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

Good afternoon, everyone. Welcome to the webinar of Wharf final results briefing. I am Angela Ng, Investor Relations Manager. Our management team in the webinar includes 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 Chairman for any opening remarks.

Thank you, Angela. The last time -- good afternoon, ladies and gentlemen. The last time I spoke to you about 6 months ago. The pandemic was still less certain under control or better control than it is today. Subsequent to that, the situation stabilized further in the Mainland. And in Hong Kong, we've seen a couple of waves since then. But generally, the pandemic situation has improved particularly north of the border. As a result of that, our group's performance in the second half of last year improved on the first half. Some of the -- for instance, some of the construction work that had to be delayed and the handover to buyers in the first half of last year, we were able to catch up most of it in the second half, which resulted in a lopsided second half compared to the first half, which is somewhat abnormal in other years. Having said that, the pandemic situation in the Mainland while under control, we still see bursts of mini outbreaks from city to city sometimes. And the public is generally quite sensitive about these mini outbreaks. And whenever it happens, people just lock themselves in, and creates a short-term problem for bigger cities. Back in Hong Kong, we also see an improvement in sentiments towards the pandemic. But unfortunately, the border's still closed, effectively closed. And until the orders become more open, I'm afraid we will still need to tighten our belt. So things started to go better in the second half of last year. And are so far this year, looking good, but I need to caution about the coming months. Still a great deal of uncertainty lies ahead of us. With that, I'd like to hand back to Angela to take us through the presentation, and I'll come back in the Q&A afterwards.

Thank you. Thank you, Mr. Ng. Now I believe that you can see our pop on presentation with the theme COVID Year Hit Operations. Despite specific disruptions caused by COVID-19, the group's underlying net profit increased by 14% to $3.1 billion, reflecting much higher profit contribution from Mainland DP, resilient performance of Mainland IP and increase in investment income. Operating businesses accounted for 72% of the group's underlying net profit, contributed to a decrease of $532 million. The remaining was investment and others, which contributed to an increase of $914 million, mainly from increase in dividends from a large investment portfolio. The group remains as a property-focused company. Properties accounted for 65% of total assets. Properties also accounted for 76% of total revenue and nearly 60% of underlying net profit. Looking at the financial highlights. Washout in the first half was followed by pockets of recovery in the second half. IP revaluation also returned to surplus in the second half. Inclusive of IP revaluation deficit, group net profit increased by 14% to $3.9 billion. Basic earnings per share was $1.27. A second interim dividend of $0.20 per share was declared. Full year dividend increased by 23% to $0.40. In the following slides, we will walk through the individual performance of different business segments in the order of Hong Kong properties, Mainland IP, Mainland DP, hotels and logistics. The Hong Kong properties portfolio post a landbank of 3.6 million square feet, including the newly acquired Mansfield Road sites, which have doubled the landbank size of our Peak portfolio to 0.6 million square feet. Activities stepped up recently with a burst of sales and leasing transaction recorded from Mount Nicholson, 77, 79 Peak Road and 11 Plantation Road. One apartment at Mount Nicholson was sold for $533 million in 2020. While the latest transaction of 1 apartment was recorded in January this year for $419 million. Attributable operating profit was $751 million. 2 houses and 10 apartments remain unsold at Mount Nicholson. Featuring a harmonious balance of sophisticated city living and nature, 77, 79 Peak Road was launched in January this year. Among the 8 houses for sales and lease, 3 houses have been sold in quick succession for total contracted sales of $1.7 billion, with the latest house sold at $558 million or over $92,000 per square foot. And for 11 Plantation Road, which comprises 7 houses, house 1 with over 10,000 square foot was leased at a monthly rent of over $1.3 million this month. Moving on to Mainland investment properties. Domestic consumption regained growth momentum since the eased lockdown on in the second quarter. The group sees the opportunity by launching a series of creative but effective marketing and sales support at the flagship malls and achieved stellar results. Over 250,000 people participated the countdown event at Changsha IFS last year, while a new high of nearly 300,000 footfall was recorded at Chengdu IFS during the National Day Golden Week. We are also glad to witness recording sales at our flagship malls and also expanded loyal VIP customer base. Mainland IP revenue for the year increased by 7% to $4.2 billion, even under the pandemic. CAGR for the past 5 years was 16%. The booming sales from luxury segment and the strong spending momentum is expected to continue this year. Changsha IFS achieved exceptional sales productivity with full year retail sales up by 42% and full occupancy was achieved. Entering into year 3 of operation, reversion upside is anticipated this year. Tower 1 offices were highly favored by major corporations, leading to a surge in occupancy to 83% of IP floors. Chengdu IFS is regularly ranked among the top 10 malls in Mainland China for retail sales, and often the only one from Western China. Retail sales of the mall was up by 18% in 2020. The outstanding market position brought double-digit retail rental reversion and the 3 Grade A office towers continued to rank amongst the highest rent rates in the city. Office occupancy stayed firm at 82%. Moving on to Mainline development properties. The group continues to be selective on land banking to sustain quality and return. Landbank totaled 2.8 million square meters, with key focus remained in Hangzhou, Beijing, Shanghai and Suzhou. Completion of 55% owned Shanghai One Jingan was a highlight of the year. On an attributable basis, Mainland DP revenue increased to $77 billion and operating profit also increased to $7.6 billion. Operating profit margin increased to 43%. Net order book amounted to RMB 28 billion. Target completion for this year is 1.2 million square meters. And for contracted sales, the group beat the sales target by 16% to RMB 17.4 billion, with over 80% of sales from Suzhou, Hangzhou, Beijing and Chongqing. However, ASP control continue to curb profitability of the new launches. Sales target for this year is RMB 15 billion and salable resources totaled 1.1 million square meters. Moving on to hotels. The group manages 16 hotels in Mainland China, Hong Kong and the Philippines under Nicolò brand and Marco Polo brand. Diverse performances were observed across regions, with Mainland China recovered the soonest. Nicolò brand is our award-winning brand established in 2015. And the 3 Nicolò hotels in IFS had their RGI consistently at the top of market. Record high occupancies were reported in the third quarter under the robust local demand on luxury hospitality. The highly successful Nicolò collection continues to grow with the 5th hotel in Suzhou. Expected to open on the first of April, Nicolò Suzhou has already garnered a number of The Most Anticipated Hotel of the Year award. Turning to our logistics business. Global supply chain was heavily disrupted by the pandemic. Against the backdrop, the group had a rewarding year, mainly due to a strong recovery in the second half. Total throughput of modern terminals stayed flat for the year. The Hong Kong Seaport Alliance is on track to strengthen its competitiveness through operational upgrades and continued focus on service delivery. Now let's move on to the financial management. Net debt was $25.5 billion. Gearing ratio maintained healthy at 15.6%, average interest cost lowered to 2.9% and interest CAGR was 9.3x. Looking ahead, the global economy is generally expected to bounce back from a low base if the vaccine rollout is successful. However, the pace and strength of recovery are far from certain. In this regard, China will continue to play the role of an important growth engine. The group will seize the opportunity upon gradual revival of global economic activities ahead. This year, there are a couple of highlights across our business, including the 3 rare properties in our Peak portfolio in Hong Kong, namely Mount Nicholson, 77, 79 Peak Road and 11 Plantation Road. In Mainland, we are anticipating the opening of Nicolò Suzhou and our flagship IFS [ loss ] continued with ongoing brands expansion, while DP segment is also prepared with new project launches. In the last part of the presentation, I will walk through our efforts in sustainability. This group participated involved emergency rely fund to support the meeting affected by COVID-19. We were also a member of Hang Seng Corporate Sustainability Index and raised a green loan facility of RMB 1 billion to refinance Changsha IFS. For green buildings, Changsha IFS and Chengdu IFS were awarded the LEED Platinum certificate. And for youth development, the group is defaulted in supporting a project we can and our business units are partnering with 5 weekend schools to provide support. That concludes my presentation, and now we will come to the Q&A session.

