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Edited Transcript of 1109.HK earnings conference call or presentation 20-Aug-19 7:00am GMT

Half Year 2019 China Resources Land Ltd Earnings Presentation (Chinese, English)

Wanchai Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of China Resources Land Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Tang Yong

China Resources Land Limited - Chairman

* Shen Tongdong

China Resources Land Limited - SVP and Chief Information Officer

* Li Xin

China Resources Land Limited - President

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Conference Call Participants

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* Ryan Li

JPMorgan - Analyst

* Eric Yu Zhang

China International Capital Corporation Limited - Analyst

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Presentation

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Unidentified Company Representative [1]

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Good afternoon, ladies and gentlemen. Welcome to China Resources Land Limited interim results announcement for 2019. Today with us: Executive Director and Chairman of the Board, Mr. Tang Yong; Executive Director and President, Mr. Li Xin; Executive Director and Vice Chairman of the Board, Mr. Zhang Dawei; Executive Director and Senior Vice President, Mr. Shen Tongdong; Executive Director and Senior Vice President, Mr. Wu Bingqi.

Now shall we invite Mr. Tang Yong, Chairman of the Board, to deliver a speech. Mr. Tang, please.

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Tang Yong, China Resources Land Limited - Chairman [2]

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Dear friends from the investment, good afternoon. First of all, welcome to our interim results announcement of China Resources Land Limited. Every year at this time in the mid of August, I believe that this is the busiest season for you as well. So on behalf of the Company and the management team, I would like to extend our sincere gratitude for your support. Thank you very much.

While I prepared for this speech, actually, I talked with any that in August of this year, so we talked about the situation in the first half, the Hong Kong situation, as well as the future plan. So actually, we give it a title to this Board. So I call it that the deep water always run sideways and this is the potential for the future. Out of uncertainties, we can also realize certainty. So perhaps this is also our core value of China Resources Land Limited.

Looking at our interim results, you can see that we have been operating stably and healthily. First of all, in terms of our performance, the business revenue realized a steady growth by reaching the RMB45.8 billion as well overall revenue up by 4.7%, in which the investment property realized a lease revenue of RMB5.7 billion, up by 30%.

Also in the first half, our development business realized a total settlement, but we believe that there will be a positive growth. And by the end of the half of this year, there was an 11.2% growth in terms of our development business.

The rental increase was also reflected by our investment properties, which realized RMB44.7 billion in total revenue, up by 30%. And if you can see, there was also a 39% of our growth in our investment development business. There was a 37% of our growth in the retail business that settled gross margin also back to the normal, reaching at a high level in the industry, which was 38%.

In development business realized a 36% gross margin, up by -- it dropped slightly than in 2018, back to the right normal. Investment properties realized a 37.6% for gross margin. And shopping malls were put into operations consecutively and the (inaudible) efficiency also increased. There was a 37.2% of our growth in the retailing business.

As for the net profit attributable to the shareholders also increased steadily, accounting for 12.7% -- RMB12.7 billion. And the core net profit to the shareholders also increased.

So this morning, we had the Board meeting and assumed that the dividend payout was -- there was a 13.7% increase of our dividend payout, which was HKD0.144 or RMB0.129; increased by 10.8%. So the deepest increase as well as the contribution to the shareholders also increased steadily. So that we can realize a steady growth in terms of other returns to the shareholders. And the dividend payout ratio was 37.5%. So we have full confidence for reaching our goal at the end of the year.

In the first half this year, the total agreement also increased by 26%. And we have confidence that we can finish all the contracts, as I said, for the whole year.

And as for the terms of our financials, our debt level has been very low in the industry, which was 43.6%; increased slightly than 2018, but dropped slightly than the middle of last year. And our financing capability has been stable, and overall financing cost was 4.45%; decreased by 2 basis points than 2018.

A good company must be able to endure time and instead of their short-term growth. So we have a long-term commitment to our shareholders. [In face of] the uncertainties of our political and geographical situation, we are good at finding opportunities so that we can realize certainty out of uncertainties. We stick to the commitment that were made to the shareholders. And for prudent management, we can realize high-quality and steady growth.

Now I would like to invite Mr. Shen Tongdong, our Executive Director, to share with you our highlights as you may hear from him out of the presentation. Mr. Shen, please. Thank you.

