Swire Pacific Limited (19) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the live webcast of the Swire Pacific 2020 Final Results Analyst Briefing. We apologize that Mr. Merlin Swire, Chairman of Swire Pacific, is not physically present here today. He's self-isolating at home out of the abundance of caution as he has been in contact with the potential close contact of a confirmed COVID case. Instead, he has dialed-in for this session. Also attending the briefing today is Ms. Michelle Low, Finance Director of Swire Pacific. Merlin and Michelle will first take us through a detailed look at our results for 2020. Over to you, Merlin and Michelle.

Okay. Well, thank you, and welcome, everybody. I'm going to start just with a brief review of what's been a pretty turbulent year for us as for others, and then talk a little bit more about how we're executing on our strategy of focusing on Greater China. Michelle will then talk about the financials in a bit more detail. We'll briefly cover the divisional performance, and then we'll be ready to go for questions. Next slide, please. So as you can see, we had an underlying loss for the year of almost HKD 4 billion, a big swing from the prior year, where we've had a number of one-off gains on disposal. On a recurring basis, we were also marginally loss-making. Next slide, please. So on the dividend, despite this challenging year and the losses we've made, we are committed to continue paying a dividend, and you can see we're planning to pay HKD 1.70. That is a big reduction on where we had recovered to last year. We know that's painful for shareholders. But I would say that insofar as our dividend policy says that we will pay out approximately half of our underlying profits over the cycle, you can see that taking the 5-year average of dividend payouts, with the dividend that we're paying this year, that average is 59%, i.e., we are paying out ahead of our policy through what is a difficult period. Next slide, please. We've seen this slide before, not a happy story. Return on equity for the year, negative 4.1%. Almost all of that comes in either the noncash or nonrecurring items, and I'll break that down later for you. But the effect is to take our 5-year average return on equity down to 4.7%, which is obviously an unsatisfactory position. Next slide, please. So I'm just going to spend a little time on this because I think it tells the story of the year as clearly as we can. Left hand bar is shareholders' funds at the start of the year and the right-hand bar shareholders' funds at the end of the year. And just focusing first on the the return on equity element that leads to the minus 4.1%. On the left section there, recurring profits, you can see that the resilient performance of Swire Properties and the robust performance of Swire Coca-Cola was more than offset by Marine Services and by the Cathay Pacific losses such that our recurring profit was mildly negative. We then had, in the aviation sector, on top a number of restructuring costs and asset impairments. That's a big chunky figure. And in Marine Services, another very big impairment on the fleet after a big setback to the market earlier on in the year. On the property valuations, again, there's been quite a lot going on here. You can see that statutory gain of HKD 1.3 billion on disposal of Cityplaza One and then some losses in our Hong Kong Property portfolio's valuation, that HKD 4.2 billion splits broadly evenly as between our office portfolio in Pacific Place, which has been under pressure, and our retail portfolio across Hong Kong, which has been also under pressure. In the Chinese Mainland, we saw some positive valuation gains despite the troubles that COVID brought, and there've be 1 or 2 other small adjustments there, too. So that's where the 4.1% comes from. If you look at the translation differences line, I mean, this is a relatively encouraging story, it reflects the strengthening of the renminbi through the year, and it reflects the growing size of our Mainland Chinese portfolio, both on the property side, from which the majority of these figures come, but also on beverages and other businesses that we have in the Chinese Mainland. So if you put all that together, before the payment to shareholder of dividends, the the total reduction in shareholders' equity was 2.6% for the year, which clearly is disappointing. But I think given the exceptional nature of the year, it is far from disastrous, and personally, I think it's a creditable performance in the circumstances. I should say that the core operating cash flows of the Swire Pacific Group have remained very resilient through the year. Next slide, please. So I think you saw the Cathay results yesterday and a lot of details provided there, which I won't repeat here. Just to say that the refinancing that was put together was very substantial, HKD 39 billion from the Hong Kong government. HKD 39 billion as a refinancing in June, which included the Hong Kong government's investment in preferred shares. HKD 6.7 billion earlier this year in the way of convertible bonds. And that has put Cathay in a very strong liquidity position to weather the storm. And Swire Pacific's contribution, along with other shareholders, we contributed HKD 5.3 billion to the rights issue. I should say that the preference shares came with warrants and the convertible bonds also have a convertible element evidently. If all of those convertible elements do convert, then the dilution effect for Swire, which wouldn't take effect for 5 years, would be to reduce our shareholding from 45% to 38% and for our partners, Air China, their shareholding will reduce from 30% to 25%. So that's the financing picture. And I think Cathay has put itself in a strong position as it could in the circumstances. The restructuring that was done last year was very painful. But it has led to a position where Cathay's cost base is considerably lower than it was. And I think it's in a good position to come out strongly when the market allows it to with a streamlined business built around a 2-brand strategy, Cathay Pacific as the premium carrier, Hong Kong Express as a low-cost carrier. And we certainly remain confident in prospects for the business in the medium to long term. Next slide, please. Well, this is one of our core principles, which we state every year in our annual report: a focus on Asia, principally Greater China because of its strong growth potential and because it's where our group has very long experience, deep knowledge and strong relationships. And on the next slide, just to illustrate what we're doing there, these are really just a snapshot of some of our bigger projects in Greater China in the top half of this slide. You'll be familiar with all of those projects in Hong Kong, a very big commitment to building new grade A offices in Hong Kong. We have new projects underway and close to completion in the Chinese Mainland, Qiantan and Taikoo Li Sanlitun. The HAECO Xiamen airport relocation is a big project. I think you're aware of all of those. There are some new commitments and Phase 2 extension of INDIGO in Beijing is a very substantial project for us, and we'll turn that site into a very large office and lifestyle destination not unlike Taikoo Place in Hong Kong, and we're very excited about that. And we have also made 2 investments in health care services in the Chinese Mainland, and I'll talk more about those a bit later. We've also down weighted to a certain extent, outside Asia, selling offices in Miami, selling vessels out of SPO. And you will see partial disposal of Cadeler, that reflects the listing of our wind farm installation business on the Oslo Stock Exchange. It's a business with good growth potential. It needs capital, but our focus is on putting capital into Asia rather than into European markets. So we've listed it, brought in some strong new partners, raised fresh capital and now has a good growth potential without fresh capital from us. Next slide, please. Well, this is another one of our principles to divest from businesses which have reached their full potential under our ownership and to recycle of capital released into existing or new businesses. And on the next slide, really this is just a summary of what we've done over the last 3 years. This will all be familiar to you. Obviously, in 2020, the big story was Cityplaza One. We're very happy with the price we got for that, and we think the timing in the market cycle was very good. But the total for the last 3 years, therefore, in excess of HKD 45 billion. Next slide. And that's put us in a very strong position. As we say in our annual report, we are prudent financial managers, and this enables us to execute long-term investment plans irrespective of short-term financial market volatility, while we're clearly in a period of short-term financial market volatility. But we're also in a period where we're seeing a good range of opportunities in our core businesses, and we're well placed to take advantage of that. So our gearing now is down to the lowest level since 2006 at 12.2%, and I think this brings us back in line with many of our peers in Hong Kong, and in particular, peers in the property industry. We've got a very strong liquidity position, and our credit rating is strong. So we're in a good spot for continued investment, and we intend to invest consistently and strongly in the years ahead after what has been a relatively slow 18 months in terms of new projects. Okay. I'll hand over to Michelle at this point.

