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

Good afternoon, everyone. A very warm welcome to Wharf final results briefing. Our management today include Mr. Stephen Ng, chairman and Managing Director; and Mr. Stephen Fu, Financial Controller. I am Angela Ng, Investor Relations Manager. For today's briefing, I will first start with the presentation, followed by a Q&A session with our management. And you can see from the screen, the theme of the presentation this year is pandemic woes cost HKD 10 billion NAV erosion. Mainland and China were seriously hit by COVID controls and lockdowns last year. Almost all business segments dented, and the group's -- and the group was not spared. Total property sales decreased by 74% to HKD 6 billion in view of a very weak market. The group took a prudent approach to make an impairment provision of nearly HKD 6 billion against unsold stock. For Investment Properties, rental income fell by 11%, NAV declined by HKD 10 billion or 6% to HKD 152 billion, which is equivalent to HKD 49.6 per share. Now let's take a look at the group's segmental breakdown. Mainland properties account for over 60% of group revenue and operating profit and over 40% of total assets. There were less contributions from Hong Kong properties and hotels last year. Logistics and investments are the other key contributors to the group. Group revenue decreased by HKD 4.3 billion or 19% to HKD 18.1 billion in which Hong Kong DP decreased by HKD 3.9 billion after a bumper 2021. Underlying net profit decreased by 92% to HKD 303 million, inclusive of the above mentioned impairment. Excluding the provision, DP reported a profit of HKD 1.7 billion. Total dividend for the year was steady at HKD 0.40 per share. We maintained a strong balance sheet in the volatile market. Net debt decreased by HKD 7.9 billion year-on-year to HKD 5.3 billion. Gearing reduced to 3.4%. Net debt, excluding Modern Terminals, was HKD 2.2 billion, equivalent to 1.5% of NAV. The group's long-term investments provide strong liquidity and dividend income. Market value of the listed equities was HKD 40.3 billion at year-end, and HKD 1.5 billion dividend income was booked to P&L. We adhere to a prudent financial management and has prepaid debt to reduce exposure. In the past 18 months since June 2021, gross debt reduced by HKD 42 billion or 68%, while net debt reduced by HKD 36 billion or 87%. Average interest cost for the year was 2.6% with all floating debt. Interest cover was 8.8x. In the following slides, we will walk through our business segments in the order of Hong Kong properties, Mainland DP, Mainland IP, Hotel and Logistic infrastructure. Our Hong Kong land bank amount to 2.8 million square feet, of which the rare and unique collection on the peak account for 0.6 million square feet. On an attributable basis, contracted sales decreased by 79% to HKD 1,025 million, with one apartment on Mount Nicholson and one house on 77/79 Peak Road sold. Recognition was HKD 905 million, and net order book at year-end was 70 -- sorry, net order book at year-end was HKD 733 million. Moving on, our Mainland development properties. The ongoing interruption by COVID had a heavy impact on sales and construction activities. In parallel, sentiment is weakened under market illiquidity and high-profile defaults of the debt-ridden developers. Contracted sales for the year reduced to RMB 4.2 billion. Sellable resources for this year totaled 0.6 million square meters. On attributable basis, Mainland DP revenue decreased by 50%, with recognitions mainly from Hangzhou and Suzhou. Land bank decreased further to 1.7 million square meters, and no addition was made in 2022. Target completion for this year is 0.2 million square meters, and net order book decreased to RMB 8.5 billion. Moving on to our Mainland IP. Growth momentum lost steam since March last year due to COVID lockdowns and economic slowdown. Sentiment towards discretionary spending was especially weak in December when infection spread after lifting of COVID control measures. Additionally, office leasing demand was weak under such volatile business environment, leading to soft rental and occupancy in an already oversupplied market. Therefore, overall Mainland IP revenue experienced the first reversal in recent years with a decrease of 11% to HKD 4.8 billion. Looking at the performance of our flagship IFS series. Chengdu IFS and Changsha IFS malls have proven track record in productivity, which attracts top tier brands to open debut stores or flagships. The market-leading position enable IFS to achieve double-digit rental reversion despite the sales and turnover rent was dragged by lockdown during the year, mall occupancies stood firm, but office occupancy and rents are under pressure. Moving on to the Hotels. The group owns or manages 16 hotels in Mainland China, Hong Kong and the Philippines under Niccolo brand and Marco Polo brand. The Hotel segment was severely hit and resulted in a loss. On a positive note, Mainland domestic travel has started regaining pace in the first quarter this year. Despite the challenging environment, the group's Niccolo hotels remain consistently outperforming the competitive set in terms of revenue yield. Turning to our Logistic infrastructure. The global demand is weakened starting in midyear due to the inflation and economic slowdown. Under the supply chain disruption by COVID, there are mixed performances across different ports. Hong Kong's cross-border gate volume was further curtailed by border controls. For Da Chan Bay, it was able to capture opportunities with higher international trade and reported growth in throughput. In the next slide, we will take a look at our project pipeline, outlook and sustainability. For project pipeline, our upcoming sales in Hong Kong includes 1 Plantation Road, Kowloon Tong project and Kai Tai JV project. Kowloon Godown project is under planning stage for residential use. In Mainland China, Changsha IFS Tower 2 will be completed in phases. Looking ahead, a number of macro headwinds could tip 2023 to potential global recession. However, there is a positive spot in Mainland China with the exit from Zero-COVID policy and the supportive measures in economic recovery. In the last part of the presentation, I will walk through our efforts in sustainability. Wharf is a constituent of Hang Seng Corporate Sustainability Index Series with AA+ rating. Our projects are awarded with Green Building certifications. Chengdu IFS and Changsha IFS even achieved LEED platinum certification. The group has established 2030 environmental targets, covering electricity and water consumption. We also increased the use of renewable energy. For example, Chengdu IFS has sourced electricity from hydroelectric power. Also, around 300 solar panels were installed at a warehouse building of Modern Terminals. In regard to the community contributions, Wharf Group is named the second top donor by the Community Chest for 2 consecutive years. For youth development, our flagship program, Project WeCan, partner with 82 schools and benefited over 87,000 students. The group also has a robust set of measures for occupational safety and health to safeguard employee well-being. We also strive to uphold the standard of business ethics and corporate governance. That concludes my presentation. Now we will come to the Q&A section. Just a little housekeeping notes before we start. [Operator Instructions] May I now invite Mr. Stephen Ng and Mr. Fu to come to the stage, please.

