Wharf Holdings Ltd

HKEX:4

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Angela Ng, executive]

Good afternoon, everyone. Welcome to the webinar of Wharf interim results briefing.

I am Angela Ng, the Investor Relations Manager. Our management team in the webinar include Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director.

Now we will share the screen to the PowerPoint presentation. Now I believe that you will see our presentation with the theme COVID End Game Unknown.

Business was seriously curtailed by COVID in both Hong Kong and Mainland China during the first half, development properties for the brunt through sales, sales recognition as well as impairment provisions. Investment properties also reported its first reversal in recent years. However, logistics was a positive spot. As a result, group revenue decreased by 33% and operating profit by 19%. Underlying net profit improved by $788 million to $428 million, mainly due to lower impairment provisions made in the reporting period.

Now looking at the group segmental breakdown. As the company focuses on premium property, investment properties and development properties account for over 60% of total assets, group revenue and operating profit.

Moving on to financial highlights. Group revenue decreased to $8.2 billion with less DP bookings and IP contribution partially offset by the positive performance in logistics and investments. Underlying net profit has turned around inclusive of an impairment of $2.5 billion on DP. Group underlying net profit improved by $788 million. Group profit attributable to equity shareholders declined due mainly to unrealized IP revaluation deficit and absence of profit from non-core disposal this year. An interim dividend of $0.20 per share was declared.

The group maintained a strong balance sheet in view of macro uncertainties. Total equity was $162 billion. Group net debt decreased by $2.3 billion from December last year to $10.9 billion. Cumulative reduction in net debt was over $13 billion in the first -- in the past 12 months. Gearing ratio further reduced to 6.7%. For the long-term investment portfolio, market value of listed equities was $45.6 billion at the end of June and $0.9 billion dividend income was booked to P&L.

Then we will walk through our business segments in the order of Hong Kong properties, Mainland DP, Mainland IP, Hotels and Logistics infrastructure. Total Hong Kong land bank amounts to 3 million square feet, of which key portfolio accounts for 0.6 million square feet, which can be seen from the map in this slide. During the first half, our high floor apartment in Mount Nicholson was sold. On attributable basis, contracted sales and net order book were $0.3 billion.

Moving on to development properties in Mainland, dynamics of the residential development property market has shifted against the developers. In addition, the pandemic drastically slowed down selling activities and construction, particularly in the cities such as Suzhou, Shanghai and Beijing. The illiquidity market magnified the funding pressure on the aggressively geared developers, which in turn weakens demand psychology in a vicious circle. In the first half, the group recorded contracted sales of RMB 2.3 billion and full year sales target is RMB 9 billion. Sellable resources totaled 0.8 million square meters.

On a attributable basis, Mainland DP revenue decreased by 29% with recognitions mainly from Suzhou and Hangzhou. Land bank fell further to 1.9 million square meters. Target completion for this year is 0.7 million square meters and net order book decreased to RMB 14.8 billion.

Moving on to Mainland investment properties. COVID lockdowns and control as well as flagging economy resulted in the first reversal of Mainland at revenue in recent years. Consumers are wary and cautious even with government stimulus, portraying a slower recovery compared to that in 2020. For August market, it is still soft under stagnant demand and oversupply.

In the first half, overall Mainland IP revenue decreased by 4% to $2.6 billion.

Looking at the performance of our flagship IFS series, Chengdu IFS and Changsha IFS laws continued to be among top productivity nationwide, with occupancy stood firm at 90% and 98%. The market-leading position led to double-digit positive rental reversions. However, sales and turnover rents were affected under COVID. August leasing were vulnerable to the substantial oversupply Office occupancies at Chengdu IFS and Changsha IFS were 80% and 69%.

Moving on to our Hotels. The group manages 16 hotels in Mainland China, Hong Kong and the Philippines under Niccolo brand and Marco Polo brand. The hotel segment reported operating loss under COVID and Mainland domestic travel restriction. The first quarter was unfavorable, but the second quarter started to improve, but the recovery has been sporadic, gradual and unpredictable. Nonetheless, Niccolo revenue yield continued to outperform the competitive set.