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [3]

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Dear friends from investment, good afternoon. So coming next, I would like to share with you our midterm performance for 2018 -- 2019. There will be 6%. First of all, the Company profile business overview, financial overview. The business performance overview ex-business actually is appendix.

Since you have already know very well about the Company and you also know very well about our business, so I would skip the first part. Now I would like to start from the second part of the Company. In the first half this year, we realized overall revenue of 45.8% (sic, RMB45.8 billion), increased by 4.7%, in which investment property realized 4.7% of a rental increase, up by 30%.

Recently, the rental has been increasing steadily and the fair value of our investment properties also went up steadily. And the net profit attributable to the shareholders was RMB12.7 billion, up by 43.8%. And the earnings per share was RMB1.84, and the Board suggested about RMB0.129 per share of a dividend, up by 17.3%. Or, if it is in Hong Kong dollars, it is HKD0.144, up by 10.8%.

In terms of our sales, in the first half, we realized contract amount for RMB118.8 billion. And we have consolidated our position of top 10, realizing over 50% of our total target. The investment property scale also realized steady growth by the end of last year. We are operating 53 shopping malls: 37 has hold and 18 are leasing.

Financing cost as leverage levels are maintained at the low level. And at the end of the year reporting period, the weighted average finance cost was 4.45%, dropped by 2 basis points than the end of last year. Net interest bearing debt increased by 9.7%, reaching 43.6% than the end of last year. In the second half, it is estimated that the debt level at the end of the year will drop.

The slide 9 is the breakdown of our P&L. You can see that even though the settlement cycle was influenced by different factors and there was a slight increase so far; however, benefited from the strong growth of our rental income [actually less] the joint operations. Putting aside the valuation factor, there was an 11.3% to RMB8.1 billion of the net profit attributable to the shareholders.

We think that the balance sheet management is very important to maintain steady financial healthiness. So within the reporting period, we enhanced our cash management and improved capital utilization rate. By the end of June, there was a 10.4% increase of interest-bearing debt to RMB146 billion and the cash balance decreased by 11% than the end of last year. And the leverage level also increased slightly than the end of last year, but still maintained very level at the end of last year and the mid last year. The total interest-bearing debt and the net interest-bearing debt dropped by 2.7 and 3.6 percentage points.

In the first half, our equity financing cost has been stable and the maturity periods also distributed evenly. So because of the influence of 4.5- and 10-year newly issued USD debts, the average debt maturity is extended to 4.7 years.

RMB exchange fluctuation increased; therefore, the Company has been actively managing the foreign exchange exposure. And the RMB net debt exposure further reduced to 19%.

Now let's look at the different business segments. In the first half, we realized RMB36.6 billion in our development property. Because of the high basic figure in the first half last year as well as the distribution of the second half of such properties, in the first half, our settled revenue basically maintained the same level. In Tier 1 cities, the settlement amount reduced to 28%, back to the right normal.

And for a long time, we focus on the high energy level of cities. This strategy remains unchanged. In the top 10 cities in the first half are the Tier 1 cities, Tier 2 cities, and the core Tier 3 cities. In terms of our development cost, we enhanced our cost control and basically the single site cost or finance cost was maintained at the same level.

In terms of our contracts, in the first half there was 26%, 11.6% of our growth reaching RMB118.8 billion and RMB81.5 billion. We have confidence that we can realize the target of RMB242 billion of our contracts. The top five cities covered all the four Tier 1 cities, increasing the unit amount increasing to 15%, reaching RMB19,000 per square meter, reaching the high level in the recent years. Generally speaking, 80% of the contracts happened in Tier 1 cities and Tier 2 cities.

Investment property is one of the core competitivenesses. Recently, this core competitiveness has been gradually reflected and enhanced. In the first half, our total rental revenue increased by 30.4%, reaching RMB5.7 billion, in which shopping malls realized 75% of our total rental revenue.

Investment property also realized a steady increase in terms of fair value. And the book value was evaluated of RMB140 billion, in which shopping malls contributed 75% of our total capital valuation value. And in the routine period, the property valuation capitalization rate basically maintained at the same level. Basically, they are driven by the market environment, actually the growth of our revenue income.

