Sun Hung Kai & Co. Limited ($86)

Good afternoon, everyone. And welcome to the Sun Hung Kai & Co. 2025 annual results conference call. I am Christian Arnell and here with me today from the senior management team are Mr. Tony Edwards, Deputy Chief Executive Office; and Mr. Brendan McGraw, group Chief Financial Officer. Today's presentation will be conducted in English and will consist of prepared remarks reviewing the group's financial and operational performance in 2025 and outlook for 2026. Following management's prepared remarks, we'll open the call to questions from the audience. [Operator Instructions] Before we start, I'd like to remind you that today's discussion will contain forward-looking statements. These forward-looking statements are based upon management's current expectations and current market and operating conditions, which are difficult to predict and may cause the group's actual results, performance or achievements to differ materially from those in the forward-looking statements. With that, I'd now like to pass the call over to Tony. Please go ahead.

Thank you, Christian. Good afternoon, everyone. 2025 was a strong year for the group, delivering resilient performance despite a challenging external environment. Our total income increased by 28.4% year-on-year to HKD 5.5 billion, while EBIT rose 50.1% to HKD 2.7 billion, reflecting a better operating performance and platform realizations. The attributable profit reached HKD 1.6 billion, representing more than a threefold increase year-on-year, primarily driven by robust investment gains from our investment management business. The Alternative Solutions business, Sun Hung Kai Capital Partners, continue to scale rapidly with total AUM rising 56.7% to HKD 24.6 billion. And finally, our investment assets increased to 18.9% to HKD 15.7 billion, while the Consumer Finance loan book grew steadily with gross loan balance of 6% to HKD 11.8 billion. Turning to our key strategic messages. The group's profitability remains strong, driven by strong investment returns, which have benefited from good network effects of the alternative investment platform. Total AUM reached USD 3.2 billion with 57% growth, demonstrating the scalability and resilience of our solution-orientated business model. and its ability to generate enduring cash flows. Our long-term investment track record of 16.3% IRR and flexible balance sheet continue to support the growth across external capital inflow, investment partnerships, consumer finance and mortgage servicing. We maintained a low cost-to-income ratio and an EBIT margin of around 50%, reflecting a disciplined and well-managed operating model. Recent investments in technology infrastructure, including AI enablement and talent are gaining traction and supporting future growth and resilience. As the uncertain macro environment is likely to be persistent, the secular investment case for alternatives remains compelling. As you can see, our solution-orientated business model is designed to leverage the benefits of a holistic ecosystem for alternative investment stakeholders. At the core is our alignment strategy, with the aim to align the interest of third-party capital, the group and investment partners, whilst benefiting from mutual platform benefits. This is underpinned by our deep expertise, built up over 20 years of alternative investment experience, supported by a systematic data-driven investment processes and rigorous due diligence. We also provide access to proprietary deal flow and GP networks leveraging the group's investment capabilities to deliver privileged opportunities. Strong governance supported by transparent processes, proprietary research and a principles perspective, further enhances risk management and provides better long-term outcomes. With that, I'll hand over to Brendan to walk you through the investment management performance.

Thank you, Tony. In 2025, our Investment Management business delivered a profit before tax of HKD 1.8 billion, driven by higher net investment income across nearly all asset classes. Return on assets improved significantly, increasing 11.9 percentage points year-on-year to 15.1%. If you look at the charts on the right, the improvement in return on assets was broad-based across the portfolio. Private equity saw the most meaningful uplift, reflecting strong realizations and valuation gains while hedge funds and public investments also delivered solid returns. Special Situations and Structured Credit continued to perform defensively, contributing stable returns with improved capital efficiency supporting the overall increase in group return on assets. Total investment assets reached HKD 15.7 billion, with private equity, external funds and direct or co-investments representing approximately 60% of the portfolio. We also increased exposure to Special Situations and Structured Credit, now accounting for 11.8% of assets, enhancing downside protection while preserving upside optionality. Our portfolio remains well diversified by both geography and sector, reflecting an overall portfolio management approach. Geographically, North America, China, Asia and Europe accounted for 33.6%, 19.9%, 14.6% and 14.3% of investments, respectively. By sector, exposure is well balanced across financials, TMT, diversified consumer and real estate, supporting resilience across market cycles. Private equity was the largest contributor to investment income in 2025, generating HKD 1.3 billion profit before tax. Total assets increased 18.6% to HKD 9.4 billion, while return on assets rose 15.3 percentage points to 16.5%. Net IRR since inception improved to 16.3% and DPI increased to 0.86x, reflecting ongoing realizations and liquidity events. The successful public listing of HKD 2 billion of the private equity portfolio further enhanced liquidity flexibility. I will now hand back to Tony to discuss Alternative Solutions.