Turning to our logistic infrastructure. Cargo volume in South China increased with DaChan Bay as outperformer, but Hong Kong lost volume and market share despite business mix improved. The market condition is increasingly challenging on the macro uncertainties and regional competition while global restructuring of supply chains may weaken demand for China's production and logistics capacity.

In the following slides, we will take a look at the financial management, outlook and sustainability. The group adhered to a prudent financial management. Net debt was down to $10.9 billion. Gearing ratio was down to 6.7%. Interest cover was 11.5x. Average interest cost was 2.1%. For project pipeline, our upcoming sales pipeline in Hong Kong includes 1 plantation road, Kowloon Tong project and Kai Tak JV projects and for Mainland investment properties. Changsha IFS Tower 2 will be completed in phases.

Looking ahead, the global economic outlook is crowded by macro uncertainties and the economic and political fundamental paradigm shifts are adding fuel to inflation fire whereas Mainland China is facing immense challenges ahead, including the global supply chain restructuring. The upcoming 20th National Congress will be a milestone to watch from Mainland and Hong Kong. In addition, with connection with the world and Mainland China remain as the key to Hong Kong's economic recovery.

In the last part of the presentation, I will walk through our efforts in sustainability. The group is a constituent Hang Seng Corporate Sustainability Index with AA rating, and a constituent in Hang Seng ESG 50 Index. We are also named Second Top Donor by the Community Chest that for 2 consecutive years, recognizing our contribution during COVID, for environmental protection, the group is dedicated to constructing sustainable buildings Chengdu IFS and Changsha IFS will achieve LEED Platinum certification. We continue to make progress on reduction of CO2 emission as waste. For youth development, our flagship program, Project WeCan partnered with 82 schools and benefit 80,000 students.

That concludes my presentation. Now we will come to the Q&A section. For analysts with any questions, please press the raise hand button on your Zoom control panel.

[Angela Ng, executive]

We will have the first question from Karl Choi, Bank of America.

[Karl Choi, analyst]

Yes, I have 2 questions. First is on China IP. Could you discuss the amount of rent relief that was given this year, and how much was actually booked in the first half? Because I think you probably capitalized and amortized the rent relief, and the sales recovery that you've seen so far, for example, in the month of June, did you see year-on-year growth in tenant sales.

Second question is on China DP. Obviously, you're off to a slow start. Compared to the sales target of RMB 9 billion for the full year. Do you still look at it as an attainable goal? Sort of do you have -- or would you have more sort of sellable resources -- more launches in the second half to make up for the slow start in the first half.

[Tin Hoi Ng, executive]

Karl, I didn't hear the first question too well. Can you ask it again?

[Karl Choi, analyst]

The rent relief that was given out in Changsha and...

[Tin Hoi Ng, executive]

Rent relief.

[Karl Choi, analyst]

Yes. Rent relief. Sorry, rent relief, yes.

[Tin Hoi Ng, executive]

There's very little rent relief in the first half. We don't have very substantial IP assets in Shanghai. Shanghai, as you know, is the city, which was hardest hit. Changsha, Chengdu and Chongqing will also hit as well but not nearly as badly as Shanghai was. So the answer is a very small amount, if any. And sales recovery, it's uneven. For instance, Chengdu, even after the end of the period, in the month of July, Chengdu was hit by a new mini wave. And there was a regional and district-wide lockdown in Chengdu as well. So there is no clear trend that we can observe so far.

Back to your second question, the Mainland DP business. Our target for the full year is $9 billion. We've only done about 30% of that in the first half. And I have to admit the odds for being able to achieve the full year target are very long, very, very long. The market is -- it's simply very quiet with the exception of a few cities where we have recently either directly or indirectly seen renewed activities. Most of the cities are still quite quiet.

[Angela Ng, executive]

The next question from Mark Leung, UBS.

[Mark Leung, analyst]

Hi, management. Can you hear me?

[Tin Hoi Ng, executive]

Yes. Thank you.

