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

Good afternoon, everyone. Welcome to the Webinar of Wharf Financial [ Wealth ] final results briefing. I am Angela, Investor Relations Manager. Our management team in the webinar include Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director. Before the presentation and Q&A session, let me now pass the time to Chairman for opening remarks.

Thank you, Angela. I'll be very brief, so we have more time at the end. 2021 started off reasonably well, but things started to turn down in the second half of last year. In spite of that, we closed the year with respectable results. But then the first quarter of 2022 is almost in entirely different world. First, it was the fifth wave of the COVID pandemic, and that was quickly followed by the military conflict in Europe. Both of those have potentially very far-reaching and deep implications for the world, in general, and Hong Kong and our business, specifically. We can talk a little bit more about both of them later on. But first of all, let me pass it back to Angela. Thank you.

Thank you, Chairman. Now, I believe that you are going to see our Power Point presentation with the theme, recovery, fragility, exposed with COVID waves. The recurring COVID outbreak seriously disrupted social and economic activities, at the same time, different market-specific issues also affected the performance of our business segments. For our core properties businesses, luxury development properties [ lowered ] in Hong Kong, while in Mainland, certain price control and other regulatory policies, together with oversupply of nonresidential properties, point to impairment provisions. Slowdown in Mainland investment properties in the fourth quarter is also alerting. Meanwhile, logistics saw uplift due to supply chain disruption. Prudent capital management is exceptionally important in the current market. Operating cash flow and partial realization of long-term investments helped the Group to reduce debt level by 48%. Now, looking at the Group's performance. As a premium-quality property company, properties accounted for 70% of total business assets and 77% of total revenue. By location, Mainland China accounted for 53% of total business assets and Hong Kong accounted for 41%. Group revenue increased by 7% to $22.4 billion. Underlying net profit increased by 7% to $3.6 billion. Total dividend was $0.40 per share for the full year. Despite the challenging operating environment, the Group maintained a strong balance sheet. Total equity increased by 2% to $166 billion, as mentioned in the highlights. Group net debt was halved to $13 billion, and gearing substantially improved to 7.9%. As at year end, the market value of our listed equity was around $44 billion, with cumulative surplus totaled around $1 billion. Also, dividend income of over $1 billion was booked to P&L. Then, we will walk through our different business segments in the order of Hong Kong properties, Mainland DP, Mainland IP, hotels and logistics. The Group has been active in the peak portfolio in Hong Kong last year. Two Mansfield Road sites were acquired for $15.6 billion on an attributable basis, and contracted sales for 2021 was $4.9 billion. As at year-end, total Hong Kong DP landbank amounted to 3 million square feet, of which peak portfolio accounted for 0.6 million square feet. Attributable sales at 50% owned Mount Nicholson was $1.1 billion during the year and that for 77/79 Peak Road was $3.9 billion. Moving on to Mainland development properties. ASP control and other regulatory policies have increased investment risk in the segment. Sentiment for residential properties remain weak amid a turbulent market, and the nonresidential stock is slow moving in the oversupplied market. During the year, the group recorded contracted sales of RMB 13.9 billion. Sales target for this year is RMB 9 billion, and sellable resources totaled 0.8 million square meters. On attributable basis, Mainland DP revenue increased by 64%, with the investment upside depressed by ASP controls. Net order book at year end was RMB 16.7 billion for 0.5 million square meters. Target completion for this year is 0.5 million square meters. Landbank depleted further to 2.1 million square meters, and replenishment has been on a very selective basis. The Group's landbank has been mark-to-market, which is still undergoing correction, and an impairment provision of around $3.9 billion was made. Moving on to Mainland investment properties. The Group's proactive efforts from a small nascent base, some 20 years ago, are beginning to bear fruit. However, the market has become much more competitive. Retail sales momentum slowed down since the fourth quarter last year, and office demand is weak with oversupply. That said, the IP market in Mainland China is alerting. Compared to a low base in 2020, revenue increased by 28% to $5.4 billion. However, RMB interest costs as well as tax substantially reduced net yield. Looking at the performance of our flagship IFS series. Being the top mall in Hunan for luxury and latest trends, occupancy at Changsha IFS Mall remained high at 99%. Tower 2 is scheduled to complete in phases from next year, comprising Park Hyatt, plus one more hotel and high-rise apartments, but the ASP is expected to be soft. Chengdu IFS mall consistently ranks among top 10 for sales, nationwide. Year-end occupancy was 95% and a double-digit rental reversion was achieved. Meanwhile, rental rate at premium Grade A office towers was flat, but remained among the highest in the city. Occupancy further improved to 87%. Moving on to hotels. The Group manages 16 hotels in Mainland China, Hong Kong and the Philippines under Niccolo brand and Marco Polo brand. Hotels in Hong Kong and the Philippines are most severely affected by COVID, most reported deep losses, including full or partial closure in some cases. Recovery in Mainland China is still fragile. Revenue-generating indices of our Niccolo Chengdu, Chongqing and Changsha in China consistently outperforms the competitive set. However, occupancies were hard hit by travel restriction in China. For Niccolo Suzhou, which opened in April last year, it's ramped up quickly, but was stalled by COVID. Turning to our Logistics business. For modern terminals, supply chain disruptions created opportunities, but limited space has restricted handling capacity, and anti-COVID measures also reduce manpower productivity. Meanwhile regional competition and trade tension persists. On the other hand, air cargo volumes of Hong Kong Air Cargo Terminals remained strong. Let's move on to the financial management. As mentioned earlier, net debt was substantially reduced to $13.2 billion. Gearing ratio notably decreased to $7.9 billion (sic) [ 7.9% ]. Average interest cost remained low at 1.8%. Interest cover was 9.8x. For the coming attractions, there are a number of projects in our pipeline for Hong Kong Properties, including Peak properties, Kowloon Tong sites and 30% JV Kai Tak site. And for China investment properties, phase completion of Changsha IFS Tower 2 will start from next year, featuring prestigious high-rise apartments and Park Hyatt as well as another 5-star hotel. Looking ahead, challenging times continues, as macro policy and geopolitical outlook intensify business. COVID outbreaks and market-specific issues also continued to hamper growth across our business sectors. In the last part of the presentation, I will walk through our efforts in sustainability. In view of the recurring COVID-19 outbreaks, the Group has expanded its support to the pandemic relief and recovery of Hong Kong, including an additional round of HKD 5 million donation, was made by our Wharf Emergency Relief Fund to the Community Chest Rainbow Fund, and another HKD 5 million donation to students in need in 82 Project WeCan schools. We also offered the use of Kowloon Godown for the storage of medical and other supplies. And currently, Modern Terminal is providing daily shipments of fresh produce and necessities from Shenzhen to Hong Kong. Apart from COVID relief and other sustainability efforts continued, the Group raised its first sustainability-linked loan to $2.1 billion. And the Group remained at Hang Seng Corporate Sustainability Index Series member and achieved an HSI ESG rating of AA. Other highlights also include the 10 years of support towards Project WeCan, with 72 partner organizations and has benefited 80,000 students from 82 WeCan partner schools. On the Group level, Wharf was awarded 10 years-plus Caring Company Logo, and a number of our properties have obtained LEED or [indiscernible] certification. So that concludes my presentation, and we will come to the Q&A session now. [Operator Instructions] So we have a couple of questions coming up. And the first one will be from Cusson Leung from JPMorgan.