The first question from maybe Karl Choi first from Bank of America.

I have 2 questions. First is now that China is fully reopened, can you discuss a bit more? Latest thoughts on your -- where you see the best investment opportunities, whether it's Hong Kong DP or China IP or China DP or just continuing to pay down debt? And related to that second question is, obviously, the stock is trading at a very inexpensive valuation, less than 0.4x price to book. When you think about capital allocation, would you consider share buyback? Or can we expect Wheelock to buy in the open market as well to support the share price?

Okay. Maybe I can give you, first of all, a quick market update in the areas of DP and IP in Mainland China. Both markets were very weak last year. They were particularly weak towards the end of the year, particularly in December when all COVID measures were removed, and all of a sudden -- take our employees as an example, within a matter of a few weeks, 80% of our employees in the mainland had contracted the virus, but they also recovered very quickly, within a matter of several weeks thereafter, we had 99% of them back at work. Touchwood, we have zero fatality from COVID among our colleagues, and only one case of hospitalization. So it came and went very, very quickly. But we are perhaps -- our sample is probably not a representative sample because our employees are mainly in the larger cities, not in the rural areas. And generally, they are between the ages of 20 and 60. So neither too old, nor too young. But the good news is they came back very quickly. And there's a good cross-section of population that would fall into that description as well. So December was disastrous. First 2 weeks of January, things started to warm up again, but only very slowly. Then the third week of January, which was -- which happened to be the last week before Chinese New Year, that's when things really started going again. And since then -- in the 6, 7 or 8 weeks since then, I think recovery is substantially complete, let me say that, for consumption, particularly for luxury consumption. But the question remains whether or not there is an element of revenge consumption within that cycle. And if there is, whether that revenge consumption is sustainable. And there are other questions that we need to answer or the whole economy needs to answer because some of the short-haul destinations, notably Japan and Korea, had imposed hurdles to entry from the Mainland. And those hurdles are only recently removed. And short haul, particularly for -- what do you call it -- buying sprees, if I may call it, short haul is generally more popular than long hauls. And with the 2 large destinations, Japan and Korea, effectively closed until very recently, much of the buying power stayed within the borders of the Mainland. Now that they have reopened how much of the buying power would be leaked? We don't know. Hopefully, not very much. But certainly, this year will be much better than last year. I would be very surprised if that doesn't eventually pan out to be the case. That's in the retail area. While on IP, I would just mention very quickly the office market. Office market was also very badly hit last year. At the same time, as additional supply entered the market in all cities, including Tier 1 cities. What also happened was demand started to shrink. Some of the sectors were hit by policy. Earlier, it was education late -- and then maybe technology and maybe something else. They take turns. And that took some of the occupancy out of our buildings. And we have not yet recovered from the decline in vacancy -- in occupancy, rather. Decline in occupancy, we have not yet recovered. We're trying hard to rebuild. But because some of the expatriates, including Hong Kong expatriates, decided to leave Mainland China during the last year, in particular. It will take a little while for them to come back and to expand again. So the office sector is -- continues to be weak even today. In the DP area, there was -- sales was significantly down last year for the whole sector. And we did not do better than the sector. In fact, we did slightly worse than the sector. We did worse than the sector, which was a key decision, which led us to form the view that our unsold properties in the Mainland were probably