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Edited Transcript of 14.HK earnings conference call or presentation 13-Aug-19 9:00am GMT

Half Year 2019 Hysan Development Co Ltd Earnings Presentation

HK Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Hysan Development Co Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kon Wai Lui

Hysan Development Company Limited - COO

* Shu Yan Hao

Hysan Development Company Limited - CFO

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Conference Call Participants

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* Chi Tsun Jim

JP Morgan Chase & Co, Research Division - Analyst

* Justin Kwok

Goldman Sachs Group Inc., Research Division - Executive Director

* K.C. Ng

Macquarie Research - Analyst

* Karl Choi

BofA Merrill Lynch, Research Division - Director

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Presentation

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Unidentified Company Representative, [1]

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Okay. And thank you all for coming to Hysan Development's 2019 Interim Results Announcement Session. Let me introduce our panel for this afternoon: our Chief Operating Officer, Mr. Ricky Lui; and our Chief Financial Officer, Mr. Roger Hao.

We'll start today's session with a presentation from Ricky and Roger, and we'll follow that with time to take some questions from the floor. As we have a live webcast today, we'll also be taking questions online.

And before that, I'll invite Ricky to start. Ricky?

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Kon Wai Lui, Hysan Development Company Limited - COO [2]

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Good afternoon. Let me give you some highlights of the interim result.

Our turnover and recurring underlying profit increased by 9.1% and 8.9%, respectively, taking into the account the full period operation of Lee Garden Three.

Occupancies of retail and office were 96% and 97%, respectively. As you know, we are under a volatile market conditions with ongoing economic and sociopolitical challenges.

For our company business model, you can see from the graph that nowadays, the office and the retail are basically 50/50, one is 45%, one is 48%. So we're taking this as a dual engine business.

For the dual engine business, the ability of it is that it's providing the term mutual empowerment. For example, there's a dynamic relation between the office and the retail creating positive and self-sustaining cycle, for example, the expanded and diverse retail offering has actually attract more local and multinational company and also as you see the co-working space are very popular in our areas as well. But at the same time while this new tenants they arrive, they also create another need. Some new need and new demand on different types of retails. So they are mutually empowering each other.

The 2 sectors that is more -- has high growth in our office portfolio are banking and finance and flex and co-working. You can see the, for example, the finance industry people, they have relatively high income as you guys, so -- okay, and of course you guys have families, and so the young families drive the need of the lifestyle and the kind of kids elements. So you can see the LG3 has bring in all this, a lot of furniture store like the BoConcept, Homeless and then in Lee Garden Two, we got (inaudible) that's Maggie & Rose City Club. All this are driven by the strength of topography of the office tenants.

And then for flex, the -- you got full range of flex here in Lee Garden like Spaces, theDesk and WeWork. They have different offering. You can see the business of this co-working is moving away from only startup to become a very important facility even for corporate because of the flexibility and the different style of working environment has stimulated internal productivity as well. It's become a very critical part of our ecosystem and the characteristics of this more vibrant, young, energetic working style has sort of create different kind of elements of retail that are demanded, like the larger drinking place and also the lifestyle store and coffee shops, et cetera, which become a very popular in our areas as well.

About the community. We have been focusing in creating our community. We take the community as a whole to really make it a very good locations and destination for people from both retail and office. Three elements we have been concentrating on: one is the special accent in the neighborhood. Probably, you -- if you visit our Lee Garden further enough, you'll see all this kind of old and new stuff altogether, for example, the Shanghainese gourmet store. We also -- you also see the mural of (inaudible) in one of the building of Pak Sha Road, and at the same time, some modern shared economy kind of stuff like a place called [69] which is the shared kind of recycling fashion shop.

We're also trying to make use of the space to give more new unique features and value to the portfolio. For example, the ninth floor of Hysan Place, we created into a place called Urban Sky where we try to integrate coffee shop together with culture and art event space. A lot of events has been held there and this has become a very interesting feature for both the office and the retail component.

Technology. We have built our infrastructure, the video-speed Wi-Fi -- area Wi-Fi in 2018. Since then, we start application phase. Right now, we have e-coupon, we have the [South end]. Everything is under vWAN. After that it will become a one platform where you can ride on for membership, for products, for transactions. And the ultimate goal for our infrastructure to help us to build the wireless smart community with smart mobility, smart living and smart environment.

A very hot topic, ESG. The company, of course, stay here for 95 years already and we are going to stay here for another 95 years. So we try to connect the life, the working, the living, the shopping and socializing for all generation, really make it a kind of preferred destinations. To do that, we put a lot of emphasis on ESG. Recently, we have set up sustainability committees and try to formulate our long-term sustainability policy and monitor execution.

