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Edited Transcript of 101.HK earnings conference call or presentation 21-Jan-20 8:30am GMT

Full Year 2019 Hang Lung Properties Ltd and Hang Lung Group Ltd Earnings Presentation

Hong Kong Jan 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Hang Lung Properties Ltd earnings conference call or presentation Tuesday, January 21, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chichung Chan

Hang Lung Properties Limited - Chairman

* Wai Pak Lo

Hang Lung Properties Limited - CEO

* Hau Cheong Ho

Hang Lung Properties Limited - CFO &

* Wenbwo Chan

Hang Lung Properties Limited - Executive Director

* Chuk Fai Kwan

Hang Lung Properties Limited - Director of Corporate Communications & IR

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Conference Call Participants

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* John Lam

UBS Investment Bank, Research Division - Research Analyst

* Justin Kwok

Goldman Sachs Group Inc., Research Division - Executive Director

* K.C. Ng

Macquarie Research - Analyst

* Wai Ming Liu

HSBC, Research Division - Analyst

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Presentation

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [1]

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Good afternoon. Welcome to the Hang Lung Group and Hang Lung Properties annual results presentation. It's my pleasure to introduce the speakers today: Mr. Ronnie Chan, our Chairman; Mr. Weber Lo, the Chief Executive Officer; Mr. H.C. Ho, Chief Financial Officer and Executive Director; Mr. Adriel Chan, Executive Director.

Perhaps let me pass the floor to Weber to give you an overview about the results first, and we welcome questions later on.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [2]

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Okay, good afternoon. I'm sure you read the information and also, I think, to analysts, I think I will be more direct.

First, talk about the dividend. A lot of you, when we have a chance to gather together, you keep asking this and now at least we give you some answer. In terms of final dividend paid for HLP. We increased by HKD 0.01. So total will be HKD 0.76 for the whole year, which I would say, to confirm our view on our prospect of the Mainland retail business, including both the mall and I will say the rental income prospect in the next few years.

If you look at the numbers, I think the numbers speak for itself. If you look at the renminbi in terms of growth, we are talking about 12%. However, if you look at Shanghai, 8%, but outside Shanghai it's about 19%. So I think maybe this time is the first time maybe we will talk about, across-the-board, our rental growth across all properties, actually having a positive growth this time.

And if you look at the second half of the year versus the first half. In Shanghai, we jumped from 4% in the first half to 12% in the second half, which make us even more confident. If you look at the mall, Plaza 66, 18% growth in the second half and Grand Gateway, 17% growth. So a very solid and strong growth from a very high base.

Outside Shanghai, from 14% first half to 24% second half. So sequential growth, I think, is one of the themes that we talk about from last year to this year. So every single time when we have a first half and the second half is stronger in terms not only the absolute, but the growth rate of the last year and the same as this year as well.

If you look at the business in Hong Kong. We have 2% growth in terms of revenue. And I'm sure if you look at the breakdown of the first half and the second half, you will see first half is 3%, second half actually we have some slowdown, significant -- I would say not significant, but actually it's a negative growth that actually affect the overall year of 2%. But our properties in Hong Kong, you will agree with me that it's quite resilient because of the nature of our properties in Hong Kong, a lot of those neighborhood mall and those basically, I would say, be affected, but impact is not that significant compared to those shopping area like Mongkok and Causeway Bay.

So in terms of the sales. Definitely, in the later part of the year last year, you see the sales was significantly affected. But I have to give everyone a caution that the 2% growth this year have not reflected fully on the rent concession. I'm sure the accounting treatment, you all know, some of those we have to amortize along the leasing terms. So some of the impact that we work together and help the tenant may not fully reflected in 2019. And some of those will be reflected in '20 and onwards. But overall, our leasing business, we are quite pleased.

In terms of the residential sales in Hong Kong, we saw only one, Blue Pool Road, so I think that's why I can explain to you the property sales actually have a drop. But if you look at the inventory, we only have 9 Blue Pool Road left for sales because we turned 2 of them into investment properties, 1 Long Beach duplex this time. So I think the inventory behind is not much. But of course, in the future, in the next few years, we are developing AIC. We are developing our commercial building in Electric Road. Down the road in 2022 and 2023, we have some more properties in the pipeline.

In Mainland, overall, in the future, I think we are optimistic, not only because of our existing business doing well, but also we have another 20 million-square foot pipeline, which we are going to complete in the next few years. The first one will be on Wuhan Heartland 66 this year. And I'm sure you heard about the Phase 2 of Center 66 in Wuxi and Phase 2 of Forum 66 in Shenyang and also our Hangzhou Westlake 66 in 2024 and '25.

