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Edited Transcript of 272.HK earnings conference call or presentation 28-Aug-19 10:00am GMT

Half Year 2019 Shui On Land Ltd Earnings Presentation

HK Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Shui On Land Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* B. Y. Lo

Shui On Land Limited - Executive Director

* He Hau Sung

Shui On Land Limited - MD, CFO & Executive Director

* Jessica Y. Wang

Shui On Land Limited - MD of Shui On Management Limited & China Xintiandi Co. Ltd.

* Ka Ping Sze

Shui On Land Limited - Head of IR

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Presentation

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Ka Ping Sze, Shui On Land Limited - Head of IR [1]

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Good afternoon, ladies and gentlemen. Welcome to Shui On Land's interim result announcement. I'm Michelle Sze, the Head of IR of Shui On Land. So on the stage, we have Mr. Douglas Sung, our CFO, Managing Director and CIO; and in the middle, we have Stephanie, our Managing Director; and also Jessica, also our Managing Director.

Let me pass the stage to Douglas.

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He Hau Sung, Shui On Land Limited - MD, CFO & Executive Director [2]

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Okay. Thank you. Good afternoon, everybody. Let me kick off with the -- maybe a report on our financial for first half 2019.

Okay. So on this page, you see some of the key figures for first half financial. Maybe I'll just highlight a few of the more important ones. I think, first of all, you will see that we are continuing to grow our recurring income. So you see that rental and rental-related income increased by about 17% year-on-year compared to first half 2018. And now we will have further breakdown for you later on in the presentation.

You see that contracted sales compared to 2018 period has a noticeable decline. And this is mainly because in first half 2018, we recognized the revenue and profit from the transaction with COFCO, where we sold 50% interest of 2 residential sites in Rainbow City in Shanghai. So we recognized that, we completed that transaction in the first half 2018, and we booked the revenue and the profit. So that was a relatively large amount. So if you take that out, we actually see property sales revenue increased by 76% year-on-year to CNY 5.1 billion. So that was the fourth figure here in the table.

Gross profit, CNY 3.5 billion. Again, the decline is -- compared to the first half 2018 is primarily because of that transaction with COFCO in the first half 2018. And profit for the period and attributable profit to shareholders were both up 8% year-on-year. So profit attributable to shareholders is RMB 1.326 billion.

We have an increase in profit margin. And I'll go through that later on in the presentation.

Our financial and balance sheet continues to be very strong. And you can see that net gearing, as of first half, is 44%. So it's only a slight increase compared to 2018.

On some of the key strategic achievements, and I would maybe highlight this as a reflection of the company's ongoing strategy to focus more on commercial real estate going forward. So you will see that some of our key transactions in the first half were basically all related to the commercial real estate area. For example, we completed the acquisition of Brookfield's share in China Xintiandi in March this year. So right now, China Xintiandi is a 100% owned subsidiary of Shui On Land.

We also completed the purchase of Corporate Avenue 5 in Xintiandi in June this year through our investment platform with Manulife and China Life, the Shui On core office investment platform. So we will have again more detail for you later on.

We have also opened 2 shopping malls, retail malls in the first half of this year. We completed the renovation and the AEI for Xintiandi Plaza in Shanghai, in Taipingqiao Xintiandi. So that was formally opened in May. We also completed the development and opened the Wuhan Horizon North Shopping Mall in May also. So again, we were very busy in expanding our commercial property footprint.

We didn't have a lot of new property sales in the first half. I think we mentioned in March, when we have the annual result announcement, that we expect this year a lot of new launches will be in the second half of the year, particularly closer to fourth quarter. So that's why you're not seeing a lot of property sales revenue in the first half, but we expect that will pick up in the second half. And I think Jessica will later on give you more highlights.

On the financial, some of these I already mentioned, so I won't go through this line by line. So overall, you see an increase -- a pretty big increase in rental income.

Again, revenue was dropped -- was declined year-on-year, mainly because of the transaction in first half 2018 with COFCO, that's caused quite a bit of distortion in the year-on-year comparison. Overall, profit margin increased in the first half of 2019 to 45% gross profit margin. And again, I mentioned that for -- profit attributable to shareholders is up 8% year-on-year to CNY 1.32 billion.