[Operator Instructions] Now we will receive the first question from Karl Choi from Bank of America.

I have 3 questions. One, can management talk a bit more about how the dividend was set in for the full year 2020? I think in the first half, the dividend was sort of set sort of disregarding the DP impairment. Just wonder how you set it for the full year? And also for -- second question is for 77 to 79 Peak Road. I believe it's currently accounted for as an IP on your balance sheet. And for the sale, would you just book any gain versus the value on your book for now? Or would it be versus your redevelopment cost? Because obviously, it makes a big difference in terms of profit and also dividend. And lastly, can you just talk a bit about the net or the -- currently, the margins for your net order book for China, given the fact that you had the impairment in 2019. So the cost basis was written down. I just wonder what the -- your current margin level looks like.

Okay. I'll ask Kevin later on to address the second question, and I'll deal with the first and the third first. What we did this year in deciding the distribution for the full year was to look at the full year underlying net profit compared to that from a year ago. The increase there was, I believe, about 14%. We took account of the unusual situation this year. And we decided to increase the payout ratio to somewhere around 39% of underlying net profit. So it's an increase. We took account of special year. On a more regular basis, I think we would still tend to adhere to a payout ratio which is closer to 30%. So I hope that answers your first question. As your third question, when you look at our operating margin for Mainland DP in 2020, you need to take account of a particular project, i.e., One Jingan. That is a project with a high margin. And that's higher than normal. Of course, the flip side of that was we paid a fair bit of tax or accrued, at least, if not paid, a fair bit of tax against that bigger margin. That kind of margin is unlikely to recur. And so I would not expect our operating margin for our Mainland DP to be sustainable in the coming 1 or 2 years. As to your second question is an accounting...

IP disposal.

Yes, 77, 79 Peak Road.

I think it's quite clear that for IP, we will we vary each IP every year with the varying market conditions and substantiates if there is any disposal. We will compare the consideration, again, the market variance stated in the balance sheet. So in clearance, all the other service arising from the IP already has been taken into account in the respective years. So it's just a pure comparison of the consideration against variations -- latest variations, the latest financial years, yes.