So a lot of work to do, but I just want to stop it here for now. And of course, if you have any questions, more than welcome to answer.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [3]

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Will the Chairman anything to add before I move to the floor?

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Chichung Chan, Hang Lung Properties Limited - Chairman [4]

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Again, I want to emphasize that the properties outside of Shanghai have been doing fantastic. Not just top line growth but also operating profit is also very, very attractive. You are talking around 4 or 5 of those [67] properties that are at 40%, 50%, 60%, 70%, 18% -- 80-some percent operating profit from some of them. So that means, all along, we know that this business, the cost once you open a shopping center or commercial complexes, the cost is very high, marketing, fixing-up problems, what have you.

And then your top line, it's pretty fixed. It takes time for it to grow. But as time goes on, the top line will grow. And then, at the same time, the cost will drop. And once that takes place, the jaw opens up, so to speak. And once the jaw opens up, everything from the top line falls to the bottom. And that's exactly what we've been observing outside of Shanghai in many of our properties right now. And so I would not be too surprised that in the next few years, the growth rate from Mainland outside of Shanghai will be faster than that of Shanghai.

Now Shanghai is doing very well, as you can tell. Plaza 66 is doing great. And Grand Gateway, all indications from whatever was already completed in AEI have been doing double-digit growth.

Plaza 66 for 3 years have been having double-digit growth, and oftentimes, in terms of sales, as much as 20-plus percent in terms of rent growth -- rent revenue growth in the teens. And from all indication, it is very likely that Grand Gateway will enjoy the same and we won't finish Grand Gateway fully until the third quarter of this year. So for that unique reason, Shanghai would still grow very well because of Grand Gateway's following the example of Plaza 66. But in the longer-term, steady-state basis, I think that the growth rate outside of Shanghai, it will be -- may be greater.

Just an observation, something for your amusement. Shanghai's sales, Plaza 66, one shopping center is 98% of all of Hong Kong for our portfolio. Did I explain myself clearly? You take the sales of all our properties -- retail properties in Hong Kong. It's just slightly a hair above one shopping center of Plaza 66. And if our projection is correct, then it is very likely that Grand Gateway, within a short period of time, maybe 2, 3 years, will also exceed that of Hong Kong.

Now obviously, Hong Kong is not growing and I'm making the assumption that Hong Kong will be flat. Will Hong Kong be flat in the next 2, 3 years? Who knows? It may even drop, right, it's a possibility. I don't know.

And then the third one, you take all our property outside of Shanghai and treat them as a whole, that, too, is approaching the whole of Hong Kong, not quite close as Plaza 66, but it is very possible that within 1 year, the sales of all our shopping centers outside of Shanghai, on the Mainland, will exceed that of everything that is sold in our shopping centers in Hong Kong. So it really tells you that Mainland China market is really, really powerful.

And another thing I would mention to supplement what Weber said is that so many of the big, big, big brands, the top 20, 30 brands in the world are opening up in our shopping centers, both in Shanghai and especially outside of Shanghai. I think if we're not already sold, soon to be. We are probably the top few landlords from much of the top brands in the whole of China in terms of the number of stores in 1 landlord's properties.

And some of you might have seen the announcement that Kering made that they want to be what I'd consider as a strategic partner of theirs, which we welcome, of course. I remember Henri Pinault, the Chairman, said to me once -- the first time I met him many years ago. He said, hey, Ronnie, you guys are a LVMH company, meaning that we only take LVMH as our tenant, but not any of the Gucci group or the Kering Group. Well, it's the -- it's really not -- we have nothing against them. It's just that, in those days, their people in -- mainly on China was so damn difficult to work with. But now things have changed, and we are very happy that we'll become a major landlord of the Kering Group with many brands.

I want to just highlight a few of the properties that perhaps some of you may not have paid attention to. Olympia 66, Olympia 66 in Dalian, it's humongous, 2.3 million square feet. And we only opened Phase 1, which is about 87% of the property only until last year, then we are now beginning to open up the second half, which is 13% total of the total (inaudible).

Well, now a lot of major brands are now moving in there as well. And hopefully, there will be more to come, which we're working on them. But you can already see, as you know, in your business, your ability to discover -- yet to be discovered by the public opportunities. And I'd like to think that, that is one of those that if you were to project 2 years down the road, that's going to be a really beautiful property, not just physically, it's already beautiful physically, but also financially. Just like about 3, 4 years ago, I used to tell people that Center 66 in Wuxi is a beautiful property financially as well as aesthetically. Well, at that time, you still can't see it, but we know because we know who's going to move in there and so forth. And surely -- sure enough today, Center 66 is the home to luxury. All the major brands in the city, except one, have already moved or are moving to Center 66.

