Sun Hung Kai Properties Ltd

HKEX:16

Earnings Call Transcript 2023-Q2

[Hong-ning Sum, executive]

So welcome to Sun Hung Kai Properties Limited Properties FY 2023 Interim Results Analyst Briefing. Today, I'm so grateful and excited to see you all in person, okay? After 3 years of COVID, we're finally back to normal. So hope you can enjoy the briefing and find the briefing useful. So without further ado, let me start my presentation.

As usual, I will give you an overview of results and the performance of our business, followed by the Q&A section with our senior management.

To begin with, I will go through the financial highlights. Please note that all figures are in Hong Kong dollars, unless stated otherwise.

For the 6 months ended 31st December 2022, the group's underlying profit amounted to $9.5 billion, representing a decrease of 36% from last period. The decrease in underlying profit was mainly due to less property sales recognitions in Hong Kong and lower rental income partially offset by improved contribution from nonproperty and hotel businesses. Including the net effect of revaluation losses of around $1 billion on investment property, the reported profit decreased by 45% year-on-year to $8.4 billion.

The underlying earnings per share was down 36% to $3.27, while reported earnings per share dropped 45% to $2.90.

On dividend, the Board of Directors has declared an interim dividend of $1.25 per share, the same as last year.

Let's talk about the profit breakdown by segment. The gross property development profit dropped by 56% to around $3.4 billion. As mentioned, it was mainly due to less property sales recognitions in Hong Kong as all the current financial year's residential developments for sale with approximately 2 million square feet of GFA are scheduled for handover in the second half of this financial year.

On rental business, the group's net rental income decreased by 8.6% to around [ $8.9 ] billion. The drop was attributable to a 5% decline in net rental income from Hong Kong portfolio as well as 20% decline in net rental income from the Mainland portfolio amid RMB depreciation and negative impact of COVID measures.

Benefiting from more regional and international business travelers coming to Hong Kong, the operating loss of group's hotel business reduced by 61% to $63 million. Profit from other business increased by 5%, partially due to higher operating profit from SUNeVision.

For the period under review, the total operating profit was down by 25% to about $14.6 billion. For financial position, the group maintained strong balance sheet with a healthy level of net gearing ratio of around 19%. Net book value per share was around $205 per share.

The group debt maturity profile remained well staggered. The exposure to interest rate risk is well managed with non-RMB floating rate debt accounting for 54% of total debt. The group continues to attain A1 and A+ credit ratings from Moody's and S&P, respectively, both with stable outlook. We will continue to stick to the prudent financial management discipline.

Moving on to the performance of business segment. Let's start with the property business in Hong Kong. As at the end of December 2022, the group's total land bank in Hong Kong amounted to 57.9 million square feet of attributable GFA comprising 34.8 million square feet of completed properties and 23.1 million square feet of properties under development. Among the completed properties, retail portfolio account for 35%, while office accounts for 30% of the total. For properties under development, the majority is for residential use, representing 71% of the total.

In the first half of financial year, the group increased its land bank through to government tender. In November 2022, the group was granted the right to develop and operate the Artist Square Towers project in the West Kowloon Cultural District for about 47 years in a build-operate-transfer agreement. The harbor front commercial development is expected to synergize with the groups nearby once ICC and the High Speed Rail West Kowloon Terminus Development, forming a unique commercial cluster with over 5.7 million square feet of premium Grade A office and 2 luxury hotels to capture the enormous business opportunities from the Greater Bay Area development.

The group also successfully acquired commercial sites near Anderson Road in Kwun Tong, located in the new residential cluster in Kowloon East, the project will be developed into community shopping centers, offering diverse options for the daily lease of a rising population in the area and expand the group's retail portfolio in Kowloon East.

Turning to the property development business in Hong Kong. For the period under review, the group recognized around $2.9 billion property sales and $1.2 billion development profits in Hong Kong, over a TAM around 83%. The substantial decline was mainly due to the old residential project for sale to be completed in the current financial year, our schedule for handover in the second half. These projects include NOVO LAND Phase 1, Wetland Seasons Bay Phase 3, the YOHO Hub Phase 1, St. Michel Phase 2 and KENNEDY 38, totaling about 2 million square feet of attributable GFA. As at the end of December 31, 2022, about $31.2 billion contract sales is yet to be recognized.

During the period under review, the group's contract sales in Hong Kong amounted to $13.4 billion. The residential property market has recently shown size of recovery with increasing transaction volume. This line shows that the group has ample salable resources with diversified product mix. NOVO LAND Phase 2 will be launched very soon. We have another 6 new projects ranging from mass to high end, planned for launches for the rest of 2023.

