Swire Pacific Limited (19) Earnings Call Transcript & Summary

Hi, good afternoon, everybody. Thank you for joining us today for the Swire Pacific Pre-Close Briefing. And today we have Pat Healy, someone you already know, now he's the Chairman of Cathay Pacific and also the Chairman of Swire Coca-Cola. He will be also talking through with yourself the Aviation, Cathay Pacific and also the Swire Coca-Cola business during the review. As usual, we'll start with a business run through and then followed by Q&A questions. I suppose all of you have a copy of the PowerPoints, and they'll also be on the screen, showing the relevant page. In fact, 2019 has been a very challenging year for us, starting second half of -- starting June or in the second half. And in terms of the business environment, the protests in Hong Kong has impacted the business to different varying extents, the airline business, the hotel business, the retail business and the retail-related business has been hit the most. And in fact, the situation appear to be softened a bit and it's still uncertain how this would be -- would come through. And in terms of the global trade tension, it has already sort of started in late 2018, and we have seen a strong cargo movement in the last quarter of 2018. But then starting 2019, we have already seen the pressure on cargo for Cathay Pacific business. And I also put on the third point is the slow recovery of the offshore industry. And this is sort of out of our expectation that this recovery has been slower because lots of indicators have been showing towards that the activities on the oil rig fixing area has improved. But of course, you know there are also pressure in terms of the supply and demand, which are constraining the recovery of the industry. And there's also another important point, which I have not put in here is the currency. The strength of the U.S. dollar currency and also the weakening of the renminbi also has been impacting the business as well financially. We saw very solid results in the first half, and we have recorded a 40% increase in profitability to HKD 4.2 billion for the group. And -- but then since June, with starting the protests, we -- the overall performance of the group has been affected. But also, as I mentioned, they are to varying extents across the divisions. For Swire Properties, in fact, the overall performance has been stable. And there, we have seen robust performances from Hong Kong office and also Mainland China retail portfolio. However, the Hong Kong retail and hotel performance have been quite adversely affected by the protests. And later, we'll go through the various impact which we have seen. And the first half of Cathay Pacific, in fact, has been very encouraging for the airline. We have seen lots of good signs of recovery and also the transformation has been moving well. But then there are exceptional challenges as a result of the protests and the continuing uncertainty surrounding the global trade tensions has been affecting the business in the second half. HAECO business, after privatization in late 2018, in fact, the business has been trending well and it remained solid. I put down here, except for HAECO Americas, is the continuing loss of the HAECO America. But in fact, the loss has significantly reduced with the better performance of their airframe maintenance services, and so that is very pleasing on that front. Swire Coca-Cola remained very strong, and it has performed well, particularly in Mainland China. There have been a lot of initiative, which the division has put out, and Pat will run through with you later. As I mentioned, SPO remained weak. And on -- in assessing the outlook we have, in November, made an impairment charge in respect of the vessels' carrying value. Despite all the activities that has been increased, the problem is mainly because of the charter hire rates, which has not substantially recovered. And so we have adjust their outlook in terms of recovery pace. Loss at the Trading & Industrial Division, which is mainly arising from the Swire Resources and also Qinyuan Bakery in China, and also there, we also had to make an impairment in Qinyuan Bakery, and I'll run through also later. What's very encouraging for 2019, as you are aware that we have made significant divestments of properties and also noncore properties within Swire Properties, and we have generated some HKD 17 billion of proceeds, and this has further strengthened our balance sheet following some disposals that we have made in 2018. And it is important that we want it to be -- remain strong in terms of our financial position, such that we have the firepower to sort of get in to investment when opportunity arises. And of course, there are still quite strong pipeline investments within Swire Properties that we are right now engaging. On the Property Division, I mentioned that the Hong Kong office has enjoyed quite resilient performance. Though we have seen reduced demand from PLC companies and there have been a slowdown of the MNC requirements, but Hong Kong is so unique because supply is just out of balance with demand, and it's very tight supply throughout Hong Kong except Kowloon East, and this has underpinned the rental. And within Pacific Place, in fact, we have continuing to see a good positive rental reversion. And also down at Quarry Bay, our very important decentralized hub, also have been enjoying good positive rental reversion. And throughout the portfolio, as we have stated in our third quarter statement, the occupancy rate was very high at 99%, with only 1% vacancy, which, in fact, is just, I would say, substantially full. And the situation has not changed much since then, and despite there have been upcoming vacancies release in central, putting some pressure on perhaps the rental, we are still looking at positive rental reversions for our