Hongkong and Shanghai Hotels Ltd

HKEX:45

Earnings Call Analysis

Significant Revenue Boost and Future Outlook Amid Operational Challenges

During the first half of 2024, the company saw an 89% increase in revenue to $4.6 billion, mainly from the sale of four Peninsula-branded London Residences and new hotels in London and Istanbul. However, the half-year results were marred by a $448 million loss due to depreciation and higher financing charges from new properties and renovations. The company remains optimistic about stabilizing its recent investments, particularly in London and Istanbul, which have shown promising early performance. Despite some operational challenges, including weak markets in Hong Kong, the overall outlook remains cautiously optimistic with strong future revenue potential.

A Robust Revenue Surge

In the first half of 2024, The Hongkong and Shanghai Hotels reported an impressive 89% increase in consolidated revenue, reaching $4.6 billion. This surge was primarily driven by the remarkable sale of four Peninsula-branded London Residences, which alone contributed $1.7 billion to the revenue. Additionally, the company recorded revenue from the soft openings of both The Peninsula Istanbul and The Peninsula London, which opened in February and September 2023, respectively.

Challenges with EBITDA and Hotel Operations

However, despite the significant revenue growth, the EBITDA before nonrecurring expenses dropped from $498 million in the previous year to $395 million. This decline can be attributed to several factors. The Peninsula New York is currently undergoing renovation, leading to decreased revenue from that property. The newly opened hotels in London and Istanbul are still stabilizing, and the overall market conditions in other regions have been weak. Notably, a substantial depreciation expense of $100 million and increased financing costs of $237 million have also impacted profitability, leading to a reported loss of $448 million for the period.

Real Estate Highlights and Ongoing Strategies

The sales of residential units were crucial in offsetting financial losses. In particular, the performance in the commercial properties division skyrocketed by over 400%, producing $2.1 billion in revenue. Despite this influx, the company is still focused on selling the remaining unsold apartments in London to further reduce interest costs associated with debt.

Operational Performance and Future Expectations

Looking ahead, management is optimistic about the future, particularly regarding the London and Istanbul properties. There is an expectation that the second half of the year will outperform the first, boosted by significant events like the Quail Motorsports Gathering and seasonal sales such as mooncakes which historically perform well during this period. Moreover, while challenges remain in Hong Kong's tourism sector, especially concerning long-haul travelers, localized demand offers potential for recovery.

Financial Stability and Credit Strength

Despite the struggles, the company has maintained a solid financial footing. The net borrowings reduced by 7% to $14.1 billion, and they enjoy $3.2 billion in available liquidity. The weighted average interest rate stands at 4.72%, and a significant 74% of committed facilities are classified as green loans. Additionally, they have recently received an 'A' rating from the Japan Credit Rating Agency, reflecting their strong financial health and commitment to sustainability.

Cautious Optimism for Recovery

Management anticipates a recovery path influenced by operating improvements in London and Istanbul, especially as both properties ramp up their occupancy and revenue. They aim to enhance operational efficiency, indicating a focus on cost control while boosting revenue through quality service and strategic marketing efforts, particularly in addressable markets like Greater China and securing domestic business opportunities.

Conclusion: Navigating Recovery and Growth

Overall, while this year marks a period of transition for The Hongkong and Shanghai Hotels amid various operational challenges, the long-term outlook remains positive. Their strategic focus on existing properties and the gradual stabilization of new hotels underscore a commitment to fostering growth. Investors should be attentive to how the company manages interest expenses and drives revenue growth, particularly through its landmark properties in London and Istanbul.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen. Welcome to The Hongkong and Shanghai Hotels' 2024 Interim Results Presentation. My name is [ Claire ], Assistant Director of Corporate Finance and Investor Relations. The interim results announcement will be posted on the Hong Kong Stock Exchange website after this session.

Our senior management is going to give a presentation, followed by the Q&A session. For audiences joining us in person, if you have any questions, you can wait until the Q&A session. For audiences joining us online, you're welcome to submit your questions online by clicking the raise your hand button at the top right-hand corner of your screen.