Thank you, Merlin. And I want to draw to your attention to the revenue number, which, for this year, we have reported a 7% decrease. But the bright spot is beverages. It has recorded a 4% increase. And it's very encouraging. And at the same time, the cash generated from operation remained relatively resilient as at HKD 15 billion. This is a snapshot of the results by division, and we'll go through the divisions one by one later on. As Merlin said, we have a good liquidity position and financing position. The net debt at the end of the year was reduced down to HKD 39 billion, representing 12.2% gearing, one of the lowest since 2006, and we are very pleased with this status. And also, the note that the cost -- average cost of debt has shown an improvement, given that there's a good -- sorry, some good arrangement which we have done. Relating to the balance sheet strength, we have HKD 62 billion headroom at the end of the year, of which HKD 33 billion relating to Swire Properties and the head office and other divisions remain very resilient and strong in terms of its headroom. And this is very important from our perspective to maintain such a strong liquidity position because we will be ready to invest when the right opportunities come. And in terms of the profile, maturity profile, it's relatively well spread. That said, we are still in process with the discussion with banks to extend some of the tenure for the facilities. A very quick snapshot of the commitments that we have had at the end of the year is, in total, is HKD 27 billion. And as property is always our sort of biggest spender of our capital commitment is accounting for 70% of the commitment. And you'll note that there's a HKD 9.2 billion new commitments relating to the INDIGO project, which Merlin has mentioned. And HAECO has also included in the capital commitment. Commitments to spend relating to the new airports in Xiamen. And also beverages, there's continuing investment in terms of property assets for the logistic infrastructure, merchandising equipment and also digital capabilities. We thought this is very important to continue to drive their business for beverages. A very quick overview for the properties. In fact Swire Properties has announced their results, and they also have a very thorough analyst briefing. Just a few highlights: the recurring underlying profit for the Property division decreased by 7%, despite the average effects of the COVID-19. And that's mainly relating to hotel and also lower rental income from Hong Kong. And at the same time, Office, in fact, has been doing relatively steady, and our Chinese Mainland portfolio has been performing or recovering very strongly since the first quarter of 2020. For the Aviation Division, Merlin, would you just give us some highlights here?