portfolio. And in terms of the retail sales in the second half, all of us are aware that the Hong Kong retail sales has dropped quite significantly, and we are not in a [ concession ]. And what we have been doing within Swire Properties, so we have been working with tenants, offering them rental concession. This is carried out on a case-by-case basis. And it is important that we continue to support Hong Kong retail industry as well as our tenants through this challenging time. And a lot of our tenants, in fact, have very long-term strategic relationships with us. It's not just Hong Kong. In the various centers in China, they are also our very important tenant. And so it is -- we have been in continuous dialogue with them, we have been managing the situation and -- to ensure that there is a win-win situation. And in terms of the sales, there have been quite a drop in sales, and of course, that would have an impact on our turnover rental as well. And on the top of that, we are giving rental concessions to the tenants. But for Hong Kong retail portfolio, in fact, the relativity of their contribution to the Swire Properties' overall net rental income is relatively small. So I would say the impact is relatively insignificant in the context. And the occupancy cost, in fact, for the tenants, of course, with -- through this challenging time had increased a little bit. And so we are working with them through this difficult time. But if we just look at our statistics, Pacific Place, up to the third quarter, we have seen a decrease of rental -- retail sales by 12%; and CP marginally sort of on par, 1%; and Citygate is 3.1%, up to the third quarter. In fact, the number will be widening for the full year. And -- but in fact, in Pacific Place, we also have done some changes to the center. We have seen the reopening of Harvey Nichols in September, the food -- the Great Food Hall has been renovating, giving more attractive offerings. And there have been also a few new brands added to the tenant mix, which are very pleasing. And also worth mentioning is the opening of the Citygate extension, which, in fact, is very much -- quite busy I would say, I've been sort of going to Citygate at times in the -- and that appears to be quite an attraction also to the locals these days. The good story is the strong growth -- sales growth in Mainland China. Of course, sales growth what you will be expecting would be leading to net rental income growth, and this always -- that sort of lagged. But in fact, we are seeing very good trends in terms of the sales growth -- continuing sales growth through -- after quite a few years, and it's still double digits and the importance of our China retail portfolios has been increasing year after year. The retail sales in U.S.A. has been increasing and also the office has been stable, but in fact, for the office, it's fully leased. And in U.S.A., the lease term are relatively long, so it's already sort of fixed in stone in terms of the rent -- in terms of the leasing status. We have, in the past, always stressed that there's only very little land bank for trading purposes within Swire Properties, and we are very pleased to announce the winning, as a consortium, for the residential property at -- in Wong Chuk Hang, and it's a joint venture consortium with Kerry and Sino Land, and that would be completed by 2023, so there's still a few years to go. And in terms of the -- our first project and now, still the only project in Singapore, the EDEN, which had already been sort of launched in November and the show suite is already up and running. And so it's a lot of marketing activities going on, a lot of viewing, and we have been receiving very positive feedback so far. And in Jakarta, we announced our projects and so the construction is yet to start but we expect that we will be launching the sales sometime within 2020. And underlying profit overall for Swire Properties has been benefited, as I mentioned earlier, by the disposal of the properties, namely the Cityplaza Three and Four, and also 625 King’s Road in July, and also some of the noncore property assets as well. But of course, on the other hand, we will be losing rental income from -- arising from such disposal. Hotel, I mentioned hotel earlier. It has been hit by the protests. And so what we will be seeing in the second half, there will be lower contribution due to the lower tourist arrival in Hong Kong. And I would say in terms of the performance, we are sort of still looking at 50%, 60% occupancy, which is not too bad such -- under current environment. And for properties, you see that the development -- the pipeline development is relatively strong and we have a list of the projects listed on the right-hand side. And in fact, these projects are already known to you. And one project, which perhaps we have not mentioned here, is the extension of the -- in Mainland China, Sanlitun in Beijing. So we are sort of working on the extension, we would name it as Taikoo Li West. And sometime this year, that should be open and that would be an interesting sort of attraction as well to the shoppers. The strong pipeline in Swire Properties, we are on track in terms of the development. And it is important that we continue to grow our pipeline, and that will support the long-term rental growth. And we are also very well positioned for further opportunities because if we look at Swire Properties, their balance sheet is -- have a gearing of a mid-single-digit gearing, which is, I would say, continually very low. And at the end of June, they have HKD 16 billion capital commitment and which we hope that we'll be adding more and able to announce more in the course of 2020 if we are able to materialize on some of the projects that we are right now sort of looking at very closely. So Aviation, I'll have Pat to run through with you the CX business.

