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

Everyone, a very warm welcome to Wharf Interim Results Presentation. You may download the PowerPoint presentation from this QR code on the LED wall, and the recording of the event will be uploaded to our corporate website afterwards. We kindly request that attendees refrain from taking photos or videos during the event. Our management today include Mr. Stephen Ng, Chairman and Managing Director; Mr. Stephen Fu, Financial Controller; and I'm Angela Ng, Investor Relations Manager. Same as before, I will start with the PowerPoint presentation followed by the Q&A session with our management. The theme for the presentation this time is Feeble Recovery from COVID. Mainland property market is still a big challenge after the prolonged pandemic situation. Market sentiment remains weak as contractor sales continued to decline, exerting downward pressure on the average selling price. The office market is even more sluggish with limited interest in office stock and en bloc sales. As a result, it has become necessary to make impairment provision for the slow-moving stock. On the IP front, retail sentiment is not bullish, and the recovery momentum for retail rental markets was generally below strength. Looking at the segmental breakdown. As a company focusing on premium property, Mainland and Hong Kong properties account for around 60% of total assets, group revenue and operating profit. Contributions from hotels rebounded from a low base, while logistic and investment are the other key contributors to the group. The Mainland and Hong Kong economic recovery lost momentum as the mixed economic indicators underscoring the ongoing challenges. Currency translation also tends to understate year-on-year comparison for Mainland businesses when expressed in Hong Kong dollars. In the first half, Group revenue decreased by 1% to $8.1 billion. Underlying net profit surged 3x to $1.8 billion, inclusive of a DP impairment of $1 billion for the slow-moving stocks. Total dividend was steady at $0.20 per share for the first half. We maintained a strong financial position to navigate the global headwinds. Net debt remained at low level at $15 billion, representing a gearing ratio of 10.1%. The group's long-term investment continued to provide strong liquidity and dividend income. Market value of the listed equity was $45.1 billion at the period end and $1.2 billion dividend income was booked to P&L. Our total debt was capped at a low level of $23.9 billion, with onshore debt accounting for around 40% of the total. Average interest cost was 4.9%, mainly due to the floating rate debt. And the average interest cost was 6x. Then we will walk through our business segments in the order of Hong Kong properties, Mainland DP, Mainland IP, hotel and logistic infrastructures. The group's Hong Kong properties on the market are all in ultra luxury cars. Therefore, the generally quiet market has low impact to the group. The exclusive Peak Portfolio comprises a rare collection of highly unique properties. The sales tempo typically differs from that of the mass market, and the border reopening also helped to expand the market catchment. Our land bank in Hong Kong also consists of a healthy pipeline of projects at some key locations in Kowloon. Total land bank amount to 2.8 million square feet. All projects under development are proceeding according to plan. A house in Mount Nicholson was sold in the first half with attributable contracted sales of $289 million, equivalent to $82,000 per square foot. Recognition was $311 million and net order book at period end was $787 million. Moving on to the Mainland development properties. As the market awaited policy incentives, the housing market remained sluggish and office sales were even worse. Our contracted sales was RMB 1.4 billion and average selling price tumbled. On an attributable basis, Mainland DP revenue decreased to $3.3 billion with recognitions mainly from Hangzhou and Suzhou. Land bank decreased to 1.6 million square meters with no new addition during the period. Target completion for this year is 0.2 million square meters and net order book was RMB 6.6 billion. Then moving on to Mainland investment properties. Our Mainland IP revenue stable -- was stable in a weak market with 2% growth in the RMB terms. Retail sentiment is not bullish with sales and rent recovery lack momentum due to the weak employment market and macro uncertainties. In addition, oversupply situation worsened. Despite the weak market, our flagship IFS series in Chengdu and Changsha remained a top choice for the top-tier brands, underpinned by their proven productivity. Both malls achieved double-digit positive rental reversion and occupancy stood firm at 97%. Meanwhile, Chengdu IFS office rental is still among the city's highest. And then moving on to hotels performance. The group manages all owned 16 hotels in Mainland China, Hong Kong and the Philippines under Niccolo brand and Marco Polo brand. It is worth mentioning that our third hotel brand will be launched with a new vibrant and lifestyle hotel opening in Changsha IFS in the fourth quarter. Overall speaking, revenue and occupancies rebounded in our hotel portfolio. Notably, the hotels in Mainland China achieved decent growth and room rates reaching new peak. The Niccolo Hotels consistently outperformed among the competitive set and reported record-breaking revenue and gross operating profit. Meanwhile, the hotels in Hong Kong has a relatively modest recovery due to the slow resumption of traveling logistics and manpower challenges. Turning to our logistic infrastructure. Global demand remained weak, affected by the weak global economy and trade tension. Hong Kong port is still struggling to recover the volumes lost during the COVID, while DaChan Bay reported a moderate decline. In the next slide, we will take a look at our project pipeline, outlook and sustainability efforts. For project pipeline, our upcoming sales pipeline in Hong Kong includes 1 Plantation Road, Kowloon Tong project, Kai Tak JV project and Kowloon Godown redevelopment project. In Mainland China, Changsha IFS Tower 2 will be completed in phases, comprising a new hotel under our own new brand to be opened in the fourth quarter, and also Park Hyatt in the mid of next year. The development also comprises high-rise apartments. Looking ahead, while the businesses are still readjusting to the post-pandemic changes, recovery is still under pressure amid macro challenges and multiple headwinds. Although the mainland government is unveiling policies to support the economy and consumer confidence, but the benefits would take some time to be revealed. And in the last part of my presentation, I will walk through our efforts in sustainability. Wharf Holdings is a constituent of Hang Seng Corporate Sustainability in the series with AA+ rating. Our projects are awarded with Green Building certifications Chengdu IFS, Changsha IFS and Shanghai Wheelock Square even achieved LEED Platinum certification. We also established the 2030 environmental targets to reduce environmental footprint. We also support the use of renewable energy. For example, Chengdu IFS has sourced electricity from hydroelectric power. Moreover, solar panels were installed at the warehouse building of our modern terminals in Hong Kong. In regard to the community contributions and youth development, our flagship program Project WeCan partnered with 82 schools and benefit over 87,000 students. We also have a set of robust measures for occupational safety and health to safeguard employee well-being. In addition, we are committed to uphold the standards of business ethics and corporate governance. That concludes my presentation. Next, we will come to the Q&A section. [Operator Instructions] Now may I invite Mr. Ng and Mr. Fu to come to the stage, please.