In terms of our shopping malls, by the end of June, we ourselves are holding 35% of our shopping malls, in which 22 the Mixc cities and 13 cities the Mixc. And the total number of our members also increased to 8.45 million people or 25%, and the traffic also increased dramatically. And the total revenue out of our retailing business was RMB29.3 billion, up by 37%. The rental income as well as gross margin both increased to nearly 40%. Gross margin was maintained at a stable and high level.

In the first half, the total retailing amount per unit increased by 18%. The growth mainly was from the steady growth of our business as well as better management efficiency. We can see that the first leasing cycle in those shopping malls increased strongly, including the Mixc city in Shenzhen and the Shanghai Mixc city. And in Zhengzhou and Wuxi, the performance in the past was not satisfied enough, but recently the performance is much better. And what is more important is that even though the competition in the market is fierce, however, the shopping malls all increased very good growth, including the ones in Shenyang, Chongqing, and the Tiexi Mixc city.

In terms of financials and the returns, based on our experience in the past, we made a comparison between the shopping malls by the operating years. Before 2014, there was 5 Mixc cities in the mix and the average operating years was 8.8 years. So these are mature ones. And through improvement of the operations efficiency, the rental return rate also increased by 2.5 percentage points, reaching 36%.

Between 2014 to 2018 -- 2019, the first half of 2019, we gradually opened 11 other Mixc cities in the mix and the average operating years was 2.6 years. And these are the young ones. However, the rental income realized at 30% -- 70% actually. Here, retailing amount also increased about 70% with the rental return rate up by 2.3 percentage points, reaching 12.4%. These 28 shopping malls contributed RMB16.8 billion or 57%, which was much higher than the whole year for 2018. The contribution capability also dramatically increased.

This slide shows our plan for the upcoming years of our self-run shopping malls. From the second half this year to 2021, there will be seven, two, and nine new properties. By the end of 2018 (sic), there will be 53 shopping malls altogether. After 2021, there will be 30 new shopping malls that will be opened gradually. Along with the size of the business, particularly those shopping malls increased. Our advantage of the two-wheel driver strategy will be able to show this off better.

In terms of land bank, by the end of June this year, we are holding 57.7 million square meters, including 43.65 million square meters for equity reserves, particularly in the Yangtze River Delta, the Great Bay area, as well as the Beijing/Tianjin/[Hubei] area, which account for 15%, 9%, and 7% out of our 76% of equity reserves.

We have been very strategic and cautious about land reserves. And in the reporting period, we invested land reserves from 9.7 million square meters or the equity area of 9.6 million square meters. By the end of last year, the land reserve increased very slightly, in which Tier 1 cities and Tier 2 cities account for 82% of our total land reserves. And 55% of our land reserves are for shopping malls.

So in our business growth model of DP plus IP plus X and based on our long-term strategic net deployment as well as the escalated development model, we have reserved great energy for our transformation and growth. X business include the municipal update innovation, property management, agency services, server construction operations, long-term rental apartment, the senior caring properties, and so forth. So different business sectors are at different development stages.

Now I would like to share with you more details about the X business. First of all, the municipal innovation business -- renovation business. We started early in this sector and have accumulated great experience. Based on our outstanding capability for the complex development, we have built up the old landmark projects such as the Shenzhen, the CR sciences city.

So with the triple win operations model, we -- according to our initial estimation, the 87% of the land reserves in Shenzhen are in the Great Bay area, including the 55% of our land reserves in Shenzhen and Guangzhou. Currently we are implementing on following up 18 projects, which account for about 24 million square meters in total floor area. And it is admitted that from 2022, there will be contribution out of the agreements.

In terms of property management, the customer satisfaction has been increasing steadily based on our good quality as well as the good word of mouth, we have won recognition in the market. In the first half, we expanded our business channels. And in the period, we increased our total management area from 10 million square meters; two-thirds of them are from externals, from outside. And it is estimated that by 2020 the total managed land reserve will reach 200 million square meters.

Meanwhile, we also participated in the high-tech area, particularly in building out smart communities. And by adopting cloud computing, artificial intelligence, Big Data, IoT connection so that we can connect people, things, and management so that we can build up a strong connection between different parties.

In many years, the Company has been focusing on the agency services of our construction operations in Shenzhen area. It is also one of the channels for us to acquire diversified projects. The purpose is to make use of our capability and advantages of our construction operations to improve the value and overall competitiveness so that we can build ourselves into the first array to municipal operating -- operators.