Thank you, Brendan. Our Alternative Solutions business, Sun Hung Kai Capital Partners, delivered HKD 63 million of pretax profit, up 28.8% year-on-year. This was driven by the strong growth in AUM and fee income, partly offset by higher operating and reorganizational costs associated with platform optimization. During the year, we deepened existing partnerships and formed a new strategic alliances, expanding platform capabilities and revenue streams. Key developments included collaboration with Wentworth, continued partnership with GAM, co-investments in the take-private of Janus Henderson with Trian Investment Partners and a strategic alignment with Mubadala Capital for co-investment flow and other privileged risk return. Despite a challenging fundraising backdrop for asset markets, our total AUM increased by 57% year-on-year to USD 3.2 billion. Growth was driven by good risk return outcomes for our customers, which drove strong net inflows and activated new investment and third-party capital partnerships. Fee income rose 83% to HKD 104 million. This significant growth serves as clear validation of our strategic initiatives as they are activating platform effects that we have created. We anticipate more market volatility and therefore, more demand for alpha generated by our investment alternative investment capabilities. Looking ahead, we will continue to invest in this platform as we expect additional monetization opportunities from these flywheel effects. I'll now pass back to Brendan to cover off on our credit business.

Our consumer finance business conducted by UA Finance delivered stable performance, recording a pretax profit of HKD 794 million in 2025. Excluding the exchange loss of HKD 97.4 million from the liquidation of Mainland China subsidiaries, the adjusted pretax contribution was HKD 890.9 million, representing a 4.4% year-on-year increase. Total gross loan balance of UAF increased 6% year-on-year to HKD 11.8 billion. Supported by disciplined underwriting and portfolio management, the return on loans for UAF reached 28.4% in 2025, up 30 basis points, while the loan charge-off ratio stood at 6.9% up 20 basis points. In 2025, UAF Hong Kong generated growth in profitability and transaction volume as well as tightening its measures to mitigate credit risks and manage loan charge-offs. Total gross loans of UAF Hong Kong increased by 5.6% year-over-year to HKD 9.7 billion. UAF China continued to reduce operating costs and focused on its shift from unsecured to secured lending. Total gross loans in China increased by 7.9% year-over-year to HKD 2.1 billion. The sim credit card delivered solid results, supported by a substantial expansion in customer base with increased transaction volume. Total credit card usage amount reached HKD 1.7 billion in 2025, up 54.6% year-on-year. Overall, with rising loan volume, new revenue streams from credit card business, higher return on loan and disciplined cost control, total income of Consumer Finance business increased by 4.2% year-over-year to HKD 3.3 billion in 2025. The cost-to-income ratio improved slightly by 10 basis points year-over-year to 31.1% in 2025. In 2025, our mortgage loan business conducted by Sun Hung Kai Credit recorded a pretax profit of HKD 7 million. The year-on-year reduction was due to our active management of the existing loan portfolio, cautious new loan originations and prudent provisioning policy. However, the return on loans improved by 30 basis points year-over-year to 10% in 2025, indicating enhanced profitability despite prevailing market pressures. Meanwhile, SHK Credit extended into mortgage services business in late 2024. During 2025, it was appointed servicer for 2 portfolios totaling USD 170 million owned by developers and institutional investors. As at the end of 2025, total mortgage loans serviced by SHK credit amounted to HKD 1.1 billion, up 34.3% year-over-year, whilst loan servicing income reached HKD 4 million in 2025. Now let me go through our key financial performance in 2025. Attributable profit increased by more than threefold to HKD 1.6 billion. Total income reached HKD 5.5 billion, up 28.4% year-over-year. The cost-to-income ratio of our fees and interest-based business, which include Credit and Alternative Solutions, stood at 31.2%. Our interest cover improved to 4x. Our net debt decreased by 12.8% year-over-year to HKD 5.8 billion, while our shareholders' equity increased by 5.6% year-over-year to HKD 22.3 billion. Consequently, our net gearing ratio reduced from 31.2% in 2024 to 25.8% in 2025, reinforcing our balance sheet strength. The charts on this slide highlight our long-standing commitment to disciplined asset growth and value creation, which has consistently translated into long-term strong EBIT and attractive shareholder returns. As illustrated, our capital has been deployed with a clear focus on quality and sustainability, underpinned by a long-term proven track record of stable capital return across market cycles. Operationally, our EBIT margins are around 50%, demonstrating our continued focus on profitability. The charts also reinforced our consistent dividend policy. The Board declared a second interim dividend of HKD 0.15 per share for the year ended the 31st of December 2025. Together with the interim dividend of HKD 0.12 per share, total dividends for 2025 are HKD 0.27 per share, increased by 3.8% year-on-year. Since 1997, we have returned a total of HKD 15.9 billion to shareholders through dividend payments and share buybacks while maintaining a strong and flexible balance sheet. Together, these elements underscore our focus on disciplined capital allocation, sustainable earnings growth and long-term shareholder value creation. Now I'll pass to Tony to talk about our cross-sector synergies and outlook.