For outlook, we all know that Hong Kong is under some pressure and uncertainties now. The global economic slowdown, the Sino-U.S. trade dispute, the recent social conflict. So all this are giving pressure to Hong Kong in short term, but Hysan's curation of tenants mix, focus on asset enhancement, our strength in property management and integrated connected portfolio, in particular with balance -- healthy balance sheet, we believe that we can go through this short-term pressure and continue to flourish in longer term.

The last thing is Hysan is very committed to Causeway Bay and Hong Kong, we remain unchanged at the confidence about Hong Kong.

May I now pass to Roger to talk about some numbers.

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Shu Yan Hao, Hysan Development Company Limited - CFO [3]

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Thank you, Ricky, and good afternoon, old friends, new friends, and so good to see you again after a while. Let me quickly go over some of the numbers and then we can go straight into the Q&A section.

This page is a brief summary. As you already know from our announcement, top line grew by 9.1% and on a recurring basis, it is pretty much around 9%. And for the reported profit which was affected by the relatively lower amount of the valuation gain, which resulted into a reported profit of a decrease about 7.6%, and shareholders' funds increased by about 2.1%.

Turning to turnover, again as you can see the right-hand column is the component of the contribution from our 3 business units in first half of 2019. Again, as you can see from the announcement, we have secured around a 9% growth year-on-year comparing to first half of 2018. And as also highlighted in one of the bullets, we mentioned that we highlighted that part of the contribution actually coming from the full operation of Lee Garden Three. As you may recall, we start to have Lee Garden Three coming into our portfolio, start contributing to the top line. And actually, the revenue from Lee Garden Three ramp up significantly starting from second half of 2018. So on a year-on-year basis, we have a baseline effect which I will go into detail. But for the 9%, if we exclude the Lee Garden Three on a like-for-like basis, our year-on-year growth is 6%.

Okay, next please. On this page is a very quick summary about our position, our financial position, which I'm sure all of you are very familiar with. In terms of gearing, we still maintain a relatively low gearing about 5%.

Debt profile. During the period, the first half of the year, we have actually done a number of private placement tapping into the corporate bond market. As a result of that, you can see that the average debt maturity increased from 4 years to around 5 years, as of the interim dates, with the average cost remaining at 3.6%. And credit rating remained at investment grade, and then the final point is about green financing. As again you may recall, we have actually issued a Green Finance Framework towards the end of last year. And during the period, we issued about HKD 1.5 billion corporate bond via the private placement.

Next page please. So on cap rate, again, these are the cap rate adopted by our valuer (inaudible) and as you can see from this page, basically they remain unchanged from 6 months ago.

Okay. Going into our individual business unit. Retail, revenue reaching $1 billion representing about a 4% year-on-year growth with first half of 2018. Again excluding the impact from LG3, the increase on a like-for-like basis is around 2%.

Contribution from turnover rent, as you can see $49 million, occupancy at 96%. Overall, in terms of rental reversions, we managed to secure a mid-single-digit positive reversions for the portfolio as a whole for the first half of 2019.

Next please. About our tenant sales. Again, as you recall in Q1 after some of the finalization of the sales figure from our tenant, Q1 -- actually, our retail tenant managed to get a 5% year-on-year tenant sales in Q1 this year. Q2, the growth rate reduced to around 3%. So with these 2 quarters adding up together so it give us a first half of around 4% growth in our tenant sales.

Foot traffic, as you can see from this slide increased around 5%. So on the right-hand side is actually some of these public figures which you are very familiar with, showing the -- but in terms of trade, while this is a general Hong Kong market performance, as you can see, the jewelry, watches and valuable gifts get a relatively largest year-on-year decrease. While food, alcoholic drinks and tobacco have a slight increase.

So next page is actually some of our newer retail tenant as we secure and opened or relocated in the first half of 2019. I won't go through them one by one here.

Next, let's move brief -- quickly to office. Again, you can see that office first half revenues $929 million, a 13.3% year-on-year increase. Again, excluding LG3 which actually is a major office building, the year-on-year increase is 9%, so that is 4% of the growth is coming from Lee Garden Three.

Overall rental reversions, we continue to see a midteens positive reversions for our office leases for the first half of 2019.

In terms of the mix, as Ricky earlier on pointed too, now banking and finance is our biggest sector in terms of the office portfolio representing approximately 1/4 of these high spending individuals. And the other, the second biggest is the professional and consulting, et cetera, et cetera. So all in all, we still see our portfolio relatively diversified without heavy reliance on that. And as you may also notice, especially when we saw each other in the last 6 months, co-working our business center now is also one of the key elements in our offering. So all in all, that represent about 10% of our overall office portfolio.

