Swire Pacific Ltd

HKEX:19

Earnings Call Transcript 2022-Q4

[Unidentified Company Representative]

[Starts Abruptly] May we now invite Guy and Martin to take us through a detailed look at the results for 2022.

[Guy Bradley, Chairman]

Thank you, and good evening, everybody, and welcome. For those of you that come and see us often, you'll recognize that we're without Karen So, who runs our Beverage division, and she's up in Zhejiang Province at a big bottler conference at the moment. But she tells me that we'll get her back for the interim. So, you have to deal with Martin and I for today.

Okay. So, the Swire Pacific 2022 Performance: there are three major highlights as far as I was concerned. The first one being the exciting expansion that both the Swire Properties division and the Swire Coca-Cola division demonstrated in the year. The second highlight was clearly the recovery of Aviation with the cessation of the COVID-19 related measures. And thirdly, we commenced a share buyback program, first time for a long time, and, as you just heard in the video, have produced a 15% dividend growth.

On the financial front, and Martin will cover that in some detail in a second, I've taken out in this top left-hand figure -- for recurring underlying profit, we've taken out the effect of Cathay Pacific, which is in line with our dividend policy. And you can see on that basis, the RUP for the year-on-year is pretty flat, but we have raised dividends by 15% to HK$3.00 a share.

As I mentioned just now, we did commence a share buyback program for up to HK$4 billion announced in the middle of last year. It's been very successful, I think, in terms of producing a strong share price performance since. And so far, to-date, the total consideration spent on buying back those shares has been about HK$2.6 billion.

At the core business level, you can see on the left, the Property Division in terms of recurring underlying profit, managed to put in a performance that was pretty flat to the previous year, which, given all the COVID uncertainties in 2022, I thought, was a very strong performance from the Property Division.

In Beverages, too, 2021 was a record year at HK$2.5 billion profit on a recurring basis. 2022, with all the lockdowns and the impact that we had in the Chinese Mainland on COVID, still delivered a great figure at HK$2.4 billion in terms of RUP.

On the Aviation side, obviously, it looks on this chart like the losses got bigger. But if you pay attention to the colors of the box there, you could see that there was a big change in the loss making of the associate business of Cathay Pacific and an improvement in the actual Cathay Pacific airline and its subs between 2021 and 2022. And that last point, I think, is the takeaway, which is very encouraging. Cathay Pacific had a very good end second half of 2022, and we're very confident they'll take that into the new year.

Okay. Martin, finance, please.

[Martin Murray, Finance Director]

Thanks, Guy.

So, we're reading from right to left. So, we reported a statutory profit of HK$4.2 billion above our 2021 statutory profit of HK$3.4 billion. The underlying profit, which principally adjusts for the changes in the value of the investment properties was HK$4.7 billion versus HK$5.3 billion in 2021. And disregarding the non-recurring items, the recurring profit was HK$3.8 billion versus HK$4.9 billion in 2021. With a strong outlook, we can hit our dividend target. Hence, it's increased 15%, and we hit our target of HK$3.00. The cash from operations principally reflects less trading income from Swire Properties.

So, here, we look at the right-hand side again, in terms of recurring profit of HK$3.8 million versus the HK$4.9 billion reported in 2021. You can see that this is mainly driven by the losses in Cathay Pacific. However, if you disregard the HK$2.8 billion from the losses from the associates, the results from Cathay Pacific improved, we'll talk about that later. The second half results from Cathay Pacific were very exciting.

The performance of Swire Properties was solid despite the weak Hong Kong office environment and the impact of COVID-19 in Mainland China in the second and third quarters. And similarly, the Beverage business was not too far off its record profit in 2021 of HK$2.5 billion, again, despite a very difficult second and third quarter in Mainland China.

The underlying profit of HK$4.7 billion against HK$5.3 billion adjust for the following non-recurring items. So, we had lower gains from the disposal of Taikoo Shing carparks, the gain on the disposal of Swire Pacific Offshore and the absence of impairments in Cathay Pacific with some impairments taken in the Qinyuan Bakery. Statutory profit adjusts for the valuation of investment properties with a net gain in 2022.

