U.S. Markets closed

Edited Transcript of H78.SI earnings conference call or presentation 2-Aug-19 3:00am GMT

Half Year 2019 Hongkong Land Holdings Ltd Earnings Presentation

HAMILTON Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Hongkong Land Holdings Ltd earnings conference call or presentation Friday, August 2, 2019 at 3:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Robert Wong

Hongkong Land Holdings Limited - Chief Executive & Executive Director

* Simon Collier Dixon

Hongkong Land Holdings Limited - CFO & Executive Director


Conference Call Participants


* John Lam

UBS Investment Bank, Research Division - Research Analyst

* Justin Kwok

Goldman Sachs Group Inc., Research Division - Executive Director

* K.C. Ng

Macquarie Research - Analyst

* Karl Choi

BofA Merrill Lynch, Research Division - Director

* Ken Yeung

Citigroup Inc, Research Division - Director

* Praveen Kumar Choudhary

Morgan Stanley - MD




Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [1]


Okay. Good morning, everyone. Thanks for coming in, despite the weather, a bit challenging now. So thanks for joining us, the Hongkong Land result announcement for the first half of 2019. We're also pleased to welcome those that participating via the group's webcast. I'm Robert Wong, the Chief Executive of Hongkong Land. With me is Simon Dixon, our Chief Financial Officer.

Following our presentation, there will be an opportunity for questions. And for those of you watching via the webcast, please send us your questions through the website, and we will include them in the Q&A session.

I'll take you through an overview of our results, investment properties and development properties before turning over to Simon to cover financial highlights. I will then conclude with our outlook followed by Q&A.

Turning to our results highlights. The group's underlying profits in the first half was USD 466 million, up 2% when compared to the same period last year. The operating profit contribution from the group's investment properties and development properties were both higher during the period, partially offset by higher financing costs.

Profit attributable to the shareholders was USD 411 million after accounting for nontrading net losses of USD 55 million, which primarily relates to the Hong Kong Central portfolio.

Despite a high independent valuation, a nontrading loss was recognized as a result of capital expenditure and FX movements.

In terms of underlying earnings per share, the group generated USD 0.20, while the overall earnings per share was USD 0.18 after the impact of nontrading items.

Net asset value per share at 30th of June 2019 was $16.50. The Board has declared an interim dividend of USD 0.06 per share unchanged from the first half of last year. During the first half of the year, the group secured one new development properties project in Wuhan. I'll go into this project in more detail later in the discussion.

I shall now turn to the group investments' properties. The group currently has an attributable interest in over 9 million square feet of investment properties. The group's Central Hong Kong portfolio is our more significant investments. It comprises some 4.9 million square feet of offices, retail and hotel space and is valued at close to USD 32 billion. This is followed by our Singapore portfolio, which accounts for some 1.8 million square feet and is valued at nearly USD 4 billion.

Not included in this slide are projects under development. These primarily include the British embassy site in Bangkok and the CBD Z3 sites in Beijing.

Turning to our Hong Kong office portfolio. Given the prime CBD location, there is naturally high concentration of financial services, legal and accounting firms. They account for 79% of the portfolio, largely in line with last year.

Office rental reversions were positive as market supply remained tight, although leasing inquiries continued to be slow.

During the period, our average office rent was HKD 116 per square foot per month, up 2% from HKD 114 in the second half of 2018. Physical vacancy at the end of June 2019 was 2.8% compared to 1.4% at the end of 2018.

On a committed basis, taking into account existing lease commitments, vacancy was 1.6% compared to 0.6% at the end of 2018.

By comparison, vacancy based on existing lease commitments across the Hong Kong Central Grade A office market was 2.3% compared to 1.8% at the end of 2018.

The weighted average lease expiry at the end of June 2019 increased to 4.6 years compared to 4 years at the end of 2018. This is a result of our efforts to term out the leases of a number of our key tenants.

As of 30th of June 2019, only 10% of our Hong Kong office portfolio is subject to expiration or rent revisions during the remainder of the year.

Turning to our retail portfolio. Fashions and accessories account for significant portion of our portfolio at 48% followed by food and beverage, which account for 31%. Our average net rent increased from HKD 236 per square foot per month in the second half of 2018 to HKD 239 per share per square foot per month in the first half of 2019. This is mainly due to positive base rent reversions during the period.

At the end of June 2019, physical vacancy remained low at 0.7%.

Turning to our Singapore office portfolio. Similar to our tenant profile in Hong Kong, our Singapore portfolio contains a high proportion of financial services firms due to its prime location and high quality of our developments. Average gross rent across our Singapore portfolio was SGD 9.6 per square foot per month, a 4% increase from SGD 9.2 in the second half of 2018. Rental reversion remained positive during the period.

Physical vacancy across the portfolio increased to 3.3% compared to 2.5% at the end of 2018.

On a committed basis, vacancy was 0.9% compared to 1% at the end of 2018. This compares to overall vacancy based on existing lease commitments across the entire Grade A Central Business District market of 5.1% compared to 7.2% at the end of 2018.

As of 30th of June 2019, only 2% of our share of the portfolio is subject to expiration or rent revisions during the remainder of the year.

Turning to other parts of Asia. In Beijing, WF CENTRAL is performing within expectations. At the end of June 2019, the property was 86% let, and occupancy expected to reach over 90% by the end of this year. The 73-room Mandarin Oriental hotel located on the upper floors of the WF CENTRAL complex opened in March 2019 and has received positive reviews.

In Indonesia, Jakarta Land, our 50% owned joint venture, continues to perform well despite challenging market conditions. Office occupancy at the end of June 2019 was 74% compared to an average occupancy of 66% in the Jakarta CBD office market.

In Phnom Penh, the office space of our prime mixed-use complex EXCHANGE SQUARE was 88% occupied.

In other parts of Southeast Asia, performance of the group's assets remained within expectations.