So far, we are holding 100 projects for such services. And these represent RMB57 billion for total contract amount and which will contribute RMB1.5 billion in our revenue. These projects cover parks, schools, roads, hospitals, and so forth. In future, we can duplicate the examples to other areas.

The long-term rental apartments has been supported greatly by the national government -- national policies. By sticking to the steady growth principle, we are actively exploring the long-term profit-making model. And we make use of the SOE background and acquire the low-cost long-term leasing land.

So far, for those properties beyond three months of leasing and the total leasing rate is over 90%. It is estimated that there will be two-digits revenue. And by the end of this year, we will be able to manage the apartments of over 40,000 of them.

In terms of our senior caring property projects, we are facing with the biggest senior caring market in the world and we are actively building up the business model. So by the end of this year, we will be able to lock about 8,000 beds for the senior caring purposes.

In terms of our sports and culture area, we have also added in the industry. We have already formed mature culture and sports facilities as well as the business model and a profit-making model. We have already made it a unique and effective channel to supplement our land reserves.

We have already got deployments in Shenzhen, Shanghai, Hangzhou, and Xi'an. Shenzhen one gym has been -- stadium has been a very successful case and it has laid a good foundation for our continuous growth in the future.

The industrial fund has the purpose of realizing this as a land management capability and value export so that we can capture the opportunity in the secondary market. In October last year, together with China Life as well as the (inaudible) Holdings, we set up the first industrial fund of RMB15 billion with a focus in the hotels in Shanghai, office buildings, as well as commercial properties. In the future, the fund will be an important platform for us to deliver services and as well as the capital operations to realize the full lease of our capital values.

Along with the better life, we see also great demands for culture and entertainment consumptions. Theaters has been a very important one. And last year, we set up our own theater brand for the Mixc cinema. And in the first half, our total box revenue was over RMB88 million. By the end of this year, we will be running 19 theaters with 155 screens. In the upcoming five years, we are dedicated to be the high-end theater operator in terms of the scale, the quality, as well as the profit-making capability. So that is about our X business.

The sixth part of the presentation is appendix, so it is for your reference and I will not elaborate about those figures.

So with that, I would like to conclude my report. Thank you very much.

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Unidentified Company Representative [4]

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Thank you very much. Now I would like to open the floor for questions. Please raise your hand if you want to ask a question. So for the interest of time, three questions per person. Please identify yourself before you raise the question. The first question, please.

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Questions and Answers

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Unidentified Analyst [1]

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Thank you very much. Three questions, or two questions, maybe. I noticed that in the past two years your investment end is very good and you have made a lot of investments. The first question is from the sales point of view, do you see any opportunities that in the second half or in 2020 do you see any potential for higher speed of growth? Do you have confidence that you maintain one of the top 10 in the industry?

So there is another question. In the second half, how do you think about the land market? Do you think that you will invest more in the land market?

The second question is about rental. So this year, so your rental income will be exceeding RMB10 billion. In the future, do you have any specific goal for increase of rental increase? Or what is your plan for the investment properties in the future? Thank you.

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Tang Yong, China Resources Land Limited - Chairman [2]

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Thank you. Your first question. I believe 2020 we can realize two-digits growth as well and I believe that we can do it in 2020. We definitely think we can hit this target if you look at our land reserves and our preparations. So we have full confidence that we will remain to be a top 10 company. This is your first question.

The second question, land market. So there are more and more fluctuations and more frequent fluctuations in land market: from cold, to heated, by influenced by the land supply as well as the market itself and Company policies as well as the Company's own cycles and policies as well as the industrial cycles.

So generally speaking, we have confidence on the prospect of land market. In the second half, in some cities, there are some new opportunities and we hope that we can go on capturing those opportunities. But for the Company to maintain a steady and healthy balance sheet and the debt level, so this is also important. Every time I would say the same, so basically this is our focus. So this is your first question.

The second question about rental. So this year, there was a 30% [type of] growth than last year. And overall, we can maintain this growth by the end of the year in the future. So our business performance will continue to be a good and there will be two-digits of growth in our rental revenue; 10% to 20% of growth each year for the upcoming five years. We have confidence that we can do it.