Slide 12, again, this just shows the movements in a waterfall chart. Swire Properties, the increase in trading profit from EIGHT STAR STREET and The River in Vietnam, was offset by lower office rental, weaker rental in Midland China and higher losses from hotels. In the Beverage business, the COVID impact in Mainland China and increased costs, partially offset by the continued strong performance in the U.S. business. In Aviation again, very strong second half performance from Cathay Pacific, not including the associates.

In Slide 13, here, we have the balance sheet, and it remains very strong. We have had significant CapEx, but gearing remains relatively low at 18%, which I'm very comfortable with. And this includes the HK$2.6 billion in the share buyback. 60% of our borrowings is fixed, and our weighted average cost of debt remains at 3.2%.

Here, we've got a very healthy liquidity. You'll see that our bank balances and short-term deposits have come down. We had built a war chest for COVID. But given the change in interest rate environments, we no longer have to hold that. And so, we've also got a very solid and prudent debt maturity profile.

With that, I'll pass it back to the Chairman.

[Guy Bradley, Chairman]

Thank you. We're looking at the individual businesses, and, first, Swire Properties. As those of you that were at the Swire Properties' presentation will have just heard, 2022 was extremely robust performance in what were, at times, challenging market conditions. Recurring underlying profit was pretty much the same as it was the year before, which is a very a creditable achievement, I think, given all the turbulence faced last year.

But in the strategic sense, we made significant progress last year. Taikoo Li Xi'an, which is a 70% owned project that we acquired in the early part of 2022, is very exciting for us. It becomes the next Taikoo Li project following the success of Chengdu and Taikoo Li Qiantan.

Also in the Chinese Mainland, we announced the Sanya Retail Project, where we have a 50% interest in Hainan Island, which is very exciting for Swire Properties and also the collaboration with the Jing'an district government on Zhangyuan. And lastly, in February 2023, we were able to buy from our partner, the 50% in Sino-Ocean Taikoo Li Chengdu that we didn't already own. So, there's some very good progress, I think, in the Chinese Mainland in the investment property portfolio in the core cities that we're in.

In Hong Kong, in the investment property portfolio, you could see that we continue to invest in Citygate, and Two Taikoo Place obtained its OP in September and is now currently enjoying a 56% occupancy rate as part of this drive to decentralize Hong Kong office down into Taikoo Place. And Two Taikoo Place, as you all know, is the latest tech and high building -- latest high spec building that Swire Properties has produced.

Finally, on the residential side, we acquired a site in Wan Chai at 269 Queen's Road East early in the year as a government tender. We acquired our first site in Bangkok, a 40% interest in the residential site, and we continue to look in the Chinese Mainland for similar high-potential residential trading.

This shows the flat nature of the recurring underlying profit. You can see that underlying profit dropped 9%. That really reflects the difference in -- between 2021 and 2022 in terms of the decrease in profit from divestment. And specifically, we sold less carparks in Taikoo Shing last year than we did the year before. But basically, both those numbers are very similar.

I just want to highlight the contribution in this chart on -- from the Chinese Mainland. Chinese Mainland retail is now the second largest rental contributor. As you can see in the chart on the right at 30% of gross rental income for the company. And if you include office, that figure goes up to 37%, which is just behind the contribution of Hong Kong office at 42%. So, great performance from the Chinese Mainland in the last two or three years. And if you look, it actually goes back further than that. If you look at the chart on the left, you can see the compound growth rate at 12% of the gross rental income since 2014, which is a very healthy rate of growth.

In terms of investing in the long term, Swire Properties have announced its HK$100 billion plan to develop projects in the Chinese Mainland, in Hong Kong, and in trading in Southeast Asia over the next 10 years. And we're delighted to say that of that HK$100 billion, about HK$39 billion has already been committed in there. And the pipeline continues. You can see in the bottom left, there's two projects, one in Guangzhou, Julong Wan and one in Beijing, which would be an asset reinforcement project for Taikoo Li Sanlitun, where we both -- in both cases, signed framework agreements, and we're hopeful that they will turn into two more projects for us in the Chinese Mainland. Meanwhile, in Hong Kong, we continue to invest in our two core areas of Pacific Place and Taikoo Place. So, lots of long-term potential growth for Swire Properties, which is very exciting.