So now may we take the first question from the floor from Karl Choi, Bank of America.

I have two questions. First, I just want to ask about the tenant sales performance for your Mainland Chinese malls in the first half. And was there any difference in the first quarter versus second quarter, i.e. initial after the pent-up -- after the reopening? Or do we see any slowdown in the second quarter? And also any big differences between Changsha's performance versus Chengdu's performance? And second question is about the investment portfolio. It looks like we added to it and raised some debt to fund it versus last year where we sold -- actually sold down the portfolio to pay down some debt. Just curious about the thinking behind it and how are we thinking about the second half in terms of adding or reducing or just keeping it relatively stable?

Okay. Thank you. Comparing this year to last year, we need to start with last year. First quarter of last year, that was when retail sales were relatively better than in the second quarter. For our portfolio, the retail income on a year-on-year basis started to decline in the second quarter of last year, continued for about 1 whole year before recovering in the -- towards the end of the first quarter of this year. So on that basis, there was not a great deal of significant difference between the 2 quarters this year, very similar growth rates as such. Having said that, I should quickly add that while we do not have a good deal of data post the reported period, there is indication that retail sales in our respective properties and possibly reflecting the general market of slowing down in the month of July. So that is something we still need to look at. We're not sure yet. There are early signs of a possibility, which we can't confirm at this moment in time. And therefore, if you look at the entire portfolio in renminbi terms, total turnover in the first half was slightly ahead of the same half last year, and operating profit was about flat. But of course, because of the strength of the Hong Kong dollar, we reported in Hong Kong dollars, once converted to Hong Kong dollars, we actually reported a decline both in revenue and in operating profit by some number in the mid-teens -- sorry, mid-single-digit. So that's the IP situation. Concerning listed investments, yes, we did increase our investment in the first half of this year. You will remember, and I think you did mention this too last year, we sold down that portfolio quite a bit. We saw the market turning against the portfolio and slowed down. And this year, we took advantage of generally better prices to replenish some of what we had sold. In doing so, we effectively made a turn. But we didn't buy back everything. We bought back those stocks which we feel have the most potential between when we sold and when we bought again. In spite of that, our gearing is comfortable at about 10% currently. So I hope I've answered your two questions so far. I'm sorry. Oh. Chengdu is still a bigger revenue and profit center for us today, partly because it's more established. But Chengdu is facing more competition in that city than Changsha. Well, new competition is coming up in all cities, but the threat that we see in Chengdu today is a little bit greater than that in Changsha. So I hope we can continue to keep up. We've been doing well in the past 7 or 8 years. We've established a good market position. And we will do more to try to defend our market position. But there is competition.

