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Edited Transcript of J36.SI earnings conference call or presentation 5-Aug-19 1:00am GMT

Half Year 2019 Jardine Matheson Holdings Ltd and Jardine Strategic Holdings Ltd Earnings Presentation

Central Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Jardine Matheson Holdings Ltd earnings conference call or presentation Monday, August 5, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Raymond Witt

Jardine Matheson Holdings Limited - Group Finance Director & Director

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Presentation

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John Raymond Witt, Jardine Matheson Holdings Limited - Group Finance Director & Director [1]

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Good morning. Welcome to the Jardine Matheson and Jardine Strategic 2019 Half Year Results Presentation. Jardine Matheson's profit in the first half was impacted by a slow start to the year at Astra, while Hongkong Land and Dairy Farm both saw increases in profit. While no underlying profit was recognized from JLT, the reported net profit benefited from a significant gain on the sale of our stake.

Generally, the group faced challenging conditions in the period primarily caused by weaker consumer sentiment in Indonesia. Most businesses, however, delivered resilient performances. The group's financial position remains strong.

This slide sets out the structure of the Jardine Matheson Group, with which most of you will be familiar. In addition to the ownership interest shown, Jardine Strategic holds a 58% interest in its parent, Jardine Matheson. There have been no material changes since our 2018 full year results presentation.

I'll now give you an overview of the group's results for the first half of the year in more detail, and there'll be time at the end for questions that you may have. As always, my focus will be on underlying profit attributable to shareholders, which the group uses as its key earnings performance measure. Underlying profit excludes what we call nontrading items, which are specifically defined by an accounting policy in our accounts. By focusing on underlying profit, the intention is to provide a clearer understanding of the ongoing performance of the group.

Overall, for the first half of 2019, the group's revenue, including 100% of associates and joint ventures, rose 13% to $50.3 billion. Consolidated revenue for the group was down 5% at $20.2 billion. The group's underlying profit in the period was $738 million, 3% lower than the first 6 months of 2018. There was a net nontrading gain in the first half of $1.5 billion compared with a net nontrading gain of $136 million in the first half of 2018. Underlying earnings per share were 3% lower at $1.96. The Board has recommended the interim dividend be increased by 5% to $0.44 per share.

Turning to the contribution of individual businesses to Jardine Matheson's profit. Jardine Pacific's businesses saw lower overall results mainly due to the timing of project completions in Gammon. Jardine Motors made a good start to the year with a better result in its Mainland China operation and the benefit of a higher contribution from its investment in Zhongsheng. There were, however, lower profits from Zung Fu in Hong Kong.

Hongkong Land saw its profits rise modestly as its results benefited from increased contribution from investment properties and development properties, partially offset by higher financing costs due to land acquisitions. There was a higher contribution from Dairy Farm as most of its businesses performed well in the period, although the food business continued to face challenges. Mandarin Oriental saw lower profits in the first half mainly due to the closure of The Excelsior and reduced earnings from its Bangkok hotel, which is undergoing renovations.

Jardine Cycle & Carriage saw a lower contribution from its investment in Truong Hai Auto Corporation, or THACO; while Astra's performance was also weaker in the period, with a reduced contribution from its automotive business and agribusiness offsetting higher earnings from its financial services and heavy equipment, mining, construction and energy businesses.

You will notice that there was a significant reduction in corporate and other interests. This reflects the inclusion in respect of 2018 of JLT's contribution for the first half of that year, while in the first half of 2019, we did not benefit from any underlying profit as a result of the sale.

Moving to nontrading items. During the period, the major component was the $1.5 billion sale gain arising for the group's stake in JLT. There was a net nontrading gain of $44 million in the fair value of other investments held by the group, which are marked-to-market at the end of every accounting period. This was offset by a loss at the Jardine Matheson level of $37 million due to a modest change in the overall valuation of Hongkong Land properties. Overall, the group saw net nontrading gains of $1.516 billion in the first half.

I'll now turn to the individual operating businesses before returning to the group net debt position, summary of business developments and outlook for the second half. I will deal with the businesses held directly by Jardine Matheson before moving on to the group's listed entities, which are held through Jardine Strategic, all of which have recently issued their own results announcements.

Jardine Pacific's operations produced mixed results. Its underlying profit was $56 million, 9% lower than the same period last year.