As for the future, in every half-year, on every year, we talk about the same question [as far as] spinning off and splitting or the securitization, so on and so forth. So since it is more and more to the time point. And now, for the splitting, I don't think it is a very good idea to do it at this time to reflect our values to the shareholders. This direction remains unchanged and we will go on looking to this [easing]. Thank you.

The second question. Ryan, please.

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Ryan Li, JPMorgan - Analyst [3]

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Good afternoon, management. Three questions for you. The first one is about the development business. So looking at the China Resources Land Limited, in the past two to three years, you have been very active in land reserves. And the first half you acquired over 10 million square meters.

Just as Mr. Shen said, the land prices goes up and down and this cycle is getting faster and faster. So in terms of land reserve implementation replenishment, are you doing it in compliance with the cycle or what? So from the cycle and from the expansion, so what is your model? So this is the first question. The second question is about your resource -- the salable resources. What will be the total salable resources in the second half?

The second question is about investment properties and about splitting. Because in the past two years, if we are talking about splitting and the opportunity, up to how many shopping malls would be opened in the pipelines? In 2019, it is the peak; in 2020, there won't be a lot of new shopping malls.

So if you think about it in this way, is 2019 would be the right, say, or 2020 will be the right time, right? Otherwise, in 2023, it would be a long time to wait. And if the interest goes up for the -- so for you, it may not be a good time point. So what is your opinion on it?

Third question is about the delivery. We noticed that in 2020 and 2021 there will be growth, of course, because of the minority shareholders equity and interest. So 10% to 20% of our profit increase. Do you think it is conservative in some way? In terms of a delivery 2019 to 2020 due to deliverables and the revenues, what will be the total number of deliverables and revenue? Thank you.

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Tang Yong, China Resources Land Limited - Chairman [4]

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Let me take your first question, part of your first question, the salable resources. Mr. Shen will talk about other questions and also talk about the deliverables.

Now, first of all, the land replenishment. So just now when I talked about -- when I talked with my colleague just now and that we have our disciplined enough investment. So this in the first half, even though we replenish land reserves, but if you look at our net debt level, it is still low in the industry. So we stick to our principles. We stick to our discipline for land reserves.

As for the NT cycle thing, actually, people wouldn't know when they did it. So I think we need to stick to the disciplinary and stick to and capture the opportunity, so anti-cycle is our wish. But don't do the wrong thing because, generally speaking, from this industry point of view, in the past few years, so the industrial growth has been slowing down and the concentration is increasing. So big developers are competing fiercely and gross margin further squeezed, but we have our deadline of gross margin for us. We don't have to follow others of expanding our business scale or forgetting the risks in the industry.

So that is about -- every time that we -- we have been very active. Most of the land, actually, our offer to buy [so buy] the market publicly. Our advantage is in municipal renovation projects. If we were not active, we were never able to -- we will never be able to capture the [rockets]. So I don't think I've fully answered your question, but I just expressed our attitude and our investment behavior in the market.

As for the salable resources, Mr. Shen will answer this question. As for the split, you may feel that I haven't given you any specific answer or signal. Okay, now, if I answered your question again, your remark made of our 2020, well, we will look at this time spot seriously.

In terms of our Company, our pursuit is on sustainable growth. It has been our pursuit all these years, including the sales and settlements as well as the increase of our investment properties. We will be able to support the two-digits growth for the Company.

So Mr. Shen, perhaps you can share with them about some specific figures.

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [5]

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Yes, in the full year, total salable is RMB435.9 billion. As for the settlements, there will be -- there is about 90% of our increase.

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Unidentified Company Representative [6]

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Next question, Eric.

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Eric Yu Zhang, China International Capital Corporation Limited - Analyst [7]

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Thank you, management. Over time, so China Resources is always surpassing itself each year. So three questions. The first one, shopping malls. In the first half, our total sales and rental increase has been very high. So 18% of increase, same-store growth increase, even though there is pressure in the economic sector. And this 18% is [account of our shining].

So my question is from the management point of view, after realizing such a good performance in the shopping mall sector, how did you do it? What are the methodologies? In the second half and next year, there will be new shopping malls. So considering the macroeconomic situation as well as the locations of those shopping malls, do you see more challenges for you? Do you think that your methodology can be duplicated in the new shopping malls to realize our same-store growth?

