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

Good afternoon, 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 displayed on the LED wall. Today, our management team includes 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 a Q&A session with the management. The theme for the presentation this year is property write-down much lower in 2025. Let's take a look at the results highlights. As the headline suggested the group's investment properties revaluation deficit and development properties impairment provisions were altogether $3.5 billion less than the previous year, resulting in an increase of $3.3 billion in group profit. And also with lower DP provision, underlying net profit increased by $1.3 billion during the year. Following the disposal of part of the long-term investment portfolio, the group turned to net cash by year-end. NAV per share was $48.01, representing an increase of 7%. We remain focused on our core businesses with over 60% of total assets are in premium properties across Hong Kong and Chinese Mainland. Following the suspension of land acquisitions in Chinese Mainland since 2019, we have strategically shifted capital to Hong Kong projects. Those projects are gradually bearing fruit. During the year, the group has launched 1 Plantation Road at the Peak and Victoria Voyage JV project in Kai Tak. The Peak project in Kowloon, 8 Lung Ting Lane, is preparing to launch. Meanwhile, the investment properties in Chinese Mainland hotels and logistics infrastructure continue to deliver solid recurring income. And this slide shows more details on our financial performance. During the year, Mainland DP sales continued to contract, particularly for nonresidential properties, which is the main reason for the drop in group revenue and operating profit. Underlying net profit increased by 47%, mainly driven by a significant reduction in Mainland DP provisions and a decrease in borrowing costs. Contribution from Hong Kong DP increased and that from logistics, the third largest contributor, also increased. However, these contributions were partially offset by a decline in Mainland IP. Inclusive of a lower IP revaluation deficit, group profit restored to $50 million. Dividend per share remained unchanged at HKD 0.40, representing a payout ratio of 30% of UNP. The group has been proactively managing its financial position, achieving a net cash position by year-end following the disposal of $9.7 billion in equity investment. Net cash was $4.5 billion if excluding the debt from Modern Terminals, which is nonrecourse to the group. As the group strategically converted debt to renminbi in the past few years, average interest cost remained low at 2.5%. In the next few slides, we will walk through our business segments in the order of Hong Kong properties, Mainland IP, Mainland DP, Hotels and Logistics Infrastructure. In Hong Kong, the group has been capitalizing on the improving property market sentiment to initiate project launches during the year. At the peak, following the penthouse at Mount Nicholson with record high average price for apartments. 1 Plantation Road recorded its first transaction in December. House 1 was sold for $558 million. Meanwhile, our 30%-owned JV project, Victoria Voyage, recorded total sales proceeds of $2.8 billion after its launch in August. Attributable Hong Kong DP revenue increased to $1.1 billion and operating profit to $287 million. As at the end of last year, our Hong Kong residential land bank amount to 2.7 million square feet. Preparations are underway for the launch of 8 Lung Ting Lane, which is our Peak project in Kowloon. Major projects under development include Mansfield Road project on the Peak and Kowloon Bay redevelopment project. Regarding the Mainland IP, Retail sales in China rose partly driven by the government-led trade-in programs and promotional events. Despite intensified competition in both online and offline, our flagship malls, Chengdu IFS and Changsha IFS continued to see solid occupancy of 97% and 99%, respectively, underpinned by critical mass and constant efforts on tenant mix and marketing. On the office side, the supply-demand imbalance worsened. As a result, our Mainland IP slipped to $4.4 billion and operating profit to $2.9 billion. And moving on to Mainland DP. Subsequent to suspension of land acquisitions, available stock has been depleting, resulting in lower contracted sales. As a result, revenue declined to $1.4 billion and operating profit to $208 million. Most residential inventory has been sold, while office stocks remain slow moving. Impairment provisions was made accordingly. At year-end, our DP stock was 1.2 million square meters. Net order -- excuse me, net book value amount to $15.9 billion. Moving on to hotel. Wharf Hotels currently operate 16 hotels under our own Niccolo, Marco and Maqo brands, mainly in Hong Kong and Chinese Mainland. Park Hyatt Changsha is the group's only hotel with outsourced management. In Hong Kong, occupancy was supported by strong visitor growth with room rates trend improving in the second half. However, in Mainland -- in Chinese Mainland, despite the growth in domestic tourism, travelers' spending pattern continued to pressure the performance. Segment revenue increased by 6% to $656 million and operating profit broke even. Turning to our Logistics Infrastructure. Realignment of major shipping alliances further pressure Hong Kong shipping volume. Meanwhile, ongoing global disputes are reshaping cargo flow, and we continue to monitor the evolving trends and the opportunities that may present. Modern Terminals' throughput in Hong Kong declined mildly by 6%. Overall segment revenue slipped to $2.1 billion and operating profit to $278 million. Now I will go through our efforts and performance in sustainability. Wharf Holdings maintained strong ESG ratings and green building certifications, including A rating in MSCI ESG assessment, LEED Platinum and BEAM Plus Provisional Platinum ratings. Last year, the group's near-term science-based targets were approved by SBTi, which marked an important milestone for our sustainability journey. Sustainable financing made up 50% of financing as of December last year, while an accumulate green or sustainability linked financing amount to $23.6 billion. More details on our ESG efforts could be found in the PowerPoint presentation. In the final part of the presentation, let's turn to the outlook. Global risk and disruption are significant and continue to accelerate. In this volatile environment, navigating instability and transformation becomes a primary challenge. Based on current observations, Hong Kong's property market is regaining confidence, while Chinese Mainland property market is still a concern. Looking ahead, the group will continue to leverage its core strength and prudent financial management to navigate ongoing headwinds and sustain stable performance. That concludes my presentation. We will now proceed to the Q&A section.