Looking at individual businesses. Jardine Schindler continues to be the biggest contributor to Jardine Pacific. Its profits were broadly flat. JEC saw profit growth mainly as a result of better performances in its equipment trading and engineering and data center businesses as well as the benefits from the rollout of improvements in business efficiency in Hong Kong. These are focused on improving manpower productivity and enhancing procurement efficiencies.

Gammon's earnings were lower than last year due to the timing of projects. Its order book looks strong going into the second half, having grown by 14% year-on-year with strong pipelines both in Hong Kong and Macau.

Jardine Restaurants also produced a steady performance. Its store development program is progressing well, and there's a focus on growing the number of its outlets, with a particular focus by KFC on Hong Kong and Taiwan and by Pizza Hut in Vietnam.

Earnings from transport services were affected by a reduction in cargo throughput at Hactl, but this trend was better than the rest of the market.

Looking now at our motors businesses. Jardine Motors saw a 23% increase in underlying net profit to $107 million for the period. This was in large part due to an increased contribution from Zhongsheng as a full 6 months profit for the period from July to December 2018 was included in the first half results. In 2018, due to the timing of reporting, only 2 months of results were included.

Zung Fu in Mainland China delivered a higher contribution, with good performance from its after-sales business. The U.K. saw lower underlying performance. While its operating profit rose due to improved margins and growth in its after-sales business, its results in the same period last year benefited from the profit of the sale of dealership land. The Zung Fu business in Hong Kong faced challenges from slower new car deliveries as a result of delays in obtaining vehicle certifications as well as weaker consumer sentiment. Zung Fu continues to achieve a strong 46% share of the luxury car market in Hong Kong.

Looking now at Jardine Strategic. Consolidated operating profit in the first half of the year fell by 1% to $779 million. The nontrading items totaling $878 million reflect primarily the company's share of the gain on sale of JLT. The Board has approved an interim dividend of $0.105 per share, an increase of 5% from last year.

As of 30th of June, the net asset value per share of Jardine Strategic, which is calculated by reference to the market value of its underlying investments, was $61.10, down 11% from the end of 2018.

I'll now turn to the principal businesses of Jardine Strategic. Hongkong Land's underlying profit of $466 million was 2% higher than in 2018. Its investment properties benefited from the continuing tight supply in Hong Kong central office leasing market. The group's central office portfolio comprises some 4.9 million square feet of office, retail and hotel space and is valued at close to $32 billion. While vacancy in the portfolio was 2.8% at the end of June, it would have been 1.6%, taking account of new lease commitments. At the end of 2018, office vacancy was 1.4%. The retail portfolio remained effectively fully occupied.

In Singapore, there were positive rental reversions. Vacancy in the group's office portfolio, which comprises some 1.8 million square feet and is valued at nearly $4 billion, was 3.3% at the end of June 2019. Although it would have been 0.9%, taking account of new lease commitments. At the end of 2018, vacancy was 2.5%.

Turning now to Hongkong Land's development properties. In Mainland China, the operating profit contribution from development properties in the first half of 2019 was $142 million compared with USD 47 million in the equivalent period in 2018 as a result of more sales completions. At 30th of June 2019, the group had $1.7 billion in sold but unrecognized contracted sales compared with $1.358 billion at the end of 2018. As with last year, both sales completions and contracted sales are expected to be stronger in the second half of the year.

The group has some 5.9 million square meters of developable land bank, of which 55% is located in Mainland China. The portfolio in Mainland China comprises 20 projects across 7 cities.

Hongkong Land incurred higher net financing costs in the period due to the acquisition of a new site in Wuhan and deposits paid for recent land auctions. The profit contribution from the group's Singapore development properties business was lower than the prior year. In 2018, profits were recognized on completion of the large Sol Acres executive condominium development. Presales are progressing satisfactorily at the Margaret Ville and Parc Esta projects.

Dairy Farm saw 3% lower sales from its subsidiaries for the first half of the year due to the deconsolidation of Rustan's Supercenters following the disposal at the end of 2018 as well as the implementation of Dairy Farm's regional store optimization plan. Underlying profit was 5% higher at $177 million, thanks to a strong performance by Yonghui and the profit contribution from the group's new investment in Robinsons Retail in the Philippines.

While Dairy Farm's Health and Beauty business delivered strong results, overall profit growth was held back by the costs associated with the continued investment in the group's business transformation program.

