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

Good evening, everyone. A very warm welcome to Wharf Holdings final results briefing. I am Angela Ng from the IR team. You can download the PowerPoint presentation using the QR code on the LED wall. So the backdrop photo here features our 1 Plantation Road project on the peak surround by lush greenery and offering stunning views of the ocean and sky. With the market sentiment in the Hong Kong luxury residential improving, we have begun preparations to invite buyers for some of the 20 newly completed houses at 1 Plantation Road. And now let's kick off our results briefing. Today, our management include Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director and Company Secretary. We will first go through the PowerPoint presentation and then open the floor to the analysts for Q&A section with the management. So here shows our results highlights. Looking back to 2024, under the sluggish economy, our group revenue declined by 36% and OP by 18%, mainly led by fewer recognitions from Mainland DP -- Mainland development properties. UNP declined by 22% as we took further steps to de-risk our DP stock by making additional impairment provisions, mainly for the nonresidential stock. The softer capital values result in noncash IP revaluation deficit and led to a group loss. In view of the economic uncertainties, the group maintained prudent financial management with gearing further improved to 5%. Full year DPS was steady at HKD 0.40. And here is our balance sheet. The group has maintained a strong balance sheet and proactively managed debt exposure. We timely converted all gross debt into RMB with 35% of it at fixed rate. As a result, average interest rate went down by 1 percentage point to 3.7%. Net debt reduced to HKD 7.1 billion. Cash flow remained healthy and our listed investment portfolio continues to provide liquidity. Market value of listed equities was HKD 33.9 billion and HKD 1.9 billion dividend income was booked to P&L. And this slide shows the group's total assets breakdown. Wharf Holdings is a property-focused company with over 60% of total assets in Hong Kong and Mainland properties. Since 2019, we have not replenished our land bank in Mainland China and have strategically reallocated our capital to Hong Kong properties. Currently, the majority of our Hong Kong properties are under development and all are progressing on track. In the coming few slides, we will walk through our business segments in the order of Hong Kong properties, Mainland DP, Mainland IP, hotels, and logistics and infrastructure. Our Hong Kong properties are showcased by the ultra-luxury Peak Portfolio. During the year, one apartment at Mount Nicholson was sold for $600 million, equivalent to over $130,000 per square foot. And the last house at 77/79 Peak Road was sold for $501 million, equivalent to $80,000 per square foot. As at the year-end, our Hong Kong residential land bank amount to 2.8 million square feet, including the 1 Plantation Road project on the Peak. Moving on to development properties in Mainland China. While residential inventory diminishing due to the lack of land replenishments, attributable contracted sales have declined and attributable provision of $2 billion was made for the slow-moving stock, particularly in the nonresidential sector. As at the year-end, our net order book amount to RMB 600 million with remaining stock totaling 1.2 million square meters. In regard to Mainland investment properties. Mainland domestic consumption slowed down last year. However, with proven track record and geographical advantage, our flagship malls, Chengdu IFS and Changsha IFS remain popular among global and domestic brands, achieving satisfactory occupancy. Office leasing was weak amid the gross supply and demand imbalance. As a result, Mainland IP revenue decreased by 4% and OP by 6%. Moving on to hotels. Wharf Hotels currently operates 16 hotels in Asia, represented by 3 self-owned brands, namely Niccolo, Marco Polo and Maqo. Additionally, Park Hyatt Changsha, which is owned by the group and managed under an outsourced contract, opened its store in Changsha IFS in June last year. Hotel segment was challenging with the intense market competition and cautious spending sentiment, which result in a decline in room rate across the industry. Turning to our logistics infrastructure. Due to escalating trade tensions and regional competition, the market throughput for Hong Kong's port business has declined by 6% year-on-year. On a positive note, given the growing demand in local distribution and cross-border e-commerce, Modern Terminals is building a new modern logistics center in the Kwai Chung Terminal. And here shows our project pipeline. In Hong Kong, our completed or to be launched projects include 1 Plantation Road, Kai Tak JV project and Kowloon Tong project. While those under development include Mansfield Road project, Kowloon Bay redevelopment project and the new logistics center by Modern Terminals. In Mainland China, the high-rise apartments at Changsha IFS Tower 2 is under development. Looking ahead, a major looming trade war, geopolitical tensions and the U.S. Fed rate trajectory are introducing volatility to the economy. As we navigate this complex landscape, the group will maintain prudent financial management while focusing on our core competency to drive progress. In the last part of the presentation, I will walk through our efforts in ESG. Wharf Holdings maintained strong ESG ratings and green certifications, including A rating in MSCI ESG assessment and LEED Platinum. We have formulated the 2030 targets, which are on track. Additionally, we are developing new carbon reduction targets in accordance with SBTi criteria. As at the year-end, the group raised and accumulated sum of $20.3 billion in green or sustainability-linked loans. We are also dedicated to various business in community initiatives, including our flagship project, Project WeCan, which supports youth development. We are also an active supporter of the Community Chest and continuous efforts were made to promote our employee well-being. Same efforts are placed to uphold the standard of our business ethics and corporate governance. That concludes my presentation. We will now proceed to the Q&A section. A quick housekeeping note for the analysts before we begin. [Operator Instructions] Now may I invite Mr. Ng and Mr. Hui to come to the stage, please.