And so that's the kind of thing that I encourage you as analysts to watch, not just what you see today, but what is already quite obvious to management. If you see that, you may have more confidence in some of our properties.

And we did okay share price-wise. But I think there's a lot more room to go. But I'm biased obviously. As the Chairman of the company, I always say good things about my company. But I think I'm the most honest of the lot isn't it. Anyway, so I'll probably shut up probably.

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Questions and Answers

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [1]

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So thank you, Ronnie. Welcome any questions from the floor and also investors online. Just raise your hand and let us know your name and organization name. HSBC?

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Wai Ming Liu, HSBC, Research Division - Analyst [2]

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Congratulations on the results. This is Raymond Liu from HSBC. I got like 3 key questions. The first question is about the dividend between actually Hang Lung Properties and Hang Lung Group because as -- when we look at the results, for the full year results, the [divi] hike is different between the group and the company. So can the management share with us what's the logic behind in the latest dividend policy on this one. That's the first one.

And the second thing is, can you -- can we have the update on the leasing progress on Heartland 66?

And the last question is about the Wuxi project. Seems that the retail sales growth in the second half this year seems to moderate a bit. Can we have more update and understand more about this performance?

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [3]

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Use the mic, use the mic.

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Chichung Chan, Hang Lung Properties Limited - Chairman [4]

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I'll let Weber actually take the first one and then Weber or Adriel, somebody, take the second one. I'm a lazy guy. I didn't sleep last night so...

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Wai Pak Lo, Hang Lung Properties Limited - CEO [5]

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So I think -- why I don't I talk about the operation first. Heartland, we are -- leasing rate, we are close to 60% already. Why 60%, because a lot of the key difference has to be coming from the luxury brands. And then we always hold until the very late end to finalize those deals. So hopefully, the next time when we see you, we can give you more numbers, but this is in line with our Kunming progress. We are aiming to open this more in the summer. So basically, we are working very hard to line up all the tenant. But we have to be frank, at the same time, because of the recent pneumonia issue that we will have some setback to us because in terms of travel, in terms of visits, some people may delay or cancel some of those. But we still believe that is about that range. We are aiming for the summer to open this shopping center.

In terms of dividend policy. I would say the Group and Properties, first of all, we increased HKD 0.01 on Properties, which, I would say, 4 years ago before even I joined, we sent a very honest message to the shareholders and to the investor group basically telling the people that we see tough market, right, because of the anticorruption and all that. So we were very responsible to set this out. But at the same time, we also see strong momentum from our retail sales recently. And we are cautious because together with the social unrest in Hong Kong, we want to make sure that we want to send the right message, too.

So I think to respond to your question, our policy is always the same: we set our dividend policy is according to our core leasing profit, right? And we see more certainty on the leasing profit improvement and that's why we are confident to send a message to the analysts and to the investor and to the shareholders.

Why the group will be a little bit different from the Properties this time because if you look at the details, the capacity, the payout ratio, now you will see a different compared to the P. Because P, you have a lot of properties still under development, but G every year you will receive the dividend from the P and you will also distribute group dividend now. You will see there is a net increase, always. That's why the capacity is different and also we would like to differentiate.

And also, at the same time, we would like to report to long-term shareholders who support us for a long time. And the special dividend is something extraordinary because we have extraordinary gain from sales and that's why we return part of it to the shareholder as well.

So I think our policy is exactly the same, but we want to differentiate the Group and the Properties may not have to be the same all the time. But that shows you we look at our capacity. If we are capable to deliver more, we are more we are more than happy to reward our shareholders.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [6]

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Also the question regarding Wuxi's retail sales number.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [7]

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Okay. So I don't know whether -- why you are not happy with Wuxi. Wuxi is still growing by 20%. The first half, of course, the base of last year, was lower. But the second half, if you remember, we were having a high double-digit growth of second half of last year as well. So this also double-digit growth. So maybe you are very demanding. It's about 17%, 18%. So it's still bad. So I would say more to come. 2020, we expect even higher numbers because more brands are coming in. As Chairman mentioned, we finally consolidate our brands into our shopping centers. One example we can quote used to be Gucci was in Dongfeng, which is Oriental, right?

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [8]

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Oriental Plaza.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [9]

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Oriental Plaza. So finally, they opened with us, overlapped with them for 1 month and now they closed down that store and moved completely to ours. So more similar store will be happening that way. So I will hopefully can announce to you more in details, but this is coming in 2020.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [10]

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We call it a migration of tenants from other places. When the Chairman mentioned about the cooperation agreement with Kering, there's a question from an investor. Whether Forum 66 included in this cooperation? And how's the future of that shopping mall?