Thank you, Brendan. As a principal led alternatives investment platform, we are dedicated to delivering aligned investment solutions for our investment partners, third-party investors and ourselves. Below are key collaboration achievements from this year. Our adaptable capital enabled Wentworth to establish a new business vertical resulting in the creation of distinctive investment solutions for clients seeking diversified exposure to Australian credit opportunities. In Hong Kong, through close collaboration with our investment partners, our Special Situations and Sun Hung Kai Credit teams successfully acquired several residential mortgage portfolios. This initiative assisted deleveraging in developers balance sheet and expanding our mortgage servicing operations. On a global scale, we have strengthened our partnerships with Mubadala Capital and GAM. Most recently, our private equity team together with third-party clients participated in a take-private transaction of Janus Henderson, offering Sun Hung Kai Capital Partners clients exclusive access to a compelling co-investment opportunity. We are now strategically positioned to capitalize on the ongoing expansion of alternative investments, reinforced by our commitment to grow global strategic partnerships. By prioritizing capital efficiency and prudent risk management and leveraging our integrated platform and experienced team, we strive to continue to deliver sustainable growth and enduring value to our shareholders. Thank you very much.

Thank you, Tony. [Operator Instructions] We have our first question. This is a 2-part. Profit before tax from the investment management business increased significantly in 2025. What drove this performance? And is it sustainable? Second, what does the exit pipeline look like for 2026?

Okay. Maybe I'll take that one. Yes, I think the main driver in 2025 has been in North America, where we have seen some significant listings and some companies been able to come back to the market as interest rates have decreased and share valuations have increased. So that has been a good contributor to the pipeline in 2025, but we do also expect that notwithstanding current events, obviously, in the Middle East if things can normalize we do expect that to continue into 2026 as well.

And if I could add, I think I'd just point out that for the first time, we've disclosed the performance of the investment portfolio, which is a 16.3% annualized IRR since 2010. What's important about the repeatability is the systematic nature of our investment teams and their capabilities, which is based on their experience and competence, our processes, our governance and the culture, which has driven significant value for shareholders over many years, and we expect that to continue in an environment when it's difficult and also in more mundane environments as well. So I think that repeatability and consistency of our investment returns is very strong, and we're very capable to do that.

Thank you, Tony. The second question is also a 2-part. What were the key growth drivers for the Alternative Solutions business in 2025? And is there any AUM target for 2026? Second, where do you expect fee income to come from and are there new partnerships or seeding projects in the pipeline?

