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Edited Transcript of 4.HK earnings conference call or presentation 8-Aug-19 9:45am GMT

Half Year 2019 Wharf Holdings Ltd Earnings Presentation

HK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Wharf Holdings Ltd earnings conference call or presentation Thursday, August 8, 2019 at 9:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Angela Ng

Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited

* Tin Hoi Ng

Wharf (Holdings) Limited - Chairman & MD

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Conference Call Participants

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* K. Y. Cheung

Goldman Sachs Group Inc., Research Division - MD

* Karl Choi

BofA Merrill Lynch, Research Division - Director

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Presentation

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [1]

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Good afternoon, everyone. A very warm welcome to Wharf interim results briefing. I'm Angela Ng, Investor Relations Manager. Before the presentation and the Q&A session, may I first introduce the Chairman and Managing Director, Mr. Stephen Ng, to deliver the opening remarks? Mr. Ng, please?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [2]

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Thank you. You all would have seen the announcement, hopefully read it, and I will leave Angela to take you through the presentation. I only want to make a few points before we start. And these points are already in the announcement and/or in the presentation later.

First of all, as we highlighted in the announcement, as at the end of the period, i.e., on the 30th of June 2019, our group had over RMB 100 billion of assets. And that is a -- that is not a small amount. And given the attention that some investors had been paying to the currency movements recently, we thought that was something that we should flag for the attention of investors.

Some investors have longer-term investment perspectives. Others have shorter term. And some look at the renminbi as a depreciating, devaluing currency. Others look at it the other way. Different people may have different views. Our view is we hold a long view. In the long run, obviously we believe the renminbi will not be a bad currency to be in. But there will certainly be shorter-term volatility, and we wanted to flag that for the attention of investors.

Number two. You will have noticed from our announcement and later on in the presentation that we talk about the China DP business, development property business, i.e., properties that were built to sell. And you -- I'm sure you are aware of the policy measures to cool property prices, housing prices in Hong Kong, in China and other parts of Asia, in Singapore and so on. The -- what we have observed is that the measures to cool housing prices have been -- have become tighter, stricter in the past half year or so. And obviously, with ASP under stricter control, it would affect the margins of our DP projects, which is a reason why the last time we bought any land in Mainland China was almost a year ago. We're waiting to see where the policymakers are going with this particular factor before we decide to make our next move in buying land in the Mainland.

Third point I wish to make is China IP. Our China IP portfolio can broadly be divided into retail and office. We have some service apartments but not that many. The retail portfolio is doing quite well. The office portfolio is doing less well. With the more established assets in our office portfolio, particularly those in Shanghai, occupancy rate is reasonably good and rental is stable. However, in the -- generally, in most Mainland Chinese cities, even including Shanghai and Beijing, we see a general oversupply of office space, and that oversupply can get worse before it gets better. That is our current assessment, which means that it is probably going to take us a little longer to lease up the portfolio that is in our current -- on our current balance sheet. But with a long view and with a strong balance sheet, we're not too worried about that. But again, it's a factor that we wanted to flag to investors so they know.

The last point I want to make before I sit down is in Hong Kong, our DP business focuses primarily on luxury housing. Mount Nicholson is a good example of what we sell in Hong Kong. And at that end of the housing market, transactions are few. It's -- and you don't expect to sell too many 400 million, 500 million homes in Hong Kong in any 6-month period, which is why it would tend to be more volatile than if we were selling in the mass market where we can get rid of several hundred, if not 1,000, units over a weekend. So it gives rise to ups and downs in revenue and profit recognition. It is, again, another factor that we wanted to raise to the attention of investors in case they look at year-on-year comparison how much we're selling this year versus same time last year or recognizing this year versus same time last year. We wanted to make sure that their view would not be distorted by the relatively short time span of the reporting period.

So those are the 4 points I wanted to make to open this today's session. And I will now hand back to Angela to take you through the presentation. Thank you.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [3]

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Thank you, Chairman. The theme this time is portfolio facing headwind. First, let's begin with the highlights for the first half of the year.

The group's businesses are largely property-focused assets in China valued over RMB 100 billion, accounting for about 70% of group business assets and contributing about 80% of group profits.

Looking at the operating environment, the Sino-U. S. complex has profound impacts on both economies as well as Hong Kong. Moreover, RMB weakened by 0.4% again (sic) [against] Hong Kong dollar in the first half and faces continued uncertainty.