So the income statement, I've already mentioned quite a bit of the figures. On the revenue, basically, you can see the breakdown in 3 areas. Property sales is about CNY 6.3 billion. Rental income is about CNY 1.1 billion. And about CNY 420 million of other income. So overall, if you net out the cost of sales, gross profit is about CNY 3.5 billion. Profit margin, I mentioned, is 45%. So operating profit is about CNY 3.2 billion.

And then a couple of, I think, highlights on the figures below. On the investment properties revaluation, basically stable in the first half. I'll have the break down for you later on. So the revaluation gain is only about CNY 90 million -- CNY 93 million, out of a CNY 43 billion commercial property portfolio. But again, in large, it's just some miscellaneous costs and expenses. There is a reversal of impairment loss of CNY 180 million. So this is related to a provision we made in first half 2018 for the final payment on the Foshan residential site we sold to Country Garden in 2016. So last year -- the final payment was related to a final site clearance, relocation clearance. So last year, we noticed that there was some delay in the relocation. So that's why we made a provision on that final payment, CNY 180 million. We completed the relocation, we received the payment from Country Garden, so that's why there's this reversal of the provision of CNY 180 million in the first half.

Finance cost, down by about 8%. So it's about CNY 860 million finance cost in the first half. That includes the fluctuation of the FX. So you see a net exchange loss of about CNY 17 million. We continue to hedge roughly about half of our FX exposure. So we are trying to manage a lot of the FX volatility through hedging. So you haven't seen a bigger impact to our P&L in the first half. Profit before tax, about CNY 2.5 billion. And then I mentioned, profit for the period and also the attributable profit to shareholders are up -- both up 8% year-on-year. The Board recommend the interim dividend to maintain at HKD 0.036.

And on the next page, you will see that, last couple of years, we have been gradually increasing our dividend to shareholders. So although that in the interim period we are maintaining or recommending a stable dividend of HKD 0.036, based on yesterday's closing price, Shui On Land is actually paying a dividend yield of about 7.2%. So we do believe that this is an attractive dividend level for shareholders. And we will obviously reassess and revisit the final dividend after our final period to see whether there's room to increase full year dividend in the second half of the year.

Okay. Recognized property sales. So these are basically property sales that we've sold and handed over to buyers, mainly coming from 2 projects in Taipingqiao, Lot 116, which the units sold in 2018 and we handed over in the first half this year, and also from Foshan. So these will be the 2 main contribution in the first half. And then I mentioned earlier on the valuation of our investment properties. So the overall carrying value in the first half is RMB 43 billion. So these are all the completed properties, commercial properties. You can see that it's -- basically, overall, the value is stable. It's up only 0.2% compared to end of last year, about RMB 96 million. The increase mainly coming from 2 projects: the Xintiandi Plaza in Shanghai, where we completed the AEI, and I mentioned we formally opened -- have the formal opening in May, so this is a markup mainly to reflect the completion of the AEI; and then from the Shanghai KIC project as a reflection of the rental income increase during the period. And then these are the locked-in sales, basically sales that we have signed but not yet handed over. So it's about RMB 7.2 billion as of first half, mainly coming from Wuhan and Chongqing and a little bit from some of the Foshan and some of the other projects.

Financial position. We have cash on hand, about 15 -- almost CNY 16 billion in the first half of the year. If you net out the total debt, our net debt is about RMB 21 billion. So it's a slight increase from December of last year. And the overall gearing, again, is up marginally to 44% compared to 40%. But overall, we are still very comfortable with our balance sheet and we think the gearing is still very reasonable. And we believe that this is obviously very beneficial for the company, given the quite uncertain financial markets right now.

So this is basically just graphically show you the gearing. We have been deleveraging in the last few years. At the current level of about 40%, 50% gearing, we think this is a sustainable level, and we hope to be able to maintain at this level in the foreseeable future.