Now let's look at our IP assets currently under development. The first project under development is our 49% stake in the British Embassy site in Bangkok, which is located on Wireless Road and is in the prime Central Business District of the city. Subject to the finalization of design schemes and approval from the relevant authorities, construction is expected to commence in 2020 and complete by 2025.

Our second project under development is our 30% stake in the Beijing CBD Z3 site, which is located in the heart of Chaoyang District along the East third ring road. The site was hand overed in late 2018 following like -- land clearance delays.

CICC, which is one of our JV partners on this project, have -- has committed to be an anchor tenant. Subject to the finalization of design schemes and approval from the relevant authorities, construction is expected to commence next year and complete by 2023 or 2024.

This slide summarize our current development properties project under constructions and to be developed. They are primarily residential let, but some of them also feature sizable office, retail and hotel components, particularly in Mainland China.

In total, they amounts to 6 million square meters of [development of] GFA. Mainland China continues to be our key market, accounting for 55% of the total.

Our Mainland China development properties portfolio consists of 20 projects across 7 cities, namely Beijing, Shanghai, Chengdu, Chongqing, Hongqiao, Nanjing and Wuhan. Of these 20 projects, 18, including development area that is either under construction or to be developed. In terms of net investment, Nanjing is our largest market in Mainland China and accounts for 34% of our total net investment in the portfolio followed by Chongqing and Shanghai, which accounts for 32% and 22%, respectively.

This chart shows the attributable leasable area of the groups held for medium-term lease assets based on committed projects to date.

As at the end of June 2019, the attributable carrying value of our medium-term lease assets amounted to USD 1.4 billion. Upon completion, this is expected to increase to USD 2.4 billion.

These assets, which are largely commercial in nature, are initially held for let rental. Subject to market conditions, they are expected to be exited or partially exited once rents stabilize after 1 to 2 leasing cycles.

During the first half of the year, the group's shares of development properties revenue recognized in Mainland China, including its subsidiaries and share of joint ventures, was USD 293 million. This represented an 83% increase from the same period last year due to higher sales completion.

In terms of sales performance, the group's share of contractor sales was USD 643 million, largely in line with the same period in 2018 or though lower than the second half of last year due to the timing of sales launches. Market sentiment in the group's core markets remains stable.

At the end of June 2019, the group's shares of sold but unrecognized contractor sales in its developments in Mainland China was USD 1.7 billion. This compares to USD 1.4 billion at the end of 2018.

63% of the sold but unrecognized contractor sales are scheduled to be hand over and recognized during the remainder -- remaining of 2019.

Turning now to Singapore. This slide shows a total of 4 development projects, including Lake Grande, which was completed in the first half of 2019.

During the period, the group's development properties revenue recognized in Singapore was USD 185 million compared to USD 907 million in the first half of 2018, which benefited from the completion of the Sol Acres executive condo project.

In terms of sales performance, contractor sales in the first half of 2019 was USD 255 million compared to USD 101 million in the same period last year, mainly driven by sales at Parc Esta, which commenced in November last year.

At the end of June 2019, sold but unrecognized contractor sales in Singapore was USD 492 million, up 17% from the 2018 year-end.

33% of the sold but unrecognized contractor sales are scheduled to be recognized in the second half of 2019 under the percentage completion method.

This slide provides a brief summary of the status of our development properties outside of Mainland China and Singapore, which have been launched for sale.

In general, our projects are on track and are performing within expectations. Two Roxas Triangle in the Philippines is expected to be fully hand overed by the end of this year.

During the first half of this year, we secured one new development properties project in Wuhan. The 9-hectare residential site is located in the Hong Kong Lake area and emerging mid- and high-end residential area to the west of the city. The project is expected to yield over 1,300 high-rise apartments and over 300 low-rise duplex apartments. We currently own 100% of the project but are in advanced discussions with prospective JV partners to jointly develop the site. Subject to concluding JV terms, we expect to hold at least 1/3 stake in the project.

This concludes the review of our investment and development properties portfolios. I will now pass to Simon to take you through the financial results.


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [2]


Thank you. Good morning, all. Thank you, Robert. I'll rattle through this relatively quickly. It's quite straightforward for this first half. So we can move on to Q&A.

The group's consolidated profit and loss account is summarized here. As you'll see, the first half profit has increased by some 2% to $466 million.

Just turning briefly to each major line item. A consolidated revenue has decreased from $1.5 billion in the first half of 2018 to $804 million in the first half of 2019, as the 2018 results benefited from the completion of the wholly owned Sol Acres project in Singapore. This is also the main reason for the decrease in net operating costs during the period. The share results of joint ventures increased by 72% to $127 million, reflecting higher sales completions of joint venture development properties in Mainland China during the period.

Net financing charges have increased by 13% to $59 million, reflecting increased average net borrowings and a marginal increase in average interest costs during the period.

The tax line represents tax for the company and subsidiaries only. Tax on the joint ventures and associates is obviously captured within the results of joint ventures and associates. The decrease in taxes is in line with the lower overall operating profit during the period, with the effective tax rate period-on-period remaining unchanged.

Nontrading items represents predominantly investment property revaluations which have effectively flat given the overall size of our portfolio with no change in cap rates.

This next slide shows the movement in underlying profit by major component. The investment properties and development properties segments include their share of the group's pretax operating profits derived from joint ventures and associates. Given the significance of the group's joint ventures, particularly in relation to development properties, this presentation of our results provides a clearer summary of our performance during the period.

Operating profits from investment properties increased by $25 million, benefiting mainly from higher average rents in Hong Kong. Operating profits from development properties increased by some $45 million due to higher sales completions in Mainland China. This was partially offset by a lower contribution from Singapore as previously mentioned.

The group has also recognized higher net financing charges as well as higher taxes, including land appreciation tax in China.

Moving onto the next slide, which shows the operating profit by business activity and by region, again, including the group's share of joint ventures and associates.

