Sun Hung Kai Properties Ltd

HKEX:16

Earnings Call Analysis

Sun Hung Kai Properties FY 2023 Results

Sun Hung Kai Properties' FY 2023 results depict a company navigating economic headwinds with resilience, exemplified by a diversified portfolio and prudent financial management. The underlying profit decreased by 17%, with Hong Kong property sales declining 27%, leading to a 43% drop in development profit, amidst a general profit downturn across segments. Nonetheless, Mainland China operations surged, including a stark 178% increase in property development profit to HKD 2.6 billion. The hotel business rebounded from a loss to a profit of HKD 161 million. Rent and other business income remained largely stable, with modest adjustments. The full-year dividend is maintained at HKD 4.95 per share. LEED Gold or Platinum certification is being pursued for major properties under development, reflecting strong commitment to sustainability and ESG initiatives. Looking forward, Sun Hung Kai is set to strengthen its recurring income and continue pursuing growth with cautious optimism.

Welcome to Fiscal Year 2023 Results

Sun Hung Kai Properties welcomes us to their annual results briefing, attended by over 30 analysts, symbolizing investor interest and the company's commitment to transparency.

A Challenging Year with Declining Profits

The year ended with a 17% decrease in underlying profit to HKD 23.9 billion, mainly due to a slump in property sales in Hong Kong. The total dividend remains steady, indicative of the company's commitment to shareholder returns despite the reported profit also dropping by 7% to HKD 23.9 billion.

Diverging Fortunes in Property Development

While overall gross property development profits fell sharply by 29%, the story was different across geographies. Hong Kong suffered a decrease, but Mainland China saw an astonishing 178% growth, thanks to higher sales completions, a testament to the company's geographic diversification strategy.

Rental Revenue Holds Steady Amidst Wider Turmoil

The group's rental income presented a mixed picture. Hong Kong's rental income remained virtually unchanged, but Mainland's income was hit by a 16% decline due to currency depreciation and rental relief extended to tenants affected by business closures. However, a strong recovery in the hotel business and a 10% increase in profits from logistic and infrastructure segments signal underlying strengths.

Sales Resilience in a Tough Market

Despite the market turbulence, Sun Hung Kai achieved HKD 33.4 billion in contracted sales in Hong Kong, marking a 13% year-on-year increase and nearing the company's sales target. The company smartly capitalized on 20% of these sales from completed units, ready for immediate occupancy.

Retail and Office Rentals: Striving for Stability and Growth

The rental portfolio in Hong Kong modestly grew by 1%, with retail rental income recovering by 5.5% in the second half of the fiscal year after border reopening. Offices experienced a slight decline, which was mitigated by the overall stable occupancy of around 93%. The point to note: retail and office spaces remain important pillars of the Group's steady income stream.

Looking Forward: Investment in Recurring Income Sources

New investments are on the horizon to bolster the group's recurring income. In the near term, developments like TOWNPLACE WEST KOWLOON are expected to begin operations, while extensions to YOHO Mall and other ventures are slated for 2024. These forward-looking investments are inline with the company's strategy to safeguard and grow its recurring income over the medium to long-term future.

Earnings Call Transcript 2023-Q4

[Hong-ning Sum, executive]

[Interpreted] Good afternoon, ladies and gentlemen. Welcome to Sun Hung Kai Properties Analyst Briefing for FY 2023 annual results. Today, we have over 30 analysts joining us. Please stay behind after the briefing and enjoy some refreshments outside the auditorium. As usual, I'll give you an overview of the results and the performance of major business segments. Then we will have a Q&A session with our senior management.

Let me start off the presentation with financial highlights of the results. Please note that all figures are in Hong Kong dollars unless stated otherwise. For the year-end at 30 June 2023, the group's underlying profit amounted to HKD 23.9 billion, down 17% year-on-year. The decrease in underlying profit is primarily due to the decline in profits generated from property sales in Hong Kong, while the group's sizable recurring income generated by rental portfolio and non-property businesses remained relatively stable.

The reported profit decreased by 7% to HKD 23.9 billion after taking into account the revaluation gains of investment properties of around HKD 220 million. The underlying earnings per share and reported earnings per share were HKD 8.24 and HKD 8.25, respectively. On dividend, the Board of Directors have recommended a final dividend of HKD 3.70 per share, together with the interim dividend of HKD 1.25. The total dividend for the full year will be HKD 4.95, the same as last year.

For the profit breakdown by Segment. The gross property development profits declined 29% year-on-year to HKD 11.3 billion. The decline is mainly due to the lower development profit from Hong Kong. On the other hand, property development profit from Mainland China increased by 178% to HKD 2.6 billion, mainly driven by higher sales completions. The good total net rental income amounted to HKD 18.5 billion, down 4% year-on-year.

Net rental income in Hong Kong was more or less the same as last financial year, while net rental income from the Mainland portfolio was down 16%, mainly driven by RMB depreciation and rental relief granted to the retail tenants who were affected by the business closure during April and May last year.