Management, I have three questions. One is, we look at the announcement the same side, there is over 30% of turnover rent from your China IP. Just want to see what's the progress of converting that turnover rent into your base rent? That's question number one. Number two, given the current situation of the local developers, does the company have any plan to expand the current IFS portfolio? Question number 3 is, coming back to Hong Kong. If one day there is a plan for the government to relocate the [indiscernible] Container Terminal, does Wharf have the right to redevelop the site?

Okay. First question, turnover rent. There is a natural process of conversion of turnover rent into base rent. It's built into the lease renewal mechanism, particularly in the case of new malls. When we first opened, when tenants and landlord are less certain about the trading capability of a particular mall, we typically would set the base rent a little lower, so that tenant and landlord would share the risk more. But once trading record is achieved, then there is a track record and tenant and landlord can negotiate for a more reasonable and normally higher base rent. So that would happen usually when the first lease term ends. Typically, it is a 3-year lease, then we start to see it in the fourth year. So that will happen, particularly in the case of Changsha IFS because that opened in 2018, late 2018. So that's -- the 3 years are coming to an end. To your second question, there are, as you pointed out, a number of new investment opportunities, given the current situation, and we do look at them. However, our selection criteria are high, and we see, that is more a market for buyers than for service. We're in no hurry. If we can identify a compelling opportunity, compelling implying in terms of quality of assets, risk of investment, upside/downside relationship and all those. If we come up with a compelling opportunity, then we would consider making a serious attempt. Otherwise, we continue to be very selective. To your third point about relocation of the [indiscernible] Container Terminal, if that happens one day. It is a fact, if you look at the land grant, that the land is specifically granted for use as a container terminal, no other use. If one day the Terminal business evaporated out of thin air, we would still need to get approval for lease qualification before we can do anything of that nature, you have in mind. So that will not be automatic. I think that hopefully answers your question.