The contribution from investment properties was $555 million, 5% higher than last year, largely driven by the Hong Kong portfolio, which was up 4% year-on-year.

The contribution from development properties was $193 million, 30% higher than last year. This was principally due to higher sales completions in Mainland China.

Overall, Hong Kong and Mainland China continue to generate the bulk of the group's operating profits.

Turning now to the group's consolidated cash flows. The group continues to generate strong and stable operating cash flows. During the period, the group generated $438 million of cash from its operating activities. This compares to $173 million during the same period last year. The increase is primarily due to lower land payments for wholly owned development properties during the period, partially offset by lower sales proceeds from and higher development expenditure on the group's wholly owned development properties projects. I think in the appendix, we also break out the cash flows from operating activities in a bit more detail.

Under investing activities, the group had net outflows of $356 million compared to $378 million in the first half of 2018. This includes the gross investment of $649 million in joint ventures, predominantly the fund development expenditure, also $50 million of major renovations CapEx, which mainly pertains to the Central portfolio here in Hong Kong. This was partially offset by $321 million of repayments and advances from joint ventures.

Under financing activities, the group has paid dividends of $369 million compared to $326 million in the first half of 2018, reflecting last year's 10% increase in final dividend.

The group also has a net drawdown of borrowings of $55 million compared to $798 million in the first half of 2018. So overall, that brings net debt at 30 June to $3.9 billion, which is around $300 million higher than the 2018 year-end.

Moving on to the next slide, which breaks down the carrying values of our -- of both our investment properties and development properties by region.

The value of our investment properties are based on independent valuations. The value marginally increased from USD 38.5 billion at the end of last year to USD 38.7 billion at the end of June 2019.

Bearing in mind that a lot of this increase was due to FX movements we report in U.S. dollars. The bulk of our valuation pertains to the Hong Kong portfolio, which is valued in Hong Kong dollars.

The value-add development properties and net of presale proceeds, and therefore, it shows our effective net investment. Net investment in development properties increased from $5.2 billion at the end of 2018 to $5.4 billion at the end of June 2019, mainly due to development CapEx spent, partially offset by contracted sales during the period.

On the chart on the right-hand side, we clearly split out the percentage relating to the medium-term lease assets in Mainland China, which Robert touched on earlier, which you can see comprised about 25% of our net investment in development properties.

Regarding treasury management. The group's financial position and liquidity remain strong. Net debt was $3.9 billion, the net gearing was 10%, up from 9% as of the end of last year due to the funding of new investments secured in [2018], funded in 2019. The average tenor of our drawn debt is sitting at 6 years, which is broadly unchanged from last year. The average interest cost is 3.7%. You can see that it's just up very mildly from last year, mainly due to increases in floating rates -- floating-based rates, credit margins remain the same. Our credit ratings by S&P and Moody's remain unchanged at A and A3, respectively.

The maturity profile of the group's committed lines are shown on the right-hand side. The debt maturities are well staggered as you can see over a number of years, very well diversified between both banks and the debt capital markets.

At the end of June 2019, excluding cash and those facilities which are unused and committed, which relate to specific projects, the group has available liquidity of USD 2.5 billion, which compares to USD 2.6 billion at the end of 2018. So we've got very significant standby liquidity, which does give us the ability to move quickly if opportunities present. I think to state the obvious, take into account some headroom. This would also give one an indication of where we see our maximum net debt based on current cash flows.

That brings us to the end of the financial section. I'll now hand it back to Robert, who will discuss the group's outlook


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [3]


Okay. Thank you, Simon. I will now conclude with our outlook for the rest of the year. Our investment properties portfolio is expected to continue to generate stable returns. Rental reversions in Hong Kong are expected to continue to be positive throughout the remainder of the year, although the extent of positive rent reversions will likely depend on the outcome of the ongoing U.S.-China trade negotiations. However, our investment properties portfolio remained resilient to economic events in the short term as the area subject to expiration and rent revisions up to 2020 is relatively low as a result of our active lease management.

For the group development properties business, in the second half of the year, high sales completions in Mainland China are expected. Overall, we expect performance to be solid in the remaining of 2019.

As I mentioned in the result presentation in March this year, we will be announcing a number of new strategic initiatives which will enhance the services that we are currently offering to our tenants in Hong Kong and the region. These initiatives remain on track and would likely be announced in the coming months.

We have skewed one new project during the first half of this year and will continue to see investment on an opportunistic basis across the region.

We expect to see more opportunities in Mainland China primarily due to a steady land supply, wide government land auctions as well as a recent softening in land market sentiment.

During the first few months of the year, land auctions in Mainland China were keenly beat. As a result, despite attending a number of auctions, we were only able to scale one new project. The land market sentiment has since softened in recent periods, following tightening restrictions on developing -- developers financing. This is expected to benefit strongly capitalized developers such as Hongkong Land, and we hope to be able to secure more new investment in the second half of the year.

This conclude my remarks. And I'm pleased to take your questions. If you would like to ask a questions, please raise your hand, and the microphone will be passed to you. Please state your name and company before you raise your questions. Meanwhile, we will monitor the screen for questions raised via our website.


Questions and Answers


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [1]


Perhaps we'll take the first one, which has come through online from Phillip Zhong in Hong Kong from Morningstar Investment Management.

What's the expected time frame for the first disposable -- disposal of medium-term lease assets?

I think as Robert's alluded to, these assets were assets that first need to be stabilized. We've only had a couple of them come into operation. So we are still at least 1 or 2 leasing cycles away from that. So I think the best estimate would be within perhaps at the end of the next 5-year period. So looking at more like 2024, but that will be entirely sort of driven by the market and may either be brought forward or pushed back. It may be a complete disposal or maybe a partial disposal. So still some years away.