After full border reopening since early this year, the group's hotel business recorded strong recovery and generated an operating profit of HKD 161 million against an operating loss of HKD 429 million. Profit from other business were up 10% year-on-year, largely due to better performance from the group's transport infrastructure and logistics as well as SUNeVision. The total operating profit was down 11% year-on-year to HKD 34.7 billion.

The group continued to maintain a strong financial position. The net gearing ratio as of June 2023 was 18.2% versus 19.2% 6 months ago. Under the high interest rate environment, the group's interest coverage ratio during the period was 6.8x. Net book value per share rose to HKD 207.80. As always, we shall continue to adhere to our prudent financial management discipline with ample liquidity, diversified funding sources, and well-balanced debt maturity profile. 42% of the group's outstanding debt were either Hong Kong dollar fixed rate debt or RMB-denominated debts, which are not affected by the rising trend of interest rates in the U.S.

Moving on to the performance of the business segments. Let's start with the property business in Hong Kong. As of the end of June 2023, the group's total land bank in Hong Kong was about 58 million square feet of attributable GFA, comprising 36.4 million square feet of completed properties and 21.6 million square feet of properties under development. Among the completed properties, retail space accounts for 34%, while offices account for 30% of the total. For properties under development, about 66% were residential properties for sale.

During the year, the group had 3 commercial sites with a total GFA of 2.3 million square feet through public tenders. With these 3 new acquisitions, which will be kept for long-term investments, the group's recurring income will be further strengthened over the medium term. In March, the group successfully acquired a commercial site in Mong Kok through a public tender. It will be developed into a comprehensive commercial complex consisting of around 1.5 million square feet of floor area, enjoying a convenient transport network to Admiralty and cross-border points to Shenzhen.

Upon its completion by 2030, it will synergize with the group's Grand Century Place complex next to MTR Mong Kok East Station, forming a new commercial hub of about 3 million square feet in Kowloon.

Let's turn to our property development business in Hong Kong. The group's recognized property sales in Hong Kong dropped 27% year-on-year to HKD 23.9 billion, while development profits decreased by 43% to about HKD 8.5 billion, reflecting lower sales completions and profit margin. Major contributors include NOVO LAND Phase 1A & 1B, Wetland Seasons Bay Phase 3, The YOHO Hub Phase 1, St Michel Phase 2 and KENNEDY 38. And during the financial year, about 2 million square feet of attributable residential GFA were completed, and a majority of these units have been sold. As of the end of June 2023, about HKD 28 billion contracted sales were yet to be recognized and around HKD 24 billion will be recognized in FY 2024.

During the year, the group achieved about HKD 33.4 billion contracted sales in Hong Kong, representing 13% year-on-year increase and about 95% of its sales target. Around 20% of these achieved contracted sales were derived from sales of completed units, and this table shows the major contributors. And so in this map, the upcoming launches in the next 9 months include 6 projects across the territories with diversified product mix attending to potential buyers. YOHO West atop the Light Rail Tin Wing Station will be launched soon, and we will continue to launch new projects for sale when ready and speed up sales of unsold completed units and noncore properties to generate cash flow.

Next, I'll go through our Hong Kong rental portfolio. During the year, the group's well-diversified rental portfolio in Hong Kong recorded gross rental income of HKD 17.7 billion, up 1% year-on-year. The overall occupancy stood at about 93%. Accounting for 51% of gross rental income in Hong Kong, the group's gross rental income from retail portfolio has bottomed out and registered positive year-on-year growth of 5.5% in the second half of the financial year amid full border reopening. The gross rental income of office portfolio registered a slight decline of 1.6% to HKD 6.2 billion, mainly due to negative rental reversion.

The group's malls showed improvement in both footfall and tenant sales after full reopening of the border and lifting of all social distancing measures. Overall average occupancy stayed at a healthy level of 95% during the year. The group continued to extend its customer base by leveraging its integrated loyalty program, The Point, to enhance shoppers' experience. The group continues to enhance its quality services and install more superfast EV chargers at its 8 major malls to cater for the rising trend of using EV. The Point members now can redeem EV supercharger services with their bonus points, the first of its kind in Hong Kong since it was launched in June this year.

The group also maintains close relationship with tenants and customers to keep tabs on market trends. In addition to promotional campaigns, the group also regularly renovate its malls and upgrade their open spaces to boost comfort and freshness for customers. The group's office portfolio in Hong Kong registered an average occupancy of about 92% during the year. Despite the challenging operating environment, the office leasing inquiries have shown signs of improvement since border reopening.

While our premium offices at IFC in core central were almost fully let, occupants of ICC continued to stay at a satisfactory level. Despite keen competitions in Kowloon East, The Millennity office cluster achieved a satisfactory level of overall occupancy during the year. The group will continue to upgrade the green building standards of its major commercial buildings. Both IFC Hong Kong and the group's headquarter, Sun Hung Kai Centre, attained lead platinum certifications during the year.