Finally, on the last business unit, the residential, overall, you can see that the year-on-year growth rate is actually the best among the 3. We managed to get a 20% year-on-year increase, reaching $156 million turnover and with good positive reversions around mid-single digit. The increase of -- 20% increase is actually a combination of 2 factors, primarily -- first of all, we have renovated a more than dozens of units in Bamboo Grove, which actually gave us a very strong rental reversions. And at the same time, we also help uplift the remaining units' asking price. At the same time, we managed to get an occupancy back to the 91% level. So these 2 factors contribute to the 20% increase in our revenue from residential.

So before I wrap up, 2 more points -- few more points. One is the Tai Po residential project. The progress is on track. All major statutory submissions approved. And now, the site formation and foundation construction work on track. And we are finalizing some of the more core discipline detail design, and we have already started seeing a few round of visual mock-ups on these units.

Next is also one of the key elements in our new retail, most of the time revolve around technology, which I'm sure Ricky can share with you a lot more later on. As you may notice, we already have our gift vouchers put online with e-coupons and with the area Wi-Fi, video-speed Wi-Fi, we start to collect more data with a view to give us a better platform going forward to understand our customer, shoppers much better.

And again, another very crucial element is our loyalty club. We actually experienced quite a significant growth in numbers of members in 2019 first half, and we have conducted around 20 marketing and branding events.

And finally, in terms of some of the (inaudible), I also actually saw a lot of you in there, which you can see the names there, I won't repeat here.

So that, I hope, give you a very quick roundup of activities both financials and marketing.

Let me stop here and see if any of you have any questions.

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Questions and Answers

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Unidentified Company Representative, [1]

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Questions from the floor? And we'd appreciate if you can let us know who you are and which company you represent. Please use your microphone when asking the questions as they're going out live online.

And now handing back to Ricky and Roger to pick up questions.

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Unidentified Analyst, [2]

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Yes. If you let me ask the simplest question which is the hottest topic now. Can you share with us what's your latest, let's say July retail sales performance? And hence, how do you see the outlook of your second half? I think this is very -- most of the people want to ask. And secondly, also regarding the retail sales, seems that this time, overall your retail sales performance seems to be quite resilient when compared with others, for example, especially in the second quarter. Can you share with us why is this case? I mean why you are doing better than the market while you are focusing relatively high end and the high is doing bad?

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Kon Wai Lui, Hysan Development Company Limited - COO [3]

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So I'll answer the second question first. I think if you look at our -- we're talking about dual engine today because office picked up quite a bit over the time. So now we have more balanced portfolio. And secondly, if you relook into our retail, you will see -- yes, we used give people impression we are high-end area. But if you really break down our income, the Hysan Place non-high brand portfolio, basically it is not smaller than the high-end sections. Right now -- secondly, although we've been like -- our client has fair balance means we are not very concentrate or focus or rely on the PRC tourists only. Hysan Place or even the Lee Gardens are quite recognized by people in Hong Kong local, Hong Kong customer favorite place. So because of that, I think you will see that we are a bit more resilient to the current situation.

And for the outlook office for July, August, there will be quite some pressure. We really we need to see when it will stop or how will it be settled and see any good force to do the rebound later this year. But at this point of time, we got to be conservative in looking at the second half.

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Shu Yan Hao, Hysan Development Company Limited - CFO [4]

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Thank you. And again to supplement Ricky's point, for the month of July, obviously, we haven't collected all the tenant sales data. Normally, it should be in around the 20th to the 25th, and it actually towards the end of the month. So far, we have collected about around 70%, 7-0 percent, in terms of number of retail tenant. I guess based on that, I guess our forecast for this month probably will end on a year-on-year basis in negative early teens in terms of tenants, both negative early teens in terms of growth rate, okay?

And also, the performance for the first half. Again, as Ricky mentioned, we have -- for the company, we have dual engine. At the same time, the office also helped the driving some of the demand on the retail side. As you can see from that, both Hysan Place as well as the Lee Garden Hub secured quite a good tenant sales growth. Of course, as you know, Lee Garden Hub which we have a lot of high brand. So on a per-ticket size, they have a much larger in terms of the sales. But in terms of growth rate, we see that both Hysan Place and Lee Garden managed to get a relatively decent growth, like Hysan Place for the first half of the year is around 4%, first half year-on-year whereas the Lee Garden Hub is around 6%.