Now let me discuss about our Hong Kong rental portfolio. During the period, group's diversified rental portfolio in Hong Kong continued to achieve steady occupancy with an overall occupancy of about 93% and recorded gross rental income of $8.8 billion, down less than 2% year-on-year. The performance of the group's retail portfolio is bottoming out with gross rental income down only 1% year-on-year, which is the lowest decline since the pandemic outbreak in early 2020. The gross rental income of the office portfolio decreased by nearly 4% to $3.1 billion as a result of negative rental reversions.

The gross retail portfolio achieved resilient performance with increased footfall and leasing activities, and overall occupancy of about 96% were recorded. Tenant sales of shopping malls, in particular, local-focused regional mall, outperformed the market. Visitor arrivals have been increasing recently, following the full resumption of normal travel between Hong Kong and Mainland, driving further recovery in footfall at our shopping malls.

The group's retail portfolio distinguishes itself from its peers with attentive and innovative initiatives together for customers' changing preferences. To bring refreshing ambience to shoppers, we continue to upgrade indoor and outdoor space of our major malls with green and trendy elements. The group regularly roll out unique promotional campaigns to boost shoppers' traffic and tenant sales. With more than 2 million members, The Point, which is the group's online platform and integrated loyalty program, has further strengthened its collaboration with business and tenants. To capture business opportunities arising from the broader reopening with the Mainland, the group has rapidly introduced a range of marketing activities, including a developed cross-brand rewards scheme.

The group's office portfolio continued to deliver resilient performance amid challenging office leasing markets. Superior office at IFC in Core Central were almost fully let. Another iconic network, ICC, which is to improve occupancy with the introduction of new quality tenants during the period, such as financial institution with private wealth management operations.

The Millennium City cluster in Kowloon East maintained satisfactory occupancies amid keen competitions in the area.

We are expanding our property investment portfolio in Hong Kong with a number of new developments in the pipeline. The Office Com retail joint venture development at 98 How Ming Street in Kowloon East is showcase of the group's commitment to sustainable development. Leasing activities of The Millennity, the project's 2 Grade A office projects, towers, covering 650,000 square feet, are progressing well, and we have started to hand over to tenants. The [ Podium more ] of 500,000 square feet within the development is scheduled to open in 2024.

The group's mega integrated project topped at High Speed Rail West Kowloon Terminus has unparalleled connectivity within Hong Kong and to major Mainland cities via railways. The new landmark, together with nearby ICC and newly acquired Artist Square Towers project, were positioned as a unique commercial hub and wealth management center in the Greater Bay area. Slated for completion by late 2025, the integrated projects managed to attract global financial institution UBS, as the first anchor tenant.

The group's recurring income will be underpinned by various new additions, including what I have mentioned as well as time-placed West Kowloon, the extension of YOHO Mall in Yuen Long, Mall at Kai Tak town centre, office com retail project next to MTR Tin Shui Wai Station, et cetera. And we expect the size of the group's property investment portfolio will reach over 37 million attributable GFA by end of FY 2026.

Next, let me talk about our property business on the Mainland. As at the end of December 2022, the group's total land bank on the Mainland was 68.3 million square feet to attributable GFA, comprising around 20 million square feet of completed properties and about 48.3 million square feet of properties under development. Among the completed properties, the retail portfolio accounted for 45% of total, while premium office accounted for 39%.

Moving on to the property development business on the Mainland. The group's revenue from property sales on the Mainland surged 175% year-on-year to $4 billion due to higher sales volumes. Development profits increased by $1.5 billion to $2.2 billion with satisfactory development margins. As at the end of 2022, around $44.5 billion contract sales were yet to be recognized.

During the period, the group's Grade-A sales on the Mainland amounted to RMB 2.6 billion. Main contributors include the residential portions of Hangzhou IFC and Jovo Town in Chengdu.

The table shows the group's launch pipeline on the Mainland for the next 10 months with a total attributable GFA of around 2 million square feet.

Now I will discuss the performance of our Mainland rental portfolio. During the period under review, the group's gross rental income from Mainland rental portfolio decreased by 17% year-on-year to $2.8 billion. The decline was mainly due to the pandemic-related measures, rental concession and RMB depreciation. All these factors are either one-off nature or unrelated to operations. In RMB terms, the gross rental income was down around 10% year-on-year.