Back in Hong Kong, weak demand has further weakened by travel, retail, export, re-exports, stock market and threat to employment. Facing headwind from different fronts, the group's profit declined by 14%. Full year outlook will also be uncertain.

Currently, the group's property-focused businesses comprising IP and DP in Hong Kong and China and hotel and management. During the reporting period, revenue increased by 3% to $8 billion, 70 -- 67% contribute by properties. Underlying net profit decreased to $2.2 billion, 84% contribute by properties. Business asset amount to $180 billion with properties account for around 80%.

Operating profit increased by 34% to $3.7 billion, and interim dividend of $0.25 per share was declared.

Regarding the listed equities portfolio, as of end of June this year, market value of the portfolio was $33.6 billion. Unrealized surplus was $3 billion. The CME2 portfolio took up around 60%, and the balance is Hong Kong blue chips, which are mainly properties. No disposal in the first half of the year.

In the following slides, I will walk through the individual performance of different business segments, namely asset turns, including DP in Hong Kong and China; recurring income business, including China IP and hotels and services, which are the Logistics businesses.

First, let's focus on asset turns. The luxury-focused Hong Kong DP currently holds a land bank of around 3 million square feet, while China DP focusing in Hangzhou, Beijing, Shanghai and Suzhou has a land bank of 3.6 million square meters. The group's quality DP projects include Mount Nicholson in Hong Kong, which remains among the most valuable properties in Asia. Our DP business in China remain focused with the top 10 projects contribute around 80% of total sales.

Looking into the performance of our DP business. Mount Nicholson in Hong Kong has sold 4 houses and 2 apartments for a total contracted sales of $3.6 billion. This experience indicates demand for luxury homes is steady but has a tempo different from mass markets.

Underlying demand for quality properties in Mainland China remained firm in top-tier cities. However, ASP controls have affected future project profitability. The group has been prudent and not made any new land purchase for nearly 1 year.

Attributable contracted sales decreased by 10% to RMB 6.5 billion. With focused sales strategy, around 80% of the sales was generate in force -- in top 4 cities or from the top 10 projects.

On an attributable basis, China DP revenue decreased to $5.2 billion and operating profit was $1.8 billion. The net order book was RMB 23.5 billion.

Moving on to recurring income business. With the driving forces from Chengdu IFS and the newly opened Changsha IFS, China IP revenue increased by 22% to $2 billion. However, oversupply in the office sector in most cities may increase in coming years.

At Chengdu IFS, our flagship in Western China, retail sales grew by 13% to RMB 3.3 billion while office was 80% committed.

Fully operate for just 1 year, Changsha IFS has become a new iconic landmark and generates a retail sales of over RMB 2 billion.

As for Hotel Management, the group currently manages 17 hotels in China, Hong Kong, the Philippines under the Marco Polo brand and Niccolo brand. Revenue increased by 9% and GOP increased by 11%

Established since 2015, Niccolo has quickly evolved as an internationally acclaimed hotel brand. From this table, we can see that the Niccolo hotels at our 3 IFS in Chengdu, Chongqing and Changsha rank among the highest in room yield and room rates again the -- against their competitive set.

Moving on to services, which include Logistics business. Amidst macro headwind and growing regional ports competition, total throughput of Modern Terminals was flat during the first half. Hong Kong Seaport Alliance was progressively implemented from the 1st of April. The efficiency gains will be reflected in 3-year period. For Hong Kong Air Cargo Terminals, total throughput was 0.7 million tonnes.

And then let's move on to the Financial Management. Net debt reduced to $24.6 billion. Gearing ratio further reduced to 16.9%. Interest cost was 3.3%. Interest cover was 6.3x. Looking ahead, in view of the trade dispute, October Brexit, global currency and interest rate movements, we hold a cautious outlook towards the markets.

Lastly, sustainability. Our sustainability efforts have made some remarkable achievements in different aspects. And for Project WeCan, the group's business units are partnering with 2 schools to provide opportunities and care to the secondary school students. The group continued to be a member in Hang Seng Corporate Sustainability Index. The group has also raised its first green loan facility of $2 billion to refinance Chengdu IFS.

So that concludes my presentation.

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Questions and Answers

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [1]

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Now we will come to the Q&A session. May I invite Mr. Ng and Mr. Kevin Hui, Director and Group Financial Controller, to come on stage, please?