Thanks, Michelle. So as Michelle mentioned, obviously, the first half was quite encouraging for Cathay. But then obviously, the second half has been extremely challenging in view of the Hong Kong situation. Obviously, Cathay already put out a lot of public information with the monthly traffic figures, and they also had their own analyst briefing in November. So I'm not going to add to any of the figures that have already been issued. But as you can see from the November traffic numbers, the picture is quite consistent over recent months, which is that the inbound traffic is extremely badly impacted. So the year-on-year decline for November was 46%, and that compared to 35% decline in October. And again, as was mentioned at the time of the November traffic results issuance, that picture sort of continues when you look at forward bookings. So it's the -- the inbound traffic is very badly impacted. Outbound traffic is much less so, so it's sort of high single-digit decline. But then the overall impact on yield is very significant, and this is the situation that we're in. On cargo, again, looking at the November traffic numbers with that decline of about 6% in tonnage carried year-to-date, cargo is less about the Hong Kong situation and just more a story of the geopolitical tensions that have sort of characterized the cargo market for the last year or so. So as a result of all of that, it's no surprise to see the statement here that the second half financial results of Cathay are expected to be very significantly below the first half. The positive statement to the final bullet point here on Cathay is that the Hong Kong Express acquisition is something we're delighted about, that closed in July and the transition since July has been very smooth. There are some synergies between the airlines. But fundamentally, it's important to recognize that Hong Kong Express is -- will continue to operate with a high degree of autonomy as a stand-alone, low-cost carrier. It's a very different airline serving a very different segment in a very different way. So that's on Cathay. And moving on. The transformation program is a very important part of how the airline has been managed over the last 3 years, and we continue to engage in a lot of continuous improvement programs, which are helping to counter the rising cost pressures. Obviously, we remain very flexible in terms of capacity. You'll have seen again in the November briefing, they went into this in a little more detail, so in terms of reductions in frequency, and remaining flexible to adjust to the very sort of dynamic demand situation. And -- but you can see in the winter schedule that the capacity reduction has been quite significant. In addition, remaining flexible in the current situation also means being flexible in terms of the fleet. And again, the details were announced during the November briefing. But that involves some deferrals of orders and also some accelerated retirements to try to manage the overall size of the fleet to the current reduction in demand. And of course, productivity remains absolutely key and remaining flexible in the face of the current situation. Over to HAECO. Yes?

Thank you, Pat. And perhaps, before I go through HAECO, I'd just like to remind yourself that within Swire Properties, in fact, the retail centers we have 2 concepts in China. One is the Taikoo Hui concept and one is the Taikoo Li concept. And the Beijing one, we have not called it Taikoo Li because it was the first project that we came out at that time, we named it Sanlitun, so when I refer to Taikoo Li West in Beijing, in fact I'm referring to Sanlitun West, just to clarify this point, in case it has confused you. Thank you And on HAECO, it had a very good 2019. And we privatized the company in late 2018. And we are pleased that the HAECO results continue to be very satisfactory. And U.S.A. is the area that we are working very closely, and we have seen significant reduction in the losses in U.S.A., and -- but we also had to make an impairment in the respect of the goodwill at Cabin Solutions business in November. That is not saying that we don't have -- we had not seen improvement, it's just that the outlook -- because, in accordance with the accounting standard, we have to use a discount cash flow concept, and with the slower recovery of the business and as product portfolio has taken longer to establish order book, so on that front, that drives the impairment number. And in fact, we have been very pleased that in the course of 2019, HAECO America has launched a new premium seat, called the Eclipse. And so they are sort of talking very closely with their various airlines, hopefully, to secure some contracts. And elsewhere in Hong Kong and also in Xiamen, we continue to see solid results. And Hong Kong, the airframe business, in Xiamen the airframe business had been strong, and particularly encouraging is our engine overhaul business. HAESL has been performing very strongly, partly due to the heavier, what we call the volume, engine output, and also there's also more favorable workload, the content is much heavier, and so that drives further productivity on margin. TEXL also has been good, but the result is broadly on par with last year. And on -- for the other business, in fact, they also have been performing relatively well, and the results are broadly in line with last year. And worth mentioning is the Xiamen airport move, which is expected to be done in '20 -- late 2023 or early 2024. And so we'll move to the new airport area. And right now, the team is very busy doing the design of the new facilities and they are in good progress, and we expect that we'll be moving at the time when the airport opens. And for Swire Beverages or Swire Coca-Cola, I'll pass to Pat to do the review.