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Wai Pak Lo, Hang Lung Properties Limited - CEO [11]

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So what do I try to answer that. First of all, yes, where we work with all the fashion brands, we talk to them not only from individual project, but we talk to them as a portfolio. So from time to time, we work together with them and look at opportunities. We have some brands in Forum. However, at the same time, because we have so many properties, we basically deal with all those fashion brands together as a whole. There will be some brands. So when they are ready, we will be more than happy to announce to you. So yes, definitely, Forum is included.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [12]

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Thank you, Weber. Jevon?

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Unidentified Analyst [13]

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Congrats on the good results. And I just have a simple question. May I have some information on the reversion as well as the occupancy cost situation for the malls inside Shanghai and also outside of Shanghai?

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Wai Pak Lo, Hang Lung Properties Limited - CEO [14]

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Why don't I start? And anyone please supplement. Plaza 66, if you look at one by one in Shanghai because we only have 2 in Shanghai, so very easy to say. Plaza 66 definitely is a rental reversion, positive rental reversion. In Plaza 66, the revenue is very sensitive to the retail sales growth. So you can see if you have a high double-digit sales growth, that translates into your range directly. So definitely, there is a positive trend.

Plus in Grand Gateway, Grand Gateway is a bit of mix because there's a lot of positive reversion. However, because we are going through a renovation, major renovation, we are still having like 13%, 14% space still not opened yet. So you will see first half, we have a negative 4%, if I remember correctly. But second half, you see already 17%, 1-7 percent growth.

So when we are gradually complete our AEI project, for Grand Gateway, you see a positive rental reversion. But now because the North tower complete, but South tower we have to close in the very beginning of this year and we just opened the [retender] for LV, for Tiffany, for Gucci, for Celine, for all the other brands to open, now you see the second half have a tremendous growth. So hopefully, next year, full year, we'll have a much clearer picture seen in Shanghai.

And in the other part, outside Shanghai, mostly, actually, you'll see -- I will not generalize it, but a lot of those like in Parc 66, in Center 66, in Olympia 66, a lot of them are from rental reversion because occupancy, they are close to a very high level already and if you see a significant increase of rent -- by the way, including Palace 66 in Shenyang, we are achieving 20%, is mostly a rental reversion increase.

But at the same time, some of the new mall like Dalian -- Olympia, some of those is because of the occupancy increase as well. So it's a combination of both occupancy increase and the rental reversion increase. But overall, I would say the rental sales momentum is strong across Shanghai and outside Shanghai in Mainland.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [15]

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Thank you, Weber. Any remarks from the Chairman as well? Okay. Any further questions? Goldman?

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Justin Kwok, Goldman Sachs Group Inc., Research Division - Executive Director [16]

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Justin Kwok, Goldman. Perhaps 2 questions. One, outside Shanghai, as you see a lot more positive developments now happening, how would it affect your view on buying more land? Would you take a pause or will you turn more aggressive in doing that in a way?

Perhaps the second one is regarding the service partner now. So I think on your slide, you now put it in 2021 and 2022 as a potential date. Is it a earliest date or is it a later date? How do you -- well, how would you react to the market where you can accelerate faster or decelerate? What kind of hurdles you are seeing on that front? Just want to see how do you look at the time line.

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Wenbwo Chan, Hang Lung Properties Limited - Executive Director [17]

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The first question was -- that's right. The second-tier cities, I think, for us, we've always seen second-tier cities as a high potential area. I think a lot of our investors and some of our analyst friends didn't take the same view on second-tier cities. And so that's why I think there's a bit of a gap in expectation. I think for us, we're happy that our expectations are now being proven. And so our view has not fundamentally changed when it comes to second-tier cities. We're always looking. We're always looking in many places. And if the opportunity arises at the right place at the right time at the right cost, we're very happy to continue to expand. So I think that what we're seeing right now in the second-tier cities is more proof that our original thesis was correct. And so I think that we'd continue to do that if there were opportunities.

Of course, the opportunities, who knows when they'll come. It's a lot to do with the government, land sales and and less to do with us because we're looking everywhere.

Sorry, the second question was service apartments. So we have, obviously, flexibility. We're not intending to hold back. We'd like to sell those as soon as they're available. And so we hope to start doing that in phases starting in 2021. The first one, we expect to finish will be Wuhan, followed by Wuxi.

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Chichung Chan, Hang Lung Properties Limited - Chairman [18]

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Third one is Forum and the fourth one is Kunming.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [19]

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One thing I want to add. In recent discussions, a lot of people talk about technology, and they always mention technology is unstoppable trend. But I will argue in front of all the analysts here, we are now in a business in Mainland on retail is an unstoppable trend as well. Because if you look at how we operate and also what kind of segment we are in, we are operating at the highest end. And as Chairman mentioned, we are building 5-star hardware. But in the last few years, we are emphasizing on how we can be more customer-centric by providing experience and giving a very good customer relationship, and therefore, we can actually generate more sales.