In the near term, the group's recurring income base will be further expanded with new property investment coming on stream. TOWNPLACE WEST KOWLOON is scheduled to commence operations in the fourth quarter of this year. Both the YOHO Mall Extension in Yuen Long and a shopping mall underneath The Millennity in Kwun Tong will be opened in 2024. The group's recurrent income base will be further enhanced over the medium to long term.

The West Kowloon commercial cluster comprises of High Speed Rail West Kowloon Terminus Development and Artist Square Towers Projects, and upon their full completions in 2026, they will join the completed Hong Kong ICC and 2 luxury hotels to form a unique commercial cluster with in aggregate premium grade A office space of about 5.7 million square feet. In addition, the Mong Kok Commercial Complex is also scheduled for completion by 2030. As mentioned before, the contracts would create strong synergy with the group's existing portfolio in the vicinity upon full completion.

Next, I will go through our property business on the Mainland. As at end of June 2023, the group's attributable land bank on the Mainland was 67.5 million square feet. Of this, over 20 million square feet were completed properties and about 47 million square feet were properties under development. Among the completed properties, 45% of them were shopping centers, and premium office accounted for 39% of the total.

Moving on to the property development business on the Mainland. And during the year, the group's recognized property sales on the Mainland surged almost 108% year-on-year to HKD 5.3 billion, mainly driven by higher sales completions. Development profit increased by about 180% to HKD 2.8 billion with higher development margins. Major contributors include residential projects in Foshan, Dongguan and Chengdu. Unrecognized contracted sales amounted to HKD 4.4 billion as of the end of June 2023.

The group achieved attributable contracted sales of about RMB 4 billion on the Mainland during the year, mainly came from the residential portions of Hangzhou IFC, Jovo Town in Chengdu, and Oriental Bund in Foshan. In August, the group launched a third phase of the residential unit at Hangzhou IFC and overwhelming response was received. About RMB 2.3 billion of attributable contracted sales were achieved. For the next 9 months, the gross launch product by on the Mainland includes 3 projects as shown in this table with a total attributable GFA of around 853,000 square feet.

Now we'll discuss the performance of our Mainland rental portfolio. During the year, the group's gross rental income for Mainland rental portfolio decreased by 11% year-on-year to HKD 5.8 billion or down 4% in RMB terms. The decline was mainly due to the lingering impact of pandemic in the first half of the financial year and rental contraction granted to the tenants that were affected by the business closure during April and May 2022. Both the COVID related impacts and rental contractions were one-off incidents. If excluding rental contraction, the gross rental income from retail portfolio stayed the same as that of the previous year.

Situated in the prime location across major cities on the Mainland, the group's retail portfolio has been gradually recovering in both traffic and tenant sales since the beginning of this year. The group's Shanghai IFC Mall stood out with its tenant sales rebounding, its occupancy also maintained at high level. Other premium malls in the group's portfolio also performed well during the year. The first phase of Nanjing IFC Mall has already opened.

And despite challenging office leasing market on the Mainland, the group's grade-A offices at Shanghai IFC, Shanghai ICC, and the first two phases of ITC achieved satisfactory occupancies during the year. In Shanghai, Three ITC Tower A was nearly completed, and its occupancy is steadily ramping up. The group has continued its efforts to incorporate green elements in these major commercial projects and Beijing APM Office Tower was the new member in receiving LEED certification during the year.

The group's recurring income base will further enhance over the medium term with its integrated projects coming on stream. The remaining portion of Nanjing IFC Mall will be opened in late 2023. In Shanghai, the construction of remaining parts of Three ITC is in full swing with core superstructure of Tower B office already topped out. Both office towers, i.e., Tower A and Tower B have attained Platinum pre-certifications from LEED and WELL. In addition, ITC Maison, the mega mall, is targeted to open from 2025 onwards by phases with a wide range of well-known global banks. So far, we have received strong interest from luxury brands.

That concludes the group's Mainland rental business. I will move on to our hotel operations. After full border reopening, the operating environments of our hotel business have improved substantially, and the group's hotel business generated an operating profit of HKD 161 million against an operating loss of HKD 429 million for the previous year. During the year, Go Royal, a loyalty program for the 5 Royal brand hotels, have recruited over 100,000 members, and they also launched a campaign with The Points to bring in new members. The occupancy of the Ritz-Carlton Shanghai, Pudong, showed notable improvement amid recovery of domestic travel. Our new hotel, Andaz Nanjing Hexi at Nanjing IFC, commenced operations in April this year. In Suzhou, Four Seasons Hotel will open in late this year.

Now let's move on to our ESG initiatives. The group is committed to obtain LEED Gold or Platinum for its major commercial properties under development, which include the High Speed Rail West Kowloon Terminus Development. Besides we have been actively promoting green construction, green energy transformation and green commuting. The group is also committed to leveraging resources to give back to society, including nurturing the younger generation and promoting sports for charity and healthy living. For more information about our sustainability performance, please refer to appendix of this power point, or our website.

