Swire Pacific Limited (19) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the Q&A session of the Swire Pacific 2020 final results analyst briefing. We apologize for not being able to bring you the live webcast of our 2020 results briefing yesterday due to a technical issue. Nevertheless, a video recording of the results briefing has been uploaded on our website for your viewing. Attending the session today are Mr. Merlin Swire, Chairman of Swire Pacific; and Ms. Michelle Low, Finance Director of Swire Pacific. [Operator Instructions] Before we begin the Q&A session, we'll pass on to Merlin to say a few words. Over to you, please, Merlin.

Okay. Thank you. Good afternoon, everybody, and sorry again for taking up so much of your time previously -- yesterday afternoon. I hope most of you have had a chance to either read our statements or look at the briefing that we put online last night. But I'll just, in a couple of minutes, try to summarize that presentation. I mean first up, clearly, 2020 was a very unusual and tough year for the business and we recorded our first loss in modern history. But despite all of that, from my perspective, the fact that the reduction in shareholders' funds before payment of dividends was 2.6% rather than a much larger figure was, of course, disappointing, but it's far from disastrous. And again, notwithstanding the underlying loss we reported, we did pay what we consider to be a fair dividend, consistent with our desire to be as current as we can with ordinary dividends. I mean of all of our businesses, as we all know, Cathay was particularly hard hit. But from a Swire Pacific perspective, what I would say is that the recapitalization of the business, which in total last year and this year has now seen HKD 46 billion of fresh capital will go on to the Cathay balance sheet, Swire Pac had contributed HKD 5.3 billion of that and that has allowed us to reserve capital elsewhere for other things. The outlook for Cathay remains pretty uncertain. But they are in a very, very strong liquidity position and I'm certainly confident that they can navigate their way through the next 18 months from here as the market recovers. I mean in terms of the big positives for us for the year, I think we were very encouraged by the progress of our property business in China, particularly the retail side there. Retail sales in our malls in the second half were up 29% year-on-year. And we really feel that those malls are beginning to mature and show their worth and that they are winning in the cities in which they are located. And secondly, Beverages was kind of winning on all fronts. Well, there are different operating conditions in the U.S. as compared to China, but the business grew strongly. And EBITDA for that business was up 18% and is now above $5 billion per annum. It's a very strong cash-generating business. In terms of other positives or reduced negatives perhaps, the recurring losses at SPO were somewhat reduced and we continue to find ways to both shrink the business in terms of selling vessels and cutting costs. And we expect SPO, certainly the oil and gas business, to be cash positive in 2021. I mean turning to the balance sheet and our pipeline, you will have seen we continued with capital recycling last year, particularly with the sale of Cityplaza One for about HKD 10 billion. We felt that was a very good price at a good time in the cycle, and it's brought our gearing at year-end down to 12.2%, which is a solid position, and I think in line with many of our peers in Hong Kong and it's put us in a good position to invest. And we have now effectively sold through a number of aging office assets in Hong Kong and are looking to reinvest. Some of you know, in Quarry Bay, we are -- we built Taikoo Place One (sic) [ One Taikoo Place ]. We're halfway through building Taikoo Place Two and we have plans for Taikoo Place Three. And in Beijing, we committed early this year to INDIGO Two, which is a big extension of our retail and office project there and that's going to create a wonderful new decentralized zone in Beijing. And as we look forward, I mean, on the Property side, there are clearly opportunities coming up in the Admiralty area over the next 12 to 18 months for us to try and fortify Pacific Place. And in China, what we're doing there is really focusing on very high-quality, usually retail-led projects. Those often take a long time to come to fruition. COVID has slowed things up a bit. But we're feeling really bullish and excited about what we can do in China in the coming period. Beyond that, and I spoke a little bit about this yesterday, we've taken our first steps into health care services, invested just over HKD 1 billion. We plan to invest several billion more in the next few years with a view to building knowledge and relationships and a platform that could allow for more accelerated growth in the middle part of the decade. So I'll pause there, and Michelle and I will be happy to take any questions.