[Operator Instructions] Now may I invite Mr. Ng and Mr. Hui to come to the stage, please. Okay. I see the first question from Cindy.

This is Cindy from Citi. I have 2 questions. The first is wanting to understand your view of the Hong Kong ultra-luxury home market. What's your projection of volume price trend this year? And how do you assess the impact from the higher stamp duty for the units above HKD 100 million? So second question is actually on your cash position and long-term investment. So last year, obviously, very good return from stock investments. Looking into this year, how would you like to use this chunk of cash? Would you consider, say, looking for some new investments, doing a little bit more shareholder return or maybe buying into some other stocks for future investment? And given the stock market volatility and the geopolitical risk you mentioned, would you rather say happy to hold on to your net cash or even liquid a little bit more of your long-term investment just to be super safe?

Thank you. Ultra-luxury properties in Hong Kong, we're positive about the outlook for that market. Already, we were beginning to see good interest from buyers in the second half of last year. And what happened in the Middle East the last 2 weeks, we believe will drive more capital and people -- both capital and people, eastwards from the Middle East, both driving them back, and on the other hand, retaining people who would otherwise consider going in the westerly direction. So we are positive about that end of the market. And given that we have little or no debt pressure, we will not have to sell in a hurry. So if we get the right price, we'll deal. If we don't, we won't. I know this is 1 Plantation Road. And a lot of the slides you saw earlier in Angela's presentation actually come from that property. The #1 house is the one which is at the front at the lower tier. That's the one sold for $600 million -- $560 million, $91,000 per square foot. And that sale was completed a week ago. So the deal is done and completed. We expect to see more transactions later this year. We will release additional units from this property to the market. The 2 tiers, you see a lower tier and an upper tier, the lower tier, there are 14 houses; and in the upper tier, there's 6 houses. And the upper tier houses are bigger. And we've been getting indication of demand for the bigger houses. They are about 1,000 square feet to 1,005 square feet bigger, as big as 7,002 -- biggest being 7,002 square feet. And if we can keep up the same kind of ASP per square foot, that will be good. Now obviously, the stamp duty -- additional stamp duty is a factor. But if all considered, we hope the positive factors will override the negative factors. Second question about capital management. Yes, we took advantage of a good market last year to realize some profit, which did not go into the P&L. It went directly to reserves. We are not in a hurry to reinvest it, particularly given the turmoil in the financial markets. We consider the risk at the moment a little bit higher than we're prepared to take. So in the meantime, we are parking it in very -- basically very low-risk instruments, let me call them instruments. And we'd be in a position to either play offense or defense depending on how the macro environment goes. Defense, meaning still staying in low risk and offense if it looks like there's improvement in certain sectors of the market. So we believe we're in a good position to play our hand either way.