I will argue this unstoppable trend exists in a traditional business like commercial real estate in Mainland for a high-end segment. I remember 2 years ago when I joined the company, a lot of people keep arguing about the e-commerce, how you deal with them and all those. I hope in the last 6 months, as I mentioned to some of you, I didn't encounter this question anymore because I think we can operate -- we can still survive together and we survived together with them in the last decade. And I truly believe that we will survive together in the coming decades, too. But running an affluent segment, having the best mall at the best location in the cities, I think this middle class -- rising of the middle class and domestic consumption increase because of the policy, this is another unstoppable trend. So I just want to welcome any discussion. But this unstoppable trend, if we can capture them, I think the opportunity is immense.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [20]

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Thank you, Weber. There is a question from London regarding valuation. It says given the strong operating performance of projects outside of Shanghai, should the valuation upward for those projects in second-tier cities?

And also, given the weak performance in Hong Kong, would that devaluation should come down more significantly using this [word] ? And also, whether you will provide cap rates for Hong Kong and Mainland China outside Hong Kong? Perhaps H.C.?

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Hau Cheong Ho, Hang Lung Properties Limited - CFO & [21]

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For the Hong Kong first. Properties in Hong Kong actually recorded valuation loss of HKD 950 million. But part of that was offset by other valuation gain in respect of 2 Blue Pool Road houses we transferred to investment properties for leasing. And the value just topped the last sales value of the Blue Pool Road houses compared with the cost, and hence, the valuation gain on these 2 units. And on the surface, then it seems that the Hong Kong valuation loss is not what most people believe. But at the same time, the valuer also said that he also realized the valuation of our properties actually on the conservative side and we've been saying that for many, many years. And likewise, the drop in value for the Hong Kong properties actually on the Hang Lung portfolio would be less than other people.

And for the valuation in Mainland, the valuation loss of properties outside Hong Kong -- sorry, outside Shanghai, mainly west with the offices in some of the Tier 2 cities and just reflecting the market and competition environment there with the increased supply in certain cities.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [22]

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I think particularly for the office sector, right?

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Hau Cheong Ho, Hang Lung Properties Limited - CFO & [23]

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That's right.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [24]

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Okay. Thank you. Any other questions? UBS.

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John Lam, UBS Investment Bank, Research Division - Research Analyst [25]

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Congratulations for the good results. Three questions for me. Number one, for the Hong Kong retail revenue, can management provide outlook because it seems that in second half, the retail sales has weakened. And also in terms of the retail rental revenue outlook for 2020?

And then the second question is regarding on the supply of the shopping malls in China. Because we often also notice that quite a lot of developers in Mainland China, they're also expanding their shopping mall. So in terms of the tenant retention and also in terms of the buying power with the tenants, how do we manage that?

And thirdly, regarding on the financial statement because the company also provided a recurrent -- reporting currency in RMB terms, so I just wonder because right now, already half of the revenue -- more than half of the revenue come from Mainland China. Will company consider to change the reporting currency to RMB to better reflect the operating performance?

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Wai Pak Lo, Hang Lung Properties Limited - CEO [26]

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So why don't I answer first. Please chip in, any of my colleague. First, our outlook for Hong Kong retail set in 2020, I would say, is still uncertain, of course. So if you look at our first half, was 3% growth; second half was a bit of negative drag down. Therefore, you will have a 2%. We will expect, we'll remain weak for the first 3 months. That's why we will expect some rent concession or relief we need to offer to support and work together with our tenant. But we don't have crystal ball. We really don't know how long these issues will drag us. But as I mentioned earlier, hopefully, you will see our portfolio is a lot more resilient. When you look at some of our shopping centers, our sales impact is minimal.

The 2 most adversely affected area were Causeway Bay and Mongkok, which we will continue to monitor. But we will not have a very high expectation on growth in Hong Kong. However, hopefully, because of our resilient nature, hopefully, the impact will not be that significant for us in Hong Kong.

The second one I would like to...

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [27]

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More supply.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [28]

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More supply, okay. Again, yes, every single year, you heard -- you will hear a lot of more being completed in China, but as we all discuss, what kind of position are they? Are they operating at a higher standard like what we do in Hang Lung? And are they at the core location like what we have in our portfolio?