Following the central government's call to prioritize the expansion of consumption, the group's retail portfolio on the Mainland has recorded further improvement in footfall and tenant sales of late. The group's Shanghai IFC Mall and IAPM Mall in Shanghai and the 2 joint venture malls in Guangzhou continued to sustain high occupancies. The newly completed Nanjing IFC Mall has some restaurant recently opened, while the remaining portion is scheduled to open in phases from 2023 onwards. Commitment by retail portions within an integrated developments, the group's offices, Shanghai IFC and Shanghai ICC, both sustained high occupancies amid a challenging leasing environment. Nanjing One IFC occupancy remains stable while the leasing inquiry for Nanjing Two IFC have increased recently.

The group's several integrated projects in Mainland China are coming on stream. In Shanghai, the 220-meter office tower A of 3 ITC was completed with tenants moving in since August 2022. The construction of the remaining parts of 3 RDC is currently underway and are scheduled for completion by late 2024.

Looking ahead, with new integrated landmark projects under development, the group's footprint in major cities on the Mainland will substantially increase. We expect by end of FY 2025, the size of the group's completed properties for investment will increase by over 8 million square feet or 45% to over 26 million square feet of attributable GFA, and this mega development will serve as a new growth driver for the group's recurring income in the future. That covers the group's Mainland rental business. The next item is about our hotels operation.

The performance of the group's hotel business in Hong Kong continued to improve, seeing the gradual easing of currency measures. Occupancy and daily rates of the group's hotels increased meaningfully recently due to the removal of cross-broader travel requirements and increase in visitor arrivals.

On the Mainland, the occupancy of the Ritz-Carlton Shanghai, Pudong also shown notable improvement recently, benefiting from the normalization of economic activities. And we continue to develop premium hotels in major city main cities, including Andaz Nanjing and Four Seasons Hotel Suzhou.

Now let's turn to our ESG initiatives. Apart from maintaining met goal or platinum ratings for its major commercial properties under development, the group also continues to upgrade its existing core investment properties to meet higher green building standard.

Our signature developments in Hong Kong ICC, One IFC, Two IFC and IFC Mall, together with our headquarters, Sun Hung Kai Centre have all attained LEED platinum ratings. We have also been promoting actively green constructions and the use of innovative technologies with real estate sector. To better serve our community, the group promote spots for its charity and healthy living.

Two large outdoor sports events, the Sun Hung Kai Properties Hong Kong Cyclothon and the Sun Hong Kai Properties Hong Kong 10k Championship, will make a return recently. We also encourage reading and holistic development, especially among youth, by rolling out different programs. For more information about our environmental targets, and the latest ESG performance, please refer to the appendix of this PowerPoint or our website.

That's all for our business update. Next, let me discuss the market and business prospects. Hong Kong's economy is expected to recover in 2023 after the full resumption of normal travel with the Mainland. For the primary residential market, the relatively stable local mortgage interest rates and broader economic revival will help strengthen homebuyers' confidence. For retail sector, the return of tourists is a key impetus. Leasing momentum is likely to step up with some expansion demand from retailers. On grade-A office markets, pent-up demand and expansion or upgrading activities will support the leasing market. However, softer external economic growth and higher vacancy in some districts may continue to wait on brands.

On the Mainland, economic growth being the top priority, pro-growth policy and other stimuli will help restore market confidence and drive a stronger economic recovery. For primary residential markets, various measures to ensure stable developments of property markets will help restore market and buyers' confidence, transactions are likely to pick up amid economic recovery. For the retail sector, with the government's plan to prioritize consumption, local spending will be boosted and leasing market will be supported by improved market sentiment.

For Grade-A office leasing market, operating environment will improve amid the pro-growth policy. Local companies may resume their expansion activities, while MNCs may take time to conclude their leasing decision amid slowing global economic growth.

Moving on to our business prospects. Over the short term, the group's rental portfolio and hotel operations have shown further improvement, and we are well prepared to see opportunities amid improving operating environment. On property sales, the group has ample saleable resources with diversified product mix to cater for different homebuyers' needs amid improving residential market sentiment.

In the medium to long term, the group is confident about the prospects of the Mainland and Hong Kong, and we continue to grab development opportunities with good potential, contributing to the prosperity of Hong Kong and the country. The group's footprint will be further expanded through the development of new landmark integrated projects in Hong Kong as well as major cities on the Mainland. And we will continue to strengthen our development business with selective land acquisition when opportunities arise, while strictly observe the prudent financial discipline.

I would like to wrap up the presentation section with a message extracted from the Chairman's statement. Following a 3-year fight against the pandemic, Hong Kong is on the path to normalcy with the long-awaited broader reopening. With this distinctive advantage under 1 country, 2 systems, Hong Kong enjoys strong support of the motherland and is closely connected to the world. While Hong Kong is starting a new chapter to work, governance and prosperity, the group has firm believe that benefiting from these advantages as well as its sound common law system, [ low ] test regime and well standard business practices, the city will be able to boost its core competitiveness and reinforce its status as an international financial transportation and trade center.

