and shared the quarterly enterprise risk management bulletin to increase our staff risk awareness. Next, I'll pass to Tony to talk about our ESG efforts and future plans.

Thank you, Brendan. I'll share our ongoing efforts in ESG. We have introduced our responsible investment policy by integrating ESG factors into our investment decisions, supported by screening and alignment procedures to promote responsible investing. Our target for UNSDG-Aligned Investments has been increased from 30% to 50%, and we achieved this goal in 2024. We also partnered with an independent service provider to conduct an audit and assurance for our 2024 ESG report, ensuring greater transparency and credibility for our disclosures. In Environmental achievements, we reduced our paper consumption by over 40% and water consumption by more than 30% compared to 2023 levels. We continue to invest in developing our team and average training hours per employee increased by 130% year-on-year. During the year, our employees also participated in different volunteer activities, demonstrating our commitment to social responsibility and giving back to the community. Last but not least, I would like to share with you our business outlook and future plans. Looking into 2025, multiple challenges persist, including elevated interest rates, China's ongoing structural economic reforms and geopolitical tensions. In the Credit segment, we remain focused on expanding our service and product offerings, such as SIM Credit Cards to capture untapped opportunities. In the meantime, we will continue to invest in digitalization to enhance operational efficiencies and improve credit risk evaluations. On the mortgage business, we will maintain a conservative approach to loan origination, but focus on managing our existing portfolio and capitalizing on opportunities to develop our mortgage servicing business. In Investment Management, we will continue to manage our portfolio. Our discipline in the last few years has been ideally -- has let us be ideally positioned to capture opportunities arising from dislocated markets with an optimal balance of downside protection and upside potential. In Funds Management, we remain committed to building the platform through new partnerships. increased investment in sales and marketing and the expansion of our distribution network. We will further collaborate with strategic partners, including GAM, Wentworth and others under exploration to diversify our product offerings and extend our global reach. We will continue to invest in developing FOS to grow our client base, leveraging the investment access and our alignment of interests with clients. Across the group, while navigating the ongoing challenges, we will also be strategically positioning our business for growth as we complete our strategic business transformation and enter the next phase in 2025. By selectively deploying capital and building out our Funds Management platform, we aim to capitalize on emerging opportunities and drive sustainable value creation for our shareholders. Thank you.

Thank you, Tony. We will now proceed to our Q&A session. [Operator Instructions]

Hi. Congratulations for the great turnaround and results. This is Joyce Con from Dynasty Alliance Investment Management. I've got a macro question about U.S. interest rate Fed. They cut the rate by 3x and holding it at current levels, but there is a chance to have a couple of cuts more. So may I know the management's view on interest rates? And how does it impact our NIM on our credit business? Thank you.

Okay. Maybe I'll take that on the macro point and then Shirley, you can talk about the credit business. I mean, yes, obviously, we're tracking this very closely as well. It varies from month-to-month how many cuts there may be, I think, what the market thinks. Yes, we believe that there will be another couple of cuts in 2025. But obviously, it can change because the economic environment is changing with new policies being promoted by the U.S. government could stoke inflation, maybe not, but we'll wait and see. But I think for us, we won't bet on that happening. We'll have to manage our businesses appropriately so that we make sure that our NIM is well managed and that we continue to be profitable in that business.

Yes. Maybe I will talk about the impact on our credit business, especially Consumer Finance. I think that's the biggest part of the credit business because our Consumer Finance business, they basically benefit from the rate cut cycle. And in the second half of 2024, actually, our finance cost allocated to UAF Finance is actually lower than the first half. So averagely, in total in 2024, our financing cost incurred by UAF is relatively stable compared to 2023, which means that basically, we are already at the peak. And in 2025, no matter it's 3x cut or even 1x cut, different people have different views, but we see that it's more favorable friendly for our net interest margin.

Thank you management for your presentation. Yes. I'm Kate from UOB Kay Hian. I have 2 questions. The first one is regarding our capital management. We can see that we have continued to reduce our MTN exposure and has actually been lowering our gearing ratio since 2021. So can you share with us our plan for capital management going forward? What -- maybe what would be the rough mix of our fixed rate notes and paper and also our bank and borrowings? This is our first question.

Okay. Maybe I'll take that one. Yes, we have been actively deleveraging as you can see from the numbers. I think there's a couple of functions in that. So some of the -- in the businesses themselves, you can see that the loan balances haven't been growing rapidly. So that has a natural effect. But also, we are conscious that we are in a relatively high interest rate environment. So we've taken the opportunity to pay down debt where we can. I think going forward, we've tended to try and maintain around about 40% to 50% gearing ratio. So we're at the low -- we're definitely below that at the moment. So we probably could move towards more towards that in the future. And the fixed floating ratio, we will traditionally, we've kind of roughly been around about 50-50. We're now about 75-25. So we will obviously be looking at how we can balance that out going forward as well.

Okay. Thank you, Brendan. I have another question regarding our recent investment in Wentworth. Can you share with us some details on the growth potential of the real estate private equity and private credit in Australia?

Yes. Thanks. I can take that. We've been working with Wentworth for 2 or 3 years. We've also been invested in the Australian real estate sector for many years. And we've had our fund, the MCIP fund investing in Australia. And we took the view to develop this partnership because we identified a really strong talented team of investors, and they wanted to expand their reach from private equity investing in real estate to debt investing in real estate, and it is our business model to provide seed capital and also acceleration debt and equity capital to -- in talented investment teams. And in Australia, in general, what we found is there's a very strong immigration trend. There's 600,000 new people arriving in Australia every year. There is only 4 banks in Australia, there's 43 in Hong Kong. And the banks are retreating from the real estate lending market, development market. And the development process remains opaque and very localized. And we have a lot of experience in the Australian market and really understand how Wentworth are applying their experience. So we think there's a strong growth potential in that debt business. And we have a very good and talented team that are very well respected in that market that are going to allow us to exploit that opportunity.