[Mark Leung, analyst]

I got about maybe 2 questions. I think the first one is also on the China DP side. Given many of the SOE developers are now under a distressed situation. If there is any financial difficulties from our JV partner, do we consider to buyout the equity stake? I think that's the first question.

And the second question is, actually, we have done several runs or impairment loss for both Hong Kong and China DP. For this round of impairment, may I know is it mainly contributed by Hong Kong or China? And lastly, it's about on the dividend policy because I find that the underlying profit actually has turned around into a positive amount where we are maintaining the -- interim EPS remain constant. Just want to check with management? What is our DP policy guidance in the future?

[Tin Hoi Ng, executive]

Okay. Thank you. Whether or not we -- first question, whether or not we may be interested in buying out our joint venture partners. The short answer is possibly, but it really depends on specific projects and specific price expectation. At this point in time, we still don't see the right deal. And so we haven't done anything. And I don't think we are expecting anything on the horizon in the near term.

Impairment -- most of the impairment concerns Mainland DP assets, and it's caused primarily by the turn -- the downward turn in market performance since the beginning of this year, actually since the second half of last year. Our sales in the first half were significantly down on last year and on budget. And I think you can say the same thing about almost all of our peers without exception. And when we took a look at our portfolio as at the end of the period, it was clear that we needed to write down some of the slow-moving assets.

Dividend policy. Yes, you're right. Our underlying net profit improved from last year. But our underlying net profit per share in the first half of this year is still lower than our dividend per share. In other words, we paid more in the first half of this year than our underlying net profit will entitle us to. We're paying out of reserves. What we did -- what the Board did in coming up with that dividend was to try and give our shareholders and investors at least the same dividend as last year, notwithstanding the fact that we -- the payout ratio was 100 and whatever percent, over 100%.

So to the extent possible, we would try to maintain similar dividend as in last year. Although our overall dividend policy has not changed, i.e., that we would look to pay about 30% of our underlying net profit. As I said just now, for this first half, we paid more than 100%. So more than 100% is obviously a lot more than 30%. But the 30% guideline applies to the full year. And for the first interim dividend, we took the view that if possible, we'll try to maintain the same payout as last year.

[Angela Ng, executive]

And then the next question from Chuen Yeung, Citi.

[Ken Yeung, analyst]

Citi, Ken Yeung. I just have one question. It's basically -- since I think maybe last year or even before, Stephen already paint quite a bearish view on China, which proved to be right, not only on China DP but also on China IP saying that the competition is very keen, et cetera. So I believe that you must have a plan for Wharf in the next 5 years.

If we are bearish on China DP, if we are bearish on China IP, if we are also -- probably Hong Kong DPs is just maybe your sister -- not sister -- maybe real is also doing that. So what will Wharf be in the next 5 years in terms of the investment and that we can believe that this company will be going on the direction? So I'm just wondering what will this company be if we take a step back in the next 2 to 3 or 5 years' time?

[Tin Hoi Ng, executive]

Okay. Good question. First of all, I think in a volatile market, we -- or mine sitting on cash. Some of our peers sit on cash too. So I think even for personal portfolios, some of us are sitting on cash rather than being fully invested. So that may not be necessarily be a bad strategy, generally. Having said that, I think we have in our hands a few projects in Hong Kong, which require investment in construction, if nothing else, over the next few years. We have 2 projects on the peak, which we acquired at the beginning of last year or end of the preceding year.

We have a project Kowloon Godown. The Kowloon Godown project has cleared planning approvals. And if everything goes well, hopefully, we'll be able to start that within the next, say 6 months. So -- and then after that, there is this Yau Tong joint venture. And don't forget, we also have a joint venture in Kai Tak. So there are at least nearly half a dozen projects in Hong Kong, which can -- which will require capital. And that's where our capital can go to, if nothing else. And at the end of the day, as I said, sitting on cash may not be a bad strategy when markets are hostile.

[Angela Ng, executive]

And then the next question from Will Chu, CIMB.

[Will Chu, analyst]

Management, can you hear me?

[Tin Hoi Ng, executive]

Yes. Please go ahead.