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [2]


And I think one of the key factors that the -- affects the timing of these disposal is the speed of the development of the REIT market in China. As you all know, China is actively looking into the development of a proper REIT market. And certainly, assets of this new nature would be perfect. It would be a perfect candidates for REITs to be injected into REITs and then the -- and then managed by first-class operator like Hongkong Land. So again, this is a factors to be looked at and then be closely look into from time to time. So any other questions? Yes.


Ken Yeung, Citigroup Inc, Research Division - Director [3]


This is Ken from Citi. I think one major investor concern is regarding the outlook of the expansion of the Central office rental, given that you had mentioned regarding the trade war. Do [it] have some impact on your outlook? So can I ask -- one is, how is the -- is it the vacancy is trending up in your portfolio?

And secondly, how do you see the rental if the trade war situation continues as what we are seeing for a prolong period? I think this is the first question. Second question is regarding the China sales. You have been acquiring quite a lot of the project in the last 2, 3 years, but the first half, the contractor sales, do you see some decline? Can I ask when was -- do we have a target? And when do we see a continuous picking up in terms of the China sales given you have more and more China projects?


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [4]


Okay. For the first question, of course, everyone suffer if there is a extended dispute between China and U.S. Of course, this morning, you all pick up the news that fresh impositions of tariffs is on remaining USD 300 billion of China imports. Of course, the -- how these things panned out, of course, is nearly -- is up to everyone's guess. It's very hard. The -- it's hard to predict, one can safely say that if it's really the -- over an extended period, bound to have impact on all businesses. And then I don't think Hongkong Land will be immune from the negative impact of an extended disputes between U.S. and China.

And then the -- and of course, I think the -- as I mentioned in my concluding remarks, is Hongkong Land able to withstand short-term pains? Yes. And we are in a very good position to withstand short-term pains because over the last 2 years, we have been actively managing the -- our leased portfolios, trying to extend the lease in order to cover the -- and -- or encourage our tenants to take long-term lease with us. The average lease durations, the -- as also mentioned in our -- in my presentation, the -- compared with 6 months ago, we have already increased from the average lease term of 4 years to 4.6 years already. So it's quite a meaningful increase in lease terms, to give you an idea, that the -- and in the next -- the -- up to the end of the next year, we only have -- next year is 20% subject to rent review and expiration. The remainder of the year is about 10% subject to that. But almost half of them has been dealt with anyway.

So between now and I will say, the next 18 months, we have a relatively modest level of rent reviews and expiration. And hence the -- what we expect, the – a quite a significant impact to our -- we suffer potential [backhauls] in our vacancy. I do not expect that to happen. The -- Of course, one of the key elements that people is always looking at the Central office market is how decentralizations have impacted. Again, last time, the -- I have in the -- I think I have said that the analysis of the impact of our portfolio is very, very small. Only 4% of our tenants have left annually. Since the beginning of this year, we have 3 wins, no decentralization in our portfolio. The -- We look at all our tenants' number, the -- I will say the -- most of the people leaving is because of us doing some tenants' management arrangement, that we need to take back the space for others [who lose] expansion, very, very limited number.

One or two people really left Central, the -- and then disappeared. So as far as the Central portfolio or as far as our portfolio is concerned, I don't see much the -- much [bungs eye] in a lease, I would say, in the foreseeable future. Rent reversion, again, in my presentation, I have already advised that for the remainder of the year, unless very, very surprising events happened, I do not see that rent reversion will be negative, will remain positive. And of course, I hate to make predictions about what about next year, but based on today's rents -- it's purely based on today's rent, we also expect rent -- positive rental reversion next year. But again -- then the more that I try to forecast more dangerous and more uncertainty one, so you may have to make your own judgment as well. But again, these are all made based on current situation and then the -- and let's hope the things would not turn to a very worse situation.

Your second questions is about China sales. I think we actually experienced very satisfactory results, the -- for the first half of this year. All the project launches in China have met with very, very strong demand. The -- They are good and bad for price control in China. On the one hand, the -- as long as you do not overpay for land, the -- which I don't think we are.

Actually, the sales price is well within the -- of the ability of the people and hence, almost all of our sales launch so far this year has been quickly snap up, the -- by the market. So I don't see that the -- really having a concerning trends in terms of our sales. Of course, subject to approvals for the rest of this year and then the timing of these approval, et cetera, I do expect the sales level to be more than the first half of this year. And the -- so I think the -- overall, it should be a quite and healthy development, I think, in terms of our China sales -- residential sales market is concerned.


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [5]


If I could just perhaps add, Ken, I think one of your questions related to the better Hong Kong, just on the vacancy. So you will see the trend line that we've reported from up to 2.8%, just to reiterate that, that is physical vacancy on a committed lease basis. So leases that have been committed, that falls down to 1.6%. So there's effectively no change period on period or end of year versus first half. Perhaps we can go to a question again from...


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [6]


Or maybe, Simon, before we do that, I think yes, you remind me on the vacancy side. Again, the -- of course, if you look at, okay, we used to be enjoying 1% or even lower; now we are talking 1-point-something. Of course, on a percentage basis, it is quite a change. But it's still, I mean, it's still a relatively low number. I mean anything -- I would say, anything below, what, 3% to 4% is a very healthy portfolio situation. I think one should -- as a portfolio manager, we should not be targeting to have 1% vacancy. That means probably you're undercharging your rent.

The -- You should be more -- enable tenants to be -- to have a reasonable space for expansion and moving around. Actually, 3% to 4% vacancy, even it happens, is not really that concerning. And as I said, the -- I don't see major holes coming up in our portfolio as a result of our lease management. So it's a pretty, I think, very healthy situation for our Central portfolio and also for our Singapore portfolio is also very solid. The -- Likewise, the lease expiration for the next 18 months are relatively low-level. And probably the rent reversion in Singapore would probably enjoy a better rent reversions because rent -- current rent compared with 3 years ago, which is quite weak, 3 years ago in Singapore, is actually, one would expect a stronger rent reversion in Singapore. Okay, next question, Simon?