We already have the first question from Karl Choi, Bank of America.

Two questions. First, regarding the 1 Plantation Road project. Management -- sounds like management is quite optimistic about the outcome, noting the strength in demand from high net worth individuals and talked about how it was obviously a very high-quality product. Just curious about whether that means you can actually expect relatively quick asset turn even though the lump sum for this type of project, it tends to be very big, obviously, for each unit. And second is moving on to Mainland retail sales. I think some of your peers mentioned that they saw stabilization in the fourth quarter of last year in terms of sales performance. That seems to have carried over into the new year. Just wondering what you're seeing? Is that something you're also seeing for Chengdu and Changsha?

Okay. Thank you. The ultra-luxury residential market in Hong Kong is a very niche market, small supply and small demand and certainly not a turnover business, the kind that you would see for, for instance, MTR projects. So for instance, Mount Nicholson, you're familiar with it. It's taken us more than 10 years to complete the project. I think if I remember correctly, the site was bought in 2010. And even today, we still have a couple of units remaining. So it -- that is the nature of that segment of the market, and we expect a similar behavior for number 1 Plantation Road. We're in no hurry. In the case of 77/79 Peak Road, it also took us a few years to sell a total of 9 units. But the initial indication of demand is encouraging. And so if everything goes according to plan, we would probably put a few of the first units on the market to invite interested buyers to bid for them. To your second question, the -- out of our remaining stock of Mainland DP properties, there's only a relatively small proportion of residential properties. So we're not directly as close to the market as many of our peers are. What we have left is the majority of that is nonresidential; it's commercial, it's primarily offices. And offices are certainly not selling well in the Mainland. What I can say to you, however, is that, as you may know, we are the second largest investor in a company called Greentown China. And I sit on the Greentown China Board. Now they haven't announced yet, so I can't disclose anything which is price sensitive about Greentown China's performance. But generally, the information I'm getting about the market from their point of view is that, yes, the market has stabilized. First, after September last year, there was a burst of activities, but that was not sustained too well. It drifted downwards a little bit. But the industry's response to the outcome of the two sessions is positive. They see signal coming out from central government being positive to the industry, to the sector, quite unlike what it was a year earlier. So the tone has changed, and they feel much better about the coming months. Having said that, of course, at the end of the day, it's execution of that general policy. And so the outcome, the precise market outcome, will take probably a few more months before we can see it.

[indiscernible]

Oh, I mistook the question, sorry. So I didn't answer your question. Retail sales in Mainland China has been weak. It's been weak throughout last year. January -- the January that just passed is probably not representative given the timing of Chinese New Year. So we need to look at January and February together. But January by itself, there was some good news. However, as I said, it may be a distorted view. There's still generally weakness in the marketplace, and we don't -- we haven't seen any positive sign of recovery yet.

Thank you. May we take the next question from Cindy, Citibank.