The second question is also about shopping malls. I noticed that that is the 5.7% to 5% of our cap revaluation; you have already got RMB145 billion. If you take these shopping malls to the secondhand transaction, cap rate will be at 3.5%. So the market value of the shopping malls actually already higher than is on the market value. So do you have any considerations for those shopping malls to show those values to the capital market? To let the secondary market to see the values?

The third question is about financing. In the second half this year, the financing has been tightened and for -- by businesses, there has been negative impact. So what about the China Resources? So there are opportunities and there are risks.

In the first half, your average financing cost decreased slightly and the maturity increased, actually. So this is very, very good improvement. So my question is about your financing plan for the second half. And the last question about the dividend policy. Your PR ratio has been increasing steadily in the past few years. And this year, is there any chance that you will also raise your dividend payout ratio this year? Thank you.

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Tang Yong, China Resources Land Limited - Chairman [8]

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So Mr. Li will take your first question about the business increase.

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Li Xin, China Resources Land Limited - President [9]

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So apology that I have got a cold. So for the commercial side, so we are running 35 shopping malls ourselves and we are managing 18 shopping malls as well. So this is a big scale of shopping malls. In terms of increase, two points. The new shopping malls will bring along the increase of revenue income and retailing amount.

The second point is on the improvement of our own operational capability and efficiency. So in short, in terms of the commercial properties, we have already got a valuation of our own selves. Our core competitiveness, four points: number one, which is the outstanding design and operations. The design, locating, and construction, this is outperforming capability.

China Resources, we are good at designing, locating, and building. And we are also good at the combining all these different projects, different product lines, and different cities. The positioning is a core competitiveness.

The second core competitiveness is our influential -- our great influence of the invitation, the tenant invitation capability. So we have built up a very good relationship with most of the tenants, so realizing win-win for both. So it is also a very good capability we have.

The third capability is that we are a very good manager and operator of the shopping malls, including the tenants and property management, the property services, and membership management. This also includes the adjustment management of the tenant invitation programs. So in the industry, we are also known for these capabilities.

The fourth capability is on building up of our team and talents. So we already started conducting trainings. So this year, it is the second time we did it, particularly for the talents of our operations as well as the tenant invitations. So for this, we are able to keep opening new shopping malls because we have already got the land reserves. So this is about the business improvement.

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Tang Yong, China Resources Land Limited - Chairman [10]

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As for the commercial properties, Mr. Li gave you a very good explanation just now. Actually, it is partially related to the questions from Mr. Griffin and Ryan. So through -- whether it is the Hong Kong capital funded or the high-end ones or the (inaudible) type of midterm shopping malls, specifically these are the two categories.

So most of them are competing at scale and a number. So for us, for China Resources Land, we have both categories of shopping malls. Actually, during the discussions, we are able to keep improving our capabilities. We keep improving our capability of investment introduction invitation as well as the operations capability building and EBITDA and financials improvement, including EBITDA.

So for us, we can combine all those capabilities and keep learning from others. Plus, our good capability of designing and building. So that is why we have built up our own core capabilities and core competitiveness, just as Mr. Li said just now.

We also focus very much on talent building, including the digitalization. For example, in managing our membership programs to support our long-term business growth.

Your second question is about the -- as I talked to Tongdong several times. So if I release too much, then our debt level will benefit from it. But we just want to do it step-by-step because we don't need or we don't want the investors to see that our profit fluctuates too much and more this year and less next. So this will influence the investors' confidence in us or expectation.

As for the releasing, it will bring more cash flow and make our balance sheet more bigger and it will be good for us for financing. So we -- in a healthy and gradual way, this is our focus and this is the potential. Just as Eric said, in Shenzhen and in some other cities for those big shopping malls, there is the capital, the assets is about 4%, so there is still room for us to release.

But why in a gradual way? The management and the Board do have our own considerations. So this is about -- as for financing, I will talk about it a little bit and Tongdong can make some comments.

Interest. Actually, this is a risk-based pricing mechanism from the financing market. For China Resources Land Limited for our balance sheet, we have full confidence that we can keep growing. So if you look at our financing activities, we are adjusting our own debt structure from a short term, midterm, and a long term. We just want to do it in a more healthy way.

The domestic financing, the international financing, we are adjusting the proportion so that we can turn our balance sheet into a more -- into a healthy one. Dividend policy will be the same. Dividend payout ratio will maintain unchanged. In the future, we will keep discussing about it.