So it's realization of revaluation reserves booked in previous years, plus if there is any additional margin, it will probably take the form -- it will take the form of DP profit. Is it a fact?

IP profit.

IP profit, sorry. IP profit.

We will now receive the next question from Praveen from Morgan Stanley.

The first question is related to what Karl mentioned about the dividend, and you pretty much answered it. I just have a minor question of why did you mention that it is a second interim dividend and not final dividend when you reported the second half number? And the second question is for me to get the breakdown of your equity portfolio, which has gone up a lot between Hong Kong or U.S. estate or property versus tech, whatever you can provide us.

Okay. We couldn't hear the first question. Can you repeat the first question?

The first question was about the dividend. You have said that this is a second interim dividend and not the final dividend. I'm just trying to understand the nomenclature. That's all.

Okay. We, pretty much, for several years now, we used to pay an interim dividend and a final dividend. Obtaining clear final dividend requires approval at the AGM, and therefore, we delayed the payment date. So as of several years ago, we changed them to first interim dividend and second interim dividend so that we can pay the second interim dividend earlier. In fact, we're probably one of the listed companies, major listed companies with an earlier payment date for what used to be a final dividend and what is now called the second interim dividend. Regarding the equity investments, the balance sheet will show, and that's also included in the announcement today, that the market value of the portfolio as of the end of last year was a little bit over $60 billion. That's -- as you pointed out, that is quite a bit higher than a year earlier. During the year, what happened was we invested additional funds in equities. But equally importantly, in the course of the year, the value of our portfolio increased. In fact, as at the end of last year, the valuation surplus, we market to market, we are committing to market, the surplus, net surplus cumulatively was in excess of $7 billion. To give you an idea of the composition of this portfolio. A little under 50% of it is in CME to technology. And the remainder are almost entirely in properties, mainly on Hong Kong properties. So the first part, CME2 is investment for growth. And they did grow very much in the course of last year. And the second part, properties is intended for yield and value because most of the -- these major future property stocks have been trading at a significant discount to NAV, as much as 50%, or higher in some cases. So we bought them for yield and for value. Now obviously, share price can be volatile. But the fact that we hold them for the long-term would remove the problem of our not being able to sleep at night. These are very, very trying stocks. And there is no overwhelming concentration in 1 stock. It's a fairly diversified portfolio.

Now we will receive the next question from Ken Yeung of Citi.

I have three questions. First is a follow-up on the equity portfolio. You mentioned, yes, this year, seems like you has expanded quite a lot from $37 billion to $67 billion. That you mentioned about some around $7 billion is from the net surpluses. I would wonder how big the portfolio you aim to be because this seems to be growing every year. Will that be $100 billion, $120 billion 1 year or 2 years later, because that seems to be to us is a little bit different from your core property business or basically, probably CME2 that you previously mentioned, using the money for maybe investment opportunities for some other real investment in CME2 rather than investing in equities. So this is the first question. How far we can go for this $67 billion. And second is, you mentioned that you didn't buy any China landbank, but you buy Mansfield Road. Can I say you are diversifying out from China or lesser investment in China and more investment in Hong Kong for the strategy. So this is on the land banking side. And lastly is on the retail sales. I think including yourself and other peers have very robust sales on the luxury retail sector in China. But basically, this is due to some -- maybe the border has -- is closed. So do we see that the retail sales probably is not -- is likely to be turned into negative if you continue to walk through tourists second half of this year, if everything is getting back to normal?

Let me try to address your questions. To your first question, you seem to be worried about the appreciation of our portfolio. If it's $60 billion at the end of last year, unlikely to be $600 billion in a year's time, if that's all from appreciation. What's wrong with that? All right? They are, as I said, very fine stocks. And when we buy them for growth, we are expecting, or hoping at least, that they will appreciate in value over time. On the other hand, you're worried about retail sales going south, which is quite possible. It is rare for a statistic to be going up and up and up all the time. There's a period when the trend is up, and it's possible for the trend to be reversed from time to time. We saw that in Hong Kong retail sales. We all know that. In the Mainland, at least, given this economic development in the last 40 years, in particular, in the last 20 years, retail sales has been strong, but there may come a time when it may slow down or even reverse. And that is a risk that we need to take by investing in retail properties. In land banking, we look at the return versus risk all the time. And in the past period, at least a year, we have come to the view that investing in Hong Kong properties would give us a better return than investing in Mainland properties, which is borne out by our very action. We continue to bid for Mainland properties on a selective basis, but we're also cautious about what price we are prepared to offer. And when we're not as aggressive as our peers, we often end up second or third best. On the other hand, when we come across rare sites in Hong Kong we're prepared to go all the way. And that's gone up in our track record over the past year and more, particularly in the last few months. Whether or not we would be buying Mainland properties again, directly yes. But again, it depends on the competition. Whether or not we'll be buying in Hong Kong again? Yes, we would certainly be looking. But at the same time, in addition to bidding for new sites, we also have some existing sites in hand, which are slated for redevelopment. And that can keep us quite busy too. So our landbank is reasonable.

And the next question comes from Andy So of Haitong.

Management, can you hear me?

Yes. We can hear you. Please go ahead.