Yes. Sure, Michelle, thank you. Look, I don't think I'll add to what I've said already on Cathay and what was said yesterday, but just to talk briefly about the HAECO Group. I mean, clearly, HAECO has been heavily affected like Cathay by the decline in aviation demand. You can see revenues for HAECO down 28%. The business still made an attributable profit of HKD 96 million despite some impairments on some of its assets and some of its spare parts. But if we move to the next slide, we can see more of a breakdown on the recurring profit, you see that figure of HKD 370 million. Now clearly, all of the businesses in the HAECO Group showed declines over prior year of 1 type or another. HAECO Hong Kong, HAECO Americas were both loss-making. And indeed, in those cases, the losses would have been considerably greater had it not been for government support in both Hong Kong and the U.S., which totaled HKD 600 million in 2020. And of that, for the HAECO Group in Hong Kong, there was HKD 324 million of support under the ESS. And in the U.S., HKD 284 million under the CARES scheme. So that was a great help in 2020. We don't expect to see that again in 2021 in Hong Kong, although in the U.S., there is further government subsidy for the aviation industry from which we will benefit. Next slide, please. Again, I think I'll pass on this because we've kind of covered most of this already. If we can move on to beverages. I mean this has really been the most wonderful story in 2020. Despite all the chaos around the world, the business is powered ahead. Profits up 22% in the Chinese Mainland, 26% in the U.S. and in the smaller markets, Taiwan has been a wonderful story. And even in Hong Kong, we managed to increase profit marginally. If we can move to the next slide, please. Well, I think there's really just 2 numbers. If we can go back? Yes. Thank you. Just 2 numbers here that I'd like to highlight. One, the attributable profit for the division reaching HKD 2 billion for the first time. But perhaps more relevant, if you look at the recurring EBITDA number, HKD 5 billion for the year, I think it's just an illustration of what a great cash generating business this is and how significant it is becoming within our operating cash flows. Next slide, please. So revenue growth by region has been variable, and I won't really go into the details and the reasons for that. But I would like to focus on the EBITDA margins, and you can see that in all regions, we've seen meaningful increases in EBITDA margin. And in the Chinese Mainland, which is our biggest, fastest-growing market, 2 percentage points improvements in EBITDA. And that's a virtuous combination of some product and pack mix changes that have improved profitability, good execution and some reduced input costs in 2020. But I think it does illustrate why this is a great business for us. It is possible for us, given how skillful we are now at executing in this business, to go on growing margins at the same time as growing top line. So we're very bullish about growth in this business. And indeed, it started 2021 very strongly. Okay. Moving on to Marine Services, which we're not so bullish about, this has been a long painful journey for our team. The business was on track and recovering as we hoped in the earlier part of last year. The oil price collapsed due to COVID in the second quarter. And we assessed that this has pushed the recovery in this industry back by 2 years, and that's reflected in the decline in rates and utilization in our core fleet in oil and gas. And it's reflected, of course, in the very big impairment we took again progressively to the oil and gas fleet. What I would say is that the carrying value of that fleet is now down to HKD 2.7 billion. And we've been continuing to do what we've been doing for a number of years, which is to manage costs aggressively, to reduce the size of the fleet and the business by selling old vessels where we can, and we sold 12 in 2020. And to try and make sure the business returns for cash positive position. And indeed, the oil and gas business is expected to be cash positive in 2021. And we await developments in the market and the industry to see what will come next for this business. Okay. Next slide. I think back to you, Michelle, for Trading & Industrial.

Yes. Thank you, Merlin. We make the small profits for the Trading & Industrial Division in 2020. Just like any other retail business, Swire Resources has been very severely hit by COVID-19, and it had incurred a loss of HKD 134 million. For the other companies, in fact, that they had all shown improvements of numbers compared to last year. Merlin, healthcare?