That's basically reflected in the time line here. And you can see at the top, from 2023, we expect to add about another 8.2 million square feet of attributable GFA by realizing some of that growth potential. And hopefully, that number will grow even larger over time.

Moving on to Beverages and Swire Coca-Cola. They've had a fantastic year in 2022. First thing that happened was they've managed to successfully restructure the still beverage production facilities from which we're able to get synergies and an ability to do our own innovative solutions and products through that still beverage pipeline. At the same time, we'll be able to realize good cost and distribution efficiencies by operating those plants ourselves. So, complicated restructure. It's going to leave us in great shape in terms of controlling our own destiny.

And then, the really big exciting expansion news last year was the acquisition of the Cambodia and Vietnam franchise territories from the Coca-Cola Company. The 16% increase in franchise population takes Swire Coca-Cola to a total of 882 million people being served in Swire franchise territories, which includes Vietnam every day. That's a staggeringly high number. And so, we're very excited about those two new markets, and there's a lot of opportunity and potential to capture growth in those developing markets in terms of per capita consumption there, relatively low vis-a-vis some of the more mature markets that we're in. So, huge opportunity for both of those.

I mentioned that 2022 was our second most profitable year. You can see the figures there on the left. The USA was a major contributor to that great result in 2022, where profit increased by 41%. The Chinese Mainland, on the other hand, decreased its profit by 36%, where sales and operations were adversely affected by COVID-19 related measures throughout the year. This just shows the diversity in our territories, in our categories and therefore, in our revenue growth. And I won't say too much more about those as they're familiar to all of you, I'm sure.

Finally, just to show the sort of adverse effect of growth, you can see that revenue increased by 4%, although volume decreased and our EBITDA margin decreased just a little bit versus 2021. But as you'll see in the outlook, we've started this year pretty well, and we're quite confident that the Chinese Mainland will bounce back in a healthy way in 2023.

In terms of Aviation, I'm going to ask Martin Murray to take you through those slides, and I'll come back and deal with healthcare and the outlook.

[Martin Murray, Finance Director]

Thank you, Chairman. So, in Aviation, you can see Cathy Pacific group, HK$2.9 billion losses are attributable share against HK$2.4 billion. The top -- the charts on the left here, the top band is HAECO, attributable profit of HK$185 million, down from HK$394 million. But if you remove the government assistance that we had in the U.S., that number actually improved. And in the bottom part there, you'll see that the exciting part is the profit for the year of Cathay Pacific where, again, it's been profitable, great second half result, cash positive since the end of the second quarter last year. And the CX associates, there HK$2.8 billion. That's an associate of an associate. So that's 45%, there's 16% of the 45%.

So, China has had a little drag in terms of its performance. But again, I think the surprise for me was that the market has reacted with some sort of disappointment in terms of the losses becoming greater, even though in January, the December trading report of Cathay Pacific has said that the losses are going to be between HK$6.4 billion and HK$7 billion, and they came in at HK$6.5 billion. So, it should have been a surprise to the market.

And if we move forward to this slide, it just shows you the impact that the COVID-19 had on Hong Kong and Cathay Pacific. Hong Kong and Cathay does not have a domestic market, and we had a big prolonged state in terms of the measures introduced, which really impacted the business. So, it's great to see that even at 30% capacity, the business was profitable in the second half.

And they are the key measures. So again, we're seeing now that Cathay has moved to the rebuild phase. So, the attributable profit, I think you can see that it suddenly is profitable again in the second half. Cash burn is now positive, and strong liquidity.

And the excitement is now that the COVID measures have lifted, then they really are rebuilding. So, by the end of March, they expect capacity to be at 50%. The freighters are at full capacity. It means that the freighters for the year, because 50% is on the passenger bellies, so they'll be about 85%. By the end of the year, they're targeting 70% and 100% by 2024.