The debt maturity breakdown. You can see that we've broken down into second half this year, first half next year and beyond. So in the near term, as of June, the maturity for second half is about CNY 6.5 billion, CNY 6.6 billion. And then for first half next year is about CNY 3 billion. But all of that CNY 6.6 billion, we continue to pay down the maturity. So as of last week, the outstanding for the rest of this year is about CNY 5 billion. So we have further paid down the maturity by about CNY 1.5 billion in the last 2 months. So overall, you can see that in the coming, let's say, 9 to 10 months, we only have debt maturity of about RMB 8 billion and we have cash on hand of about CNY 16 billion. So we are very comfortable with our current financial position. We don't really have a lot of financing needs or financing pressure in the near term. And we think that is obviously -- again, is beneficial for the company given the very volatile capital market right now.

This is just for your reference, our outstanding U.S. dollar bond and senior notes. The next one due is in October this year, a relatively small U.S. dollar bond, USD 250 million. Given the fairly large cash on hand we have right now, certainly, we have quite a lot of capacity to repay this bond. Okay.

On our asset breakdown. The total asset is about RMB 107 billion right now. The breakdown on the right-hand side you can see there is above 55% investment property or commercial property, of which about 41% are completed investment property and about 14%, 15% are commercial under construction or commercial land bank. So you can see that for Shui On Land, the majority of our asset currently is commercial. And this is, again, why we mentioned that we will continue to focus more in commercial going forward, given that this is the biggest asset base we have. And also we believe this is where our strength lies.

In particular, I want to highlight our commercial property portfolio in Shanghai. I mentioned that we completed 2 big transactions first half this year. We bought back Brookfield's share in China Xintiandi and also completed the acquisition of Corporate Avenue 5. So we have actually increased our effective exposure to Shanghai real estate -- commercial real estate portfolio quite a bit. So you can see that we actually the -- our share of the Shanghai commercial property portfolio asset value has increased by about 24% compared to the end of last year.

So right now, the Shanghai commercial portfolio's total value is about CNY 73 billion, of which the completed income-producing portfolio is about CNY 42 billion, the first half of the table. And then the bottom half are basically the ones under construction, under development, it's about CNY 32 billion. So all together, CNY 73 billion. Our share of this portfolio is 57%. So it's roughly about CNY 42 billion. So this is an increase of about 24% compared to the end of last year, mainly because of the completion of the Brookfield transaction where we are now 100% owner of China Xintiandi. So we think this is the -- we will call it the cornerstone of the company's portfolio and asset base. And this, obviously, is also our clear focus in the next few years, to continue to increase our footprint in Shanghai and, hopefully, to continue to maintain a leadership position in the Shanghai commercial property market.

So strategically, I mentioned that -- and Chairman and senior management has mentioned to analysts and investor that we are transitioning to become more commercially focused. So I mentioned that first half, we did some big transaction to increase our commercial portfolio. This will continue to be a key strategic focus for the company, particularly to try to continue to maintain a leadership position in our Shanghai portfolio.

So right now, the Shanghai portfolio, both the completed properties and the ones under construction, so together, the GFA -- total GFA is about 1.65 million square meter or roughly about, let's say, 18 million square feet in Shanghai. So basically, all of which are in downtown city center location. This makes us one of the largest commercial property company in Shanghai already. So we want to continue to maintain this leadership position and, with the right opportunity, continue to expand our footprint in Shanghai. So this is a key strategic focus for the company in the next few years. And to achieve that, we will continue to adopt an asset-light approach. So basically, what that means is we would like to continue to partner with long-term investors, such as the ones that we already have, like China Life, Manulife, for example, China Pacific Insurance Company and to continue to partner with these long-term investors to expand our portfolio. So we hope to be able to, going forward, for more platforms, like the one we formed with Manulife and China Life at the end of last year and to use these type of platforms to increase our capital sources and to increase our investment capability.

And then the market outlook, just very quickly how we see the market. So obviously, macro environment is not very certain right now. Obviously, there's trade war going on, a slowdown in global economies. So all these, I think, have proven that our more cautious approach in the last couple of years are the right approach, and we will continue to be more cautious in the next 6 to 12 months in terms of capital deployment, in terms of managing our balance sheet.

