The Wharf (Holdings) Limited (4) Earnings Call Transcript & Summary

Good afternoon, everyone. A very warm welcome to the webinar of Wharf interim results Briefing. I am Angela Ng, Investor Relations Manager. Our management team in the webinar include Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director and Group Financial Controller. Before the presentation and Q&A session, let me now pass the time to the Chairman for an opening remarks.

Thank you, Angela. I hope all of you have had a chance to glance through the announcement quickly. Not a lot of surprises given that we published a COVID warning about 3 months ago. The market was terrible in the first half -- first quarter of the year, as you all know. In Hong Kong, the problem continued in the second half. Whereas in Mainland China, we started to see some recovery in the second quarter. So overall, second quarter was not as bad as the first quarter. The one area which, I guess, was the most impactful for the first -- as far as the first half is concerned, falls in the mainland DP area because of the disruption to construction and handover of completed projects. We were able to recognize very little in the first half, and most of it slipped into the second half. It is possible that some of them will -- may sit further beyond the end of this year. I hope not. But given the low recognition in the Mainland DP area in the first half of this year, it was not a very strong first half. Hopefully, we'll be able to catch up somewhat in the second half. Now with that introduction, I'd like to hand you back to Angela and ask her to take you through the presentation. Angela?

Thank you, Mr. Ng. Now I believe that you will see our PowerPoint presentation on your computer screen or mobile device. The theme of the presentation is Pandemic Left Economies Stranded. The first quarter of 2020 was seriously devastated by COVID-19 and affected the group's business in an unprecedented way. Affected by the macro environment, port activities slowed with no recovery in sight yet. While recovery in Mainland China only started in the second quarter when lockdown measures were eased gradually, the first quarter was a washout. Mainland development property sales and recognition were stalled under the pandemic. Hong Kong development properties valuation were also affected, and a $2.9 billion provision has put the group's underlying net profit into a loss. Mainland investment properties growth momentum was disrupted by hotel occupancy plummeted as travelers stayed home under global lockdown. Looking at the financial highlights. Group revenue for the first half amounted to $5.6 billion with Mainland DP dominant for the decline in revenue and operating profit. The HKD 2.9 billion Hong Kong DP provision turned the results into an underlying net loss. With a modest IP revaluation deficit of $0.6 billion, a net loss of $1.7 billion was reported. The group maintained a sound balance sheet with IP valuation of $73.2 billion and properties for sale at $40.7 billion. An interim dividend of $0.20 per share was declared. The group's asset mix remains property-centric. Total assets, excluding cash and investments, amounted to $176 billion with properties account for 90%. Mainland China assets account for over 70% of the total assets. In the following slides, we will walk through the individual performance of different business segments, firstly, recurring income, including Mainland IP, hotels and logistics; secondly, asset turns, including DP in Mainland and Hong Kong. Now let's focus on recurring income. Upon the eased lockdown in the second quarter, the group proactively launched effective sales-driving measures to capitalize the delayed spending power resulted in a brisk post-outbreak recovery. Retail demand restored to the pre-pandemic level since May with impressive sales growth recorded in May and June driven by the luxury segment. Tenant support measures were granted to certain tenants in the first quarter to offer immediate support. Under the pandemic disruption, Mainland IP revenue decreased by 5%. In the testing first half of 2020, the outstanding market position helped Chengdu IFS Mall to soften the pandemic blow with only a mild slowdown in retail sales. Post-outbreak recovery was strong with double-digit sales growth in May and June. Demand remained keen with double-digit retail rental conversion achieved. The Grade A office towers continued to rank among the highest rental rates in the city and was 83% occupied. As the new landmark in Central China, Changsha IFS mall achieved positive retail sales growth of 6% and reached nearly full occupancy despite mandatory mall closure for 11 days shortly after Chinese New Year. Driven by the luxury segment, the mall achieved record-breaking sales in May which was encouraging. Moreover, the office is highly favored by major corporations with noticeable growth in occupancy. As for hotel management, the group currently manages 17 hotels in Mainland China, Hong Kong and the Philippines on the Niccolo brand and Marco Polo brand. We have proactively and matched various measures against the pandemic. As a result, business in Niccolo Hotels in Mainland China rebounded noticeably in the second quarter. Niccolo brand is our award-winning brand established in 2015. From the table, we can see that Niccolo Hotels at our 3 IFS in Chengdu, Chongqing and Changsha outperformed the competitive set being the one real leader in revenue yield per room. The Niccolo Hotels also achieved rewarding gross operating profit soon after the respective openings. This successful brand continues to grow with Niccolo Suzhou scheduled to open in the first half of next year. Turning to our Logistics business. With the global supply chain severely disrupted, total throughput of modern terminals declined by 5%. Macro challenges and regional competition still persist. Meanwhile, Hong Kong Air Cargo Terminals benefit from the market opportunities peculiar to the COVID-19, and total throughput was stable at 0.7 million tonnes. Moving on to asset turns. In Mainland China, the timing of sales launch and project recognition had been distorted. Following a frozen first half, sales tempo starts to resume in the second quarter. Pent-up demand and returning momentum have driven attributable contracted sales to RMB 8.1 billion. However, profitability continued to be affected by selling price control. Sales target for the year remained RMB 15 billion, and sellable resources totaled 1.3 million square meters. Attributable Mainland DP revenue decreased to $4.3 billion, and operating profit was $1.2 billion. Yet, our net order book increased noticeably by RMB 4 billion to RMB 31.4 billion. Target completion for 2020 is 1.2 million square meters. The group continues to be prudent and selective on landbanking to sustain quality and return. Landbank totaled 3.3 million square meters with no new purchase during the period. Our key focus remains in Hangzhou, Beijing, Shanghai and Suzhou. The luxury-focused property portfolio in Hong Kong holds a landbank of 3.3 million square feet. Its luxury and scarcity are signified by the Peak Portfolio and Kowloon Tong projects. The group is also tapping into CBD2 potentials with projects in Kowloon East, including the Kai Tak site acquired through JV last year. Mount Nicholson under the group's Peak Portfolio is around 80% sold and achieved some record-breaking prices in Asia. One apartment was sold during the period for $533 million. Attributable of operating profit was $286 million in the first half with one house and one apartment to be recognized in the second half. Let's move on to the financial management. Net debt was $23.9 million. Gearing ratio was 16.7%. Average interest cost was 3.4%, and interest cover was 3.8x. We see a more testing outlook ahead. The development is highly dominated by the COVID vaccine and recovery. Meanwhile, the massive QE and fiscal relief versus the economic contraction around the world is worth observing. On the geopolitical fronts, paradigm shift in Sino-U.S. relations and the unprecedented tension also cast great uncertainties on the business environment. The group will continue to be prudent in financial management and to face the challenges ahead with our sound balance sheet. In the very last part of the presentation, I will walk through our efforts in sustainability. The group is a member of Hang Seng Corporate Sustainability Index, and we have completed a preliminary climate risk mapping exercise with reference to the TCFD framework. Through Wharf Emergency Relief Funds, we provide instant support to the needy affected by COVID-19, including RMB 10 million provided to Red Cross Society of China Hubei Branch. For the youth development program, Project WeCan, our business units are now partnering with 5 WeCan schools to provide support. So that concludes my presentation, and now we will come to the Q&A section. [Operator Instructions]