And then, with HAECO, as I mentioned, the HAECO profit decreased due to the absence of the financial systems from the U.S. government. HAECO's recovery is lagging a little bit, line maintenance is down and the cabin solution remains a little bit difficult. You can see in the bottom left-hand box there. But the engine business is doing well.

Chairman?

[Guy Bradley, Chairman]

In terms of health care, as most of you know, this is a very nascent business investment for us. We've been in it for a couple of years. Those couple of years have been COVID years. So, we're in three investments, all of which are quite small minority positions in Shanghai and in the Greater Bay Area.

I'd just like to highlight two new developments that we got in 2022. One at the DeltaHealth Hospital where -- in Shanghai, where we opened an oncology center. It's primarily a cardiology hospital, but we're managing to branch into oncology, and we did that from the start of the first quarter of 2022. The common theme there being thoracic surgery. And then, the second highlight of for me really was the opening of the Shenzhen New Frontier United Family Hospital, which opened in May 22.

And in both of those cases, the hospitals that got off to a good start and continues to do so. And the DeltaHealth investment seems to be tracking where we need it to go. So, we're quite comfortable with where that's at. But I would stress that it's very early, and these numbers are very small. But we do hope to scale this up over the next 10 years to become a reasonably sized division of Swire Pacific.

On sustainability and ESG, which as you all know, is a subject that we take very seriously. We've got a few highlights from 2022. I'll just pull off two or three from this chart.

Firstly, the sustainable finance represented more than a third of total new group financing in 2022. So, we really are getting into gear in terms of green finance.

Secondly, you'll note the number of women on our Board now represents just under 30%, and we're working on that. The target is 30% by 2024. We're at 28.6%. And I think that's a constant chase. And I think we're going to sort of get there by 2024, probably on that.

Thirdly, on the goal to reduce our greenhouse gas emissions by 50% by 2030. Well, we're about 19% of the way there -- 19% of 50% already by 2022. And a lot of effort has gone into reducing that number. That's a big impact.

And finally, I'll just point to the charitable trust, the Swire Group Charitable Trust donated HK$55 million to the community in 2022.

Lastly, before we take questions, a few comments on the outlook for 2023. We continue to chase our strategic objectives of growing our core businesses and improving returns to shareholders. I think the opening of the border between Hong Kong and the Chinese Mainland will have and is having a significant positive effect on our businesses and particularly on our aviation businesses. And I remain very optimistic about the prospects for our businesses in 2023, notwithstanding various global economic headwinds that might be out there.

In terms of property specifically, I think we can see a stronger recovery in retail property investment income in both the Chinese mainland, and possibly less so, but also in Hong Kong, and in the hotel business, whilst the office market in Hong Kong is expected to remain slightly soft in the near term.

Beverages wise, you can expect an increase in volumes in the Chinese Mainland, while commodity prices, we think, will be lower. I think they peaked in 2022. And then, you've got the contribution in 2023 of the newly acquired bottling operations in Southeast Asia, and they're already kicking into profit.

Aviation wise, you can expect, as you heard yesterday, that passenger flight capacity will reach 70% of pre-COVID levels by the end of the year. Performance from associates will also improve with the lifting of COVID-19 related measures. And finally, on HAECO, we expect an improvement in their results during the year with the recovery of international air traffic despite a slower recovery for HAECO from the COVID-19 impact.

And with that, we'd love to take some questions.

[Unidentified Company Representative]

Thank you, Guy and Martin. As said, we're ready to take some questions. Please kindly advise your name and organization. Please ask your questions in English, with no more than two questions at a time. Please take my cue, and our colleagues will pass you a microphone. Any questions from the floor, please? Right, the gentleman in the front.

[Simon Cheung, Goldman Sachs]

Thanks, Guy and Martin, for the presentation. Simon Cheung from Goldman Sachs. I got two questions. Obviously, business has turned around and you have done very well with your capital allocation or expansion with, as you mentioned, property and the Coca-Cola business. I've seen, however, that some of the smaller divisions like industrial divisions, you do still incur a bit of losses over there. I know the size of which is not significant. How are you thinking about that business? And I guess, going forward, your individual company has the development plan. And you mentioned that your healthcare business, you are still looking for opportunity over there. How are you thinking about the pace of investment on that? That's the first question.