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [7]


The next question is from a company called Shareholder, with a name called Shareholder. So it's -- this could be from our boss, we'll see. It's -- Any indicators that management is looking at before deciding to adjust the final dividend?

So perhaps it's a good time to address sort of dividends and how we think about capital management and the like. I think consistent with what we've said before, that we like a stable dividend. We like a dividend that is consistent and that grows over time in line with our earnings.

So what does this mean in terms of our sort of thought process as we look forward to the second half and have a better sight as to where earnings will end up, both this year and into the future?

I think what we can say with some certainty is, is don't expect the dividend to come down in absolute terms. I think really, the key question here is whether the dividend gets rebased from a sort of dividend payout ratio perspective. You'll see that we've effectively call this around about 50% in terms of paying out profits for some time now, and for a very long time, we've just always held the interim dividend at $0.06 and then made the adjustment for the final dividend. We're continuing to hold the interim at $0.06. I think the real question is whether we will look to effectively rebase the final dividend based on both the earnings, the outlook, capital requirements as we look forward and whether we lift the dividend payout ratio. No decision's been taken on that yet. That's all to be discussed as we move forward into the second half. Justin?


Justin Kwok, Goldman Sachs Group Inc., Research Division - Executive Director [8]


Justin Kwok with Goldman Sachs. Perhaps a question on your Hong Kong land banking side. So a few years back, when the government released the Murray Road car park, actually, you did not participate. So -- well, per what the government is still alert to, they would likely release the high-speed rail station commercial site in the coming months. Is that something that you would consider? What's your view on that? And I think just a few weeks back, there seems to be some news flow quoting that there is a apartment conversion site which you might involve. So may I also ask if there are more details and more color on that?


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [9]


Okay. For opportunities, especially in all the markets that we operate, we certainly monitor them closely. The high-speed railway site, as you know, you mentioned in the Kowloon side, of course, is the opportunity set is under our radar. But I think it's a significant capital commitment, and then of course, every opportunity, we will benchmark against what other opportunities we are pursuing here and in the region. We would normally not comment on whether we will go for it or not. The -- I think it's not appropriate for management to say one way or the other, but it's only fair to say that the opportunities in our home market, we generally monitor them. And then whether we bid for that, [then we really] up to the moment that the site is released and then the terms of the release and compare that with other opportunities in hand before we make a decision on whether to bid for it.

Yes, I think the -- you pick up the news at recent times that we have make applications in -- jointly with our joint venture partners, Sun Hung Kai, for a piece of land in Yuen Long. Earlier on this year, we have paid a land premium to secure the right to develop the site to a 0.4 plot ratio. But of course, in line with the government, the -- encouragement to increase supply of housing in Hong Kong, we certainly look at also the New Territories North strategy announced by the government, that they really want to increase the density of the development in the area. So we are in line with the government policy and hence, make development proposal to the government to intensify the use of the site.

You also pick up in the news that, of course, the intensification is high. We are talking proposing the -- a development GFA from the 0.4 plot ratio to 5.5 plot ratio, of course, up to 5.5 million square feet of space. As you all know, I think it's the -- it's still early stages to say that whether this is acceptable to the government, and then if the -- of course, government have alerted to about private and public sector cooperation in terms of enhancing the supply. That may involve a component of the extra GFA being dedicated for public housing.

So what is the proportion, the -- of that GFA should be dedicated for public housing is up to everyone's guess at the moment. Government has not announced. It's a proposal that is in line with government policy. Having said that, I have worked on this opportunity since 1994. So the -- just to give you an idea. That I hope that we are able to move on that forward, the -- but we have worked on this, as I said, one of the very first project that I failed to make it happen over the last 20-something years. The -- I hope it won't take another 24 years or 25 years to make it happen. Probably it will be shorter than that period, the -- but it's still subject to a lot of uncertainty at the moment. It's a proposal, at this stage, to the government that we'd very much like to conclude earlier rather than later.


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [10]


Okay. So we have another question that's come through. It's from An Chen at AEW in Singapore. The first part of the question we've answered, it relates to commitments for office space in Hong Kong. So again, it's 1.6% on a committed basis.

The second one around the fair value loss of investment properties, what is driving this?

I think the simplest way to think about this is it's driven by the Hong Kong Central portfolio. There is an absolute fractional reduction in open market rents as we look forward. It's value-based on income capitalization approach, no change in cap rates. In the context of a $32 billion investment properties portfolio, the reduction in valuation is de minimis. The overall -- in U.S. dollar terms, the overall valuation has increased slightly. That doesn't get recorded through the profit and loss account. That gets recorded outside the profit loss account because of the slight strengthening in the U.S. dollar versus Hong Kong dollar.


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [11]


Yes. Someone in the back? Yes.


Karl Choi, BofA Merrill Lynch, Research Division - Director [12]


Karl Choi from Merrill Lynch. A couple of questions. First, can you let us know how the retail tenant sales performed in the first half, especially in the last couple of months in view of the recent protests? And sticking with the protests for a second, obviously, the situation is still evolving, but a lot of investor concerns about whether longer term, some MNCs may consider diversifying their office -- regional offices away from Hong Kong. So what's your long-term view on that, and would that increase your appetite to expand in Singapore?


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [13]


Okay. Retail sales for the first half of the year, at the Landmark, we have seen a reduction of an 8% in the overall retail sales. The -- I won't account these retail sales largely to the recent protests because it's really recent events. The trend in -- the luxury shopping sentiment in Hong Kong is very much affected by the global environment perspective. Hence, the impact on the sales.

And other factors that I think I have explained before, of course, the closing price difference between luxury goods in Hong Kong and in China is narrowing. Obviously, there is less the -- incentive for people to buy a lot of goods in Hong Kong and then bring it back to China. This is also a part of the reasons. But having said that, our Landmark sales that have a -- quite a solid proportion of it, generally, our sales have a high proportion of sales offering to locals rather than to Mainland Chinese. That is one of the mitigating factors against the trend.