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Unidentified Company Representative, [5]

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Anyone else?

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Chi Tsun Jim, JP Morgan Chase & Co, Research Division - Analyst [6]

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Jevon here from JPMorgan. Question quickly on divided, so your core profit has a pretty respectable increase of roughly 9%, but understand the management has kept interim DPS flat. So just wondering what's the rationale behind the reduced payout ratio?

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Shu Yan Hao, Hysan Development Company Limited - CFO [7]

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Right. Well, first of all, in terms of the first half result, that is, obviously, the 9% is including the contribution of the -- because of the ramp up, the timing thing of the Lee Garden Three contributions. Excluding that on recurring, we are seeing around 6%. So right now, at this moment, overall, for the entire year, we probably will be seeing something similar. But again, there's a big question mark in terms of, for example, turnover rent which depends on retail tenants contributions or the turnover.

And as Ricky also alluding a little bit too, at this very juncture, it's actually quite difficult to have a very clear view on some of our retail tenants performance. Actually, we are now in August and a lot of things happening in August, let alone in the coming months, we have no idea. But we only have the visibility on the July partial numbers. So I guess, with that, given our financial management philosophy, we want to see what is going on in the second half.

Obviously, if you look at the entire portfolio, assuming no unforeseen or major factors, all the contractual obligations been met, this year, I think we have done for example retail, around 70%, 7-0 percent of the lease that is expiring this year. For office, we are 90% done. So subject to unforeseen events, we have that idea about mid-single-digit growth. Obviously, we will look at how things go in the second half and then take that into considerations in full year dividend.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [8]

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Karl Choi from Merrill Lynch. A couple of questions. First, I noticed, I think there was some turnover rent for the office component, probably in relation to your relationship with the co-working firms. Just wondering can you comment a little bit on how the co-working tenants are working out for you, if you can tell from in terms of membership versus sort of what your original expectations are. And second is a lot of questions about office pressure potentially given slowing in the economy sort of, can you talk little about the spot rate outlook?

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Shu Yan Hao, Hysan Development Company Limited - CFO [9]

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In terms of the co-worker, apart from the operation and strategic side which Ricky can share, actually, this year, this first half, we actually see turnover rent from co-working tenant, which is a good thing, which is our original strategic intent as well, so that's one thing. In terms of -- about your second part of your question, you see some of the -- do you mind repeating?

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Karl Choi, BofA Merrill Lynch, Research Division - Director [10]

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Office, slowing economy.

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Shu Yan Hao, Hysan Development Company Limited - CFO [11]

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So rental reversion, as you can see midteens so far and actually with 90% of the deal done, I think we will probably end up with around (inaudible) in terms of the reversions. Next year, 2020, we had around 20%, so about 1/5 of the office space coming to expiry. And expiring rent, since we are talking about the deal primarily done 3 years ago, that is 2017, which is still not at the peak of it.

So based on the number, we see at least for our portfolio, we see that expiring when comparing to this year expiring rent had a 5% to 10% -- I repeat, 5% to 10% lower. So assuming the spot rent can maintain at current level, we will probably see another positive rental reversal situation. Of course, then the million-dollar question is the smart rent trend. Again, that ties to the overall demand supply and all that. Again, suffice to say, we do not see extra large amount of expiry coming up next year, partly thanks for the new Lee Garden Three office addition to the portfolio which lengthened automatically the expiry profile for office which give us a near-term stability.

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Kon Wai Lui, Hysan Development Company Limited - COO [12]

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Add a little bit on this co-working stuff, we got Spaces, we got WeWork and also theDesk. So from the experience, we can see from them, basically, they take 6 to 9 months to ramp up to like a 75%, 80% something like that. So both -- 2 of the already established co-working operator have the same pattern. Right now the upcoming is still we work with these in both the Hysan Place and the Lee Garden One. The turnout -- it seems that they are very popular and they also tell us that the trend in Causeway Bay is quite different from central or the East side. This is small surface so there is more wide range of customers in Causeway Bay, which is similar to our office portfolio.

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Unidentified Analyst, [13]

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I have a question, a follow-up question on the turnover rent -- office turnover rent. Can we assume that you have turnover rent cost in all leases related to the co-working space or is it just applied to a selected operator? And also, can we assume that if the operator rent up the occupancy to say 70%, 80%, you can start to receive the turnover rent?