Thanks again. So 2019, a very strong performance actually for Swire Coca-Cola; very pleased with results across the board. Revenue growth continued to be strong throughout the year. And revenue is growing faster than volume across all regions, which is a sign that our revenue growth management strategies are successful, both in terms of price improvements as well as profitable management of the mix, premiumization, et cetera. So -- and I think even in Hong Kong, where you might have expected a significant impact. Obviously, a lot of businesses impacted in the last 6 months. I think the business there has held up remarkably well, quite frankly, under the circumstances. So a good, solid operating performance across the board. We do continue to invest. So there's a lot of ongoing investments still in everything from smart colas and vending machines, more logistics infrastructure, a lot of investment at the moment into digital capabilities, getting digital tools and data in the hands of the front-line sales force. And I think the underlying story about Swire Coca-Cola remains the same as I've mentioned in the previous meetings, which is the realignment of the bottling system, both in the U.S. and in China has been very successful and very smooth. And so the platform that we've now created of having a much larger contiguous territory and having the Coca-Cola Company focus their efforts on the consumer and the brands, leaving the 2 big bottling groups in China and the other bottlers in the U.S. to focus on the bottling business is proving to be extremely successful. And it's created a very strong platform for future revenue growth.

Turning to Marine Services or SPO. And as I mentioned earlier, the industry has recovered slower than we expected and the utilization of the vessel, though it has improved, but charter hire rate remain depressed because of the oversupply in the market, and this situation need to be improved before we can see meaningful recovery of the day rates. And so we have been holding on that position, and that is the driver for the impairment that we have been taking back November last year. And this is not pleasing, but in fact, the team is continuing to do, I would say, a relatively good job in terms of cost containment in terms of improving the utilization and getting better rate. In fact, the overall numbers that we are looking at in terms of the core fleet utilization would be higher than what we have reported in the first half. And also the day rate, we've seen slight improvement, but not meaningful to the extent that we -- to drive -- to turn the business. And so we hope that it will gradually recover over the course of time. Turning to Trading & Industrial Divisions. I mentioned earlier that the retail-related business has been impacted. Swire Resources has been impacted since the start of the protest. And so the profit that it had made in the first half had totally been wiped out. So I don't think we are alone, but we still -- we are also having to drive quite some discounting sales to derive sales, and the margin has also been impacted. And also we are also working very closely with the landlords to try to work through this challenging time together with the landlords. And for Qinyuan Bakery in Chongqing, China, there will be higher losses compared to last year, and we did mention in the interim announcement that, in fact, we are rationalizing the business, in 2019 very closely, trying to set a good platform and that had led to the loss. And also, we have made an impairment in respect of the goodwill that's relating to the investment cost. And for Taikoo Motor in Taiwan, the performance has been stable. The car sales has been slower than last year, 2018. But in terms of the margin, we have seen higher margin in 2019. And also, there's a continuous cost management process and the aftersales business remained relatively stable for Taikoo Motors. And there's also a small write-off in the investment in an associated company within our Environmental Services business. So that is sort of the overall situation for Trading & Industrial Division, but a lot of exceptional items embedded. And on the recurring basis, so the division is still delivering positive results in terms -- I mean black number. Sustainability is an area which is always close to our hearts. And we all believe that this is important that we take this very seriously, and it's all across the divisions, all across the group that we had an overall approach to build -- that is important to building a long-term value for our shareholders. And if we just see what we have done in 2019, we have done a lot. And further to what we have done in 2018, which was very detailed in the 2018 or published in July 2019, the SD Report. But whereas the initiative for 2020, we are developing the 2030, the 10 years carbon, waste and water target throughout operating divisions and the overall targets for the group as well. And also last year, we -- in 2019, we have formalized our human rights, flexible working hour and also diversity and inclusion policies; that is sort of related to the social aspect. And in terms of the ESG area, we have maintained our AAA rating from MSCI ESG Research, and also we are a constituent stock of a few ESG indices as listed. Looking at the outlook. We mentioned that 2019 second half strong headwinds. And so the Cathay Pacific retail businesses all adversely affected by the macro environment. But what we firmly believe that the diversity of our businesses help us to weather the challenges. Say, property, the office portfolio remains stable. China, retail has been growing very strong. And our beverages or Swire Coca-Cola business has been growing strongly and also the HAECO business has been delivering good results. And also the fact that we have divested and sold quite some core -- 2 properties, which have generated substantial meaningful proceeds for us have further strengthened our financial strength. And so all these have helped us to weather through challenges. And also in terms of the execution of the investment plan, we hope that we'll be able to continue to get new investment, while we're continuing to work on our investment plans. And also areas of focus, China will continue to be the area that we'll put a lot of close look. And of course, looking at the opportunities and just the map of China is much bigger than Hong Kong. So one would definitely see that while the opportunities from China will be much better than in Hong Kong in terms of the investment opportunities. And the area that we are also very focused on are the Greater Bay Area as well. We have been looking at Greater Bay Area, which has a population of 68 million compared to 8 million in Hong Kong, so it's 10x more than Hong Kong and there's very good opportunities there. And also Southeast Asia, we also mentioned previously that we are also looking at Southeast Asia, but we look at it in a very disciplined manner, slowly. And right now, we are in Singapore, we are in Jakarta, we opened a rep office in Vietnam trying to look into opportunities as well. And this sort of outlook that we have seen, and we still firmly believe that Hong Kong will respond to its prosperity and Hong Kong, China as well, our heart will be and our capital commitment will continue to be focused in these areas. And with respect to dividend policy, something you probably will be very interested is the dividend policy remains unchanged. And it is still our aim that we will be able to deliver sustainable growth in dividends and also to pay out approximately half of our underlying profits over time for dividend. Yes, and this wrap up the review. And now I open to the floor, Q&A. Please?