And that's all for our business updates. Next, I will discuss the market and business prospects. In Hong Kong, local economic recovery will be affected by uncertain external environment. However, the government's initiatives will support continuous economic recovery. For the primary residential market, solid end-user demand and a more benign interest rate outlook will support the market. Home buyers prefer new large-scale developments with comprehensive facilities, and favorable initiatives such as talent schemes should underpin medium-term housing demand. For the retail leasing market, domestic consumption will be largely stable. The number of tourists is expected to recover, but their spending patterns may change. On grade-A office market, softer economic growth will continue to weigh on demand and rents in the near term.

On the Mainland, the economy is facing multiple challenges such as ongoing geopolitical risk and insufficient domestic demand. For primary residential markets, the easing of mortgage rules and home purchases restrictions should pave a way for market recovery. Projects in good location in top-tier cities will outperform. For the retail leasing market on the Mainland, the luxury market tends to be more resilient. Retailers are more selective in new store openings, amid keen competitions and lower consumer confidence. For grade-A office leasing markets, further improvements of economic activities and financial markets are expected to boost leasing demand.

Moving on to our business prospects. As in the past, we will adhere to selective approach and prudent financial discipline and strictly control our CapEx. The group's recent additional RMB borrowing helps achieve a better alignment of its RMB-denominated assets and liabilities and reduce the group's funding cost. As in the past, we will launch new projects for sale when ready and step up the sale of unsold completed units and non-core properties to generate cash flow. For new launches, the first phase of YOHO WEST in Yuen Long will be put on market soon.

In addition, the group sizable property investment portfolio and non-property business continued to generate a stable and substantial recurring income. And we will continue to leverage on both digital and traditional channels to increase customer engagement so as to respond swiftly to customers' needs and preference. Also, the group's recurring income base will be further strengthened with new properties for investment coming on stream in the near term. And in the medium to longer term, the group's several integrated projects under development will contribute to the growth of its recurring income upon their completion.

Last but not least, I would like to wrap up my presentation with a message extracted from our Chairman's statement. The group's sizable property investment profit portfolio and non-property business have generated a stable and substantial recurring income. These, together with this strong financial position, have allowed the group to demonstrate strong resilience in navigating through shocks and challenges. With a wealth of experience in weathering various cycles of the city over the past 50 years, the management team is well-prepared to lead the group to overcome upcoming challenges. In the years ahead, the group will, as always, observe its prudent financial principles and maintain a focused strategy to achieve sustainable growth.

This concludes my presentation, and thank you for your attention.

[Operator]

Let me introduce the panel to you. From your left, Mr. Brian Sum, whom you've already met; Mr. Christopher Kwok, Executive Director; Mr. Allen Fung, Executive Director; Mr. Victor Lui, Deputy Managing Director; at 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 begin the Q&A, may I have our Chairman and Managing Director, Mr. Raymond Kwok, to share with us some key messages. Mr. Kwok, please.

[Raymond Kwok Ping-luen, executive]

Thank you. Good afternoon, ladies and gentlemen. The previous year for our group poses significant challenges for the global economy as businesses grappled with geopolitical risk, trade frictions and high inflation in the West. The economies and property markets of the Mainland and Hong Kong have been weak of late. In the face of an uncertain operating environment, the group firmly adheres to its long-standing principle of prudent financial management. We would selectively replenish our land bank, exercise strict control over capital expenditure, promptly launch new projects for sale upon completion, and speed up the sale of unsold completed units and non-core investment properties to generate a consistent cash flow.

In addition, the government's series of measures to attract foreign talents, import labor and attract key enterprises is expected to inject new impetus into the local economy, which should bode well for the property market. On property sales, our group's developments have been popular due to the preference of buyers for new large-scale housing estates that offer comprehensive clubhouse facilities and convenient transportation networks. Sun Hung Kai Properties' reputable brand name, appealing products, and exceptional services have continued to win consumer trust in the market.

During the year, the group's contracted sales in Hong Kong in attributable terms increased 13% year-on-year to HKD 13.4 billion. New projects to be put up for sale in Hong Kong for the next 9 months include YOHO West, which is on top of the Tin Wing Station in Yuen Long; the YOHO Hub 2, also in Yuen Long, and the third phase of NOVO LAND in Tuen Mun. The first phases of Cullinan Sky and Cullinan Harbour will also be on offer. Both projects boast prime locations in Kai Tak. Cullinan Sky offers convenient connectivity with direct access to the MTR Kai Tak Station, whilst Cullinan Harbour is situated on the waterfront, providing residents with panoramic views of Victoria Harbour and ample car parking facilities.

On the Mainland, the group recorded attributable contracted sales of HKD 4.5 billion during the year. Projects to be launched on the Mainland include Shanghai Arch and new batches of joint venture developments such as Hangzhou IFC and Oriental Bund in Foshan. For the current financial year, the group's sales target in Hong Kong is HKD 33 billion and in the Mainland is HKD 5 billion. On the property investment front, the group's shopping malls, both in Hong Kong and on the Mainland have seen an improvement in footfall and tenant sales after the pandemic. The overall occupancy of the office portfolio remained satisfactory.