On the office market, we do notice that there is some, I think, slowdown in the tick-up, some slowdown in inquiries. But we believe that for the first tier cities like Shanghai, Shenzhen, Beijing, demand is still very, very strong, particularly for city center projects. So we're not too concerned about the overall outlook, although we do think that there's probably going to be some slowdown in terms of rental growth, in terms of demand in the next maybe 6 to 12 months as a reflection of the macro environment right now.

Very similar, for the retail sector, consumption, obviously, we've seen some data suggesting that it's slowing down a bit. But given the fact that we think the Chinese government is trying to push domestic consumption to support the economy, we think that the medium-term outlook continues to be okay. Again, it's more, I think, a question of a slowdown in growth rather than a decline.

For residential, particularly for the first tier cities, we think that the -- a lot of the policy restriction will be in place. We don't really see maybe a relaxation or a bit relaxation anytime soon. So for the markets like -- that we operate in, for example, like Shanghai and Wuhan, for example, we continue to believe that market will be stable. There is not a lot of supply in the market anyway. So we think that pricing will be stable. And overall, the environment will be relatively stable. In the past, basically, most of our residential launches are sold in 1 day, 2 days, right? So we are not really concerned about demand. So we think that, overall, the market will continue to operate at a relatively stable level.

Okay. So I conclude my part, and I'll hand it over to Stephanie.

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B. Y. Lo, Shui On Land Limited - Executive Director [3]

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Thanks, Douglas. So I -- let me share with everyone a little bit more about how we've been doing in our rental portfolio.

So as Douglas mentioned just now, our rental income increased by 17% to CNY 1.1 billion in the first half of this year. You'll see here that we also have 2 properties under JV and associates, which is Rainbow City as well as CA 5, which is held in our new investment platform.

In the next chart, you'll see a more detailed breakdown of how our properties are doing. And so a couple that I'd like to highlight for you. The first one, as you see, is Shanghai Xintiandi, and you'll see a drop in our rental income of 8% this year. The reason is that we're doing an AEI, a renovation of the South Block. And the first part of the South Block to go under renovation is actually where IT is. So that accounts for about 10,000 square meters of leasable GFA that has gone under renovation this year. And that's the reason for the drop in rental income. It accounts for about 17% of Shanghai Xintiandi's total leasable area. And if you look at the total Taipingqiao portfolio, which are the first 3 lines, accounts for Xintiandi Style, Shui On Plaza Xintiandi Plaza as well as Shanghai Xintiandi, this drop in rental income is more than offset by the opening of Xintiandi Plaza, which is the new retail mall on Huaihai Road. That was opened this year in mid-May. And so within the Taipingqiao portfolio, it's grown approximately 15% in rental income.

So another project we're very pleased about is THE HUB in Hongqiao in Shanghai. We're seeing a 20% increase in rental income there, and it's largely driven by increase in shopper traffic and sales at the mall. So for the first half of this year, our sales increased by 43%. So to us, that's actually a very positive sign, especially in the market conditions that Douglas just mentioned.

Two other projects that I'd like to highlight. Firstly, is Shanghai KIC and INNO KIC. Previously, you've heard us introduce INNO as a new office product, and it's actually an extension to the greater KIC neighborhood. So that came on to the market later -- basically in the last 6 to 9 months. And the lease rate here that you're seeing is the TA signing rates, so that's of 22%, but actually, as of August this year, we have an MOU signing rate of over 85%. So we're quite -- we're in okay shape for that project.

Shanghai KIC, largely an office park in Yangpu in Shanghai, saw a 9% increase in rental income. And it's because we -- there were a couple of tenants that -- whose lease were up and we brought in new tenants there. The drop in occupancy, you'll notice, is a time lag, and essentially, we're fully let.

Foshan also saw a 26% increase in its rental income, largely driven by Nova, one of the 70,000-thereabout square meter shopping mall in Lingnan Tiandi, the greater Lingnan Tiandi. It's 100% fully let, and the sales and traffic have steadily increased there.