I'm Ben Hartwright from Goldman Sachs. Can I just ask you about Cathay, please? Just wondering about the Swire Pacific views, have they changed? How do you think about the ownership there? I mean you can -- you could go 2 ways here. I mean on one hand, the share price come down, it looks attractive. It's obviously a premium asset over the long term. Would you look to add/privatize like HAECO. On the other hand, again, it's an asset that you could look at potential buyers for. There should be interest, but it would help to reduce some of the volatility in your earnings and again, get some cash into your balance sheet. So how you're thinking about Cathay strategically and your ownership there?

Thank you for your question, Ben. And as we had sort of stated very publicly and confidently in the past that we remain very long-term committed to Cathay Pacific, and we are very supportive of the various initiatives that we have put out. And that is our position and our position has not changed. And in terms of the other side, will we be -- have interest in increasing shareholding? Cathay is a listed company, so the free float right now is sort of at 25% of the -- what needs to achieve for it to keep its status. And our agreement with Air China is such that we will be having such presentation. They will be having the remainder of the percentage. And so each one of us would be sort of linked together for that shareholding. So the simple or short answer to your question is, there's no change in mindset at this stage.

Would you subscribe to that, Patrick? As the Chairman of Cathay, you can have a different view, of course, on the ownership of this company.

I could, but I don't. I have exactly the same view. No. Also, just it's important to reiterate that the Swire group in all of our companies take a very long-term view, right? So we remain absolutely committed to the airline. We still have a very optimistic view of the future of all of our businesses in Hong Kong, including our stake in Cathay Pacific.

So what was it like to become Chairman of this company all of a sudden? And what are your priorities?

Well, it's a great privilege to be Chairman of such an iconic brand, 70-year-old, 70-year-old company. This is a challenging time for many businesses in Hong Kong, Cathay Pacific, no exception. The priorities that we talked about over the last few months have been, first and foremost, obviously, being totally committed to safety. And beyond that, stabilizing operations during what is quite a critical time, and they're remaining flexible so that we're able to deal with what is a very challenging and dynamic situation in Hong Kong. And I think we're doing that.

And maybe a follow-up question on Cathay and just in the light of the protests and also the evolving Hong Kong-China relationship, I wonder whether you see any threat to Hong Kong's position as an aviation hub in the medium term. At the same time, we notice in Southern China that quite a lot of airports, quite many are expanding, some seem to have some international aspiration. I just wonder, how do you see Hong Kong's position relative to all the other airports in Southern China over time?

We think we see Hong Kong as being a very important hub. We think the figures speak for themselves, and it will continue to be an extremely important aviation hub for the region. There's no doubt that there is development across aviation in many parts of China, including the cities in the Greater Bay Area. But Hong Kong has its unique strengths and there are very few places in this region which can compete with Hong Kong as a truly international and global hub looking at the network, and we're delighted to have such a strong position in that hub. And that hasn't changed because of recent events, and we certainly don't see that changing fundamentally in the coming years.

This is Hildy from Morgan Stanley. Two questions. One is about Swire Coca-Cola, about the margin. How should we think about the trend, given -- should we think about margin improvement because of operating leverage and good business in China? Or should we think about margin erosion because of the trade tension and what happened to the material cost? So that's question one. Question two is about SPO. In the impairment assessment, what is the underlying assumption of the business recovery? So is it on 2022, 2023, or is 2021? Thank you.