overvalued because we're not able to sell them nearly at the same pace as we had budgeted. We were falling way behind budget, and that meant a number of possibilities, either the price was too high or simply because there is not enough demand -- not enough volume demand. And on both count, it meant we had unsold stock. And like all retailers, when you have unsold stock, you look at marking them to market to more truly reflect the value of your unsold stock, which is exactly what we did. And I can talk a little bit more about that later on. Then coming into the first month of the year, buying interest started to return, again, from about the middle of January, particularly in the larger cities, Tier 1 cities, and some of the top Tier 2 cities. So that is a good sign. But again, one swallow doesn't necessarily make spring. And so we need to look out for a more sustained market response before we can form any view. Against that background, what we are focusing on this year for the Mainland market in the DP area is to reboot our sales results. What we wanted to sell last year, but were not able to, hopefully, we'll be able to -- we'll try to catch up. The longer we wait, the bigger the risk is and the carrying cost and all of that. So it's more important for us this year to try and catch up on selling than to get into new projects. Having said that, another development in that sector is government has gone back in the way they sell land. Previously, they used to sell land regularly in smaller parcels, one parcel, maybe 3 or 5 pieces of land. But in the last 2 or 3 years, they changed it to much higher concentration. They would sell land -- every city would sell land 2 or 3 times a year. And every time they sell, they have 10, 20, 30 pieces, which was difficult to digest even for the largest developers. A, you need to put up deposit when you bid. And if you are interested in 5 pieces, you put down 5 deposits, and these are much larger deposits than in Hong Kong. And that was their way to suppress the price of land, but they have now gone back. They've gone back to the -- beginning to go back, in any case, to the old way, which facilitates the small, less well-endowed developers to participate in the bidding. I guess they have come to the view that they need to somehow inject fresh energy into the residential housing market. So we'll take a look, but that is not our #1 priority. And in the IP area, we're -- taking advantage of the resumption in consumption, what we need to do is to work more closely with our key tenants, the anchor tenants. Luxury is doing very well. And so luxury is one of the areas where we work hard with our tenants. And if they can help us bring additional business to the malls, additional shoppers into the malls, that would work to the benefit of ourselves and all of our tenants. That is a very, very long way to answer your question. Have I missed anything?

Second question.

Second question was?

Share buyback.

Share buyback.

Share buyback. Well, we have never been active in a share buyback. In fact, we have never done any share buyback. And that is not and has not yet been on the agenda of the Board.

Thank you. Maybe we will have the second question from Praveen, Morgan Stanley.

Two questions. The first one is related to the cheap valuation that Karl mentioned. In 2021 and 2022, Wheelock actually bought shares of Wharf at a much higher price. There was [ wedded ] deal around $28 or so. Currently, our price is much lower. So the question is, would Wheelock be interested to add more? But if I could extend that further, and market continue to speculate every day about this one, so I'm going to just open it up, about the privatization, especially when you are trading at 0.4x book, and your equity investment pool of $50 billion itself is big enough to buy every minority shareholders. And we all understand that assets are worth a lot and existing ones. So why is that not the base case scenario? And that's the first question. And the second question is if you can tell us a little bit about this equity investment as such. What is this -- the final outcome of this one? And do you think HKD 1.5 billion, which is around 3% yield, is enough? Or what are you working with that? I mean that's a dividend you're getting, but wondering the future of that.