[Operator Instructions] So now we have a few questions coming in with the first one from Karl Choi from Bank of America.

Can you hear me?

Yes, we can.

Yes. I have 3 questions. One, can you discuss -- can you clarify what kind of rental concession was given in the first half? And was it all expensed in the first half? And second, for Hong Kong property development provision, can you give a little bit more color? Was it mostly related to the Kowloon Tong project? What about the Kai Tak project? And then third is regarding the fair value exchanges on equity investments. It was around HKD 79 million in the first half. Did that include the gain from the sale of the Amazon and Facebook shares? Or it was because that gain directly went to the balance sheet?

Thank you. I'll ask Kevin to address the second and the third question. The rental concession in Mainland IP, yes, we made some rental concessions in the month, mainly in the month of February. But because the market conditions in the mainland cities that we operate in improved significantly following an initial decline, the magnitude of the concession was relatively mild. Kevin will advise you whether we had charged all of it in the first half. To your second question about the write-down, the impairment provision for Hong Kong DP, I confirm all of it is related to the Kowloon Tong project. We took a look at it, and we decided, for prudent's sake, it would be appropriate to write it down for the time being. And if at the end of the day, the project goes well, then we'd be able to write back, either partly or in whole, the provision that we made in the first half of this year. The other accounting questions. Kevin, can you address it?

Regarding the rental concessions, and we follow accounting standards to amortize the rental concessions. And actually, as what mentioned by Stephen, the amount is very mild and doesn't affected the results too much. And approximately, the rental concessions will be 50-50 in the first half and the second half. And going forward, there's not too much amortization there.

Okay. The listed -- investment listed.

The listed investments accounting standard, instead, we held the investment as long-term investment. And the [ timing ] for the [indiscernible] will go to the [ services ] rather to the P&L, mostly, affecting the services.

Whether it included the year-end -- rather the period end deficit, whether it included the sale in the middle of the period.

Yes. Regarding the sales report we announced during the year, the profits, I think is, if I'm correct, about $1.9 billion. But actually, the announced profit is compared with the disposal proceeds against the original cost. And actually, about around half of it has been reflected in last year's comprehensive in depth [ services ] and half of it reflected in the [ various ] comprehensive states.

But it didn't affect the period-end surplus or deficit because it happens. This period.

No, no. This period, no. Yes.

Okay. So now we will have the next question from Chuen Yeung from Citi.