So please raise your hand and identify yourself and the organization that you are representing if you have any questions. Karl from Merrill Lynch.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [2]

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Yes. I have 3 questions. First, as Stephen mentioned, there are a lot of uncertainties in both Hong Kong and China. So looking more on a maybe medium-term basis, especially after the renminbi depreciation, do you expect the group for future acquisitions more likely to happen in Hong Kong or China? Is there any longer-term view about the portfolio mix from a geographic perspective?

And second, a couple of housekeeping items. I noticed that throughput in Hong Kong was down 8%, but revenues were fairly flat. And I think there was more transshipment. So trying to figure out why the ASP was actually up or the implied ASP anyway.

And lastly, the pretty nice investment income of $1.2 billion, what made up -- what was in there? Was it the dividend come from the investments? Or if you could clarify.

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [3]

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I'll answer them in the reverse order of the questions. Investment income, a good part of it, is interest income. Of course, that eventually will be offset by interest expense partly. So -- and apart from that, there is also a dividend income. Mainly those 2 items.

Logistics. Generally, throughput has been slow in the first half in Hong Kong. And therefore, we're affected, too. But the first half numbers are slightly distorted because of the implementation of the Joint Operating Agreement, the so-called strategic port alliance, which started on April 1.

So we're going through a transition, trying to enhance the efficiency of operating together with the other terminals in Hong Kong. The transition will take some time. It will take no less than 1 year, possibly longer. In particular, we cannot transition by ourselves. We need the help of our business partners, in particular the shipping lines, to complete the transition because shipping lines generally have a deployment plan for their vessels, and they don't change the deployment plans easily. They usually plan ahead. So until the -- their deployment plans are substantially changed, it will be difficult to realize the full force of the Joint Operating Agreement, which is why, I think, for the current year, the numbers may look a little funny. But hopefully, by next year, things will start to get into a more normal pattern.

To your first question, I've already pointed out we have not made any investment in new DP land in China for almost a year. And we will continue to be watching that market. Now we're not in a hurry to buy into the DP market in Mainland China right now.

IP, it's a little bit more difficult. We are interested in IP sites, but we're very selective about where to invest our IP dollars. And typically, the kind of IP sites that we're interested in, other people are interested in, too. So identifying the site is one thing, whether or not we eventually outcompete our competitors to make the investment is another. Hong Kong at the moment, yes, we also look at opportunities, but there are not too many that would fit our profile.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [4]

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May we have the next question? Simon from Goldman.

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K. Y. Cheung, Goldman Sachs Group Inc., Research Division - MD [5]

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Yes. Just 2 quick questions. On the property sales, obviously it was a bit soft in the first half, and you maintained your targets. How are you feeling now that the third quarter run rate, how is it tracking compared to your full year target? That's the first question. Second one, on dividend, I may have missed it, I came in later, you maintained your EPS in absolute term, and then you're earning actually [fell] in the first half. I know that in the second half, you may have some more booking. But what's the indicative paid-outs in the second half? If any you can share with regards to your latest report.

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [6]

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Okay. First question is property sales. So far, we are behind our target for this time of the year. We ran quite fast in the early months of the year, but the second quarter started to slow. Although we are slightly behind our target for this time of the year, we are still hopeful that we'll be able to catch up or substantially catch up by the end of the year. That's partly to do with the timing of projects.

The ASP control is becoming more strictly applied. ASP control is, of course, a central government policy. But it's left -- the implementation of it is left to local government. And some local governments have in the past been able to find loopholes in that -- in the central government policy to allow developers to sell at better prices. That, of course, after not too long caught the attention of the central government, and so enforcement has become tighter, more stricter and therefore more effective, which is the fact that I'm referring to when we say ASP control will likely affect future projects' profitability. But again, to -- the simple answer to your question is we do hope to still meet our full year target given the projects that are lined up for the next few months.

Now I forget the second question. Oh, dividend. Getting old, I'm sorry.

Dividend. Yes, we, of course, reported a lower profit for the first half of the year, and -- but we decided rather than adjusting the dividend down by 10% or something, we'll maintain the same dividend as last year. That is, of course, not a prediction about how much we would pay in the second half. And we won't know about the second half until much later on in the year. Much depends on recognition on the DP side, particularly in China. Having said that, we're still hoping to be able to pay at about a 30% payout ratio of full year dividends generally.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [7]

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May we have the next question? Feel free to raise your hand. Karl from -- oh, sorry.