Thank you. We will have the next question from Karl Choi, Bank of America.

I have three questions. First is, you mentioned that retail sales in China slowed, especially since the fourth quarter. Can you give a bit more color on was the sale down, year-on-year, in the fourth quarter? And was it a comparison base issue? And how has the year started? And second question is, given the market -- stock market turmoil, can you give us an update on your stock -- your listed securities investment portfolio performance so far this year? Have you made any changes? Have you sold any more shares, since it looks like you disposed some shares in last year? So I wonder if you have continued to divest? And last question is housekeeping. Can you give us an update on the number of sold but unbooked units over at Mount Nicholson at 77/79 Peak Road?

Okay. Mainland retail sales, I think, a good indicator. Now, we can talk about global numbers and so on, but a good indicator is that actually our turnover rental income from our portfolio, it was growing year-on-year at a cracking pace in the first quarter, mainly -- or at least partially, if not mainly because of a lower base in 2020, because that was when COVID first hit the Mainland China market. So first quarter 2021, year-on-year, cracking pace. That has started to normalize in the second quarter and in the third quarter. By the time we reached the fourth quarter, we saw basically a flat year-on-year trend. And in some cases, actually, a decline, a minor decline. So that's a very clear sign, as far as our malls are concerned, if not the market as a whole, that the slowdown was happening. Now of course, arguably, in 2020, the pace crept up from a very poor first quarter to a better second quarter, to a wonderful third quarter and then to a booming fourth quarter. So the 2 years, 2020 and 2021, in a way, they were almost like mirror images. In 2020, it was a rising trend. Rising in the sense that it was less and less bad, whereas in the second, in the 2021, it became less and less good. Your second question, listing investments in the presentation that Angela gave you. Surely, we advise you that by the end of last year, the portfolio had a market value of $44 billion. And the cumulative mark-to-market surplus at that time was $1 billion, implying our cost was somewhere around $43 billion. And that portfolio also gave rise to dividend income in excess of $1 billion in the year 2021 alone. The dividend income was booked to profit, whereas a change in reserves, whether realized or unrealized, is not. Then -- and in the process, what we did was, we started to lower our debt in the third and fourth quarters of last year. We were -- we wanted to reduce our debt level and reduce our gearing given the uncertainties in the macro environment. And the quickest way to do so was to liquidate our listed investments to preserve our capital as well. Now with hindsight, that was the right thing to do, and we continued to reduce that in the first 2 months of this year. So we sold some more shares. Overall, since the portfolio has started until now, we have realized comfortably more net gain on disposal than the cumulative mark-to-market write-downs, but our debt level is now even lower than what it was 2 months ago, and we're very comfortable with our current debt position. In the case of Mount Nicholson, we have 10 units left out of the original 67. And in the case of 77 Peak Road, we have 2 units left out of the original 8 -- 9. 8 or 9?

8.

8. Thank you. Thank you for your questions.

So we will have the next question from Andy So, Haitong.

Management, can you hear me?

Yes, we can. Thank you.

I would like to ask about the property sales in China. What I understand is the China sales numbers are back in [ neutral to CNY 1.1 billion ], 20%, to around RMB 14 billion. And I understand that, that number is relatively low, and that should be the lowest in the past 10 years. When our property sales is coming down, can management give us some more guidance on the book that property sales like in coming 1 to 2 years? Should we expect that going forward, like in [ 2022 ], our book property sales this year should be even lower than that of last year? And secondly, I would like to ask about what is our sales guidance in China in this year?