Congratulations for the strong recovery of your business performance last year. This is Nicolas Wang from Dynasty Alliance Investment Management. I have 2 questions for you. The first is about the current China asset evaluation, especially in the high-tech area. I noticed that your investment, especially for corporate and private equity has big exposure to the telecom sectors. So could you share with us how you benefit from the recent trend and also especially with AI trend, I mean, artificial intelligence no matter for GDP, GPT Chat or for the recent DeepSeek in China? How you use these material tools to increase your performance also or you benefit from your invested companies? That's the question number one.

Maybe I'll take the first part of that. I'll take the first part on the investment trends. Yes, I mean, of course, we have been invested in China and in tech names for a while. So it's not just due to AI, to be honest. So we've invested in good companies which have had stable cash flows, good yields over a long period of time. And those companies have become involved in AI, which is good and natural. So obviously, we'll expect to continue to benefit from that trend. I think the underlying thing is that they're well-run companies with good solid capital bases, and that's what we will continue to try and identify.

Yes. And if I could add to that because there is a number of different levels to AI in our business on the investment management side. Of course, we've identified a number of GPs that are very well exposed to finding opportunities in the technology sector. And we're exposed across the globe to tech and telco PE risk and return. But we also have found those other investors that can deploy using AI investment-driven processes within our hedge fund portfolios. Plus we're using AI internally, as Shirley alluded to in credit, but also into the broader business using AI itself to help us improve our efficiency in terms of the operating business because it's what AI and technology does in the business is it enables to improve transparency, and that transparency allows us to grow our culture and improve our policies and procedures that enable us to be more effective at what we do.

My second question is about the asset allocation under the global geopolitical uncertainty. So you did a good job last year saying that your assets are already appreciated in Europe and in China. So my question is that looking forward, still some likelihood that there will be intensifying geopolitical tension. So what's your plan for this year? Is that strategically for some regions? Would you plan to increase the asset allocation or decrease allocation in various regions of your portfolio?

I'll take that one. At the bottom line, we have an investment policy, and we have allocations of where we put assets by sector, by geography, et cetera. And that's guided by our Board. So we follow those policies, and we assess them every year in terms of allocation. I think the key thing is don't put all your eggs in 1 basket. So we make sure that we diversify across various sectors and geographies to maximize where we can. So I don't think we're going to move all from A to B because you just don't know what the next turn will be.

Well, I can add a little bit to that because I think the allocation process is very bottom-up-driven. So we look for the opportunity and assess that. What's important is that we've got a really good balance sheet and a resilient business that allows us to take advantage of opportunities and dislocations when they happen. So we are looking for the -- a more volatile market is actually really good for us in the long term because that allows us to take investment decisions because we're very well positioned to do that.

Yes. There is a question from online. I think many investors are interested as well. The question is asked by Stephen Wong from [indiscernible]. The question is, in what occasion would we consider further improving dividend payout?

Okay. Yes. Well, I think maybe I'll take that one. I mean we've obviously been through a good year this year. We've come back into black. But I probably refer people back to as well that in 2022 and 2023, where we had losses, we continued to pay the dividend, where maybe many other institutions did not. So we take the approach that paying a stable dividend over a longer period of time is the right way. And when we have exceptional profits, which you probably saw in 2021, we added a special dividend. So I don't think we would change from that trajectory.

Thank you, Bren. Any other questions? Okay.

This is Howard from Sunwah Kingsway. I noticed that there is 2 consecutive years of look, the size of China's loan book has been declining for 2 consecutive years. Is that reaching the bottom? Or do you expect that to be lower in the future?

Yes. Thank you, Howard, maybe I will take that question. I think you're talking about the Consumer Finance China portfolio. As we previously reported, after COVID, we have been strategically adjusting our focus in China. Previously, it was mostly unsecured loans. But since 2022, we have been focusing more on secured loans and also downsizing the unsecured loans just to mitigate the risk and improve the operational efficiencies. So currently, our China portfolio is around HKD 1.9 billion. I think it's basically the stable level going forward because currently, secured loans account for around 60%. The rest is unsecured loans.

Questions probably relevant to ourselves here locally. The Hong Kong -- the mortgage finance and Consumer Finance in Hong Kong seems like a decline, we see impairment loss as well. Do we see a bottoming in Hong Kong economy and property market? Or do we still have to wait? Do we still see a light in the tunnel?

Okay. Maybe I'll take that one. I think we still have to wait. I think we are starting to see some encouraging signs. I think the government have tried to make some measures to ease the mortgage market. But obviously, I think as economic development comes back, then confidence will come back and then we can see some more recovery. But for now, I think we need to be cautiously optimistic.

Yes. In terms of Consumer Finance, maybe I can add a little bit. I think we are not in a position to forecast the GDP growth for Hong Kong. But what we can talk about is that basically in the first quarter of 2025, this is basically the end of the first quarter. We are happy to see there is some improvement in terms of impairment loss compared to last quarter. So we hope that the momentum can continue and benefit the whole year's performance. So if there's no more questions, we are almost running out of time. So we would now conclude the Q&A session. Thank you, everyone, for joining today's earnings conference. If you have any further questions, please feel free to reach out to me or Christensen, and we have prepared some refreshments outside the meeting room. So please enjoy. Thank you, everyone.