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Shu Yan Hao, Hysan Development Company Limited - CFO [14]

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I can't -- standard is (inaudible), Jeff, we don't comment on individual lease. But I think the reason why I want to highlight that is, as also Ricky pointed out there are -- a period for their business to ramp up. And apart from the trade mix consideration which co-work sort of the offer the amenities to other tenants. From the business model point of view, we also want to grow together with our tenant, the co-working tenant. So I think that is an important sign from our perspective that we start seeing that and we look forward to more. And I guess that also bring another point about the dual engine. The very traditional classification between retail and office might be coming over to the other side a little bit. Even in the old days, we don't deal with office tenant like the way we serve our retail tenant, but with these co-working tenant coming in, it's kind of like a core size retail model as well. So that is an important aspect from an operation point of view.

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Unidentified Company Representative, [15]

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Other questions from the floor?

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

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Justin Kwok with Goldman. So with more challenging outlook, at the moment, is it a good time to do AEIs for the portfolio, is there anything in mind where you think can take this opportunity given you have some potentially downtime in some of the projects?

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Kon Wai Lui, Hysan Development Company Limited - COO [17]

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So yes, we will continue to consider the AEI projects for this year -- so some minor one, also looking at any potential bigger one as well.

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Justin Kwok, Goldman Sachs Group Inc., Research Division - Executive Director [18]

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Any guidance on that?

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Kon Wai Lui, Hysan Development Company Limited - COO [19]

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Not too specific.

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Shu Yan Hao, Hysan Development Company Limited - CFO [20]

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But overall, as we -- when we saw each other for the last couple of years, we -- well, first of all, in terms of the existing portfolio AEI, apart from the redevelopment, I guess one of the thing is our existing building, not to the extent to redevelop it, but some of these functions, service may be a little bit dated, so this is also a good time for us to do a larger scale of AEI. In terms of the usage of cash, actually, some of these technology system and all that, it took quite some investment to build it up. So I would expect these are the 2 source of AEI or use of cash in our existing portfolio.

Again, for other opportunities, when we mentioned in last year final result and the annual report as well, we think we are now in a position to consider opportunities beyond our core portfolio in Causeway Bay. So a couple of times when we see each other during the last 6 to 8 months, we talked about potentially, for example the Caroline Hill locations which, according to the government, they have plans to put it out to the market, although without a specific time line. So we are interested, obviously, in a space like that. And at the same time, we also keep our eyes open in terms of opportunity.

This strategic intent, we have a good portfolio, good asset in Causeway Bay, but in the sense it's concentrated. And for the longer-term growth, we are open in terms of the potential opportunities outside. But with the one big caveat is we will continue to trade our core asset in Casuseway Bay being our core and practically, it is that part of the asset that turns out most of the cash. And we will work our very best to maintain the cash generation ability while at the same time, for example, because of our low gearing, we can consider gearing up for this investment.

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K.C. Ng, Macquarie Research - Analyst [21]

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It's David Ng from Macquarie. Just 2 small questions on the pressure of Esprit a couple of months -- a while ago hasn't been fully reflected in first half 2019. That basically is done. And I guess maybe looking forward, you have another, I guess U.K. retail may be pulling out of Hong Kong not just from that space. Is that something that is similar to the Ralph Lauren that they still have to pay some penalty or do we need to worry about quite immediate vacancy in that area and some negative reversion? And then maybe also for just the Leighton area, any other major reshuffling that we need to worry about, say the next 12 to 18 months?

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Shu Yan Hao, Hysan Development Company Limited - CFO [22]

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Okay. Maybe, I'll talk a little bit about the (inaudible). To the extent we know, that is not only a Hong Kong-only initiative or actions. And again, as far as we know, it's kind of a voluntary steps, and we had, like with most of the other tenants, a good coverage of rental deposit. So overall, we don't see big exposure from that particular news. But at the same time, in the business of retail in particular, from time to time, there will be several things, certain things like that. And we will continue to manage that space and see what is the best solution for that.

And in terms of the Leighton area, again as you can see from the past few years, actually, we have done quite a number of things, in Lee Garden area with Lee Garden Three coming in, also help us a lot. So for the Leighton area, we will continue to work on the trade mix, like Lee Theatre Plaza as well as the Leighton area -- I mean the Leighton Centre retail offering.

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Kon Wai Lui, Hysan Development Company Limited - COO [23]

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I think for the next 18 months, the Leighton Centre will still operate as normal from the leasing side.

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Unidentified Company Representative, [24]

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Anything else? So shall we?

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Shu Yan Hao, Hysan Development Company Limited - CFO [25]

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Thank you so much, and let's stay in touch. See you soon.

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Kon Wai Lui, Hysan Development Company Limited - COO [26]

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Thank you.