Okay. It's already in the presentation that Angela gave you. Our target for Mainland property sales this year is CNY 9 billion. It would be lower than last year by 30% or so. And it's the first time we would not be selling $10 billion or more -- or RMB 10 billion or more for some years. That's attributable to 2 reasons. First of all, we have less stock to sell. And secondly, the ASP is expected to be controlled -- or continue to be controlled. It is that combination. In terms of recognition, we are targeting to complete most of the projects in hand within this year. Whether or not we can hand over all of them to buyers is something that we need to still see. And of course, the other question is whether or not we can sell according to our target. Both of those will affect how much we can book this year. But generally, I think it's probably fair to say that our Mainland DP profit contribution will not be as good as it was a couple of years ago. Thank you.

Thank you. We will have the next question from Simon Cheung, Goldman Sachs.

I have 3 questions. Just back to the question about retail sales. Obviously, you mentioned fourth quarter was a bit weak [ package ]. Would you be able to comment or share with us what you're seeing maybe on dividend categories in China or even by property, how are you seeing that particularly compared to [indiscernible] and the Changsha IFS and also year-to-date trend, that would be helpful. And secondly, I remember last time, you mentioned that on your landbank in China, it will continue to be built, and that you do not grow up possibility to further write down the landbank. If I look at the net margins, last year was about, I think, 7%, 8% net margin. And given such a low net margins that you're seeing, how should we think about the devaluation of your entire landbank at this stage? I remember you also mentioned previously that you're anticipating your net margin will be offering at about 10% or so. And then I think, thirdly, I pick up that in the -- maybe second half last year, you sold your China property management business. Can you elaborate a bit more on that, and whether that's going to be more noncore to be sold going forward?

Okay. Thank you. Yes, indeed, the retail sales in Mainland China has been weaker in the last 2 quarters than in the preceding quarters. Part of that mainly because of [ scares of COVID ]. They are extremely sensitive to COVID in all of the cities. Here, we're now unfortunately used to 50,000 cases a day. There, 50 cases a day in any city would already cause lockdowns and everything. And when you get these COVID scares from city to city, people stay home or people either are ordered to stay home or they choose to stay home and that somehow would affect retail sales. That's why, at the moment, retail sales, we understand, is weak, the way we see it. I hope when COVID in Mainland becomes less of a scare, a normal -- a more normal pattern would resume. In fact, I should add that we're seeing a similar trend in our hotels in the Mainland. When there is COVID scare, people cancel bookings, all kinds of bookings, room bookings, events, dining bookings and everything. And so that hurts the consumption. Landbank, valuation of our landbank, what we do, as a matter of policy, is to enhance transparency for investors. There is no point in pretending that our landbank is worth more than it actually is. So when we do, at the end of each period, revalue, we revalue our landbank, we look at what market is, and we mark it down to market. We don't mark it up, but we mark it down to market. And in spite of that, as you pointed out, we're not reporting exceptional margins. That's because marking it down to market implies where market is down to market margin, i.e. post-write-down, the margin we can expect -- assuming everything goes according to plan, the margin we'd expect would be market margin, somewhere around the levels that we were able to report last year. So that is probably a general guidance that I can provide you. So last year, we actually wrote down another $3.9 billion of Mainland DP. Again, for transparency, there's no point in hiding it from investors only to [ hit new ] when the projects are completed. We probably tell you in advance. And by nature, it's not too different from banks writing down the loan book from time to time or writing back to the loan book from time to time depending on the valuation at the time. Your third question deals with the property management company that we sold last year. The property management company that we sold last year manages residential properties in the Mainland. It was started by some years ago, to manage our own properties, i.e., projects that we, ourselves, developed and sold. So it was always operated as a service company. We wanted to provide good service to buyers so that we can entice new buyers to buy new units. So that was what we did. But you would know that in the Mainland, what happened over the past few years, is that professional property management companies emerged and it became a business. And they have much larger scale, so they can invest more in people, in systems and in know-how. We were left behind in that process. We don't have nearly the scale they do. We probably have 1/10 the scale of a medium-sized property management company. So we can't compete with them, and we can't provide similar kinds of service as they can. So what we did, eventually, was to exit that business. We sold substantially all -- together with that transaction, we've sold substantially all management contracts in relation to residential properties, with the exception of a few that, for structural reasons, we could not exit yet. However, we still retain management of our commercial properties, the IPs. That doesn't change. Thank you.

Thank you. And then the next question from Raymond Chin, CIMB.

Hello.

Hello.