Supported by its seasoned management team, strong financial position, well-trusted brand and time-tested business strategy, the group will continue to grab development opportunities with good potential and contribute to Hong Kong's further efforts to shine on the international stage and the country's long-term prosperity, as always. This concludes my presentation. Thank you.

[Unknown Executive]

Before starting the Q&A session, let me introduce today's panel to you Mr. Christopher Kwok, Executive Director. Mr. Allen Fung, Executive Director; Mr. Victor Lui, Deputy Managing Director. The center, Mr. Raymond Kwok, Chairman and Managing Director; Mr. Mike Wong, Deputy Managing Director; Mr. Adam Kwok, Executive Director; Mr. Eric Tung, Executive Director; and Mr. Frederick Li, Group Chief Accountant.

To kickstart the session, I would like to invite our Chairman and Managing Director, Mr. Raymond Kwok, to share with us some key messages. Mr. Kwok, please?

[Ping-Luen Kwok, executive]

With the easing of the COVID situation in Hong Kong and on the Mainland, we're glad to see the long-awaited reopening of the border and the economy on the road of recovery. Despite the pandemic, the group continued to invest in Hong Kong as well as Mainland's first tier and key second-tier cities in a financially prudent manner. We are well prepared to seize the opportunities arising from economic recovery. Under the leadership of Chief Executive [ John Yi ], a lot of works have been done to drive economic development and attract talents. With full border reopening in early February, the city saw a notable growth in visitor arrivals and the faster-than-expected rebound of the luxury hotel and retail markets. Footfall at the group's shopping malls has further picked up, and there is a marked increase in the occupancy and room rates of our hotels recently.

During the period, the performance of the group's retail portfolio remained resilient, and occupancy of the office portfolio was stable. Since the end of 2022, we have seen a significant increase in leasing inquiries, and we believe that leasing demand will continue to pick up as the economy recovers.

As of 31st December 2022, the group's attributable residential land bank under development in Hong Kong exceeded 16 million square feet, adequate to meet our development needs for the next 5 to 6 years. This year, the group will offer a number of premium projects for sale. The second phase of NOVO LAND will be released very soon. In the next 10 months, we will put on sale University Hill near the Chinese University of Hong Kong, the first phase of the Tin Wing Stop Development, the second phase of The YOHO hub, the first phases of 2 high-end projects in Kai Tak and a joint venture project on Prince Edward Road West. The attributable growth for area of these projects totaled 2.6 million square feet.

On the Mainland, in the next 10 months, the group is planning to launch the first phase of the residential portion of Guangzhou South Station ICC, a new phase of Shanghai Arch and new batches of joint venture developments such as the residential portion of Hangzhou IFC, The Woodland in Zhongshan and the Oriental Bund in Foshan.

The group continued to expand its property investment portfolio. At the end of last year, the group won the tender for the Artist Square Towers project in the West Kowloon Cultural District. The group will work closely with the West Kowloon Cultural District Authority to develop it into a landmark of arts, culture and tourism. The project will also create a strong synergy with the group's nearby landmarks, i.e., ICC and also the High Speed Rail West Kowloon Terminus development. forming, a unique commercial cluster consisting of over 5.7 million square feet of premium Grade A offices and 2 luxury hotels. This commercial cluster will help boost the status of West Kowloon as a major business hub connecting Hong Kong with other great -- with other Greater Bay area cities.

The group's large-scale development at 98 How Ming Street in Kwun Tong was completed recently. Handover of its Grade A offices has started and a large shopping mall underneath is scheduled to open in 2024. Including this integrated development, the group's attributable GFA of core commercial projects in Kowloon East exceeds 3 million square feet. The new development will have strong synergy with the group's Millennium City office cluster and the APM regional mall in the vicinity.

The group's Mainland rental portfolio, especially retail premises, was affected by the pandemic during the period. but has seen quick turnaround in footfall and tenant sales after the recent refinement of anti-pandemic policies and the government's pro-growth initiatives. We will continue to develop integrated landmarks in first-tier and top second-tier cities, including Nanjing IFC, ITC in Shanghai, Hangzhou and Guangzhou South Station ICC.