So here, you'll see some new additions to our list, which is Nanjing INNO Zhujiang Lu. And so last time we mentioned we have this new INNO office product, which is a younger office crowd. It has different types of office spaces, everything from co-working to fit-it-out office spaces to built-to-suit. And so this is actually an asset-light project that we are working with the Nanjing government on. It's a management contract, we don't own the property. But we started preleasing for this property earlier this year and we are 56% preleased. So that's been good progress on that project so far.

So the last 2 projects you'll see are the 2 JV projects, which is Rainbow City. Rainbow City, we saw a decrease in occupancy because in the Palette mall, which is the small shopping mall under the residential towers, it's largely a neighborhood mall, but they had E-Mart in the basement right next to the subway, and that's approximately 10,000 square meters. So that lease came up, and we're now renovating that entire space after many years. So that's the reason for the drop in occupancy there. But the rental income, as an entire portfolio, has still risen by 9% despite that loss in leasable area. And Shanghai Corporate Avenue 5 is largely fully let, it's at 97% occupancy.

So the 2 new openings I'd like to share with you that happened in the first half of this year are in Shanghai and Wuhan. So as I mentioned just now, Xintiandi Plaza had its grand opening on May 16. And we opened with a pretty high occupancy rate of 97%. It's right on Huaihai Road, above -- I think it's the third most trafficked subway stations in Shanghai, on top of Line 1 and Line 2. So we're -- the positioning of that mall is kind of a new female shopping destination, and it's part of the overall Xintiandi footprint now.

So for Xintiandi, we're actually expanding the Xintiandi footprint to go beyond just the North and South Block. And the Xintiandi Plaza is the first new addition to the site. So if you include Xintiandi Plaza, North and South, which is what you historically know of Xintiandi as well as Xintiandi Style, it's firstly connected directly by the basement to 3 subway lines. And the size of it, in terms of GFA, will be -- it's over 100,000 square meters, which is approximately the size of a typical shopping mall in China. So from that point of view, what we're doing is we're enlarging the footprint so that we can have a more diversified retail and F&B base and not be solely driven by F&B and entertainment. And secondly, we can expand our clientele to bring in a wider attachment.

Our Wuhan Tiandi Horizon North is also a 72,000 square meter shopping mall that opened on 31st of May, it's actually a soft opening. The positioning of this mall is for young families. It's within the overall Wuhan Tiandi master plan. And so to differentiate the positioning from Horizon South, that is a little bit more upscale, and this one's more catered to family and a little bit more kid-friendly, if you will. So the whole design concept is around indoor/outdoor garden design, and it actually has really beautiful balconies all throughout the entire mall. We have a beautiful rooftop on the top, you'll see in the second photo, with a large kids playground. It has an urban farm on the rooftop as well that actually attracts lots of residents to come back. So that's a new product that we opened earlier this year, and it opened with an occupancy rate of 92%.

So here's a chart that you can look at because Shanghai is still the largest portion of our asset base. We are 74% in Shanghai if you look at the rental income contribution. And so the Shanghai portfolio had a rental income of 15%. And non-Shanghai cities, such as Wuhan, Foshan had -- saw a rental increase of 21% on average. But within our total portfolio for retail sales, we saw a traffic increase of 20% increase versus year-on-year and an 18% increase in retail sales year-on-year as well.

So this last page is just to share with you a little bit more because as I mentioned just now, we're really going through a major rebrand of the Xintiandi brand to expand its scope and expand its tenant offering. So the positioning of Xintiandi is to be a culture and social destination. And the way we see retail going forward, it has to be largely content- and experience-driven. And so your ability to create proprietary content and drive traffic and sales that way is going to be critical to its success and sustainability in the long run.

So as the culture and social destination, actually, in the first half of this year alone, we had over 100 events across our portfolio, large and small. We attracted over 23 million in traffic and 140,000 new members to our online iTiandi loyalty program. iTiandi really is at its conception. We've launched it a year ago. So this sort of intake to us is actually quite helpful, but we hope that this can become our omni-channel retail channel in the future. So it's a better way for us to engage with the customer in a new way, in a more sustainable way.