Okay. Good. The first part of your questions, it was not one question, multiple questions, should more appropriately be addressed at Wheelock than at Wharf. And certainly, I can't talk about privatization. The moment I talk about it, the SFC will be knocking on my door. Whether Wheelock would buy in this market, I can't tell you because I don't know. And certainly, it wasn't blackout until tomorrow. Today, they're still in blackout. If they enter the market, they do. If they don't, they don't. I don't have any wisdom to share with you in that regard. Concerning the investment portfolio, I would take that lead and give you an update on our investment portfolio and what happened to it in the last few years. We started to build up that investment portfolio in year 2018. That was after the demerger of Wharf Real Estate Investment Company Limited. The demerger happened at the end of 2017. And as a result of the demerger, a lot of the previous debt was inherited by the demerged company. And because the debt moved over to them, we, this company today, inherited a lot of cash. And we look for a place to park the cash before finding a longer-term home for them. Now in the 5 years from 2018 to 2022, that investment in listed securities has returned to shareholders -- to the company -- has returned to the company in excess of HKD 11 billion of realized return. A little over half of that is in -- came in the form of -- let me get it right -- dividend, dividend income. To be safe, half of it because it's half-half. I may be wrong, a little over or a little less. Half came from dividends, and half came from gains realized on disposal, and that's cash, all right? And that also represented a 23% total return on cost. Then at the end of last year, the remaining portfolio had a value of -- listed portfolio of about HKD 40 billion. And that was marked-to-market. And having been mark-to-market, it still represented a surplus to cost. So 5 years later, we have at least recovered our original cost, plus the $11 billion of realized gains. That wasn't, in our view, not a bad return during that 5 years. And we don't take aggressive positions. Most of these are safe positions with good yield. Otherwise, we wouldn't have been able to generate the kind of dividend returns we did. And we continue to hold that position. That position is probably appreciated in the intervening months from the end of last year, not by too much, but probably appreciated. And we have no immediate plan to exit that position, not unless and until we see a attractive -- or compelling rather, a compelling alternative to invest our money. It's generating a reasonable yield, 3%-ish -- actually, it's 4%. Not bad, particularly when interest rate was very low. Interest rate is currently higher, but we don't know how much longer the higher interest rate would last.

The next question maybe from Cusson, JPMorgan.

Two questions. First is in terms of Mainland IP revenue, can we have a split between retail and office? And for the 11% decline in rental revenue, was it more led by retail or office? Second question is relating to the impairment charges more to Hong Kong. What particular project is it relating to?

Okay. In the Mainland, the rental income between retail and office is roughly 3:1. And the decline last year was more serious for retail than for office. Both fell, but retail fell a little harder than office, mainly because of the sporadic lockdowns and so on, hurting turnover rent. The base rent kept on rising. It continues to. So there is base rent, rental reversion, positive rental reversion. It's the turnover rent, which -- because our tenant sales were not doing as well as previously, fell, all right? The Hong Kong DP provision mainly relates to a project in Kowloon. It's not -- none of the peak properties. Okay? Thank you.

[indiscernible].

Kowloon.

Okay. Thank you. We will have the next question from Ken Yeung, Citi.

It's ken from Citi. I recall last year, I asked similar questions, but actually summarizing what I've heard is, it seems that you're still quite cautious on a lot of things. Mainland, you want to sell, but not want to buy. And probably, I'm not sure about Hong Kong property. You're still, also observed, IP may not be investing much. So from that kind of development, I immediately think of maybe -- and all the time, I'm seeing you that you will be net cash, or basically, you...

I don't know.

I don't know. Yes. So first is, how should we be thinking of, again, on this is -- getting more and more cash? Are you'll be seeing -- or the Board asking you to investing in some project, i.e. maybe you will be expanding your equity portfolio from now 50 billion, 40 billion furthermore? And secondly is I will be expecting some shareholder will be pressuring you on returning to -- back to -- capital return to shareholders without any project. So how should you deal with those shareholders?