While this is macro environment, the -- that would not stop us from how are we going to face it. We just subject to this macro environment and then be passive about that. We have the -- we are implementing quite a number of initiatives. As I mentioned, the retail, how are we going to deal with the situation?

Again, it will be included into our strategic initiatives, which we announced in recent months. But it would not [deface] from how are we going to beef up the experience of our customers, how are we going to increase the service to our customers. I think these are the -- must be the areas that every prudent manager in retail space must be focusing on. So I think we are the -- we are heading in good direction, and it is actually, we are well on track in terms of implementing these initiatives in a sense that we would be confident that we will be able to maintain the attractiveness of our Landmark portfolio, and in time, hopefully and then I think -- and then with our strong belief that these initiatives will be able to continue to attract more customers to our portfolio and hence, will be a -- the most important counteracting factors against global trend.

This is, I think, is my response to your first questions. Of course, protests, I think it's how long it takes and how it's -- pan out, I think I'm not the right person to really predict how political situation in Hong Kong will pan out. Obviously, it affects the whole of Hong Kong, the sentiment on the retail sales, as reported in the overall market in Hong Kong, is trending down because of these protests. The longer, of course, these issues last, naturally, the impact will be deeper.

Your last part of the question is about people thinking about leaving Hong Kong and then business moving out. I think it's probably too early to draw this conclusion. And I think -- I do still believe that Hong Kong, the -- remains solid in terms of as a location to carry out business. The development of Greater Bay Area, the attraction of Greater Bay Areas (sic) [Greater Bay Area] and then the opportunities that it brings to Hong Kong and to the region, I think these, all business, of course, always have the short-term fluctuation and uncertainty.

And then looking at medium- to long-term prospects of the region, I don't see that, that has been significantly eroded. I don't see any strong evidence in that direction. And I don't think business will make a long-term decision just based on short-term events. And then of course, having said that, the -- who knows what happens with protests, the -- how it develops. I still believe that these are more short term in nature and the -- and people would be able to adjust themselves in the sense that to adjust the business strategy, the -- accordingly. But in the long run, it remains an attractive place to do business.


K.C. Ng, Macquarie Research - Analyst [14]


David Ng from Macquarie. A couple of questions, all kind of surrounding the cash flow or your cash flow projection for the company. First of all, for the acquisitions in China, whether it's the development properties or investment properties, is there any particular year over the next 5 years that you will see, basically, the -- a massive return of this capital, whether through contracted sales or disposal? Is there like one particular year that you will see a peak of this cash coming back? A related question to this is, is there any particular target or ceiling of exposure to China in terms of your growth asset exposure?

Second kind of category of question is -- I think Simon mentioned on the slide when he talked about treasury and other undrawn $2.5 billion facilities, and he kind of mentioned that's kind of the ceiling, the comfortable level going forward. Should we interpret that, basically, based on at this moment, if everything unchanged, that $2.5 billion is kind of your spending power? Or would there be other alternative form of financing that you would also consider if there is something very, very [chunky] and available today? Again, related to this is will you consider if there is any attractive Hong Kong projects for long-term holding available, do you stress on 100% ownership? Or do you still consider potential partnership for something of long-term holding potential in Hong Kong?


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [15]


Okay. I'll leave Simon to talk about the -- whether we will have significant increase in cash income in the next couple of years. In terms of the ceiling and targets, the investment targets in China, I think we must -- we are practicing quite a dynamic strategy. We shouldn't be too rigid in terms of allocation investments. Our map is Asia. The -- We remains in strong belief that the -- to place meaningful investment in the region, there are only 1 or 2 markets that you can really place meaningful investments: China or Singapore. The rest of the market, yes, really very opportunity-driven, even opportunities come up, the -- it tends to be relatively small. It won't be able to enable you to place big bets in there.

So of course, these 2 markets, where are their property cycles, and then we have to look at that individually and then make a decision. China remains and believe that the -- it's a -- it's still a lot of opportunities in China, especially I refer into my outlook discussion that recent bidding sentiment have changed the -- quite a bit to the extent that the aggressive bidding seems to be quite rampant in recent times, which is good. The -- We maintain a very prudent approach. We do not get carried away by this optimism, short-term optimism, one piece of site could be 40%, 50% higher price than what we acquired at end of last year. Say in Chongqing, give you an example, we acquired a piece of land in Chongqing, and then you would have noted that an adjacent piece of land a couple of months ago gets sold at 40%, 50% higher than our price. Of course, I'm not going to buy at that sort of -- and then we will still be the -- assessing opportunities on a very prudent basis.

Now we have seen this sort of competitive situation moderated a lot in recent times, then probably it would be not a bad time, especially coupled with the -- our experience on sales on the ground, we will have a good feel about what is sellable. And then of course, also, we have a good execution ability on the ground, that the -- we know what -- at what bidding level we will make good return, and then we just keep on doing that. And then -- but the situation keep on changing. Do I know that by this time of the year that we will be having a better environment? I don't know. The -- Early on this year, I don't know. But -- So that's why I say that we must have a dynamic bidding strategy.

Singapore, of course, 2 -- 1 is in IP assets, the other is the residential assets. Residential assets is relatively oversupply, representing almost 4 to 5 years of unsold inventory there. And obviously, one have to be a little bit more cautious in terms of a bidding strategy. IP assets, the -- of course, we -- our focus area, we certainly look at what the government will be releasing in the area that we are interested in. I'm not aware that they are going to release land in anytime soon. So probably big bets in Singapore may not happen in the -- for the rest of this year, I would say.

So I think overall, the -- every company have their own limits of investments. We have our own limits of investments. We generally keep it to ourselves about -- because it's -- again, it should be a dynamic number, that is, to take in account the market conditions in deciding your limits, and then the -- where to invest is, again, depends on the market. Currently, I would say that it's still China is the higher-chance area that we will invest our money. And the -- in terms of -- I think, maybe Simon...