We have on the second question from Mark Leung, UBS.

I have a follow-up regarding on the Mainland retail sales. So you guided obviously a pretty strong Y-o-Y growth because of last year's low base. But how about for the first half retail sales compared to 2 years ago, what's the retail sales look like? I think that's the first question, And the second question is, I think 2 days ago, you also mentioned that we have a pretty cautious outlook for Hong Kong retail, and today you are also mentioning we are heavy cautious on the Chinese retail. So from their perspective going forward in the second half, which region do you think that it will perform better?

It's a very difficult question to answer. A lot depends on manufacturers. First of all, the economic performance in the Mainland. Secondly, how much of the domestic consumption power is released for traveling abroad. Up to now, we understand the speed at which exit visas are granted or renewed is relatively slow. And therefore, that helps to retain the consumption power within the borders. If that changes, it's quite possible that some of the consumption will leak to external places, both short haul and long haul. We understand short haul, Japan, Korea, and longer haul, Europe and North America, the visa situation is still not as favorable as it was previously. So that has helped to retain the consumption power domestically. If that changes, obviously, it's -- it would become a very different scenario. But in any case, the Mainland China economy is much bigger than the Hong Kong economy. And it's -- they've probably got more levers than we do in Hong Kong. So I think, if I have to put my personal money on it, I think I would put it on the Mainland. But I've lost many bets before, personal bets, so be warned. Second half, it's really difficult. Consumption sentiment is also an important part, confidence and consumption sentiment. For instance, in the housing market, Central Government has issued directives to relax mortgage, mortgage rates and mortgage amounts. But that has so far not yet resulted in definitive action at the local level. And in turn, the confidence of buyers is still far from what is needed to rebuild a market base. Understandably, buyers are waiting on the sidelines. They want to see what the real incentives are and how they can benefit from it. At the moment, the general expectation is that prices are not about to surge, and there is no hurry to buy. And that is, of course, as you know, a self-fulfilling prophecy. Unless somehow there is the urge to start to buy, the market will not go up again. So generally, we take a positive, but cautious, very cautious approach to the second half of this year.

May we have the next question from Raymond, HSBC?

I got two questions. The first one is about Hong Kong DP. So as you mentioned, the current development is actually well under your plan. So can you elaborate further, say, for example, the sales plan of your upcoming project in the next 12 months' time? This is the first question. And the second question is about the investment in China. So the management has been, I would say very successfully slowed down your investment in China over the past few years. Given the current situation, when -- can you share with us your crystal ball in the next 5 years? Is it the right time to allocate more resources to invest in Mainland China for your future growth in the next 3 to 5 years' time?