The group actively leverages smart technologies and digital solutions to enhance customer experience and service quality, Meanwhile, the group continues to enhance the value of its existing commercial premises and improve their environmental performance to obtain green building certifications. Our iconic commercial buildings in Hong Kong, such as Hong Kong IFC, Hong Kong ICC and our headquarters building, Sun Hung Kai Centre have already obtained LEED platinum certifications. Besides all of our major commercial properties on the Mainland have also attained LEED certifications. We will continue to obtain LEED gold or platinum certification for our core commercial projects under development.

Irrespective of the challenging external environment, Hong Kong enjoys many distinct advantages under 1 country 2 systems such as strong support from the motherland, close connection with the world, our capitalist system and the common law regime. The full resumption of normal travel has further strengthened the city's global connectivity, giving fresh momentum to the city's transition from stability to prosperity. Supported by our seasoned management team, strong financial position, well-trusted brand and time-tested business strategies, the group has full confidence in the future and will continue to grasp development opportunities with good potential and contribute to the long-term prosperity of Hong Kong and the country.

Thank you.

[Unknown Executive]

Thank you, Mr. Kwok. So we now open to the floor for questions. Very quick. So we will have the first -- the second gentlemen. Ken Yeung from Citi.

[Hoi Chuen Yeung, analyst]

It's Ken from Citi. I have 3 quick questions. The first is on your sales target. You have said earlier -- I mean, last year, you have said that Hong Kong is $35 billion, which we have a very bad last year but still do quite good on the $13 billion. So how is our confidence like? Do we have -- first, do we have an update on this number? And how is our confidence of achieving such number?

And that is a little bit -- although your China is not a big number, but I also want to get a sense of how China property outlook that you are seeing on sales -- on property sell side. So this is the first one.

And second one is on your land banking. Recently, we see a lot of failed tender. So is that -- how is management build on those failed tender? Will we take this opportunity? The outlook seems that you guys are turning more positive that we can be taking up those land on upcoming land auctions in Hong Kong.

And if we want to split between your future investment between Hong Kong, China, commercial residential, where should our money be invested to? So this is the second one.

The last one is on your China retail. Raymond has mentioned that the recovery is good. So how do we see in terms of the tenant sales in China luxury malls post reopening? And are we concerned on some of the luxury leakage after border reopen to overseas country in China?

[Ting Lui, executive]

Yes. Maybe I'll answer you on the Hong Kong side. Despite the pandemic last year, which is affecting the primary launches, in the second half of last year, we still managed to launch 3 projects successfully, namely Phase 1 of NOVO LAND and Park YOHO Bologna and also Wetland Seasons Bay Phase 3. So far, we have achieved sales of HKD 15 billion. And in the remaining 10 months of this year, we still have a number projects to be launched, namely, the upcoming NOVO LAND Phase 2, which we are going to launch in next week and followed by University Hill next to the Chinese University and also the Tin Wing Station. They are the 3 big projects to be launched in these 2 quarters that will contribute a big sum of proceeds on this financial year.

In the second half of this year, we still have 4 projects to be launched. They are all sizable, 3 of them are sizable, namely, Phase 2 of YOHO Hub and also our joint venture project in Prince Edward Road, followed by the 2 important projects in Kai Tak, one connected to the MTR station and the other command the best view in the runway. And in fact, in the next 3 years, we shall have a residential completion in average of 2.5 million to 3 million square feet. And so you can see that we have ample marketing resources and that we are very confident that we can achieve a sales -- our sales target of 35 billion in this financial year.

And regarding the tender in Hong Kong, as you know, we always participate actively. And apart from our land bank in the [ Loughton ] metropolis, we don't have any preference on mass or luxury size as long as the site is having adequate size and scale and suitable for our strength of development. In fact, we have a land bank of over 16 million square feet of residential. That is enough for our development needs for the next 5 years and beyond.

And having said that, we shall continue to participate actively in the local land sales under our prudent financial discipline. And we all know that the land sales in the local market is still very competitive, and we still managed to speed up our conversion of farmlands as another source to replenish our land bank. Thank you.

[Hoi Chuen Yeung, analyst]

I'm sorry. Do you want to respond on the China properties...

[Kai-Fai Kwok, executive]

On the China side, you will see that we have, our target is HKD 5 billion. We've achieved $3.1 billion. So that's exactly a 62.7%, and it was a very tough past few months, right? And I think coming up, I would say we have a lot of projects on pipeline that we aim to launch. The next 2 quarters especially next month, we will launch the Guangzhou South Station residential project. It's been a long time since there's residential project within 1 hour commute in the high-speed train within Hong Kong. It's so convenient by [ Sammo Kai ], so I think we are quite confident with that sales. And on top, we will also be launching Hangzhou Phase Ib, a smaller phase, but still I think we will have no problem selling in Hangzhou. As you know, the market is very hot now in Hangzhou. And then of course, we'll be also selling some of the residual batches of Foshan, Dongguan and so on.