So on margins, our intention is really to drive a gradual improvement in margins, basically, by focusing on revenue management opportunities. And that's a combination of improving pricing over time, of premiumizing the portfolio by introducing more profitable and higher-priced products and categories into the portfolio and then by managing the package mix, especially across channels in order to, again, just improve revenue and improve profitability over time. And if you look how that's materializing, you will see and you are seeing a gradual but steady improvement in margins. And we certainly intend for that to continue to be the case. Margins in China remain low compared to most of the global markets. That's partly because pricing tends to be lower, especially for single-serve products, partly because it's an extremely competitive market. But for us, that represents opportunities for the future, right? And so we see a lot of headroom for margin growth and revenue growth. So that's certainly our intention. And so far, in recent years, I would say we're delivering on that in a steady and gradual way. And certainly, our intention is for that to continue.

And for this small question relating to sort of the calculation of the impairment, and we are aware that it's a discounted cash flow concept and for this exercise, we had assumed that the catch-up of the day rate has been slower than the previous exercise, and it has taken longer for the recovery to take place, but there will be a recovery over the course of time gradually. And in fact, we have, in 2019, seen improvement in utilization rates and also improvement in day rates marginally compared to 2018, but it's just the extent of the recovery, which had leading -- which had led to the impairment number.

[ Simon ] from Goldman Sachs as well. I have 2 questions. You mentioned about capital allocation or M&A in the Greater Bay Area. If I look at your group, I suppose the property is going to be held by the property company. And yet, I think SPO, you mentioned that the utilization in charter rate is still not very attractive. So when we think about all the business that you are in, what sort of an area would you be interested in? That's the first question. The second one on dividend. If I remember correctly, last year, your dividend was 60% earnings payout. So can you -- you're basically saying that you -- if earnings were to decline, you are still committed to pay a higher absolute EPS or would you just say that you would maintain? Because over the course of the cycle, I think your highest dividend payout is roughly about -- slightly over 60% in earnings term so I just get a better sense about the dividend.

Okay. In terms of the capital allocation or the investment opportunities, in fact, in our various core businesses, there are bound to be opportunities in the Greater Bay Area, which we can invest. As you mentioned, property is one of them. And there could also be some related to our core business, which we could look at for investing opportunities as well. But in fact, I mentioned that the focus is in Greater Bay Area. There is the whole China that we are looking at, but China, the Greater Bay Area attracts more attention for us, I mean, more focus. And also bearing in mind one thing is that when we look at China, it's not all the China. China is so big. We are focusing on the Tier 1 cities and for -- say, for property projects, at most will be for the sort of a Tier 1 to 2 cities which have meaningful proposition for us to consider. And in terms of the dividend policy, we refer to underlying profit. And say, in 2019, we have quite substantial divestment profits from the basis of our underlying profit. So we would not be paying sort of 50% of that underlying profit. But let's just say, over time, that we will be sort of averaging out to a 50% basis. So in good times, say, for 2019, so we have a substantial profit. And so we will be -- we will not be paying out all 50%, but we'll be reserving some dividend percentage for future in terms of ups and downs. So what we are referring to is the sort of over time number, not referring to particular year that we are fixated to pay 50% of the dividend.

Yes, but that doesn't answer the question about [ 340 ], is that -- is the [ 340 ] secure?

In fact, what we have been stating, if you look at our policy statement, dividend policy statement, what we wanted to do is that we wanted to deliver sustainable growth in dividend. And that is our aim.

A couple of questions more on the macro level. It's good to hear the DPS commitment, but I think when the new Chairman...

You hear that? There was no commitment.

Let me finish my question. So for the -- the other thing that the new Chairman quite emphasized on is the ROE improvement. Would you consider the next few years to be maybe like a transitional year, like an abnormal year that the ROE improvement may not be happening so quickly? Is it kind of like a more longer-term target to enhance the ROE of the Swire Pacific operation. So that's kind of more a macro question. Two more kind of smaller segmental question on Hong Kong retail. Any particular guidance in terms of the rental reversion for 2020? Should we expect like, quite certainly, it's going to be negative? Or it's still going to be like quite uncertain at this stage? And any particular light into the vacancy trend, like any particular hints that some of the tenants may be pulling out. I guess, not just for the core central, but also for the neighborhood Cityplaza, which may be also affected by the unrest? And I guess, final question, any further, I guess, management changes or reshuffling that we should expect in the near term? Or is it like basically done?