Thank you. In terms of the growth of nearly 60% of AUM or just over HKD 1 billion, that essentially has come from the fact that we've continued to deliver a good risk return to third-party capital, whether that's directly through our co-investment deals or through our investment partnerships. The mission of our Sun Hung Kai Capital Partners is to allow third-party capital access to our investment capabilities and enduring risk return opportunities. And I think we've managed to do that. And I think we'll continue to invest in our capabilities to continue to provide those returns, both for our principal and also for our external shareholders. We are very excited about the future. We have a number of opportunities that we are working on as we had last year. We're very pleased with and continue to invest in the partnerships with our investment partners such as ActusRay Partners and Wentworth Capital, Cornell and E15. And we will -- we continue to committed to invest in future partnerships with other general partners and invest in our partnerships with other funds and other LPs in the region, including Mubadala Capital, GAM and in the future, following the closure of the privatization with Janus Henderson.

The next question comes from Kate Luang at UOB. I believe the investment management question has already been answered, but what are the longer-term strategies for the investment management business? And then second, is there any update for the dividend payout policy?

Okay. Maybe I'll take those. So for the investment management strategy, I mean, longer term, yes, is to generate strong risk-adjusted returns, as Tony has referred to. And as we started to publish some of those returns within this particular report, our aim is to maintain them, and we maintain them through discipline and good execution. The second question on dividend policy, obviously, you'll have seen with yesterday's announcement, we have increased the dividend in light of these good results. And what I would say is the Board will continue to monitor the results of the business to see how we will continue with that in the future.

Thank you, Brendan. [Operator Instructions] The next question is a 3-part. Fitch ratings indicated that the default rate of its monitored U.S. private credit portfolio reached 9.2% in 2025. Major private credit lenders like Blue Owl and BlackRock are facing liquidity concerns for their private credit funds. Question one, what is the asset quality of your legacy private credit loans; two, do you have any new loans made by your special situations in Structured Credit and real estate segment? And if yes, what is their asset quality? And lastly, what is the outlook of these 2 business segments in terms of funding sources, asset quality and risk management.

Okay. I'll take that one first, Tony, and then maybe you can contribute as well. So yes, I mean, overall, clearly, it's in the news, what's happening with private credit lenders, particularly some of the larger ones. What I would say is that we're a bit more boutique in this area in the sense that we are not broker-driven. We are not largely involved in retail driven evergreen funds. We tend to do more targeted and bespoke private credit deals. We don't do deals where we just accept covenant-light packages. They are done deal by deal. The underwriting is very thorough. And so therefore, I do not have any concerns on the asset quality part of the question. The second part is, has there been any new loans in 2025? Yes. As you can see, we have deployed more assets in this area during 2025. We do believe that we've done that judiciously in areas where the asset strength is good, and we're not just relying on the borrower. We're actually relying on the underlying assets and cash flows as well. And our outlook for this area is that we think it will continue to be a stable part of our business. And if there are dislocations in credit markets or equity markets in terms of Special Situations, we remain balanced and flexible and we can take some of those opportunities.

I can't add much to that, Brendan. But I'd say that we have a 55-year heritage in the credit business. I think we apply that every day to all our underwriting. We do not look to underwrite on cash flow or business growth, but very much focused on those loans and those credit opportunities that have significant real asset backing and can provide us the comfort and the downside protection that we strive for.

The next question is, do you have any AI-related PE public market investments in your portfolio? And if so, what percentage do they make up in Sun Hung Kai & Co.?

We do have AI-related investments. I wouldn't disclose the absolute percentage, but this is an area that we do invest in and follow very closely. We do like to -- we don't just look at it from the software angle. We do also look at it for some of the other subsidiary angles as well like energy demand as well because we think there are also subsidiary effects from this AI take-up.

The next question is a follow-up. How have you been deploying AI across your business?

Okay. I'll take that one. Yes, this has been very interesting for us. We've gone for an enterprise AI approach, where we have deployed a large-scale platform across the business, which all staff have access to. All staff have had training on how to use that platform as well and are now capable of creating and publishing their own agents. We did it this way specifically so that we could also maintain cybersecurity, so we wanted to make sure that any confidential documents would stay within our wrapper, but our AI tools could go out and gather intelligence from the web and bring it back in to be processed. We're quite advanced in this, and we've invested a lot in 2025. We will continue to do so because we are already seeing productivity benefits.

Thank you, Brendan. There appear to be no further questions in the queue. This concludes the Q&A session. Thank you, everyone, for participating in today's call. If you have any further questions, please feel free to reach out to the Sun Hung Kai & Co. Investor Relations team or Christensen Advisory. Thank you, and have a good evening.