This is Cindy from Citi. So two questions. First is, I wanted to hear your view on Hong Kong versus Mainland China, IP and DP, which subsegment do you see could potentially recover first? And given you have a very solid balance sheet, right, so if you would consider any new investment, then which would you be looking at? And if currently, it is not the right timing, then what are the signals you will be waiting for? This is the first part. And the second part is wanting to ask about the impairment in Mainland China. So obviously, most of that is on offices. But consider your remaining not so big exposure, do you see any further impairment pressure into 2025? And after those impairments made, do you think the current, say, holding cost is good for -- to facilitate sell-through, say, accelerate in '25 and '26?

Sure. Okay. Thank you. Out of the various businesses we're in, we see Hong Kong properties, the area where we play in the playing field where we play in, in particular, the luxury residential being the most interesting in -- certainly in the next couple of quarters. Mainland IP, primarily commercial properties, the office market is well oversupplied and occupancies are not anywhere near satisfactory. And some of our Mainland offices from day 1, they've been classified as investment properties and others have been classified as development properties. And I'm jumping a little bit to the second question, and that is the bulk of our impairment provisions last year relate to the DP offices in Mainland China. In fact, we don't have a lot of residential DP left in Mainland China. And so that's why the bulk of it related to the offices. I can't predict with certainty whether the written-down prices, written-down value, is defensible. But we are generally prudent about our accounting. So I hope we don't need to write them down further. But we may be proven wrong depending on the market situation. Coming back to your first question, we have not invested directly in the Mainland China residential properties market for 6 years or so, but our indirect investment through Greentown seems to be paying off quite well. It is one of very few non-SOEs in the sector that are thriving. And that obviously pleases us. And we will be looking possibly at working with Greentown to co-invest given the right opportunities. But it's still early stage. A lot needs to be decided.

Thank you. May we take the next question from Mark, UBS.

This is Mark from UBS. So maybe I have a follow-up with Cindy and also my earlier question on this Monday is we got both malls in Hong Kong, Mainland China. Definitely, not sure the 2025 outlook, would you think that maybe your sister company, Harbour City, will outperform more or our IFS in Mainland China will outperform more? So I'd love to hear your view. I think that's the first question. And the second question is, I was quite surprised that we switched almost all our gross renminbi debt into renminbi. Just want to check what's the rationale. And for your sister company, 1997, will we consider to do the same thing given the borrowing cost is much lower?

The second question is easy to answer. These 2 companies that you referred to have completely different asset and liability profiles. The reason this company today, the company we're talking about today, has done a lot of renminbi debt is because of our renminbi assets. We have a large -- still a very large renminbi asset base. And we've taken advantage of favorable rates to effectively convert the Hong Kong dollar or U.S. dollar debt into renminbi, partly as a natural hedge against our renminbi assets. We had always been thinking about a natural hedge, but it would have been very costly when renminbi was expensive. Now that renminbi interest rate is considerably lower than the dollar rate. It just makes simple sense for us to do hedging and save interest at the same time. And then there's also a third dimension. To the extent that if the renminbi debt is onshore, we'd be able to claim tax deduction as well, unlike Hong Kong dollar offshore. So these are characteristics which Wharf REIC do not share. They don't have renminbi assets. So it's an entirely different scenario. Now coming back to your first question, whether our malls in the Mainland or how they are expected to perform, I expect the competition among -- a, among malls and b, among retailers to continue. We haven't seen signs, as I said earlier, of a turnaround in retail sales in the Mainland. A few days ago, I said we haven't seen signs in Hong Kong either. So more or less, we are in the same boat. And I don't see a clear outperformer between the two. They're going to be in the same boat.

Thank you [Operator Instructions] Raymond from CGS.

About your Greentown investment, I think you guys own some 24% stake, right?

I'm sorry.

24% stake in Greentown China, right? 24%?

22%, less than 23%.

23%. Okay. I remember -- maybe can you share with us roughly how much cost you guys have? I think from what I remember, maybe $6 something, right, something. And then now share price $11 something. So I think this congratulation, which is a very good return given most of the Chinese peer, basically, they have the problem. On this, I just want to know whether your company will consider maybe just dispose this investment given the return seems to be quite okay. Yes. So I just want to ask your management thought about this.