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [16]


I think there's a few sort of subsets to your question. The -- I think the first was about cash flows and looking at perhaps the significant investments we've made going back to the start of 2017 and through 2018. And will we start seeing that reflected through our sort of operating cash flows as for absent new investment?

Absolutely. Most of those or a significant portion of those investments tended to be single-phase, relatively short duration. So we'll see the benefit of that coming back, not so much the second half this year, a little bit, but very much into 2020, '21, '22. Clearly, we'll need to keep reinvesting them to get the benefit of that as we move forward in the future. It will also be a function of what notional investments we're able to make. But absent any new notional investment, we will expect to see very strong operating cash flows come through over the next 3 years. And the business can reasonably quickly turn sort of net cash from a net debt position, absent new investment or any change in dividend.

I think the second part of the question was alluding really to how we think about capital constraints and the availability of capital. Well, I alluded to that in the presentation, re: our liquidity. I mentioned a figure of $2.5 billion and also hinted that if you effectively add that to our net debt position, then you'll get a sort of feeling, absent a buffer, which a lot of, [let's say], a lot of large companies, particularly proper companies, will have a bit of a buffer in there as well. Perhaps is the way we are thinking about where our net debt capacity is and therefore, our available sort of fire power. So that will be the right way to think about that. And then alternative funding sources. At this stage, we are not considering any alternative funding sources. We're already very well-diversified through the banking markets and the debt capital markets, and we're not looking at anything outside of that at the moment.


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [17]


And the last part of the question is about attractive opportunities in Hong Kong and whether we will do partnership, et cetera. Again, I won't point to any specific opportunities. Hong Kong certainly is one of our key markets. Naturally, we'll look at that. But in recent times, you haven't seen us investing anything in Hong Kong in term of new projects. Doesn't mean that we won't do it in future, but again, I think, as I have answered when I answered Justin questions, the -- it all depends on opportunities and timing and how it weighs with other opportunities. And the new IP projects, of course, the -- [just say] likewise, would be the same mentality.

Whether we would be partnering with people, again, depends on the project. We are not shy of working with partners. It's actually very much a big part of our strategy. The -- If it makes commercial sense to partner with people, of course, we will do partnership. The -- one of the, of course, one of the factors is if the investment is too significant, it's better to partner with people. And then if our partners can add value to it, of course, we better work with them. So it's the usual parameters that you consider partnering with people than just doing it yourself.


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [18]


The next question is from Desmond Foong, Morgan Stanley in Singapore. The first part of the question, what was the turnover rent contribution to total rental revenue in the first half of '19?

Which is about to be pointed out to me now, yes, about 5%. So it's -- the turnover rent has always historically been a very small component. Which is why any sort of immediate downturn in sales, there's clearly a lag effect before you'll see the impact of that coming through.

And that was really kind of, I think, referring to the reduction in tenant sales at Landmark. Also a question on what the current occupancy cost is at the Landmark, which we haven't historically disclosed.

How much rental revenue did the assets classified as medium-term lease contribute in the first half of '19?

De minimis. So these are assets which are just effectively opening up. As they become more meaningful, I think probably we'll start to give a bit more disclosure around that. But these are very much assets in the initial opening stages and are yet to stabilize.

And lastly, can we get some comments on potential share repurchases?

Certainly. The -- We obviously conducted some share repurchases in 2018, some $132 million. We continue to keep this under review. For us, we understand the mechanics around the share repurchase is obviously looking to drive earnings per share, which we have been able to drive through both the share repurchases last year but more significantly through operations over the last 2 years. Last year, earnings per share up 10%; 9% which related to the underlying operations; only 1% on the share repurchase. And again, this year, earnings per share for the half, with some reasonably confident comments around the outlook for the full year, up 2%. So we will continue to keep share repurchases under review.

We clearly understand that the current share price is attractive. It's showing an earnings yield of in excess of 7%. And we will continue to evaluate any share repurchase against alternative uses of capital. So we very much view a share repurchase against alternative uses of capital, i.e., investment into either our development properties business or investment properties business as opposed to an either/or around dividends or share repurchases. So it will remain under review, and we have nothing to announce at this point in time.


Praveen Kumar Choudhary, Morgan Stanley - MD [19]


This is Praveen from Morgan Stanley. My question is related to Central portfolio. You mentioned you have spent $50 million CapEx. Could you elaborate on where do you spend, and how does it really enhance the value for customers, and how do you see the rental efficacy of that investment? And then the second question is just a numerical question of what's the spot rate that's going right now in Central that compares to your [passing] to understand how much potential upside is to deliver?


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [20]


Yes. I mean the Central portfolio, from time to time, of course, the average age is not low already. The -- We have to keep on reinvesting in our assets in order to make it in good shape. The -- We are in the last phase of, say, improving all the lifts in our portfolio over the years. We have been changing all the lifts, what is one of the main component that we are upgrading our assets. As you know, lifts services is a key part of office buildings. The last phase of it is being the Exchange Square complexes. You probably noticed that some of the lifts have a sign that's saying that it is under renovation. So it's one of the key areas that we are investing our money.

The other cosmetic changes, like the Landmark, we are repainting the external facade of the Landmark, which we have now done. Obviously, the last time that we have repainted is quite a number of years ago. Again, the -- if you were able to compare the current -- the Landmark, the facade in the future, especially when you see from inside the office, of course, I think -- I believe it's much more respectable and in line with the image of the Landmark. For us to ask the tenants to pay an absolute premium rent for the -- in addition to the service, I think the hardware needs to be. Another area is the toilet renovations. I think that the -- after years of -- that they look tired.