So yes, you have a lot other different mall. But I would say, in terms of the same positioning, I don't see it that much in the same city happening at the same time and opening at the same time. So yes, more in terms of mass segment or below mass segment, yes, they will have a lot, but at the same time, we are not competing with that particular segment. So I will not distracted by all those noise I would rather focus on what we can do. For example, our contracts, our deals with those fashion brands can actually prove to you that we are getting traction and more collaboration with those brands. And those actually are the yardstick: how well we can operate at the highest level.

So I think that one, we are confident and we believe that we can continue to do well across our

portfolio. Last one, sorry. Yes. This one, I think, maybe I'll pass to H.C.

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Hau Cheong Ho, Hang Lung Properties Limited - CFO & [29]

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On that one, we still have over 45% of our revenue coming from Hong Kong, so which is quite substantial, and on top of that, a very sizable part of our investor base. They are actually international institution investors. Whatever currency we use for reporting, we still convert those back to U.S. dollar. But anyway, we also provide the renminbi corresponding figures in our financial statement for reference purposes. So there's no real urgency for changing it.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [30]

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Ronnie, do you have anything to add regarding your strong conviction about our competitive edge in terms of competition?

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Chichung Chan, Hang Lung Properties Limited - Chairman [31]

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Well, if you are in the highest end and many of the second-tier cities can only have 1 -- they are 1-store cities, there are some that are 2 stores. Hangzhou, maybe 3 stores. Shanghai, Beijing, of course, maybe 5, 6 stores. Wuhan, for sure, it's a 2-store city, maybe even better. Shenyang, maybe a 2-store city. By the way, we were just in Shenyang recently. The amount of money that is hidden in that city is truly amazing. Anyway -- but a lot of others such as Wuhan, it's a 1-store city. Kunming is probably a 1-store city. And so when you go to those places, if you already occupied that spot and you have a good comprehensive working relationship with those big brands, not just the individual brands, but also the parent company, then I think it's rather difficult for people to dislodge you unless you really do stupid things. And let's hope that Weber doesn't do stupid things, I don't think he will. So we are basically okay.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [32]

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Thank you, Ronnie. There is a question regarding the leverage of the company. We are now at a -- net debt ratio is about 18%. How will we look like in 2 years' time given the CapEx in the pipeline? H.C.?

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Hau Cheong Ho, Hang Lung Properties Limited - CFO & [33]

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In the past, we had a fairly large amount of cash balance, which, I think, moving on from this point onward, you wouldn't expect too much difference between the net debt- and the gross debt-to-equity ratios. Now at the end of 2018, we held a very sizable amount of cash balance, I think it's HKD 12 billion or HKD 13 billion, and that's because we knew that early 2019 we have to settle the remaining payment for the Hang Lung as well as the construction expenditure for 2019. You're also aware that we completed and opened up a few new properties during last year. So knowing all this cash expenditure program and CapEx program, that's why we have a large amount of cash.

Now moving on -- from now on, we decided that we don't -- we no longer need to hold such a large cash on hand because -- unless we embark on another project. We knew that we need the exact timing of the cash payment, right?

So getting our cash work harder for us is always our objectives under such a low interest rate environment. On top of that, we had over HKD 30 billion standby facilities, bond issuing capacity that we can draw upon with multiple channel of raising funds. So we don't really need to keep that much cash.

So the debt-to-equity ratio, I think at the end of last year, it's around 20%. So over the next few years, it will be somewhere between 20% to 25%. Really depends on whether we buy more lands or whether we sell more residentials.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [34]

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Thank you, H.C. Macquarie.

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K.C. Ng, Macquarie Research - Analyst [35]

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It's David from Macquarie. A couple of questions. I guess maybe a little bit more on the retail outlook for China now that the trade talk is -- Phase 1 is done and it seems that nothing much going to happen now until after the election. How is your view on the -- maybe just -- not just for you guys, but the overall China retail sentiment, macro, whether people want to spend more overseas, domestic like actually we may see more of this one. You released, Chairman, statement in your annual report, but can you share with us basically retail outlook for China in 2020, maybe 2021.

Second question, maybe more microscopically. Interesting to hear that in Wuxi, you have consolidated. So that's a great thing. Then probably people will start asking what's after consolidation, right? So now you become the #1 and further growth in your view will be driven by more traffic coming from nearby cities or maybe further change of the demographics such that people spend more per capita. Like how would you see this trend going on, especially for the high-end segment going down the next few years?

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Wai Pak Lo, Hang Lung Properties Limited - CEO [36]

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I think in the last 2 result announcements, we talked about our belief on repatriation of purchase in the Mainland. 2018, the statistic was 26% -- okay, first of all, Mainland Chinese buying luxury products, only 26% was domestic market in the past. 72% -- 74% were in overseas. This year, we already see that 26% become 29%. And the total pie actually getting almost like 15% growth. So that means not only the percentage of domestic consumption increased, but also the total pie increased. According to Bain analysis, by 2025, this 29% will become 50%. Actually, we will invite that analyst to come to our management conference to speak in the next 10 days, which now a lot of people challenging him actually you don't need to wait until 2025 to reach 50%. A lot of brands, top brands CEO told us that it will be sooner than 2025.