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Unidentified Analyst, [8]

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This is [Michael] from UBS. And another question about China DP. You just mentioned about ASP cap in the Mainland. So in this situation, what's your strategy? Would you prefer hold off your launches? Or do you rush to sell off the current land bank to meet your sales target and acquire new land? And what's the currently selling margins for your contract sales?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [9]

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The answer to your question is it varies, obviously, from project to project. If the price limit is not too far from our own target, it is more likely that we would accept the price cap and move on with the project. In some cases where the gap is larger, then we'll need to evaluate whether waiting is a better strategy than taking the current price because the controls can get stricter even and the markets can change. So there is no one standard answer to your question, and every project will need to be looked at differently.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [10]

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So next question from Karl.

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Karl Choi, BofA Merrill Lynch, Research Division - Director [11]

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Oh. If management can talk a little bit about the either contracted sales or the sort of the margins that you expect on your unbooked revenues or maybe at least for future projects because Stephen, you mentioned that the future profitability may be capped. And then I noticed that the occupancy cost ratio at Changsha, it has -- is actually quite low right now at 10%. Do you expect the retail rental income -- is any capped to the turnover rent? Or you basically have to wait till maybe year 3 when the rental contracts are renewed to get the bigger upside?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [12]

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Okay. For what is in the -- already in the order book, the margin would not be as affected by what is not yet in the order book. As I was saying, the controls on ASP became stricter in more recent months. So for sales that we were able to book in previous years, the ASPs were more favorable generally. But I can't say the same -- I can't give you the same answer for what is not yet on the order book. It depends very much on by the time when we are ready to go to market, whether we can get an ASP that is attractive enough to preserve the margin. So it's a general warning to investors that the margin may decline, but it doesn't affect as much what is already in the order book.

Changsha IFS, you will notice that the retail income -- or retail rental right now, a good portion of it is actually coming from turnover rent. That's because our tenants are trading better than we had expected and they had expected. So the base rents are well exceeded as a result of the trading performance. Assuming that trend to continue, then their good trading performance will drop almost fairly entirely into -- to the bottom line -- to the bottom rental line, not the profit line and I guess, to a certain extent, to the bottom profit line, net of taxes and other things. Of course, a typical lease wouldn't expire yet, and they -- we won't need to negotiate rental renewal for a little while. But the fact that they are already paying good rental, turnover rent, implies that if they continue to trade well, we will benefit from it quite directly.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [13]

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May we have the next question?

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Unidentified Analyst, [14]

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This is [Stanley] from [Field Security Hong Kong]. Just one question. Should we expect more CapEx into income-generating asset because of the ASP control?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [15]

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Should we expect more CapEx into income generating...

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Unidentified Analyst, [16]

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(inaudible)

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [17]

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More -- I see.

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Unidentified Analyst, [18]

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Or maybe I'll just clarify more. Should we expect more CapEx into more rental asset like office or other hotel?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [19]

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I see. Okay. To use our jargon, if I may. I guess your question is will we redeploy capital from DP into IP or hotels, if I understand your question correctly. In other words, investing less in DP projects and more in IP projects. Well, first of all, we have not been investing in new DP sites for almost a year. In the meantime, the fact is, we have been increasing our investment in the IP projects as a result of construction costs. We're still in the middle of completing Changsha IFS, the second tower. So factually, that is the case -- that was the case in the last half year.

Going forward, we have not started to look at -- seriously at investing in new DP projects yet. So the CapEx that we'll be spending on DP will primarily be relating to construction. But on the other hand, with completion and therefore return of capital from completed projects, theoretically the DP investment should start to decline simply because there are no new projects. IP, on the other hand, we still have some more expenditure to complete Changsha IFS. So I guess the answer is yes, the mix between IP and DP will, in the immediate future, continue to move in favor of IP.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [20]

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Any more questions?

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Tin Hoi Ng, Wharf (Holdings) Limited - Chairman & MD [21]

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Apparently not.

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Angela Ng, Wharf Real Estate Investment Company Limited - IR Manager of Wharf Limited [22]

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If there is no more question, I believe this is the end of our presentation. Thank you for join us today. Thank you.