And then, the second question just -- also earlier, you commented that the share buyback, obviously, been very positive to your share price performance and that HK$4 billion, you spent HK$2.6 billion. I guess, investors generally wanted to get a sense whether there would be more to come after maybe the AGM in May? Thank you.

[Guy Bradley, Chairman]

I'll take the first two. In terms of the losses you referred to in the Trading & Industries division, I think, there was one particular case that you're referring to, which would have been our Qinyuan Bakery division. And that's had a struggling a couple of years in 2021 and 2022, no doubt, and COVID hasn't helped. But I think that we feel for 2023 that some of those losses are probably going to be reduced, and that business looks like it's trending in the right direction. But it's a tough business at the moment, and I've no really great news to report.

The other two good businesses in the Trading & Industries division are our motors group in Taiwan and Swire Resources. And they've managed to weather through 2022, and we're reasonably optimistic that they will show profits in 2023. So, it's really just the bakery business that looks difficult at this stage.

The second part of your question was the pace of development in healthcare. I mean it's been deliberately slow, partly because COVID's been a problem for hospitals in China, as you know, and partly because the management here have not been able to go into China and find more investments because of COVID. So that's why we started slow. And you asked about the pace. And I think now that there are no restrictions on travel and that you can expect the pace of investment to pick up post COVID.

[Martin Murray, Finance Director]

Yes. On the share buyback program, we did announce a HK$4 billion program. And as you mentioned, of HK$2.6 billion through that we have to stop it during the blackout period, which is now over. So that will continue through to the AGM in May. Has improved the liquidity for both the A and B shares. So, we're pretty pleased with how that's performed to date.

[Unidentified Company Representative]

Thank you. Any next question please? Right, the gentleman here.

[Evan Li, HSBC]

Thank you. Evan Li from HSBC. More of a strategic question on how would you expect to manage your capital going forward? And what would be your priorities? I think if you look in your ROE, is that going to be an angle or target for the group overall in thinking about -- in managing your asset portfolio? And also, in terms of your future capital expenditure and in view of also thinking about your share buyback going forward, how would you balance between returning shareholders' return and also when you look into new acquisitions and new businesses? That would be the first question.

And second question would be more of an ESG question. Longer term, you have a target on hitting net-zero by 2050. But understanding a lot of your business is more of a conglomerate company, are you thinking about renewable energy certificates, carbon trading as part of your scheme in achieving that?

[Martin Murray, Finance Director]

Sure. Well, in terms of return on equity, obviously, we've been dragged down over the last few years by the aviation side. So, it's great seeing that bounce back. I think strategically, what we can clearly demonstrate that through COVID we've been able to continue our investments and -- particularly in our core businesses. So, we announced over 12 months ago the HK$100 billion plan for Swire Properties, and they've already committed HK$39 billion of that. Swire Coca-Cola has moved into Southeast Asia, which we're very excited about. And again, we've got the bounce back in Aviation. At the same time, our balance sheet is strong, so we can look at other aspects. We did do the share buyback program. And in terms of the dividend, we removed Aviation from that in order to get a consistent and growing dividend target there. So, we've got a healthy balance sheet. We look at capital allocation at every Board meeting. And so, yes, we'll continue to -- you will see a big improvement in the return on equity with the bounce back in Aviation.

[Guy Bradley, Chairman]

On ESG, yes, you're right. We've got an aggressive target to be down to zero for 2050. And we are already using renewable energy sources, both in Swire Coca-Cola and in Swire Properties in terms of fueling our energy needs from renewable sources in the Chinese Mainland. So that's already begun. We're going to need more of that, and we are going to end up needing some carbon offsets for sure. Certainly, it's a very aggressive target. But the internal work on bringing down the carbon footprint is good, but it's not going to be enough on its own.

[Unidentified Company Representative]

Thank you. Any other questions, please? Right. If that's all the questions we have, then that's a wrap for today's session. Thank you so much for joining us today.

[Guy Bradley, Chairman]

Thank you.

[Martin Murray, Finance Director]

Thank you.