And then looking out towards second half of this year, we also have a very sizable projects coming up. We have a huge Phase 3 of Hangzhou that will be coming up for sale, probably in the third quarter. And then on top of that, depending if the Shanghai way off, obviously, you will have Shanghai Arch Phase 3. You will see that sometimes our China sales is lumpy because whenever we sell Shanghai Arch, we sell it all out. and then drastically increases our sales by 2 or 3x. I think we'll time the market with a good price and launch it. So as you see, many Tier 1 city projects coming up. And so we're quite confident we can reach that. Thank you.

Okay. Sure.

[Kai-wang Kwok, executive]

For, I think, commentary on the Mainland retail sales market. So 2022, we had several waves of COVID infections in China. That was a challenge. But I think the surge in cases, especially the one in Q4 was short lived, so we noticed that tenant sales in our malls have rebounded quickly since December of last year. And we also see that the sales figures for first half of this financial year is better than the second half of last financial year. And more recently during Chinese New Year, we also see that our malls have recorded very good traffic and tenant sales, and especially luxury tenants, right, they have rebounded the most quickly and have returned to high levels that were seen a year ago.

Overall, I think we are optimistic about the performance of the coming 6 months. given the recovery of the retail market in the Mainland has been much faster than expected. We've already seen long queues outside the stores at malls and restaurants and especially the luxury tenants. So I'd like you to go and see our malls in Shanghai, if you're interested.

And we shall continue to strengthen our competitiveness of our malls and achieve better performance. So in this coming year, we'll also have the launch of the Nanjing IFC Mall, which is virtually fully pre-let.

[Unknown Executive]

Invite the next questions.

[Karl Choi, analyst]

I'm Karl Choi from Bank of America. I also have 3 questions. I want to turn to Hong Kong rental for a second. First one is about Hong Kong retail. You mentioned good rebound in food traffic since the Mainland border reopening. Can you give some -- quantify the rebound?

And also, how long do you think it would take for retail or Mainland spending to recover back to the pre-COVID levels?

And second, related to that is the outlook for retail rental reversion in calendar 2023. Are we sort of done with negative rental reversion, can look for growth?

And third is on the office side. There's a lot of concerns about a lot of supply in Hong Kong. And Sun Hung Kai does have a few projects in the pipeline. Can you discuss sort of what you're seeing on the ground? And is there any concern about for some time, you won't be able to have any a lot of pricing power on the rental side?

[Ping-Luen Kwok, executive]

Christopher.

[Kai-wang Kwok, executive]

Sure. I'll talk about the Hong Kong retail portfolio. So I think last year, we had the benefit of 2 additional rounds of the consumption vouchers and virtually lifting of all social distancing and quarantine measures. I think that really helped drive up the sales figures in Q3 and Q4 of last year. And more recently, with the opening of the borders with Mainland China, we have started to see the influx of Mainland visitor arrivals. So then you see the tourist numbers, they have shot up very quickly in January. And we see the similar things happening in our shopping malls and with food traffic and sales in January, performing very satisfactorily.

And so we believe that sales will definitely return to 2018 levels. It's just a matter of time. Well, just yesterday, our Financial Secretary has announced another round of consumption vouchers. So I think that will give an extra boost to the recovery of the construction market.

And also, based on our experience in Singapore with the ION Orchard Mall, we actually -- in Singapore, retail sales in 2022 have already exceeded pre-COVID level. And they basically opened a year earlier than we did. So we believe Hong Kong has a very good chance to follow the same path in the coming year.

With regards to rental reversions, we see that the degree of negative rent reversion has substantially narrowed in the past few months and some of the malls have achieved positive rental reversions already. We also see greater interest from retail tenants to renew their leases and expand with us, both from local tenants and from tenants from overseas and from Mainland China. So overall, I think negotiations of these renewals have been progressing very well recently.

[Ting Lui, executive]

Yes. Regarding the office in West Kowloon, we are so happy to win the bid of the Artist Square Tower. And together with the ICC complex and the upcoming RXL (sic) [XRL] project, in fact, both projects are to be completed 2025 and beyond. The 3 projects is driving the evolution of West Kowloon into a new commercial, entertainment, tourist and cultural attraction. And in fact, we allow that the XRL project have great connectivity with the high-speed railing and also 3 MTR lines and also the airport express line join great number of passengers every day. And in fact, upon completion, I think the 3 projects together, you're able to capture the enormous business opportunity of the Great Bay Area, forming the new West Kowloon CBD.