Thank you, Merlin. We shall move on to the Q&A session. The first question is from Jonathan Galligan from CLSA. His question is, "First off, thank you, Michelle, for all your hard work over the years and good luck in retirement." "Second, Michelle, can you talk a little bit about your balance sheet strength and how you plan to deploy that over the coming years? Will this go mainly to health care? Or are you looking at other investment opportunities, both organic and inorganic?"

Michelle, do you want to take that question or should I give it a go?

Yes, Merlin. Thank you. Perhaps I'll just start an overview of our balance sheet. Thank you, firstly, Jonathan Galligan. And in terms of our gearing, we had the lowest gearing since 2006 at 12.2%. And in terms of our liquidity number, in fact, we have been lining up quite some facilities and we have some of the highest liquidity for some years, standing at $62 billion, of which $33 billion relating to Swire Properties. And as the Chairman has mentioned, the low gearing also arose from some of the proceeds that we have been getting from their disposal in the past few years and that is for purposes of capital recycling. And in fact, we have a lot of plans ahead of us. And perhaps I'll have Merlin highlighting some of the big plans that we have.

Okay. Thanks, Michelle. I think the reality is in terms of things that are going to really move the dial forward, the Property business as ever is the place that will absorb significant amounts of, well, opportunity for capital deployment. We see good opportunities in Hong Kong to reinforce our existing office centers. We are interested, and you've seen some steps in this area, to rebuild a pipeline in residential trading in Hong Kong. And we will continue to do that in a way that is perhaps not hugely significant for our Property Division, but in terms of scale relative to other divisions, not insignificant. And in China, we see fantastic opportunities both to reinforce our existing assets by building on to them and to find new projects. So I think that will be the core of it. Clearly, the Beverage business is one we're very excited about. And that's a franchise model. If there was an opportunity to acquire new franchises in Asia from The Coca-Cola Company, we would, of course, be very keen to do that and we think it's a business we do very well. And the partnership with Coca-Cola is very strong. I mean to smaller areas of investments, and these really are areas where I'm afraid we shouldn't expect it to move the dial, health care. There's going to be quite a lot of activity, but the numbers will be relatively small. And if there is to be a major deployment of capital that moves the dial on health care, I wouldn't expect to see that for another 3, 4, 5 years and only if we gain confidence that we can find opportunities that make sense for us of greater scale. But we're certainly committed to being in health care services for the long term, and we want to build a real platform and a real business there. Beyond that, I mean, you will have seen that we've announced a joint venture with ALBA, a German recycling company, and we're looking hard with them to build plastic recycling plants in ASEAN and perhaps in China in the future. And that will be a nice business as an adjunct primarily to our Beverages business. I think I'll pause there.

Thank you, Merlin. The next question is from [ Francis Lung ] of Mizuho. There are 2 parts to his questions. "Can you provide guidance on your dividend policy going forward? And shall we take reference of 5-year historical average?"

Well, I mean, our dividend policy is clearly stated that our goal is to be able to have a sustainably growing dividend over time and to pay out approximately half of our underlying profits in dividend. And if you look at the last 5 years, we will have paid out 59% rather than 50%. And again, that's consistent with our desire to, in a sense, be shareholder-friendly on this. We do have a conservative balance sheet, which means that in difficult times, we can afford to slowly overpay relative to our policy, and thus, minimize the reductions in dividends that come during hard times. So we are in a very abnormal period. And clearly, the Aviation business is -- has a big effect in terms of earnings per share and thus dividend per share. But we're very committed to the policy. As the business recovers, you should expect the dividend to recover alongside that. And we feel we have a balance sheet now that can both fund the long-term high-growth investment opportunities that we see and continue to have a progressive dividend policy.

Thank you, Merlin. Here are 2 more follow-up questions. "What are the competitive advantages of Swire entering into the health care sector apart from your ability to commit long term capital? Also, will you be open to assets other than hospitals and anything outside China?"