And Tongdong, any comments from your side?

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [11]

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Financing, yes, some comments on financing. For us, in terms of our financing management, we have been very prudent and very low cost measured. This year, we issued a USD debt is USD800 million, 5.5 years.

Another one is USD500 million debt 10 years. And in August, we issued a midterm note and a 3.53% of coupon rate. So finance cost has been very low.

We will keep an eye onto -- we will keep a close eye on the capital market and the financial market in the second half. Whatever change we see in the market, we will prepare actively so that we can contribute our share actively to our business growth. Next question, (inaudible).

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Unidentified Analyst [12]

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Good afternoon, management (inaudible) The first question. Just now, investors asked you about the guidance of profit. So specifically, do you have any stance for those sold but not yet settled? What is the size of it and what is the gross margin of those projects? For the projects that are being sold, what is the gross margin now?

Recently, for property market and property management, it seems that you are focusing more and more on it. I heard that your property management are doing a better job because one of my friends is the property owner and told me that China Resources Land has a very good property management. So do you have any plan to list it so for all for IP? So you don't have to think about the time now for it, right? So if it is the 30% -- 3% -- 20 times -- 30 times [of a P], it will be good for you.

The third question is about land reserves. For the city renovation, this is the one way for you to acquire land, right? So this is really something you are good at. So can you please talk more about it? And you said 30% -- 70% of them will be in China in the Great Bay area. So what are they? Are they old factories [in the moat]? And what about the land reserves outside of the Great Bay area? Thank you.

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Tang Yong, China Resources Land Limited - Chairman [13]

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Talking about the profit, the two-digits profit making, definitely we can do it. But -- so it seems that I am very conservative and [Tongdong] gave you very specific figure. Well, this is my style. So for the specific, Tongdong, you can share the figures with them, including those the sold but not yet settled, including those purchased and being sold now.

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [14]

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So for the sold but not yet settled, the figure is RMB277 billion. This year is RMB116.9 billion not yet settled. Gross margin is 30%, so the total gross margin this year is 26%. So this is about sold but not yet settled projects.

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Tang Yong, China Resources Land Limited - Chairman [15]

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I believe the property management -- actually, we are doing preparation internally. So for the split, it is not the split of our financial statement only. It involves our business and all the teams. So we are making internal preparations for that. I believe that for the property management, so this year, we may kick off the splitting. So I believe that you have been concerned about this for quite some time. And actually, we are making preparations internally.

As for the renovation projects, so we talk about 2.5 million square meters of our land reserves. Think Shenzhen, Guangzhou. So we have 9.9 million square meters, including residential, commercial, and industrial areas. And those are ME factories and R&D land.

In the future, so along with all the preparations that are made, and in the future in our Shenzhen is a very hot now. And plus the land reserving in Shenzhen, the total land reserve will be over 10 million. And we have -- for this, we are very prudent, and for some projects we have already signed agreements but not yet published.

So only we -- whatever we have disclosed is all those that we have done. We have finished all the procedures. So that 9 million square meters in total include the commercial projects and residential projects and the shopping malls and so forth. So this is also in compliance with our strategy.

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Unidentified Analyst [16]

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Thank you, management. UBS, [Jiang]. I have two questions for you. It's about figures. In P&L, there is 17.1 from other businesses revenue. So is it from the X sector? The second question: in July, rental. So this is over 30% of our growth of our rental income. But in July, there was 17%. So I just want to know why. Thank you.

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [17]

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Okay. So in revenue from others, the interest income about RMB1 billion under accounting is we acquired two subsidiaries in Shanghai. So therefore, they are also about RMB320 million of our revenue. So these are the other income.

In July, you mean the gross margin? The rental income. In July, in particular the month, it is quite normal that it can be low. Because it is cyclical because, for example, seasonal things. So midterm festival or the Spring Festival.

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Unidentified Analyst [18]

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Good afternoon. Daniel from DBS. Two questions. The first one, gross margin. In the first half, you settled gross margin by cities. And Tier 2 cities are the lowest and the Tier 3 cities, the gross margin is 36.6%, which is very good. Comparing with those in 2018, Tier 2 cities dropped quite a lot in gross margin. So in the future, how do you think about the gross margin performance in those cities? Will this trend continue?