[Will Chu, analyst]

Yes. So I'd like to raise 2 questions. One is regarding the impairments. As you mentioned, we have made some of the impairments. Actually, I see both impairments in China and Hong Kong. Could you please tell us a little bit more about the location of those projects in which you have made those impairments?

My second question is -- regarding the JV partners as some of us has covered. We know that there would be some -- there may be some problems regarding the JV projects with those Chinese partners. So in case of that, what kind of measures have you taken to ensure that these projects will still progress normally. And if you spot any irregularity, so what type of actions would you take or have you taken to make sure that you have some control in those projects?

[Tin Hoi Ng, executive]

The impairments relate not to 1 or 2 projects but to a basket of projects. There's 20 or 30 projects altogether. So I can't name you 1 or 2 or 3. We had to take a look at our entire portfolio project-by-project to determine which ones needed to be marked down to market. And the end result is the total provision of roughly HKD 2.5 billion.

As far as joint venture is concerned, there's always a risk whenever you enter into joint ventures with other parties. When you -- obviously, when you enter the joint venture, you -- before you do so, you do due diligence and you choose your partners. But you can't be 100% right all the time. So in cases where a joint venture partner defaults, whether it's in Hong Kong or in the Mainland, you need to seek recourse through the joint venture agreement. And different joint venture agreements are written differently. But generally, there are some -- they are default provisions, which would give the nondefaulting partners reasonable recourse to carry on with the project or otherwise. I can't be very specific because every joint venture agreement is different.

[Angela Ng, executive]

And the next question from Simon Cheung, Goldman Sachs.

[Simon Cheung, analyst]

I got a couple of questions. Just back to the impairment, you mentioned about $2.5 billion. Can you -- I saw quite a number of mentions in the announcement about impairment provisions, some number $2 billion, some number $1.4 billion. Just wanted to get a sense what exactly is the breakdown. And if you were to strip out the provisions, let's say, for China, what sort of net margin are you talking about? I saw the EBIT margins for China property, seemingly is still hovering at about 12%, not sure whether the number is correct or not? That's the first question.

And then on the second question, just given that the outlook for China seemingly is quite gloomy, I just wanted to get a better sense how you're seeing the situation in Hong Kong. You mentioned that you have a handful of projects up and coming. Perhaps can you run us through the sales schedules and maybe the -- all the approval requirement for some of the Godown as well as our Yau Tong projects?

And then I guess the last question is just on your -- back to your long-term strategies. I hear that you wanted to preserve more cash but sitting at where you are and taking a longer term on the company, I remember last time you mentioned Hong Kong being one of the areas where you see a lot -- more profits to be made. Have you changed your mind on that? And if so, are you going to be maybe a bit more aggressive on Hong Kong.

[Tin Hoi Ng, executive]

Okay. Impairment, I don't know where you picked up this $1.4 billion.

[Kevin Hui, executive]

I think the $1.4 billion is disclosed in the financial disclosure, which is related to projects held by subsidiaries.

[Tin Hoi Ng, executive]

Okay. Right. The attributable impairment in total is $2.5 billion. Some of those relate to subsidiaries and the remainder relates to joint ventures. I think that's the confusion if that's what you're referring to. But the total amount is $2.5 billion.

Hong Kong, well, as I said, we have these half a dozen projects, which are underway or which are soon to be underway. Collectively, they will require a good amount of capital expenditure. And that would consume the capital, which we have been able to repatriate from the Mainland. Project-by-project, the projects are the peak, as you know, they are long development cycles and they're also long sales cycles. Luxury, residential, typically do not go through presale. We don't start to sell until the projects are completed and people buy -- people don't buy off plans, they buy finished products on the peak. And so the capital tied up will be longer term. And that's a feature of luxury residential.

The Kowloon Godown project, we've got planning approval and so on. And we're trying to complete the modification -- land modification and pay the land modification premium within the next few months. And then hopefully, we'll start to award contracts for foundation and so on and so forth. The whole development cycle will take a few years.