Okay. Well, thank you. Look, I mean, obviously, long-term capital helps in this game. But this is also a business where the consumers are interested in quality. They're interested in the quality of service, commitment to service. Operational excellence makes a difference. And the reputation is absolutely key to the trust that customers place. And I think we have all those skills within our group from a management perspective. But I think also our brand is relevant here. And our brand in China, particularly driven by our property business currently is getting stronger and stronger every year [indiscernible] quite transferable to the health care sector. We also think that insofar as some aspects of health care services do involve visible real estate and the sort of lived experience in physical space, that our property development and management experience can help. I mean beyond that, the -- one of the critical competitive advantages that we see is a feature of health care services, is an ability to attract and retain and manage a large number of doctors. And we think we're good at managing people. And I think you'll see as we roll out our strategy that our intention will be to go relatively deep into subregions rather than trying to spread ourselves broadly across the country. And that's, in essence, because if you could have a number of assets within a small region, it makes it easier to deploy doctors across those assets. A single asset in 20 different cities doesn't get you very far. The focus will be on hospitals and particularly specialist hospitals, but I think there's also an opportunity here for clinics, i.e., more community-based clinics, maybe clinics in shopping malls, ourselves and others. And we're genuinely interested in the elderly care home sector. So those are the range of things that we might invest in. We've looked at investing in medical equipment or pharma or other aspects of the sector and decided not to go there because we don't get to use our skills. The focus will very much be China, but we don't rule out investments in ASEAN if the right opportunity arises. And we think the health care sector in Vietnam is quite interesting and we're looking carefully at that at the moment. Thank you.

Thank you, Merlin. Since we're talking about health care, we might as well cover another health care-related question from Jonas Kan of Daiwa Capital Markets HK. He says, "Looks like health care could be a potential new growth driver for Swire Pacific. Wondering how much the group plans to deploy in this area? And what is the group as its main competitive edge is in this business?"

Well, I think I've kind of answered that question as best I can already. I mean, as I say, we -- what we're saying is that we're prepared to deploy several billions Hong Kong dollars in the near term. We do expect in the early days in this strategy, most of our investments to be minority positions with partners with expertise in this sector. And we may co-invest with various partners. Over time, because of the skills we think we have in management that fit nicely with health care, we would like to be in control positions. But we're not going to rush at that. We recognize we're new to the sector, and I think partnering with people who have longer experience than us is the right way to go for the near term. Thank you.

Thank you, Merlin. The next question is from Kelvin Wong of Churchill Capital. There are 2 parts of questions. "Firstly, we're seeing across the board that conglomerates are reorganizing or simplifying their business structures. For instance, Wheelock in 2020 and recently Jardines in 2021. So are there any plans to change the structure of Swire and its subsidiaries? What is the thought process of the management team in this area?"

Okay. Well, thank you for the question. Obviously, we think about this from time to time. But we like the structure we have currently. We think having all our businesses under one umbrella, and it's a structure that we think is extremely transparent. Shareholders know what they're buying into. I think we're very clear about how the group is structured, how the cash flows around the group. So at the moment, we have no plans to do any significant restructuring.

Thank you, Merlin. Next question is from [ Janice Fung ] of HSBC. Her question is, "Should the adverse impact from the pandemic prolong in 2021 on Cathay and your retail properties and hotels, what's your plan to maintain liquidity of the group?"

Could you repeat that question again? I missed the start of it.

Yes. "Should the adverse impact from the pandemic prolong in 2021 on Cathay and your retail business, what's your plan to maintain liquidity of the group?"

Okay. Well, I mean, I think we're pretty happy with the liquidity position of the group. I mentioned Cathay's liquidity position earlier, which I think is very strong, and Cathay in a sense can take care of itself. I mean for the Swire Pacific Group and its subsidiaries, retail has been weak in Hong Kong, no doubt, and we've made a number of rental concessions here with some of our tenants and also in China in the early parts of last year. And I think in fact, this COVID experience has brought us closer to our tenants and to the big brands than we were before. So we feel quite good about that sort of partnership. Beyond that softness in retail, we've actually found cash flows to be relatively strong. If you look at our operating cash flows in 2020, which, of course, was the major year of the pandemic, they were pretty robust. So we feel quite comfortable with our liquidity position. We don't think we need to do anything to strengthen it.

Next question is from Simon Cheung of Goldman Sachs. His question is, "Much capital has been recycled over the last few years. Are there any areas where you see potential for further noncore disposals? And in relation to this, what do you think about your Marine businesses and its long-term return profile?"