Again, we have a program of renovating our toilets. These are the more cosmetic side. M&E is the lifts that we are investing in and also the power upgrade systems, the air conditioning as well. Air conditioning also is an area, especially with the latest technology, we can now find that the -- we could replace the previous air handling units with more environmental-friendly systems. The -- In the past, it's very, very hard because the air handling units tends to be -- you need to change the whole thing. We cannot do it bit by bit. Now with the new technology, actually, we can do it bit by bit without upsetting the operations a lot. That is a tremendous -- the -- help to us in maintaining the -- so we are embarking on a program of upgrading all our air handling units in our portfolio, partly to sustain our service level and partly for sustainability. And then we do have a lot of energy savings, the -- achieved over the years.

I think the -- you all know sustainability is a very important part of our business philosophy. We tell ourselves that since 2008, we have to reduce our carbon footprint by 30%. We have already achieved 29.4% so far. So compared with some 10 years ago, we have reduced the carbon footprint in terms of energy consumption, we have reduced it by 25% compared with 10 years ago. So it's not an increasing consumption of electricity and carbon footprint but a reduction.

All these are the -- a result of these ongoing CapEx to our Central portfolio. Would I see an immediate rental uplift? I won't say that people will immediately pay you more dollars. But in the long run, it will show up in our performance. That when we can maintain our rent, how can we maintain the rent is the general experience of the tenants feeling that we are actually upkeeping our premises in a good order. And hence, of course, in rent renewal situations, they won't be criticizing us that, "I saw that there is a significant downgrade of your service therefore, and how can you charge me more rent in the circumstances?"

This a very, very large part of our strategy, to keep our portfolio competitive and hence, the -- and this is a necessary part. And each year, we will allocate in the -- a certain proportion of our CapEx into upgrading our Central portfolio. And actually, all our IP assets will be handled in this way, along the same philosophy I have just mentioned. And then I think it is a very, very critical part of it.


John Lam, UBS Investment Bank, Research Division - Research Analyst [21]


This is John from UBS. I just have a question regarding on China business is that because your peers, which is the Chinese developers, they are in the tightening liquidity, so I think that there should be a lot of opportunity in the land acquisition market. Can you share a bit more regarding on the margin and also return hurdle rate for the China DP business? Second thing is that you also mentioned about the potential restoration for the REIT code in Mainland China. Maybe one of the...


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [22]


Potential what, say again, potential...


John Lam, UBS Investment Bank, Research Division - Research Analyst [23]


Sorry, the REIT code...


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [24]


REIT sizing, okay.


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


So one of the bottlenecks about the tax, I'm not sure if you can share a bit more about the REIT market in China.


Robert Wong, Hongkong Land Holdings Limited - Chief Executive & Executive Director [26]


Okay. I think the -- I think on the China business, so you have already highlighted that the tightening of the developers' financing is helping people like us, that we are relatively well-capitalized. And then the -- a lot of financing for the developers in China may not be entirely through proper means. And then if there is a -- the clampdown in this aspect of the financing, certainly, they can't be too at-risk in the biddings and hence, that would help us.

In the -- in terms of margins and the liquidity, I think -- if you have in our pack of information, Page 44, you will see that there is a margin disclosed for the first half of this year. It's the gross margin before LAT. Would I say that this is our target and hurdle rate before we bid for project? No, and the -- this is the -- because each and every time of the cycle is different. The -- This margin, you may say that is -- can be locked in -- largely in the period that -- where there is not too many controls in terms of the selling price and also historically, we are able to lock in sites with multiple phases. So that means the earlier phases, while we may not have a high margins, latter phases, when we are completing the latter phases, of course, you enjoy higher margins. Then we have to act in accordance with the market competitive environment. One would say that the current margin will be lower than what we have been experiencing, but it's a reasonable margin that we would be going in.

Would I tell you what exactly I would be targeting? Probably, we would like to keep that numbers to ourselves. As I think that this -- again, this -- the target is also -- not like you should not have a unified target, the -- because if they do not allow you to resell, like a recent development in Chengdu that we're bidding for, they -- you can only presell at the end of -- after you obtain the occupation permit. Then of course, the margin needs to be higher in order to justify the investment in this.

And so it has to be a range of margins that depends on the project, how attractive is the project, what is the proportion of the land cost to the whole development cost, i.e., what is your upfront cost relative to the development cash flow? Then of course, that affects -- because we have look at -- we need to look at margins, at the same time, we also need to look at the timing of this cash flow, i.e., in more technical terms in IRR, which we all have to look at that as well. Again, this -- you have to look at the cash flow, and again, certain market have a higher proportion of land costs upfront, then you probably need high margins in order to justify the strong -- a high level of cash flow at the beginning of the investment process.

So it's a -- quite a dynamic number. The -- each -- this city needs to be looked at and then risk level. The -- Certain sites have certain challenges that we may have to overcome before, again, then we will demand higher margins. The only -- that we have been enjoying quite a margin that is, I would say, among the top end of the market range, and this is a margin we have been consistently displaying our ability to deliver margins at the top end of the market range. And I won't -- I have no reason to believe that we -- how come we can't do it going forward, and we remain confident that we will be able to deliver return at the top end of the market range but may not be the same level as before.

Oh, the REIT market. I think I would like to follow that closely as well. I don't think I have intelligent answer on your -- of course, I mean, it's the -- for a REIT market to work like in Singapore, then of course, the tax is a very important part of the equation. It incentivizes people to create a REIT market, same as experience in U.S. and Singapore. Tax policy is a very large part of the equation to really develop the -- a -- or grow the REIT market. But this is an -- the -- an aspect that we'll need to pay attention to the development of this. I think they are trying to have some test case and then let's see the outcome of that. We should not be too far away from having proper REIT market, but the -- I hate to make predictions as these things are -- these policy-driven as well.

Any other questions?

All right. Thanks for all the questions. And then the -- if there are any other questions you would like to ask privately, do -- we are welcome to come forward. Thanks, everyone, for coming.


Simon Collier Dixon, Hongkong Land Holdings Limited - CFO & Executive Director [27]


Thank you.