The group's property investment portfolio has been generating a substantial recurring income, which is expected to gain additional momentum upon the completion of its new developments. Projects coming on stream include TOWNPLACE WEST KOWLOON, which will be launched soon. TOWNPLACE WEST KOWLOON offers a brand-new apartment living experience and is specifically designed to cater to the needs of local young professionals and incumbent talent seeking premium service suites. It offers sweeping views of Victoria Harbour and is conveniently located. It is in close proximity to the group's V Walk Shopping Mall and the MTR Nam Cheong Station just 2 MTR stops away from Kowloon Station and the High Speed Rail West Kowloon Terminus.

In the long run, the group's recurring income base will be further strengthened with the completion of major integrated projects. One such project is the mega commercial development in Mong Kok. The site was acquired during the year and the project is scheduled for completion in 2030. On top of property investments, the group's non-property businesses will also contribute to a stable and substantial recurring income. The group is committed to enhancing customer experience. The Point, which is an integrated loyalty program for Sun Hung Kai Properties' malls introduced the city's first rewards redeemable superfast electric vehicle charging service during the year.

This service helps promote the adoption of EVs and contributes to the development of Hong Kong as a smart and green city. The service will be extended to all major Sun Hung Kai Properties malls over time. Separately, contactless parking service and other exclusive benefits for The Point members will be extended to more than 50 Wilson Parking car parks, providing drivers with greater convenience.

To support the transformation of Hong Kong into a green and sustainable city, our group continues to invest in and embrace latest innovative technology to improve the environmental performance of its properties. We endeavor to obtain LEED Gold or Platinum ratings for our major new commercial properties and keep upgrading the green building standards of our major existing commercial properties. We also incorporate health and wellness elements into our residential projects. NOVO LAND is the first residential development in Hong Kong to receive 3 international recognized certificates for healthy buildings.

Despite uncertainties in the external environment, Hong Kong retains its unique advantages of "One country, two systems" and benefits from the strong support of the motherland, while maintaining close connections with the world. The city continues to offer abundant long-term development opportunities. True to its commitments to building homes with heart, the group remains dedicated to providing premium developments and services and building long-term relationships with customers and tenants.

Finally, throughout the past 50 years, the group has weathered different social and economic instabilities. Drawing upon its extensive experience in adapting to market and technological changes, supported by exceptional management and operational teams, strong financial position, prudent financial discipline, and a solid recurrent income base, the group is confident in successfully navigating through the uncertainties and overcoming the future challenges. Thank you.

[Operator]

Thank you, Mr. Kwok. We're about to open the floor for questions. Please identify yourself and the name of your company before asking a question. Now can I have the first question please. The first gentlemen from the third row, please.

[Ken Yeung, analyst]

It's Ken from Citi. I have 3 questions. The first is on the property sales. I also want to check with management on your latest view on the Hong Kong residential market given it's quite soft recently. Some developers are now more willing to cut price to boost sales. So especially you have some upcoming launch in Kai Tak. What will be your strategy like on the Cullinan Sky that you mentioned? And also on some of your slower moving inventory like Victoria Harbour, do you have any plan to cut price to boost sales. So this is on the sales part.

And secondly is on the land banking part. We have also seen that the land cost has come down quite a lot. What will be your plan and strategy on land banking for the coming year? Or do you think that this is a good opportunity to further replenish more land bank? And lastly is on gearing. Gearing is still quite okay. I mean, high teens level. But in face of this rate high for longer environment, what is management view? Is there any plan for further reduction in gearing? Or basically you are satisfied with this level?

[Ting Lui, executive]

Yes, on the residential market, I think the residential market is now on the recovery trend. Since the border reopening, we have seen a more boosted business sentiment, and also our economy continues to recover. And recently, we have also seen that the residential leasing market has been extremely active. The TDPS scheme, the Top Talent Pass Scheme, of the government plus the quality migrant, and also the employment policies of the government are all very well received and adding to the huge accommodation demand from those Mainland students.

We have seen that the rental index from the government is rising steadily and uptrend is continuing. I think this is providing strong support to the market. And apart from this, we all know that over 60% of homeowners in Hong Kong have paid up their mortgages. And this, again, is a solid fundamental for our market. I think in the next 12 months, those small units in sizable projects with comprehensive couple facilities will continue to be dominant of the market. And on the luxury side, those well-located, good quality projects with panoramic Harbour view will be really appealing to those affluent buyers, including locally and in the Mainland.

And as for our 2 projects in Kai Tak, we have 2 more superior projects in the district, the Cullinan Sky being connected to the MTR station, and also the Cullinan Harbour is occupying the most prominent location in the one way and having the best panoramic Harbour view. We have full confidence that upon our launch in next quarter, we can attract all affluent luxury buyers, including locally and the Mainland. As for Victoria Harbour, I think now we already have the site in Hong Kong Island that is almost abutting the Harbour, together with a high-end shopping mall and international hotel in the vicinity. And recently, we have also put a single block of smaller units for lease called Victoria Harbour Western, and we have achieved the highest range in the eastern side of Hong Kong Island. And we are planning to launch units in the Phase II of Victoria Harbour in the next quarter. And we have full confidence that those units will be well received, too.