May we have the next question from Karl Choi, Bank of America.

Two quick questions. First, sort of furthering on the last question. When it comes to sort of businesses, given your comments about positive outlook for Hong Kong resi, I assume you wouldn't hesitate to put new capital to work in the Hong Kong DP side or the turmoil may actually keep you on the sidelines? And if so, would you consider going into the more mass market or you actually stick to only just a very sort of premium positioning that you have enjoyed on the DP side? And on the China IP side, just to -- want to drill down a little bit, talk about still more oversupply. I think for Chengdu IFS, can you give us a little bit of update? I think if I'm not mistaken, one of your anchor tenants recently closed the store. Have you found a replacement? And if not, what's the strategy to backfill the space? And overall for sort of the rental income outlook in China, even though it's still -- from a competitive positioning, it's still challenging, but we've seen some rebound in retail sales and whether you can actually see some stabilization in rental income as a result.

Sure. Thank you. The property market is generally cyclical. And you may recall what happened at the end of 2017, that was when we demerged Wharf Real Estate Investment Company Limited. Shortly after that, we started to curtail our investment in Mainland DP, and we started to put a lot more capital into Hong Kong DP. And the time has come for us to get some return from our Hong Kong DP investment. And that includes not only super luxury, the Kai Tak joint venture, for instance. It's a nice upper middle market project, and we started -- it's a joint venture, and we started to realize some of that project last year. And hopefully, some more will follow this year. So if the right opportunity comes along, we would be prepared to invest in Hong Kong DP projects other than superluxury because there are actually not that many superluxury new deals in the market. We can't just sit and wait forever. But on the other hand, if there are no good opportunities, we're quite happy to continue to park the capital. Chengdu IFS, the anchor tenant space is being broken up into smaller units. It's being turned into arcade. And we have already secured a number of tenants for some of the units. The conversion itself will take several months. So we still have a little bit more time to conclude the remaining leases. We expect the -- when -- on reopening, we expect good occupancy of the previously occupied space post-arcade conversion. While on the subject of Chengdu IFS, this may not be very public information yet, but we have started to sell some of the apartments. In fact, we have achieved some sales shortly before Chinese New Year. And now that people are beginning to come back to work after Chinese New Year, we're expecting to sell some more of the residential units and at a good price, too. So we're looking for different ways to recycle the capital. We don't have a very large unsold stock in residential, given that most of it was previously already sold and which is why we're releasing these apartments in Chengdu IFS. They are large apartments. Some of them are small currently, but we will make them bigger. So there will be like 200 square meter apartments, and we're selling upwards of CNY 10 million per unit. So again, some more capital coming back. Well, generally, I think we'll see a flattish performance. We're beginning to see some recovery in the first 2 months of this year, but it's too early to say whether that's sustainable. So we're budgeting for flattish performance this year.

Please raise your hand if you have any question. Praveen from Morgan Stanley.

Let me ask some provocative question. Why is this company listed? This company doesn't provide dividend to the extent that other property companies do. It definitely is undervalued because it has so much cash, both in net cash position and the investment. The business fundamentals and performances have been relative to its peers, not as good, whether it's logistics, whether it's China real estate, whether it's provisions. I think as a private company, it could extract more value out of it. So I just wanted to get the thought. And I have the second question on China net book value. I just wanted to clarify, is it China DP net book value of $15.9 billion I saw in the presentation you had?