And you also know that we have an important commitment on in this project. UBS will relocate their operation occupying 20 million square feet. And we also have a number of big names of financial services under negotiation. And I think we can -- I have further good news to be announced that will reinforce this project as a center of wealth management, apart from the foresaid cultural entertainment and tourist attraction.

[Unknown Executive]

So my next question, the gentleman -- the one in the yes. Okay, the one in the fourth row, yes.

[Unknown Analyst]

I have 2 questions. One, regarding the reopening. Can you give us any color on the forward booking of your hotel in Hong Kong? Number two, looking at your balance sheet gearing right now is about 19.2%, would that start to limit the flexibility for any future expansion or if any future expansion have to be relying on any few potential capital raising?

[Hong-ning Sum, executive]

On the hotels? I think we've -- I think if any of you have been to our luxury hotels lately, Four Seasons, Ritz or W, you will see a very strong pickup in business, honestly, especially in February and March, a very strong prebooking.

I'll give you some numbers. Our ADR of our 3 luxury hotels is already above the 2018 level. In fact, obviously, RevPAR taking into occupancy, our -- we are at -- these 2 weeks, we're at 80% of 2018 levels. So -- and steadily climbing. And so I see that continued upward trend coming up. Especially in March, you have a lot of events, right? You have Basel and you have a few more conventions coming up.

For our nonluxury hotels, be it mostly the Royals or maybe Hyatt Centric, we are at 70% of past RevPAR -- above the RevPAR already. And again, the trend is continuing to increase.

So I think like Christopher was saying, if Singapore opens up, you see it last year, immediately, the tourists each month improved, by improve and improve the hotels now are doing way better than what it was before. So hopefully, we'll see the same trend in Hong Kong.

And maybe a final number I would like to say is if you look at tourist arrivals, if you look at our 2018 was a peak tourist arrival. We had 65 million people coming to Hong Kong, 65 million. That's on average 178,000 a day. That was the peak of our business and everything. In February, the last 7 days, if you look at the public data, we've seen 70,000 coming in on average a day. So 70,000 and before 178,000. So we're almost -- we're back to 40% already, and that number is climbing. So we're very encouraged by that.

[Ping-Luen Kwok, executive]

On the balance side, I think 2 points. I think we're going to purchase land, of course, only when there's good profit margin, given that I think the land sale prices have come down, yes.

On the gearing side, I think at the moment now, 19%, but I think we foresee more sales proceeds coming, especially from several properties, and we are also considering sale of some of our older investment properties. So I don't foresee any fundraising in the foreseeable future. And also, I think all our bank facilities are all long-term facilities, and some are actually fixed with long-term facilities. So I would say we are comfortable with our gearing position, yes. And especially on the Mainland, we have a lot of cash. And also, we have a lot of facilities on the mainland to fund all our existing investment projects under construction, yes.

[Unknown Executive]

So maybe we have the gentleman in the second row.

[Mark Leung, analyst]

This is Mark Leung from UBS. So I have maybe 3 -- 2 key questions. So I think number one is about on the land banking strategy. So you just mentioned we will acquire land with good margin, but we see, near term, got more uncertainties from the land planning from the home government side. So from your perspective, would you increase your hurdle margin when doing land acquisitions? I think that's the first question.

And second question is, going forward, for the funding side because for the Mainland onshore funding cost is coming down, we will increase our Mainland funding proportion as a whole? And in the longer run, we will also consider to launch series to recycle the capital from Mainland?

[Ping-Luen Kwok, executive]

Sorry, can you repeat the first question here?

[Mark Leung, analyst]

The first question is will we increase our land acquisition hurdle margin because of increasing policy risk from land planning from the Hong Kong government?

[Chik-Wing Wong, executive]

I think before talking about the margin requirement, would just -- I want to review what we have done in the past couple of years. We have been busy and diligent to procure land and planning approval for our agricultural land in NT, many of which is actually within the Northern Metropolis area. And I think we have, in many cases, we have secured planning approval. And many of those actually enter into another stage of land premium negotiation. And about 4 to 5 of them actually enter into a very final stage of negotiation. We hope when the price is right, we will be able to strike a deal with government.

And I mean, the hurdle margin or hurdle rate is actually very -- can't give you a very simple answer on that, but we will strictly adopt it to our prudent financial principle. And if we are confident with a good profit margin, we'll go over a project. As my colleagues just mentioned, we have already got more than 16 million square feet land bank residential in Hong Kong, so that we are going to be selective. We're going to be going for the project we think we have a good profit margin.