For the land banking, I think we all know that we have a sizable land banking sufficient for our development in the next 5 to 6 years. We also continue to acquire quality sites that is suitable for our development with reasonable land cost, and we shall continue to participate actively in the future land sales under our prudent financial discipline. Thank you.

[Raymond Kwok Ping-luen, executive]

I think on the gearing side, I think we'll try to keep our leverage at 20% or below. And I think our targeted property sales for this year would be HKD 33 billion in Hong Kong. And also, I think at the same time, for all our noncore investment properties, well, at the right price, we will sell those non-core investment properties. Anyway, I think -- so I think we have a lot of -- given that I think interest rate would probably fall early next year. So quite confident that we can achieve the targeted sales and hopefully try to sell more than our target, yes.

[Operator]

Can I have the second question, please? The gentleman in white shirt in the third row.

[Cusson Leung, analyst]

This is Cusson from JPMorgan. I have 2 questions. One is regarding your dividend payout ratio. We have seen an increase from 50% to 60% payout ratio for this year, I think together with the increase in completion of your investment property over the next few years. Are we going to go back to the previous guidance of 40%, 50% payout ratio? Or should we be expecting a change in that number? That's number one. And number two, I think in view of the current market environment in both Hong Kong and China, which is not exactly good, has the company considered expanding your investment to outside Hong Kong, China?

[Raymond Kwok Ping-luen, executive]

I think on the dividend ratio as from this coming year, we will go back to the range of 40% to 50%. So i.e., we'll cap it to 50%, yes. This year, I think -- well, actually, the year 2022 to 2023, it's a bit special because I think we understand some of the shareholders expect us to maintain the dividend, right? So we don't want any surprise. But in our Chairman's statement, we already tell our shareholders that next year we'll go back to the dividend policy of 40% to 50% of underlying profit. On the investment opportunities, I think there are -- we will focus on Hong Kong really. I think in China, we are already very busy with the sites we have and we'll focus, for the coming year, to execute all our Mainland Chinese projects. But I think I would say, for land banking, I think we'll focus on Hong Kong, yes.

[Operator]

Can I have the third question, please? Okay. The fourth gentleman on the third row, please.

[Karl Choi, analyst]

Karl Choi from Bank of America. I have a couple of questions. First, I just wanted to focus on Hong Kong retail. Can you talk a bit more about the retail sales recovery since the reopening? And how does it compare to pre-COVID times? I think Brian mentioned that the spending patterns of Mainland tourists may have changed. Do we think we can go back to pre-COVID levels in terms of sales in the near term, and also occupancy costs. Second is, could you give us an update on the pre-leasing progress of your Shanghai properties. Specifically, you mentioned that the Three ITC Tower A office opened recently, is ramping up. Do you have a little bit more color in terms of where the leasing progress is? And also update for the retail portion, ITC Maison, I think you mentioned some good response from luxury retailers, but a bit more color would be helpful.

[Kai-wang Kwok, executive]

Yes, on the Hong Kong retail market. I think for this financial year, we've seen group shopping malls recording double-digit tenant sales growth, in which we have outperformed the market despite signs of moderate growth recently. And I think I would like to highlight that the sales at our regional malls have already surpassed their pre-COVID levels. And as you can all see it from the news, visitors are arriving a bit slower than expected, but they are still continuing to be on the rising trend. And so we expect retail sales in Hong Kong to continue to grow moderately.

And I think this will be backed up by greater support from the government in terms of improving the shortages in the labor market and also recent announcements by the government to introduce more regional and international events to talent to stimulate more visitations by Mainland and overseas visitors. Meanwhile, we also leverage The Point loyalty program more to build our customer base more and also to increase the stickiness of both the local and Mainland consumers.

And then for the ITC project in Shanghai, we have recently completed the Tower A of Three ITC. It's a world-class workspace with a LEED Platinum certification. And so far, leasing has been progressing as expected with the majority being multinational companies. And as for the shopping mall, which is still under lease, we have so far received strong interest from luxury brands. From our conversations with luxury retailers in Shanghai, a good number of them are still in expansion mode, right? They want to partner with good developers, and we hope to kind of be on top of their mind so far, so our team has been working very closely with them to try some new concepts. And we continue to stay confident in our Shanghai ITC project, and we hope it will become a new landmark place.

[Raymond Kwok Ping-luen, executive]

And then I would like to add for ITC Tower A, it is already over 40% pre-leased. You have to appreciate that a lot of the foreign companies, they have been sending their senior management only since March or April, right? And they will come -- I'm sure there will be more multinational companies' SPOCs traveling to China. I think for our ITC Tower A, you've to understand it's a brand-new and world-class green workspace with LEED Platinum certification. So we are confident that with the location and the quality of the building, I think we'll be able to attract tenants from the older buildings to our ITC Tower A. As for the ITC Maison, given our success in the IFC Mall, we have talked to a lot of ITC Mall tenants in Shanghai. They are all very keen to expand in IFC Mall, and they also show good interest in also opening up in ITC Maison. So we are confident that the ITC Maison will be a new landmark in Shanghai when it opens up. Yes.