Yes. I also have 3 questions. First is on your China, Chengdu and Changsha IFS, you said a very strong rebound. Can you give us an idea what kind of retail sales year-on-year achieved on May and June? And how does that supply trending on -- in the May -- in July, sorry? This is the first question. And second question is regarding your equity portfolio. It increased to $46 billion. It's not a small amount. So can we have an idea how much we are going to achieve, let's say, $50 billion, $60 billion, $70 billion? Do we have a limit on this equity portfolio? And hence, is there any update regarding the mix of the Hong Kong Properties versus the T&T side? So this is the second question. And lastly is on the dividend. Last year, I remember you said that the payout is based on 30% of the core earnings. While this core earning last year has improved -- has already after the provision. And this year, after the provision is a net loss, but you still pay $0.20. So what does it mean? It means that do we have a fix or flow of dividend policy? Or what kind of things that we can take into? And especially when we are getting to the full year, does that mean we will still calculate as 30% of the core earnings after provisions?

Thank you. Dividend first. We feel in the first half of this year, the magnitude of the provision was disproportionate. And we also -- particularly because the regular performance was affected seriously by COVID-19. So we took a decision to disregard, more or less, the provision for the purpose of calculating earnings per share, in which case, earnings per share in the first half declined compared to the first half of last year by approximately 23%. And so we took a rounding and decided to pay an interim dividend, which is 20% lower than last year. Retail sales in the May and June in Chengdu and Changsha, what I should point out is this, the -- although life is getting back to normal in cities like Chengdu and Changsha, generally, footfall is still lower than a year ago. Where we were able to achieve gains in retail sales is because, although mass market sales is not as strong as a year ago, luxury sales is stronger. So that compensated for the decline in footfall. It's a situation where fewer people, fewer shoppers are visiting the malls. But on average, they're spending more. And that resulted in modest double-digit sales growth year-on-year in the 20s, which is very encouraging. We would expect that to continue in the foreseeable future. Part of that is maybe because people are not traveling overseas anymore or very few people are traveling overseas anymore. So instead of buying in Paris and Milan or in Tokyo, and so on and Hong Kong, the spending part of it is at least consumed inside the Mainland and in places like Chengdu and Changsha where the virus situation seems to be under better control than some of the other cities. It's been quite good. And apparently, that trend is continuing into July. Another sign of luxury spending going strong can be illustrated through the performance of our Niccolo Hotels. Now obviously, Niccolo Hotels, while represents luxury accommodations, the ticket size is not as much as a name brand shopping -- handbag or jewelry and so on and so forth, but it is an indication of consumers willing to spend. And there, our Niccolo Hotels have been doing very well in the second quarter and in July. In fact, I only received earlier this afternoon that 2 out 3 Niccolo Hotels in Mainland China had their best month ever in July. It's a reflection of both the market and the good performance that our colleagues have been able to deliver. Investment. There's not a lot of change in the underlying investment strategy. But of course, different stocks have moved in different directions over the last number of months. In particular, you would have noticed that CME2 kind of stocks, they've been outperforming the market. So that may change the relative composition within the portfolio. We haven't made a lot of allocation change ourselves, but the evaluation changes for ourselves. And we don't see a significant departure from what we've been doing going forward. Have I answered all the questions?

Mix.

Sorry?

Mix of T&T and property stocks.

I said not a lot changed, other than the organic change because CME stocks have outperformed property stocks.

Thank you. So we will receive the next question from Jevon from JPMorgan.

Could you hear me?

Yes. Please go ahead.

Okay. So 2 questions. One, also on the equity portfolio. So I noticed there's a net cash outflow of $4.8 billion for -- mainly for long-term investment purchase. Could we clarify if there are new purchases that are similar to the existing portfolio mix and whether that includes Wharf REIC shares? And second question, we also noticed the net debt increased by $4.9 billion. I wonder what's the use of proceeds and if that's related to the purchase of shares as well?

Yes. We did buy some Wharf REIC shares in the first half of this year, but we consider that very much as a Hong Kong property stock. We know it's a stock that we know, for obvious reasons, better than other Hong Kong property stocks. And if the price is good, we see it as a risk that where we can better understand than some of the other property stocks, which is why we have included it in our portfolio as well. The other question…

Net debt, $4.9 billion. Yes. I think, as you said, the net debt of this year has increased by $4.9 billion. Of course, part of it is because of the acquisition of the equity shares and some of it are offset by organic cash flow from property [ service ] et cetera.

Thank you. So we will have the next question from Simon Cheung from Goldman Sachs.

Stephen and Kevin, I have 2 questions. One relating to your China DP. Noticed that your margins on the subsidiary project actually holding up quite well. I think around 41%. But yes, I think the net margins, including associate and JCE, was actually quite low. I'm just trying to get a better sense what's in book on the associate JCE and any guidance on the margin trends or the order book, that $31 billion that you have on going forward? That's the first question. The second question. Your China IP, given the pandemic, even though with the pandemic, you are doing quite well. And it has been quite a few years that you haven't actually acquired any IP. So -- and given that you obviously spend a lot more money into property -- your investment portfolio, you do have the buy power. Just wanted to get a sense, any update on that? Is that because the valuation, the price or any other consideration?