Yang Tong bay is -- we'll have to follow because at the moment, we still have not been able to agree a modification premium with the government. Otherwise, the Kowloon Tong project is underway. Construction is underway. We're taking the right time to do presales, depending on market sentiment.

And our joint venture in Kai Tak, development is also underway. Timing for presale will be discussed among the joint venture partners. So out of those 6-or-so projects billions of capital will be required to complete them. And that's part of what I was referring to when I said we'll be bringing our capital back to Hong Kong. At least that would be the start. Did I miss any question?

[Simon Cheung, analyst]

Can I just follow up on one small one? So the $2.5 billion, if I were to clarify, is that $2 billion in China and $500 million or so in Hong Kong? I don't seems to see the breakdown between the 2.

[Tin Hoi Ng, executive]

Roughly, yes.

[Angela Ng, executive]

Thank you. And then the next question from Cusson Leung, JPMorgan.

[Cusson Leung, analyst]

Management, can you hear me?

[Tin Hoi Ng, executive]

Yes. Please go ahead.

[Cusson Leung, analyst]

Now my question is -- now we have the group restructuring several years back. And I think at that time, the objective was trying to give different choices to invest for different kind of assets in the Wharf group. And hopefully, that will help to create shareholders' value. So looking back for the past couple of years, although it was quite eventful, what will your comment be? Has that result been achieved? And if you were given the chance again 5 years back, will you be doing the same thing?

[Tin Hoi Ng, executive]

I think the answer to your last question is, yes, we would be doing the same thing if we had to do it over again. We -- the objective was to give investors differentiation and choice. The same differentiation and choice today exists. If investors wanted Hong Kong commercial investment properties, it's at Wharf REIC 1997. That's true even today. If investors were prepared to take the Mainland China risk and development property risk, they can continue to invest in the Wharf Holdings Limited, which is again true as of today. So we don't see any reason to go back if we were to do it over again to do it differently. Consumer -- investors have a choice and same choice remains today.

[Angela Ng, executive]

And then Ken Yeung has some follow-up questions.

[Ken Yeung, analyst]

Yes. Sorry, I have a follow-up to my previous question asked. I just summarized that you think it's better to hold cash. You think it's good to do some Hong Kong DP. So -- but on the other hand, you also mentioned that Hong Kong DP, especially on the luxury side is -- have a very long payback period need to be completed basically. So since that is also not very bullish.

So my question is seems as the most saver is on the relatively mass residential side. which is done by your fellow subsidiary real properties. Should we -- and honestly, we do also understand that you also assign your sales or maybe development to real property to help you on your Wharf development side on Hong Kong. So will management really consider probably you can get overall basically taking it back, which may be more efficient, and you can get involved in more on the mass residential segment, which is relatively safe?

[Tin Hoi Ng, executive]

Okay. First of all, I'm not advocating we hold cash. I'm saying even if at the end of the day, we hold cash that may not be a best strategy because currently, we are still in net debt, and the -- half a dozen projects in Hong Kong will require capital. So we're not expecting a net cash on a consolidated basis in the near future. And I wanted to make that clarification. I'm only pointing out that if there is no good investment to make in cases, then holding cash may not be a bad option. So I just wanted to make sure there is no misunderstanding.

Secondly, we also have mass residential projects in our portfolio. Kowloon Godown on redevelopment is not going to be a luxury project. It's got a beautiful harbor view, but that doesn't of itself make it a luxury project. That is likely to be more of a mass-market product. Yang Tong bay with something like 6,000 units on the joint boards would not be a luxury project, it would be mass as well. It just happens that we have several projects in the peak, which, given the nature of the peak market would make them luxury. That's all. At this point in time, we have not considered making a bid for real properties. Thank you.

[Angela Ng, executive]

For analysts who have questions, please feel free to raise your hand. So if there is no more questions from analysts, I believe we will be going to the end of the presentation.

[Tin Hoi Ng, executive]

And the Q&A.

[Angela Ng, executive]

Yes.

[Tin Hoi Ng, executive]

Thank you very much for attending, and have a good evening.

[Angela Ng, executive]

Thank you, and goodbye.