[Operator]

Can I have the next question, please? Okay. The third gentleman in the third row, please.

[Mark Leung, analyst]

This is Mark Leung from UBS. I have a question regarding on the farmland. So do you have any plans to cooperate with other developers in the farmland development? And the Hong Kong government is also pretty keen to accelerate the farming resumption, especially within the Northern Metropolis. So do you expect any resumption income in the next 1 to 2 years?

[Chik-Wing Wong, executive]

[Interpreted] On the farmland conversion, we're glad to advise we've recently concluded 2 cases in Yuen Long of about GFA 1 million square feet, able to produce about 2,000 units. And details will be announced very soon once everything is concluded, the formality is done. About cooperation with other developers, we have been doing some projects like Hongkong Land, like Cheung Kong, Henderson previously. And we are, in some cases, in various ports in the NT where we have joint ventures with other developers. Details may not be able to be revealed at this moment of time.

On the Northern Metropolis, it's a grand plan. It's not only to produce more land for housing and for innovation and technology users, but it's -- it's going to be not a huge amount of agricultural farmland in that area. Obviously, we have a major foothold in that area. And frankly, we are not keen to focus on the compensation issue. We are very focused on how to turn our land holding or the farmland into usable or developable land, preferably in the case of residential and probably the IT, subject to government's strategy, how to develop other huge amount of area into IT use, what you call the innovation and technology users.

And this is a huge task, and we are very happy to cooperate and see. Government has committed particularly on the [indiscernible]. They're going to put the detailed land use into town planning at [indiscernible] in the first quarter of next year, as reviewed recently by Secretary for Development. We're looking forward to sharing the details.

[Raymond Kwok Ping-luen, executive]

But you have to understand that we buy agricultural land not to try to wait for government to resume our land. We want to accumulate the agricultural land so that we can build a large project, so that we can provide good facilities and good natural environment for the future residents. And I think in terms of conversion, it all depends on the government premium. I hope government will be able to adjust to the latest market situation and try to reduce the premium, because the purpose for us and for Hong Kong would be trying to speed up the completion of private sector units. There's no point for government to resume the land and then wait 10 years for the land to be sold and then for the residential to be built.

It's important for this -- in order to fast complete these units, it has to be both the effort of our private sector and government. There's no point for government to try to resume the land and then re-zone, et cetera, for another 5 years and sell the land to developer. In that case, we'll wait for another 10 years before any flat can be sold. As in the past, we believe that we are much faster than the government if they are just a bit more flexible on the premium. And also it's important to know, as you all well know, I think developers have turned more conservative. I hope that government has turned more realistic and try to adjust the land premium for modification in view of the high interest rates and also in view of the fact that everybody wants more private sector housing to be built. We don't want to wait another 10 years, yes. It has to be the joint effort of private developers and also the government in order to build many units to satisfy the public, yes. Thank you.

[Operator]

For the interest of time, can I have the final question, please? Okay, the first gentleman from the fourth row, please.

[Adam Lee, analyst]

This is Adam from HSBC. I have 3 questions. The first one is the group disposed some non-core assets, including residential for leasing. Is there a target you wish to dispose in the coming fiscal year? The second one is, would the group consider bottom fishing for commercial properties in Mainland. And the third and final question would be, what's the group's launch pipelines in Mainland in financial year 2024.

[Raymond Kwok Ping-luen, executive]

So can you repeat the second question again?

[Adam Lee, analyst]

Will the group consider bottom fishing for commercial properties in Mainland China?

[Raymond Kwok Ping-luen, executive]

And the third question is?

[Adam Lee, analyst]

The third question would be, what's the group's launch pipeline in the Mainland in fiscal year 2024?

[Ting Lui, executive]

Yes, on the non-core assets, we are always monitoring and reviewing our non-core assets, including upgrading and also efficient management for possible disposal. And we have renovated some units in our [indiscernible] earlier, and those new units have been very appealing to those end users. And in last year, we have sold a number of units on average price stack of HKD 100 billion. We are planning to put more units for sale in the next quarter and our target on the sales revenue would be HKD 1 billion to HKD 2 billion per annum in the coming years.

[Kai-Fai Kwok, executive]

Sorry. As for the Mainland, I think you'll see that our next 3 years, we already have our hands full. We have around 11 million square feet of non-residential IP coming online in the next 3 years. So that, together with our existing IP portfolio of around 19 million square feet, it's more than 50% increase. So as you know, we're very focused on executing it well and turning and realizing the potential in it first.

As for sales in Mainland, of course, we are keenly observing the market. I think it's very encouraging lately that you're seeing this more and more talk of lifting of home purchase restrictions. And especially in first tier cities, there's some talk of the price cap being more and more relaxed, so that the conversion of secondhand and firsthand is not as severe. And I think relevant policies will come out, and we are very keen, especially for our projects in Shanghai or Suzhou to capitalize on it.