So some of the events to note here would be Shanghai Fashion Week; Design Shanghai, which is city wide, it's not only a Xintiandi, but a city-wide festival, but we are their property partner for the long term.

We also had a social festival, which is essentially a performing arts festival that takes place all across Xintiandi each summer. So we worked with the Edinburgh Film Festival previously, and actually still do, to engage them to do a lot of public performances in all of our public spaces outdoors. We have a lot of greenery we -- engages with a lot of the existing buildings in Xintiandi. We can actually show you some videos later.

And we actually also have some large IP events, such as Marvel Avengers S.T.A.T.I.O.N. as well as PAW Patrol at some of our Wuhan and Foshan projects that actually also attract a lot of traffic.

So I'll stop here, and I'll let Jessica introduce more about our residential and development properties.

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Jessica Y. Wang, Shui On Land Limited - MD of Shui On Management Limited & China Xintiandi Co. Ltd. [4]

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Okay. Thank you, Stephanie. Firstly, let us have a look after sales -- contracted sales for the first half of 2019. As mentioned by Douglas, actually, the residential property contracted sales in the first half is CNY 3,277 million, which contributed by 2 major projects: Wuhan Optics Valley Innovation Tiandi and Chongqing Tiandi. The commercial property contracted sales was CNY 145 million in the first half. But the major launches are scheduled in the second half of this year.

From this chart, you can see the detailed breakdown for the projects can be available for presale or sale in the second half of this year. The total saleable area is around 296,000 square meter and estimated saleable results is CNY 17 billion. That's why we are very confident to achieve our sales target for the full -- for the whole year.

And here -- next. Here is some detailed introduction for the saleable projects.

This is Rui Hong Xin Cheng Lot 1. It is a high-rise residential lot with 667 units. We opened a sales center in June and get a very good response from the customers. Around (inaudible) there's over 1,700 groups of customers have visited our sales center and it shows they are interested to buy units.

And next is Wuhan Tiandi Site B10. As we all know, this is the one of the most luxury residential project in Wuhan. And it get very good sales record in last year. And the left 3 super high-rise residential buildings will go to the market step-by-step in the coming future.

And Wuhan Optics Valley Innovation Tiandi. The R1 residential lot is the first residential lot of the whole development. Over 400 unit have been already sold out and the left 200 unit will launched in the coming future

And this is the chart, we can see based on the current landmark, the total sales area for residential is around 1.4 million square meters. And estimated saleable resources is CNY 73 billion. The attributable to estimated saleable resources is CNY 46 billion, which means the residential sales will continue to provide cash flow for the future development after the group.

And as mentioned by Douglas, we still have a strong pipeline of commercial property in Shanghai. The total GFA for the land bank or under development in Shanghai is 759,000 square meter. And with -- in other cities, we still have 2 million square meters project to develop. So that means we will provide rental growth and capital recycling potential for the group.

Okay. Here, I also would like to share some good news with all. The company won the top accolades in the period. The Knowledge and Innovation Community in Shanghai and the Foshan Lingnan Tiandi have won the 2019 ULI Asian Pacific Awards for Excellent, which recognized superior development efforts across the region. And 2 major commercial center opened in the first half, Xintiandi Plaza and Wuhan Tiandi Horizon North shopping Mall, also won 2 very important award by ICSC and CRED, respectively.

And as our Chairman requests, our developments are benchmarked against the top, the highest international standard. Among the master plan development projects, 6 projects were awarded by LEED-ND Gold level. Until now, Shui has ranked the first for the develop in Mainland China in terms of a building area, awarded the LEED-ND Stage-2 Gold level certification with a certified area of 9 million square meter. As of 30 June, there are 1.6 million square meter Green Certified Commercial Buildings held by the group. Amounting 1.1 million square meter is complete and 500,000 square meter is under construction. So the Shui On Land is committed to build high-quality, green, healthy and sustainable development communities while creating higher value for our shareholders.