[Ping-Luen Kwok, executive]

On the funding side, I think we would like to see the asset spread between Hong Kong and Mainland. Hong Kong, 75%. Mainland, about 25%. And I think we always want to make sure that we borrow to fund the -- for example, we always want to fund Hong Kong projects with Hong Kong dollars and also fund Mainland projects with Mainland money to make sure that there's no foreign exchange risk here. So we want to be as prudent as possible. Thank you.

[Unknown Executive]

For the interest of time, we will take the last 2 questions.

[Wai Ming Liu, analyst]

This is Raymond from HSBC. I've got 2 questions. The first one is about the Hong Kong office. So the company has been expanding your office portfolio in West Kowloon district very meaningfully. So how should we think of the competitiveness of this district versus the central CBD, like in the medium to long term? So do you expect the rental spread to narrow or something? How should we think about this one?

And the second is about our land banking strategy in China. So what is your latest view in the China property market? Do you -- does the management think -- is it will be the right time to increase your exposure in the Mainland China commercial property market or better to wait for a while?

[Ting Lui, executive]

Yes. As I said, our 3 development, 2 under construction, namely, the Artist Square Tower and XRL project, together with the ICC complex will form a new West Kowloon CBD. I don't think it will create much competition to the central CBD. As we all know that the central CBD is a long-established financial district able to attract leading international banks and financial institutions and all of which our IFC project being the most prominent comprehensive development. I think the West Kowloon CBD will just add to the driving force for Hong Kong to continue to be a major international finance center.

Now talking about the rental reversion, I want to mention that we have a stable rental reversion. For our office portfolio, the most important buildings, namely, the 2 IFC project, the ICC development and also our buildings in the Millennium City portfolio. We have already renewed over 70% of expiry in the next 12 months and having a very stable conversion.

[Ping-Luen Kwok, executive]

Yes. I think regarding buying land on the Mainland, I think at the moment now, we have a lot of projects already. So in the foreseeable future, we will focus on constructing and selling the residential portion of our projects under construction and also make sure that we can lease well to our tenants for all the projects commercial projects under construction. For example, right, we are quite near finishing Nanjing IFC, and we are starting to construct [ Nanjing ] IFC and we are quite near the Phase 3, right of ITC Shanghai, right?

[Kai-Fai Kwok, executive]

Yes, site 4 and site 3.

[Ping-Luen Kwok, executive]

Yes. Yes. Those are very big projects. And also Guangzhou ICC office and residential. So at the moment, we have our hands quite full already, yes. Thank you.

[Unknown Executive]

So we invite the last questions from the floor. The gentleman next to you. Yes, the gentleman next to you. Yes.

[Jeffrey Mak, analyst]

It's Jeffrey Mak from Morgan Stanley. My first question is on dividend. Your DPS has been flat for the past 4 years. And the payout ratio is currently at the high-end range of 40% to 50%. So just wondering with the full normalization of economic activity, can we expect dividend to be growing again soon? And my second question is on DP margin. You have achieved very good DP margin in the past few years. Just wondering, given that home price has been down 15% to 20% from the peak, what is your outlook on the margin on the DP side going forward?

[Ting Lui, executive]

Yes. When you look at our past sales history, I think you know that we can always strike a balance between volume and margin normally for mass project, we are looking for a quicker asset turnover. And for the high-end projects, which are normally difficult to replace with the market at our pace, mass project being like local land and the Wetland project, I think you all know that we have an overwhelming sales last year on the NOVO LAND project, and you know our cost. This is a huge project of 4,500 units. And we have already -- I think we have priced correctly to achieve such good sales. And now we have already established a solid pricing structure for the remaining phases so that we can have a reasonable and satisfactory profit margin, same as our other mass project like Wetland and the upcoming Tin Wing Station project. So above all, we should have a very stable profit margin compared with the previous 2 years.

[Ping-Luen Kwok, executive]

On the dividend policy, I think we would want to -- the optimal range would be 40% to 50% of payout ratio. So as we increase our earnings per share, we will pay more dividend. But this also our second criteria in we're to try to maintain the absolute dividend per share so that our shareholders can expect the cash flow, especially those who rely on dividends for their income.

So therefore, I think there are 2 criteria. One is to try to maintain the absolute dividend per share. The other one is we try to keep the range between 40% to 50% and also to try to maintain the absolute dividend per share. Sometimes, we may be flexible enough to stretch it to 40% to 60%, yes.

[Unknown Executive]

Thank you, Mr, Kwok. As this is the final question, our briefing session is coming to a close. Thank you very much for joining us today. We appreciate your time. Thank you.