In the food business, sales were in line with last year. The ongoing investment in the group's transformation plan is, however, beginning to show the first signs of growth in Southeast Asia.

There was sales growth in all of Dairy Farm's other formats in the period. Convenience stores increased sales in all markets with the strongest growth in Mainland China. Overall profits from convenience were, however, slightly lower as improved profits in Hong Kong and Macau were more than offset by additional costs from the expansion of the store network in Mainland China, which now totals 1,150 stores, an increase of 160 stores over the past 12 months.

The Health and Beauty division in North Asia saw strong sales, and Guardian in Southeast Asia also delivered an encouraging performance.

In home furnishings, IKEA achieved higher sales in all markets, but profits were lower due to the increased cost of goods and preopening expenses for the new stores under development in Taiwan and Indonesia. E-commerce activities are growing. Maxim's delivered good performances across all its key businesses, especially restaurants. Dairy Farm's result also benefited from 6 months results from Yonghui for the period to the end of March.

Moving now to the group's luxury hotel business. Mandarin Oriental's underlying profit for the period was $11 million compared with $22 million in 2018. This reduction was primarily due to the closure of The Excelsior and reduced earnings from the Bangkok hotel, which was largely closed in March 2019 for a major renovation.

Performances were mixed across the group's owned properties. Results in Tokyo were notably better, but there was a slowdown in corporate business at the Hong Kong hotel, and earnings were slightly weaker in the rest of the region.

In Europe, earnings were higher at the London hotel, which reopened in April and which continued to benefit from insurance coverage for the loss of profits due to the fire in June 2018. In Paris, results were lower as citywide demand was impacted by demonstrations. In America, Boston performed well but Washington, D.C. saw weaker results.

I should note in passing that we have revalued The Excelsior and realized a onetime asset gain through reserves. The asset is now classified as an investment property, ahead of the planned redevelopment of the site as a mixed-use commercial building.

Turning now to the group's other business interests in Southeast Asia. Jardine Cycle & Carriage's underlying profit for the period was $407 million, down 1% from 2018.

Before moving to Astra, let me cover JC&C's directly held motor and other interests. In its direct motor interests, there was a weaker performance from 25% owned THACO in Vietnam due to lower unit sales and margins, which reflected the increased competition in the local automotive market. 46% owned Tunas Ridean in Indonesia performed better than the previous year.

Other strategic interests benefited from an increase in the dividend income received from VinaMilk from $24 million in the first 6 months of 2018 to $28 million this year. There was a lower contribution from Siam City Cement in Thailand as improved domestic performance was offset by a lower contribution from its regional operations, principally Vietnam.

Turning now to Astra. Astra reported net profit equivalent to $691 million under Indonesian accounting standards, 6% lower in its reporting currency. This translated to an underlying contribution to JC&C of $326 million, down 8%.

Looking now at the contribution from each of Astra's operating divisions. The contribution from Astra's automotive division fell by 22% compared with last year, with 6% lower car sales and increased manufacturing costs. There was a 13% decline in the overall wholesale car market, but Astra increased its market share from 48% to 53%. Overall motorcycle market grew by 7%, and Astra's market share continued to be strong at 75%.

There was a strong improvement in performance by Astra's financial services division with its contribution growing by 29% mainly due to the recovery of nonperforming loans, lower loan loss provisions and larger loan portfolios. 44.6% of Permata Bank reported a significant increase in net income mainly due to a higher level of recoveries from nonperforming loans. Astra's general insurance company saw net income growth of 9% due to increased investment income.

The contribution from Astra's heavy equipment and mining business grew by 2% in local currency terms in the period mainly due to the contribution from the new gold mining operation, partly offset by weaker heavy equipment sales.

United Tractors' construction machinery business, Komatsu, reported a 20% decrease in heavy equipment sales, reflecting lower coal prices, while parts and services revenue were stable. Coal mining subsidiaries achieved higher coal sales, while Agincourt Resources reported gold sales of some 194,000 ounces.

Turning to agribusiness. The contribution from Astra Agro Lestari declined by 98% to a breakeven position mainly due to lower crude palm oil prices. Astra's infrastructure and logistics division has contributed $3 million to JC&C from a breakeven position last year due to improved earnings from operational toll roads with increased traffic volume.