On the point of return on equity, in fact, as we -- you appreciate, that we would take a long-term view. And so there, particularly say for property, when we work on the numbers, so it always take a few yes just for any project to give a return to us. So all these will be sort of long term. Long term is not just in one particular year that we declare what be the number, et cetera, and also the ROE would also, to certain extent, impacted by the revaluation number as well. But our aim is that we continue to work very hard and very diligently on the business and such that we will be delivering growth in ROE over the course of time. And the question on retail. Yes, I would say, in terms of the reversion that you have been raising, it's just very obvious that for the new lease negotiation, we would be facing some of the impact of negative reversion. But again, this is sort of -- retail is not -- is quite different from office commodity. Retail also depending on what type of tenants you are looking at. And so reversing. Are we talking about lease renewal? Are we talking about another new tenants coming in? So -- but the overall situation that we should be expecting that there will be certain negative rental reversion. The question on management change. I haven't seen we have further management change, right?

None that I'm aware of.

Yes.

So you talk a lot about the financial strength you have, and you finished the presentation talking about the idea that you believe Hong Kong will return to prosperity. In light of what your share price is doing, surely the best investment you can make is buying back your own stock. Why hasn't that been done?

Yes. In fact, this is not the first time that I have been receiving this question. And for the share buyback, we recognize that this is one of the means of capital deployment. But then internally, we have been discussing sort of the capital allocation strategy, and we still firmly believe that we wanted to invest our money in our -- sort of the operating businesses and rather than share buyback. So -- but this is not saying, definitely, we're not going to do share buyback. I'm not saying that's -- definitely we will do share buyback. But this is always on the radar. We are always looking at the situation.

So indeed, Michelle, you have been talking about at the previous results briefing that maybe something sizable in an investment was coming up soon. I haven't seen it, but maybe you've got cold feet now that things are going on in Hong Kong. So what can we expect in terms of investment? Is there indeed anything on the radar now because I still remember that hint that you said, okay, something sizable soon.

Yes. Well, in fact, if we look at what we have invested through Cathay, we have completed the acquisition of Hong Kong Express, and -- which is very pleasing because we managed to get into the low-cost carrier segment. Whereas for us, if we frame the term sizable, what we said is sizable were only applicable to property because for the other business, unless there's a major big merger stuff, it would not be anything compared to any property project, which can be easily HKD 5 billion, HKD 6 billion or even double-digit billion. But we have been looking at projects within Swire Properties but as you are aware, property projects, this always takes time to close out. And say for the Qiantan project we announced in 20 -- I think in 2018, we -- it has taken us almost 5 or 6 years to land that project. So there's a lot of hard work on the ground and we hope that we'll be able to announce something when the right time comes here.

In China?

In China, yes. And in Hong Kong, we have -- we won there a consortium together with Kerry and also Sino Land as well for their projects, and that is a very pleasing for us here.

On Cathay, it looks though that relative to the capital that's invested in the business and the scale of the asset, has the -- the profit in January, in recent years have not been too good. I mean even if you exclude hedging losses. I wonder what will be required to bring up the ROE maybe closer to high single-digit or low double-digit level. Would it be possible? And what will be required?

Right. I think that the -- as I mentioned earlier, echoing a comment from Michelle during her presentation, the first half results of Cathay were encouraging. And when we say encouraging, the goal for the airline is to bring return on capital employed up to that sort of high single-digit level, that's the stated goal of the airline. And the transformation program, which was referred to in the presentation is a very important part of that, right? So there was a lot of cost reduction, which already was completed at the head office level, also restructuring of [ outputs ] and to a significant extent, we were well on the path to a significant profitable recovery for the airline. Clearly, we're in a very different situation now. And we are dealing with some very challenging short-term situations. And so the immediate priority for us is to get through the current situation by remaining flexible, doing sensible things in terms of capacity adjustments, retirement -- aircraft retirements, I mean, and deferrals, and to shore up the cash situation that we have. And we have a good plan to do that. We don't have any immediate concerns. Once we get through the short-term period, that will then be the time to reset our sights and say what do we do in terms of revenue growth and improvement, fleet improvements, et cetera, to get back on track to earning those return on capital levels that are our stated aim. So I would say that, that 3-year transformation period that the airline went through was extremely positive and had us very much on the right track. We're now dealing with a very challenging short-term situation, but we always take the long-term view. We will get through this, and we'll get back on track at the end of it.

HSBC. A quick question about, obviously, in the past we've seen some disposal. We've seen some expansion, specifically, in some of the sectors. Is there any new or has there ever been a direction as to are we on a certain strategy, either trying to recover earnings for organic improvement of either restoration or an M&A diversification, just finding new businesses or going outside of the footprint? Has there been a direction or a strategy in terms of either way? Or are we just dealing with things on a case-by-case basis as the situation develops overall and for the group.