Okay. Yes, healthcare. Well, I might just talk about this for a little while because I know people are interested in this development for the group, which we do see as an exciting long-term direction for us. You saw earlier that we've invested HKD 1.1 billion so far in healthcare in these 2 investments. One was a minority stake in Columbia China Healthcare, in Shanghai in the Yangtze River. And just last month, we made a further associate investment in a big hospital being developed in Shenzhen. And maybe to talk about why we're interested in this sector? Our strategic goal broadly is to look for opportunities that will increase our exposure to businesses that benefit directly from growth in consumer spending in China. And we think the health care services sector fits that bill, the rapidly growing middle class and an aging population. There's an increasing demand for quality health care services and a short supply of such services. And we think private healthcare will play an important role and that the government will support that important role for the sector. We also think it's a very good fit for Swire's capabilities. Healthcare is a business where quality, operational excellence, a commitment to good service and reputation and brand are key, and I think that plays to our strength. It's also a business where you need long-term investment horizons. You build a new hospital, and it will take 5 or 8 years to ramp up to full operating cash flow potential. So we're a good investor for this sector in a way that some others may not be. It's a business with barriers to entry. I mean clearly, it's highly regulated, and that may put off some investors, but we operate in several highly regulated businesses already, including in China. So we're confident of being able to navigate that. And it's also a business that is asset-based. And our property development and management experience will support our growth in this area. So in terms of direction, we're focused on investing in city clusters in the Chinese Mainland, where we already have a presence in terms of a property asset. And we're going to focus on certain specialties, OB/GYN, orthopedics and rehabilitation, oncology, renal, are areas that we see as being particularly attractive. And the goal over the next few years is to take significant minority stakes where we can play a meaningful role in management or indeed control investments in operating businesses. This is a period of learning, of building relationships and building partnerships, but it's not going to move the dial in the short term, and there's none if you expect it to. We've invested HKD 1.1 billion. We've allocated several billion Hong Kong dollars to be invested in the next few years. And our expectation is that in doing that, we will build a platform by the middle of the decade, where we can accelerate growth and accelerate investments into the sector in the second half of the decade such that it becomes a meaningful business for us at Swire Pacific. Okay. Back to you, Michelle.

Thank you. I'll just very briefly cover some of the highlights of -- relating to sustainability. In fact, on the ground, there are many sustainability initiatives that the group companies are working on. And the one I pull up here just a sort of a snapshot. The SwireTHRIVE, we have expanded SwireTHRIVE to include social issues, being people and community in addition to climate, water and waste. And on the Green Financing front, we have done our first sustainability-linked loan facility. And following that, in fact, most of the loan facilities that we are right now in discussion with the bank are essentially green-related. And also very proudly, we have launched this TrustTomorrow, which is a new community initiative and the funding program. And in 2020, most of the funding are related to COVID-19 relief in the community.

Thank you, Michelle. So on the outlook, I mean, the papers you have in hand give quite detailed as of projections by division, and I'm not going to repeat those here. But simply to say that, I mean, clearly, the COVID challenges are not over, particularly in aviation, and we're expecting a tough 2021. And as I said, we're expecting to incur a recurring loss in the first half. But I'm very encouraged by the way our management teams responded to the challenges in 2020. There was great teamwork. And they've proven very resilient in operating our businesses under extremely difficult conditions. So I think that's a great sign. It's a great testament to the teams. And we're still strong, fresh and ready for whatever this year has to throw at us. Looking forward, we are very clear that our focus is on Greater China. In Hong Kong, we really believe Hong Kong's best year as an international financial center lie ahead. The demand for what Hong Kong has to offer from the Chinese Mainland is growing by the year. The depth and breadth of financial services that Hong Kong offers is increasing, and we expect this to be a very strong period for Hong Kong financial services and a strong decade, therefore, for the Hong Kong office market and indeed for aviation once COVID is behind us. And in the Chinese Mainland, we're extremely bullish on Chinese domestic consumption. I mean this year has shown, more than any other, what happens when Chinese consumers stay in the country and spend their money at home. There's an awful lot of spending power there, and we're finding ways to put ourselves in the path of that spending power. So I think we're not in bad shape. The balance sheet is looking very strong. And clearly, the last year or so, for various reasons, has been a relatively quiet time in terms of committing to new projects. It hasn't been easy to get things over the line because of COVID. But I think we're feeling more and more optimistic about the deliverability of our pipeline, and you should start to see faster redeployment of capital in the year and years ahead.

Thank you, Merlin. I would like to show you a short video now, highlighting Swire Pacific's key developments and achievements in 2020. We hope you enjoy the video. [Presentation]

That concludes our analyst briefing. Thank you once again for joining us.