So the repatriation of purchase, there's a combination of factors. First, the policy from the central government, posting -- because they have to switch from an export-oriented economy into a domestic consumption economy. We talk a lot about the Daigou, which now they have to pay tax. And third, the renminbi depreciate, now the differentiation between overseas purchase and then domestic purchase actually coming and narrowing down.

And final thing is about the relationship. Think about it, if you are the top end customer having a strong relationship with Plaza 66, they come to Dior and order the Air Jordan Dior fusion shoes. But if you go to Paris, you queue up, you will not -- you have no chance to get it because you are not a VIP customer out there.

So the key nowadays will be once we have critical mass and if those brands launch the -- money cannot buy products in Shanghai, they would rather buy in Shanghai rather than go anywhere else, become a stranger and queue up outside the store, right?

So I think this will continue. And that's why we truly believe that this repatriation of purchase, especially for luxury products, will continue. But at the same time, the rising -- as I mentioned, the rise of the middle class, again, unlike in the western world. Most of the Mainland Chinese, their home is not particularly big like houses in U.S. and all those. They need social space and they need gathering with their friends and with the climate change and all that, the best places will be shopping mall for gathering, for hanging around during the weekend. And that's why we are working on trying to provide experiential experience for our clients, having the best brand the first time coming to that particular city. So I think this conviction, we are confident. Sorry...

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [37]

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China retail outlook.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [38]

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China retail. That's why China retail outlook, we are very bullish.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [39]

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Consolidation.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [40]

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Okay. Okay. After consolidation. Of course, like Plaza 66, once you have all the brands, sales go up, right? I think the rental reversion will continue. I think the key, as I mentioned last time, now it's more clear for us: our target market is below 40 years old. So 70% to 75% of our customer buying luxury products in Mainland, they are 39 years or below, right? And therefore, we truly believe that if we can fulfill their need, therefore, they don't need to travel to Paris, travel to Hong Kong, travel to Shanghai to buy what they want, they will stay and they will buy there.

Think about it, I'm sure some of you are wearing Rolexes. And sometimes in the past, they have to travel to a megacity to buy because they don't have that particular model in Wuxi, for example. But in the future, if the market is big enough, Rolex will allocate more models into Wuxi, and therefore, they will stay and buy from there.

So I think the key is, once you have scale, once you have business, once you have the demand, once the client have the loyalty to the particular place, and they will buy more. So we truly believe that the vertical growth will come.

I worked in a different industry before. I worked in Coca-Cola before. In the '70s, they are doing horizontal growth, just trying to make sure that you have Coca-Cola in the place. After you distribute widely you make sure that you have a vertical growth.

Basically, I would say retail, once you have all the brands in the cities, they have to look at the vertical growth. Vertical growth will come from increase of income. More people appeal to those brands and they will buy more. And once they have more models, more SKU and they can fulfill the customer need, they will buy more. So this is our belief.

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Wenbwo Chan, Hang Lung Properties Limited - Executive Director [41]

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Sorry, just one more word. If you look at what's happening in Plaza and Grand Gateway, I mean, you could say that the tenant mix has not materially changed in Plaza for the past 15 years. But you still see amazing growth. And so I think that there's no shortage of runway. Obviously, if you look at it from an operational perspective, right now, we're making the most in Wuxi out of Level 1. In Grand Gateway, we're not making the most out of Level 1, but Level 2 because the people who are aspirational, the tenants who are aspirational to come in to be with the Guccis, with the Ferragamos, with the Pradas, those are the ones who are actually willing to pay even more. And so actually, I think we have a lot to do and we still have a lot of runway when it comes to reversions and tenancies.

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Chichung Chan, Hang Lung Properties Limited - Chairman [42]

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Had a few things. Number one, Weber mentioned about 26% probably 2 years ago of when the Bain report came out 2 or 3 years ago, only 26% of the luxury purchases by Mainland Chinese are done in Mainland China. Then 2025, it will become 50%, right? What he didn't say is that, that 50% or that 100% would double. So that means 4x what it is today. So 4x what it is today in 4 years from now, 5 years from now. And as Weber also said, our friends in the top brands, the CEOs towards that, that's conservative, right? So call it, 4 years. So in the next 4 years, you can have as much as 3, 4x growth. That's a lot of money. And so Adriel mentioned that Plaza 66 continue to do very well. Now Grand Gateway has LV, didn't have it before, right? And of course, also Gucci, definitely many others. So that's second way of adding impetus to our top and bottom line.