Yes.

I just wanted to get if I were to sell it over the next -- I'm just throwing a number 3 years, 5 years, doesn't matter. Would I really get $15.9 billion out of this or the amount that we really add value to the shareholder would be a lot less?

Good. Provocative, and I agree with you. But it's listed. Well, I agree with part of what you say. What I don't agree with is your comment about underperformance, not entirely. If you look at our Mainland DP performance, you see many companies doing a lot worse than us, including some of our Hong Kong peers. But you're obviously entitled to your view. We'll prove you wrong. The company has been listed for a long time. And we have very loyal shareholders. Some of them are very, very loyal, and we know who they are. And dividend is not necessarily what they're looking for. Ideally, we'd be able to pay more, but we've made it a very transparent policy of paying 30% of our underlying net profit. In the past few years, our underlying net profit has been affected by the large write-downs. And this year, the write-downs are significantly lower than before. The write-downs reflect our view of what the DP assets are able to fetch in the marketplace. So my answer to your question about whether we can get $15.9 billion in the market, if we were to sell them in the next 3 or 4 years, has to be yes. Otherwise, we'd be misleading shareholders. However, the question is whether or not we can sell all of it within the next 3 years. It's not price, it's liquidity. What remains in our portfolio, a large number of them -- a large proportion of it is office. We have written the offices down to a low ASP. But there may not be buyers for office, even if we were to write them down further. So the issue is not price. The issue is liquidity. Now the market may change, but at the moment, that is the view. Net book value, yes, I covered that one. The fact that the write-downs have been declining, it reflects 2 things: a, the unsold stock has decreased in quantity and in value. And b, we've been sufficiently, call it, aggressive or conservative. If you look back at the last few years, we've written down probably close to $20 billion, $15 billion to $20 billion, something -- somewhere in that range. We've made big money in the past. Now here, I'd like to clarify one thing, too, to provide some perspective. We, as a company, started to invest in Mainland properties about 30 years ago. Initially, it was a small amount. That was before the markets became big. Over the years, we have injected from Hong Kong into the Mainland, about HKD 120 billion of capital. You need to use equity to invest in the Mainland. We can borrow for construction. But in terms of the land, it needs to be equity. And over the years, we have pretty much repatriated the entire invested capital in Hong Kong dollars. Now the currency has fluctuated during the 30 years. But what's important for this purpose is that whatever amount we remitted into the Mainland has been fully repatriated or nearly fully repatriated. And what is left currently in the Mainland is profit. If we can realize $1 from it, we make $1 of profit. If we realize $2, it's $2 of profit. So at least in terms of capital preservation, I think we've done reasonably well. And then the upside is the remaining assets, the IFSs, and I'm including the IP, the IFSs, the remaining DP stock and so on and so forth, all of it.

Is there any more question from the floor? Jeff from DBS.

I have a follow-up question on the office in China. This $15.9 billion net book value, can I assume that all are completed already? Or you still have some under construction or just a raw land that's just a land pending development. And also, are these office stock if completed, currently for leasing? Are you generating some income from this office stock, which has yet to be sold?

Yes, they are either already completed or substantially completed. Because the market is soft, there are instances, where we don't put the final finishing touches to it yet. But the capital -- the bulk of the capital expenditure has been incurred, if that's the motivation of your question. We may -- in some cases, we don't finish some of these products because if you finish it, you start paying tax. If you don't or at least you don't put the finishing touches to it, you defer the start of the tax payment. But the vast majority of the capital required has been incurred. And if it is finished, where possible, we would lease it. Good case in point is Changsha IFS. We have offices in T1 and T1 has been completed for 5, 6, 7 years. 5 years? More than 5 years before COVID. And we have tenants in there. So they are generating a certain income to us to at least cover the running cost.