The 46% of the land you acquired are in Tier 3 cities. Do you think that you will consider more about Tier 3 and Tier 4 cities in land reserves? So this is about gross revenue and gross margin and land reserves.

The second question is about property management. This RMB2.4 billion of income out of our property management, what is the gross margin and net margin comparing with the others in the industry? Is your profitability higher than others or your capability is higher than others? Thank you.

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Unidentified Company Representative [19]

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Mr. Tang, the gross margin. Perhaps you can talk about the gross margin question and I will take the others.

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Shen Tongdong, China Resources Land Limited - SVP and Chief Information Officer [20]

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Property management. Well, the gross margin for the residential properties, the gross margin has basically dropped slightly than that of last year. As I remember, it's about 15% and now it is declining. Since it is only six months, you can see the whole picture. So sometimes, some properties, so the settlement is done in the second half. So you have to look at the whole-year picture to determine the gross profit.

So the gross profit margin will be maintained at the same level because the business size is bigger. So from new projects, the gross margin is smaller. So therefore, by the end of the year for the property management, the gross margin will be smaller or at the same time or at the same level.

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Tang Yong, China Resources Land Limited - Chairman [21]

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For the Tier 1 to Tier 3 cities, the gross margin changes. I believe that it is because of the different settlements or combination of different settlements. Tier 2 cities, so the settled gross margin is lower. So this is a normal level in the industry for us because of the different settlements. So there was a slight drop than last year. This doesn't mean that it will continue to be low in the future. It really depends on how you do the comparison: which city and which project. I don't think it is a (inaudible).

Your other question about the land purchase. Some more land purchases in Tier 3 cities. As I said before, 50% (inaudible) are on the cities and 50% are on the returns and they are both important. So this year, so for the Tier 1 cities, Shenzhen in the public cities, there are several pieces from auctions. Very expensive, very risky. In Shanghai in the first half, there are just one or two auctions so far.

In Tier 2 cities, the returns. Actually, too many people participate in the auctions, so the returns are not very high. So therefore, so our Tier 1 cities, Tier 2 cities as well as the core Tier 3 cities, these are all our targets of investments.

I think that the returns are really main concern for us. Of course, for Tier 1 and Tier 2 cities, if there is an opportunity, we will definitely look at it. Of course, risks are our major concern and we will balance the management.

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Unidentified Analyst [22]

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Two questions for you. (inaudible) Do you centralize the power to the SOEs? So for China Resources Land Limited, do you have any plans for that? The second question is about the balance sheet. And so the second question is about level. So your target is below 70 by the end of the year. So what is your plan for that? Thank you.

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Tang Yong, China Resources Land Limited - Chairman [23]

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The first question, so through the hybrid shareholding reform, we are looking at the opportunities. For some SOEs, they express their wishes of a hybrid shareholding reform in Shanghai and in Tianjin as well as in some other cities. We are participating in the discussions on the hybrid shareholding structure reform. So this will help us to expand our market and acquire new resources. For example, in Tianjin, the Mixc.

So through the hybrid shareholding reform, we were able to enter. Meanwhile, we also participated some other non-real estate projects by SOEs. So during the hybrid shareholding reform, we do have our own first-mover advantage and this is also helpful for us. For China Resources Land, we may have to wait for a while -- wait for a little bit because we have to grow first.

As for the liability, it is true [SESC] has requirements on it for the property market because for the special characteristics in the industry. We are discussing with the supervisors. For example, for some projects, we are already -- these projects are already sold but we have not collected the payment yet. But in our balance sheet, they are considered to be liabilities.

So there are a lot of such cases which have influenced our balance sheet. So we are now talking to SESC. We hope that they can understand these issues. And it is also if we resolve this issue, it will be helpful for us to grow our business better.

As for the why we are reducing our liability, we are also focusing on improving our efficiency. For example, management efficiency, operational efficiency, and reducing our inventory level and improve the turnover. I think these are the positive influence to us. There are a lot of positive influences.

For those negative influence, we see them as constraints and so that we can capture the right market and handle it rationally. I think that is how we think about it. The reduce in liability may not be a bad thing, so we have to keep enhancing our own capability and keep improving our efficiency. And that these are the good things.

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Unidentified Company Representative [24]

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If no further questions, then this is the end of our interim results announcement. Thank you very much.

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Editor [25]

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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.