Presenting today, we have Mr. Clement Kwok, Chief Executive Officer; Mr. Keith Robertson, Chief Financial Officer; Mr. Gareth Roberts, Chief Operating Officer; and Ms. Ming Chen, Chief Property Development Officer.

Now let's invite Mr. Kwok to begin the presentation. Mr. Kwok, please?

[King Kwok, executive]

Thank you, Claire. Well, the first thing you notice is that of our team around this table, I'm the dinosaur. I have been doing this for 22 years, and this will be my last press and analyst meeting before retirement, but all of my colleagues are relatively new to be at this table. Keith, of course, is a relatively new CFO. Gareth has worked at the company for as long as me, but this is your first appearance at the press...

[Gareth Roberts, executive]

Second on the analyst.

[King Kwok, executive]

And analyst meeting.

[Gareth Roberts, executive]

Yes.

[King Kwok, executive]

Ming also has around 20 years of work experience, but, of course, is -- again, she's taken up her position as our Chief Property Development Officer, and Ming is now in this meeting. So this is a sign of transition and a sign of our new management team coming through. The other thing I would mention is, if you look at this photo here, this is a very significant photo because this was the opening ceremony of The Peninsula London, which was held on the 18th of June. And I'm sure you recognize the main individuals who are unveiling the plaque. Sir Michael, his son Philip, and then Prince Edward, the younger brother of King Charles and his wife Princess Sophie. So that was a very significant moment for us because that represented finally after looking for all this time, this magnificent and hotel in London, which is in such an amazing location. And this is going to be a very important landmark asset for us for many years to come. And hence, the opening on that date was a truly significant event.

If I think back to the first half of 2024, how would I describe it? And the way I would describe it is really a continuation of getting Peninsula London up and running. And why do I say that? If you look at our results, the results have been affected, as you've all been told, by depreciation because with the hotel opening, there is sizable depreciation coming, and that's because the hotel was very expensive to build. And at the same time, there are sizable interest costs which were previously capitalized, but now are going into the P&L. If I talk about the interest costs first, we expect those interest costs to reduce as we get in the proceeds from The Peninsula London residential sales, and that's all part of the economic model of what we set out to do. But we still have some sales which are outstanding, where we're still waiting for proceeds to come in. And at the same time, of course, it takes time to build up the EBITDA of a new property like London and indeed Istanbul. And the EBITDA is not yet at the level that would be covering the depreciation and interest.

Of course, the plan is it would. But with a soft opening in September, the hotel not being fully opened until about February of this year, of course, it takes time to ramp up. And on that, by the way, the recent momentum has been very good, particularly in London, but also in Istanbul. So these big factors which are affecting our results for the first half of the year, we're working through this is all part of the consequences of opening London. Now there have been some gains booked on the sales of Peninsula London Residences, and that has helped to offset some of the impact that we are talking about.

And the other factors that have influenced our first half results, in particular, a very weak second quarter in terms of operating results, particularly in Hong Kong. I don't think that comes as a surprise to any of you that follow Hong Kong in terms of tourism and the economy in Hong Kong. And also, I think, as you know, and really, it is of much less significance, a property revaluation deficit, which actually in percentage terms is very small as compared to the portfolio, but then that amount has to be taken through the P&L as well. We've had The Peninsula New York under renovation during this time. And whilst our results are better than budgeted for the rooms that were still in inventory and the response to the renovation from our guests and customers has been very good. But of course, we've had a large part of the inventory unavailable. And so if you compare the numbers between 2024 and 2023, then of course, you have New York being affected by the renovation. So that pretty much is the story of the first half. And I think all of you would be fairly familiar already. We issued the profit warning just because the bottom line number look like a big negative number. But I think it is something that we have explained quite clearly.

So with that introduction, I will get Keith to take us through the numbers.