Okay. Thank you, Evan. In terms of the capital allocation strategy. In fact, we have been looking at the core businesses, which -- where we can sort of adding into the capital. And also, we are also exploring sort of connected or related businesses, which, we think, because of the expertise that we have in the core businesses, which will be easier for us to do sort of an entrance. So this is a directional strategy that we are looking at. And so -- and also in terms of the mapping of the years, we are looking at sort of a 10-years plan. And also, we look at the allocation across divisions. We look at allocations across regions. So not just referring to what you say is directional, but it's the strategy that we are working on, yes.

George Choi from Citi. A question on SPO. Obviously, the delivery of vessel to SPO has significantly slowed down. But just wondering if you have any plan to, let's say, further reduce your capacity given the operating trends that you are forecasting?

Thank you. For SPO, we have completed our shipbuilding program, and all the vessels which we had ordered had already been delivered, and we have no plan to make any newbuildings. But of course, opportunistically, if there's a good arrangement, we might have some sort of a charter hire. But that would be sort of a situational case-by-case assessment. But in terms of the disposal question that you mentioned, in fact, over the course of the years, we have already reduced our fleet size from more than 100 vessels to now down to 73 vessels. And so one driver for that reduction is because we want to make sure that we keep the fleet young and up to standard. And so we'll continue that disposal exercise for the older fleets.

Wilson from HSBC. A follow-up question on SPO. Actually, I want to ask, in the second half of 2019, has the loss widened or narrowed directionally, just to get a big picture? And the second question is on Coca-Cola. There's an upgrade renovation going on, on the Hong Kong plant. So just want to get an update on that and if we should expect any margin improvement after the upgrades? And is -- are those upgrades in Hong Kong applicable to maybe Mainland China or U.S.?

Yes, thank you, Wilson, for the question. For SPO, in fact, we will -- we are expecting that the results would, of course, continue to be loss-making, and it will be sort of in a less favorable position than back to -- comparing to 2018. And -- but is also partly because 1 or 2 of our vessels, which had crane problems and we are not able to hire the very expensive vessels for the period temporarily, and that will be restored back in 2020.

Yes. And on Swire Coca-Cola Hong Kong, you're absolutely right, there is a very major investment really in that facility. We considered for a number of years what alternatives we might have to that particular site. And so there were a number of years where we haven't invested significantly in that facility. And having now recommitted to that site of Shatin as being the right place for us to continue to develop the business, we now have made some decisions to put a lot of new production equipment into that facility. So we have the new can line, which came in, in 2019, which allows us to produce the new sleek cans and mini cans you'll have seen in the market. We have a new PET executive client coming in, in 2020. We have a new glass line, which will allow us to do different categories in returnable bottles. So all of that investment will be very significant over the next 2 years or so. So you will see a decline in profitability in the Hong Kong facility while we deal with that disruption and the ongoing investment. The intention, of course, is to really modernize the Hong Kong portfolio, allow us to premiumize and grow revenue much faster eventually. But there will be kind of 2 or 3 years of disruption in Hong Kong, if you will, as we go through that exercise. It's not the easiest of plants to modernize. So we're dealing with major equipment renovations and installations in a large high-story facility like that is quite disruptive. But it will certainly pay off a few years down the line.

I guess just a follow-up question. Since you said that the commitment are going to be quite sizable, can you give us some figures on that commitment? And then similarly, I saw you have a commitment table for properties. Can you share with us your commitment for the other holding company business as well, capital commitment?

So for Coke, I mean, we haven't put a number out in the public realm. I mean, bear in mind, this is one bottler, right? So if you take over the whole division of Coca-Cola, it's not really a massively material figure.

Yes, we have put out a capital commitment schedule for our properties. But in fact, if you just noted that the schedule relating to the midyear number, sort of the HKD 16-plus billion. And for the group as a whole, in fact, at that time, we have a close to HKD 19 billion capital commitment and of which we put out roughly, as relating to beverages, HKD 725 million. But bearing in mind that it's very different from property project because once you committed, you sort of make the whole commitment, and a lot of the other divisions in terms of commitment, they are made over the course of time, progressively. So it doesn't mean that what you have seen in the -- in which -- other than property, the lines of business, their commitment at the end of June, say, HKD 700 million is what they will be spending for the second half because they might be spending more than the number, but just that they had not been committed. Any other questions you might have? If not, thank you very much for joining us, and I hope to see you in March. Thank you.