Thank you. Well, I mean, broadly speaking, I think in terms of further disposals or further recycling of capital, I feel pretty happy with what we've done. I think we have sold things that are not core to our business and streamlined the group somewhat. And what we're left with is a much, on a weighted average basis, a much higher quality of asset. The Marine business, I mean this has been a long story for 5 or 6 years. It's been agony for everybody. And our goal has been to try and get that business into at least self-sufficient state. And given that the market has basically disappeared and that when it comes back, it's likely to be smaller than it was previously, we felt that shrinkage has been the way to go. So if you look at our oil and gas fleet, we've reduced it, I think, from 94 vessels at the peak down now to around 60. We've cut tremendous amounts of cost out of the business, and we are now looking to be cash positive in 2021. And whilst we don't expect a quick recovery in the market, we do think there's a chance that we have again reached the bottom. Beyond that, I think we'll just have to see what opportunities arise as the market starts to recover. I mean at the moment, this is not a sector that is attracting a great deal of external financing to facilitate dealmaking. But we're keeping an open mind and open ears, and we'll see where we go with that. I mean on separate aspect of the Marine business, where we have taken action because the capital markets have been there to facilitate, that action has been with our wind farm installation business, which is a business managed from Copenhagen and its activities, broadly speaking, are all in the North Sea and Northern European waters. And that's clearly a big growth industry. But it's not an industry where we want to dedicate a lot of capital because we see our growth primarily in Asia and specifically in Greater China. So we're able to list that business on the Oslo Stock Exchange this year. We took quite a lot of money out back to the center. We brought in a strong partner with -- in Bergesen Worldwide. And the business is now well placed to invest in new boats and the primary leader in the sector, and we're down to 47%, I think, currently in terms of shareholding. And we're assessing where we go from there. But the listing in a minor way has been a success. I think that we listed at about NOK 24, and it's now up to NOK 36 or something. So that's how we see Marine. It's tough, but we have been actively finding ways to retrieve value where we can and we'll keep looking at that.

Another question from Simon Cheung of Goldman Sachs. "Outside of health care, what other areas would you have interest in?"

Well, I mean, in terms of new areas, health care is definitely our prime focus and we're going to be pushing hard on that. We are interested in green businesses and environmental businesses. Our partnership with ALBA in plastics recycling is a good example of that. And that has the potential over the next decade to become really quite a large business. We're also, again, partly because of our beverage heritage, interested in water and water purification and water management. But we'll have to see whether opportunities arise in that space. And we have a mild interest in food and food tech, if you like. And we took a very small convertible debt investment in Green Commons, working other things, which we think is a really fantastic company, well-run and with an exciting vision, and we'll see where that leads us. But I think you'll see more activity -- more visible activity in health care than anywhere else.

Thank you, Merlin. We'll now take one final question from Jonas Kan of Daiwa Capital Markets in Hong Kong. The question is, "How does the group assess the pros and cons of share buyback as a way to deploy capital and reward shareholders?"

Well, I was waiting for that question. Look, we've said that -- we've been very clear about this. And I know that many investors will be frustrated that we haven't acted, but I don't think they should be terribly surprised. I've made it very clear that we intend to return back to shareholders primarily through the ordinary dividend and that is the case. And whilst we don't rule out buybacks in principle, if we can't think of better uses for the capital, we prefer to allocate capital towards long-term, high-growth investments in our core businesses. And share buybacks, we consider to be a very short-term use of capital. The issue is that in the industries we're in, many of the investments that we will be pursuing are, generally speaking, quite large, particularly in property, quite lumpy. They take a lot of time to put together and get to the start line and timing is very unpredictable. And so we need to ensure that capital is available to us when these opportunities arise, so that we can move quickly and be prepared to take on several things at once. And that's effectively our position. And today, we're in an unusual position because I would say 2019 and '20 were 2 years of particularly low investment by the group if you look back over a decade. And that's not because we didn't have the appetite or the confidence to invest, it's just that many of the things we were working on were taking time and COVID obviously didn't help. But I think we're now in a position where I do expect to see accelerated redeployment of capital in the coming year or so. And where we see these high growth, long-term investment opportunities, we'll take them.

Thank you, Merlin, and thank you, Michelle. That concludes our Q&A session. Thank you very much all for joining us today. Thank you.

Thank you. Thanks, all. Have a nice weekend.