Our target is HKD 5 billion this year. But hopefully, if the environment relaxes, policy relaxes, we can hopefully even overachieve it. And the last piece is that Hangzhou has sold very well for us. We've sold around HKD 4.6 billion, which pro rata for us is HKD 2.3 billion in July, August already, and it's all sold out already.

[Raymond Kwok Ping-luen, executive]

I would like to add on non-core properties. It all depends on the demand side, too. I think there's a good price for our non-core properties. We are very flexible. But it's important, I think, for government to relax on all these tough measures against investors and the main lenders, right? Because I think when Hong Kong tries to embrace a lot of the talents to come to Hong Kong, at least I think the government should try to attract them by saying, if you are the real talent, you're welcome to buy properties at the Hong Kong citizens' stamp duty rather than pay 30% and then wait 7 years.

I think if and when the government relaxes on all these very tough measures -- actually, even these very tough measures don't apply to China, because as I understand, if you're a real talent in China, you're welcome to buy properties, even though you are not from that area. For example, like in Hangzhou, I know the best talent, they even can jump the queue. So it seems, for Hong Kong, I think we need to really attract the best and the brightest, and the best way to show our good will is say, okay, there's no need to pay stamp duty. But if you leave within 7 years, you have to pay back. It's a goodwill gesture.

But in the case of I think Hong Kong, we need more new talents or more IT talents, more technology talents to all come to Hong Kong. And then as you know, I think we already have some 30-, 40-year-old good talents going to U.K. for BN(O), try to get British citizenship. So we need to replenish our lost talents with Mainland Chinese talents given that in China there seems to be a high unemployment in youth. But we don't have enough youths in Hong Kong. A lot of youths have already gone overseas.

So I think we need to attract the best talent, not to attract those average, but try to attract the best talents. And in that case, for the target of our non-core properties, I would say, it depends on the demand. I think we have a lot of non-core properties waiting to be sold. But I think we need to sell, so that we can regenerate the cash flow, so as to make use of the coming opportunity in Hong Kong for the next 2 years.

And in terms also of bottom fishing, I think in China, a lot of the bottom fishing. We don't want to buy from the developers because sometimes the accounts are quite questionable. So we better buy from -- given that all governments on the Mainland welcome Hong Kong people to buy, it's just that we have to pick the right site in the best cities, that's all, yes.

But as Adam said, we will focus on just executing, right? As you know, I think ITC A and B and also ITC Maison. So in life, it's not just about buying sites, it's about -- the tough part is about execution and trying to find the best tenants. And we believe we have the best products coming up on the Mainland because our buildings are all -- so maybe Allen you can have -- what kind of buildings you're building in Shanghai.

[Yuk-Lun Fung, executive]

Yes. I think to say about -- to talk about the offices apart from -- actually, the rental response is very good. And also it looks like that all the multinational companies, whenever they want a new office in Shanghai, at the moment, they come to us first, because our building offers the highest points for them in ESG. All of you know that ESG is big thing and all the companies have to be accountable for that. So we're very confident. We are building the best ESG buildings. And also for the shopping malls as well, because we have all the experience with the IFC Shanghai. So we know all these luxurious tenants quite well, and we're working very closely with them. So hopefully, we will be delivering really good products by the end of this year.

[Raymond Kwok Ping-luen, executive]

Yes. Eric, you can also explain what you're doing in high-speed railway in Hong Kong.

[Chi-Ho Tung, executive]

For that project, I think the previous analyst from UBS, right, you guys are moving in. Welcome to Sun Hung Kai...

[Raymond Kwok Ping-luen, executive]

I'm sure after you move in, you'll go back to work 7 days a week.

[Chi-Ho Tung, executive]

And for the high-speed railway project, we have 4 towers. Initially, I think UBS asked for half of the tower with 250,000 square feet. But now with the merger with the Credit Suisse , they are taking 0.5 million square feet from us, so a whole tower. And also, our co-investment, the office portion, Ping An, they will move their overseas headquarter to this project as well. So we're negotiating with Ping An for a big portion of another tower.

And as I said, same for ITC Shanghai. People are really -- especially these multi-international companies, they are really tough on this ESG demands. UBS have given us whole [indiscernible], and then, I heard, we got, I think, possibly the highest score actually in the world. So at Sun Hung Kai, we're committed to build the best project and also the project which will suit the current demand. So I think that's very important.

[Raymond Kwok Ping-luen, executive]

Yes, especially when it is CIO from such reputable multinational firms, right? At West Kowloon, we have 2 top class hotels, good access to China through the high-speed railway. And also, you have the cultural district, which government has invested a lot of money, and Hong Kong will be the hub between China and the West, right, on the culture side.

So please tell your boss, you want to move to West Kowloon. Anyway, okay. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining us today. I hope you have enjoyed the presentation. We have arranged some refreshments outside, so please enjoy. Thank you and see you next time.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]