Okay. Let me try to answer the second question first. If you have been analyzing our numbers closely, you may have noticed that for a number of years, we, as a group, were net long in onshore renminbi. There was a time of expansion for us, and a lot of cash was generated onshore, so to speak, onshore, Mainland China, and that was trapped onshore. What we reported today reveals that, that net long position has become net short for the first time in quite a few years, 10 or more years. That's because we have been repatriating capital to Hong Kong over that period, particularly in the last 5 years or so. On completion of projects, we have not found it commercially attractive to reinvest onshore. And at the same time, some of our completed projects, we were able to refinance them, borrow onshore in renminbi to repay the capital, which we had previously injected from Hong Kong. So when we were building up that portfolio, we borrowed in Hong Kong, Hong Kong dollars or U.S. dollars, and converted that into renminbi to invest onshore. When we bring the capital back, we bring it back in renminbi, and we sell it and convert it back into Hong Kong dollars. So the structure composition of our debt has steadily changed over the last 5, 10 years. A lot of the trapped cash has been released. And that's quite good timing as well because we're now able to borrow renminbi onshore a lot more than we previously were. Because as you know, by policy, land for property projects in the Mainland need to be invested through equity and not debt. So we couldn't borrow against land previously. All we could borrow previously was against construction cost. But that's changed when the properties are completed. They become investment properties and we can borrow against the entire project. So when we were borrowing Hong Kong dollars, when Hong Kong dollars were cheap, that was okay. It was cheaper to borrow Hong Kong dollars than renminbi. But the disadvantage of borrowing Hong Kong dollars offshore was that we were not able to claim tax deduction because it's borrowed offshore. Now we borrow onshore renminbi, we benefit from a cheaper interest cost and we also benefit from interest deduction, tax deduction model. So the effective borrowing cost for RMB assets is much lower than when we -- than if we hadn't been doing the repatriation. That in a way has helped us to mitigate the rising cost of Hong Kong dollars. Let me see, that's Hong Kong DP. Hong Kong DP sales pipeline, we -- the only other project other than what we have already been selling, the only other project which is likely to be launched for sale within the next 6 to 12 months would be #1 Peak Road. It's again an ultra luxury project. The general Hong Kong DP market has been quiet. But we, fortunately, for us, we don't have too many projects on the market and the projects that we do have on the market tend to be ultra luxury, which is a different segment of its own. And the reopening of borders has actually helped to bring buyers back to that ultra luxury segment. So in a way, it's helped to broaden our catchment. Hopefully, we'll be able to benefit from that, which is why we are monitoring the market closely to see what would be a good time to roll out the #1 Peak Road project.

May we have the next question from Ken Yeung, Citi?

Hi, Stephen. This is a question for Stephen because he's having both Wharf REIC and Wharf Holdings. I'm just curious on your investment, long-term investments in securities portfolio. In the same 6 months, you have been, just rough calculation, you have been buying HKD 9 billion in Wharf Holdings, while in Wharf REIT you are selling HKD 5 billion, which you are -- both of the vehicles are facing the same interest rate increased 5%, but the decision that you have made is totally different. One you're selling down, one you're buying. Can we understand why this such a different direction given that the interest rate is going up, but you're still buying the stocks on one but not the other. So this is the first one. Probably, I finish this and ask the second.

Sure. In deciding whether to buy or to sell, you don't just look at the market, you also look at how much money you've got. And how much money you need. In the case of REIC, our debt level was higher. And because it doesn't borrow renminbi, it was vulnerable to the rising Hong Kong dollar interest rate, entirely vulnerable. And we saw a tripling of interest cost, borrowing cost in the first half. And therefore, somewhere around the middle of the second quarter, we reexamined our portfolio and realized some of the investments in there, we were suffering from negative carry. When interest rate was low, they were positive carry. But as interest rates rose higher and higher, they became negative carry. And it would not have made sense for us to keep those. And that's what we sold. And that's -- and that helped us to bring the gearing down to 20%. The other situation here today is, at the beginning of the year, our net gearing was somewhere around 3%, I think, 2%, 3%. Okay. Low single digit. And even after the additional investment, our gearing is 10%. So we have more money in our pocket today than we had money in the pocket 2 days ago with a different company. So I think -- I hope that explains why we seem to be going in different directions.

Okay. The second question is actually I asked similar last year, I mean, in March, is from this Chairman's statement, from all the same things, that every segment that we are working on, actually, we don't have a positive view. So I'm sure that, again, I mentioned about -- you must have a 5-year strategy, 6-year strategy. If you are bearish on everything, where should we bring -- what is our target of Wharf become in the next 3 years if we continue to go into this business? Should we be buying more stocks or doing other stuff or even doing other business if we are not good on Hong Kong property, China properties?