Moving from the operating company's trading performance to the group's overall net debt position. At 30th of June 2019, the group's net debt, excluding financial services, was $5.3 billion and gearing was 8%. Net debt has reduced by $0.7 billion since the end of 2018, reflecting the receipt of the proceeds from the JLT sale, which is reflected in the JM corporate line. This was offset by investments across the group's businesses, including the purchase of some $250 million of group company shares, principally purchases by Jardine Matheson of Jardine Strategic shares. In Hongkong Land, net debt increased by some $300 million primarily due to the new site acquired in Wuhan and deposits paid for recent land auctions.

At Jardine Cycle & Carriage, consolidated net debt, excluding financial services companies, increased by some $950 million largely due to an additional investment by JC&C in Truong Hai Auto Corporation and $733 million higher net debt within Astra. The increase in net debt within Astra reflects the additional investments in Gojek and new toll roads as well as ongoing capital expenditure in Astra's mining contracting business.

The net debt of financial services increased slightly to $3.4 billion. Overall, the group is in a strong financial position with significant capacity to finance future growth.

Let me now touch on some of the developments within the group during the first half of the year. The offer for JLT by Marsh & McLennan completed on 1st of April 2019, and the group received net proceeds of USD 2.1 billion for the sale of its 41% stake. The proceeds will further enhance the group's ability to take advantage of opportunities in our core markets across Asia.

Within Hongkong Land, WF CENTRAL in Beijing is performing in line with expectations, and its hotel, Mandarin Oriental Wangfujing, opened in March 2019 and has received positive reviews.

In Bangkok, planning of Hongkong Land's prime commercial joint venture project in the central business district is well underway, with construction expected to commence in early 2020 and completion scheduled for 2025. The development, which is a joint venture with Central Group, will comprise some 290,000 square meters of prime office and retail space.

In Wuhan, during the first half, the group acquired a 226,000 square meter residential site to the west of the city center, which is planned to yield 1,600 units.

Dairy Farm is implementing a range of initiatives as part of its multiyear transformation program. These include developing a group-wide supply chain approach, improving the fresh food offering and reducing waste in stores, providing a better customer experience and making in-store labor efficiency and productivity improvements. These initiatives are on track to deliver considerable cost savings this year. The program is aimed at improving business performance and achieving long-term sustainable growth.

During the first half, Maxim's acquired the Starbucks franchise in Thailand through a 60% interest in a joint venture with Fraser and Neave, adding 372 stores in Thailand to its existing stores in Singapore and Hong Kong.

At Mandarin Oriental, 4 new hotels were opened in the period: in Beijing, Doha, Dubai and Lake Como. In addition, the group signed 2 new management contracts for a second hotel and residences in Istanbul and a new stand-alone residences in New York.

In Astra, a 44.5% interest was acquired in the Surabaya-Mojokerto toll road for $110 million, further strengthening the Astra portfolio in the Trans Java network and bringing its total interest in toll roads to 339 kilometers.

Also in Southeast Asia, in June, Astra launched Gofleet, a joint venture with Gojek to supply and maintain cars as Gojek expands its ride-hailing business. And in July, Jardine Cycle & Carriage announced the formation of a new car leasing business in Singapore and its entry into a fleet partnership with Gojek as JC&C looks towards leasing and managing car fleets for corporate clients, including players in the ridesharing industry.

Here in Hong Kong, earlier this year, we announced a joint venture with the Bank of China Hong Kong and JD Digits to launch a virtual bank levy. This project underlines the group's strength as a partner of choice for businesses across the region.

At the center, we remain focused on the opportunities and challenges being presented by changing technologies and digitalization. Our innovation agenda has continued to progress in the last year, and a culture of innovation has taken hold across our businesses. There remain much to do, however, and in recognition of this, we have recently created a new role of Director of Digital. And Anne O'Riordan, formerly a Senior Managing Director at Accenture, joined us at the beginning of June and has already started to assess the opportunities for further developing the group's digital and innovation strategy, building on our existing strengths, networks and customer insights to enable digital transformation across our businesses at pace. I look forward to updating you on the progress we are making in future presentations.

Looking ahead, in the second half of the year, we expect to benefit from higher contributions from Hongkong Land and Dairy Farm. However, the group's overall results will depend to a large extent on consumer sentiment in our key markets, particularly in Hong Kong and Indonesia. Despite the many uncertainties in the shorter term, we remain positive about the longer-term prospects for growth in our key geographies of Greater China and Southeast Asia.

With this, I've come to the end of my presentation. Thank you very much.