Then another thing I should add this. In the old days, whenever, people come to Hong Kong to buy because in Shanghai, you don't have all the new products, you have more here. So people come here. But nowadays, the top guys from LVMH, the top guys from Kering, top guys of Richemont, these guys are telling us now Wuxi is the standard. The standard used to be only New York, London, Paris or something like that, right? And then Hong Kong became one of those. And then now it's Shanghai and Beijing. And you have sometimes more there that in Hong Kong.

And in some products, within some of these brands, I was told that they're actually cheaper in Mainland China than in Hong Kong. Other products within the same brand may still be a little bit more expensive there. But there are also some that are cheaper there. So all these things are really driving the shoppers to remain in Mainland China. And then, of course, Weber also alluded to something that is using technology, and technology is helping us increase sales using the same floor space, right, the same brand, but then technology help us identify and target the clients far better than before. And so there are many, many ways to increase sales even after so-called consolidation.

Then I don't know if Weber mentioned this in some of the shopping centers outside of China -- outside of Shanghai. Well, yes, we mentioned about Wuxi. People are now moving into it. Kunming almost from day 1, except 1 brand, all the major brands that are already in the city will be in our shopping center, and some of them have opened up and others are in the process of opening up. And by the way, 34% of all the shops in Kunming -- Spring City 66 are first time to Kunming. So there's a lot of ways to grow top and bottom line.

Then I mentioned to you about Olympia 66, right? Balenciaga wasn't there, Moschino wasn't there, Gucci wasn't there. Now they are, and there will be more probably in the coming few years as we are. We can tell you everything because some of them are not materialized yet. We're in serious discussions, some of them are quite close to fruition. But until we sign on the dotted line, we can't tell you.

So a lot of these kind of things are happening. And there are other shopping centers as well. I mean, Jinan Parc 66, exciting things happening there as well. It's now 9-year old. So we are upgrading, changing. And hopefully, that will also mean better brands, higher-profit margin brands, which then translate to rent to us, right?

So I think that there are so many ways that we have no lack of use, Adriel, with runway for us to get more money with whatever -- with no addition -- with very little addition of physical locations. Just whatever we have, we just work them. We are not even milking them. Milking them takes a lot of effort. There's still a lot of low-hanging fruit that we can just do a little bit and then really translate to potentially to good bottom line growth. So that's our job.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [43]

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Thank you. We still have time to have the last question. Who want to have the final words. [Daiwa]?

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Unidentified Analyst [44]

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I have a question about Xujiahui district. It looks the district is evolving, I mean, after the grand recovery, AEI. I mean, the area has more luxury element and we are now, in the next few years, the area, they have quite a lot of office and retail space. I just wondered if the management share with us how -- how do you think the area will evolve? And how do you see the, well, the other opportunity and challenges?

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Wai Pak Lo, Hang Lung Properties Limited - CEO [45]

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We see this and opportunities. First of all, I think our timing is right. And I think before even I joined, the AEI has been started and now we are finishing off. You see the sales and traffic footfall are actually getting back or even getting stronger and stronger every day. I would say -- I always said to my team, don't worry about the rest. Focus on what you can control first. If we can build a world-class mall and having all the tenants are so happy, why I need to worry the others. However, at the same time, there's so many examples in the other part of China, which 2 malls can exist and make the (inaudible), the whole business zone even better. Let's say, for example, in Chengdu you have IFS next to Taikoo Li and they are actually performing fantastically well together, right?

So I would say, I will not only focusing on what we will lose and what we will gain. Rather, I will focusing on how we can make this more become so amazing to our tenants and so amazing to our customers, and therefore, when they need to talk about next door -- another store next door, they may think twice or they may complement each other.

So in our mind, we're focusing on our own. We exactly do what we do like Plaza 66 in the last few years and Plaza 66 in Nanjing Xi Lu, basically, you have new more coming in the last few years. But we're focusing on our own. We keep upgrading ourselves. We try to do something, which money cannot buy. The experience is great. And this is where we are. So I think I don't have crystal ball again and I don't need to worry too much about outside. What we can focus is how we are marching on, how we can keep upgrading ourselves, and therefore, our client and our customer are happy.

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Chuk Fai Kwan, Hang Lung Properties Limited - Director of Corporate Communications & IR [46]

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Thank you, Weber. That concludes the presentation today. 2020 is an important year that marks our 60th anniversary of Hang Lung Group. We take this opportunity to thank you for the support all along, and looking forward to collaborating with you going forward. Thank you very much.

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Wai Pak Lo, Hang Lung Properties Limited - CEO [47]

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Thank you.