[Keith Robertson, executive]

Thank you, Clement, and good afternoon, everybody. During the first half of 2024, consolidated revenue increased 89% to $4.6 billion. The increase was mainly due to the inclusion of revenue from the sale of 4 Peninsula-branded London Residences of $1.7 billion and the additional revenue generated by The Peninsula Istanbul and The Peninsula London, which soft opened in February 2023 and September 2023, respectively. Excluding residential sales, EBITDA before nonrecurring expenses decreased from $498 million to $395 million, mainly due to The Peninsula New York renovation, new hotels in London and Istanbul requiring time to stabilize and weak markets in a number of other hotels.

Depreciation increased by $100 million, mainly attributed to The Peninsula London. And net financing charges increased by $237 million as the group is no longer capitalizing interest on borrowings relating to The Peninsula London project, following the opening of the hotel as well as higher interest rates. A revaluation loss of $139 million was principally attributable to a decrease in the appraised market value of The Repulse Bay Complex. Given these factors, the group made a loss of $448 million for the period compared to a profit of $95 million last year. Excluding the preopening and project expenses, the post-tax effects of unrealized property revaluation movements, the group made an underlying loss of $257 million as compared to an underlying profit of $25 million last year.

I will now turn to the divisional performance. With respect to the hotels, they reported an 18% increase in combined revenue. The increase in revenue was contributed by the 2 new hotels opened in 2023, London and Istanbul. And as mentioned, the EBITDA of the hotels division was negatively impacted by The Peninsula New York renovation and the newly opened Peninsula Hotels in London and Istanbul, which was still in the early stages of operation before stabilization. With regard to the commercial properties, revenue rose by over 400% to $2.1 billion. The increase is mainly due to the inclusion of $1.7 billion of revenue arising from the sale of the 4 luxury Peninsula-branded Residences in London.

Excluding the revenue from residential sales, the division's recurring revenue increased by 14%, mainly due to the increase in number of visitors to the Sky Terrace and EBITDA is stable. Overall, The Repulse Bay Complex remains the largest contributor of revenue in respect of leasing operations, accounting for over 60% of the division's recurring revenue. Clubs and Services revenue increased by 42% and was mainly attributable to The Peak Tram's robust business performance. EBITDA is negative as some key revenue drivers, such as Peninsula Merchandising's mooncake sales and The Quail Motorsports Gathering normally take place in the second half of the year.

I will now talk about the cash flow summary. Net cash generated from operations for the period amounted to $1.9 billion after taking into account preopening and project expenses, tax payments and changes in working capital. The increase was driven by the $1.7 billion of proceeds from the sale of The Peninsula Residences in London. During the first half, $293 million was spent on existing assets, which included the $147 million on renovation of The Peninsula New York. A total of $444 million was spent on the 2 new hotels in London and Istanbul. As the group is no longer capitalizing interest on borrowings related to The Peninsula London project following the opening of the hotel as well as higher interest rates, interest payments increased to $344 million against $272 million last year. Overall net cash inflow before financing was $0.6 billion.

Moving to the capital structure and the balance sheet. Our net borrowings, excluding lease and other liabilities decreased by 7% to $14.1 billion with average committed facilities maturing at 1.4 years. The net debt to total assets was 25% and available liquidity amounted to $3.2 billion. Our weighted average interest rate was 4.72% after taking hedging activities into account. This reflects a 34 basis points increase compared to December last year. 43% of total debt had fixed interest rate. We are now delighted to announce that we have recently received a credit rating of A from Japan Credit Rating Agency Limited for long-term foreign currency and long -- and local currency-denominated debt. $2.8 billion of financing arrangement is in progress in the second half of 2024.

74% of our total committed facilities were classified as green loan or sustainability-linked loan versus 57% in June last year. The increasing use of green loans or sustainability-linked loan demonstrated the company's continuous commitment in sustainable luxury. We will continue to closely monitor our overall debt and cash flow positions to maintain sufficient financial headroom.

I will now hand you over to Gareth to talk about operations. Thank you.

[Gareth Roberts, executive]

Thanks, Keith. Good afternoon, everybody. I'll now give a brief overview of our Peninsula hotel operations around the world. Firstly, looking at Greater China. The Peninsula Hong Kong had a good first quarter, although we saw some slowdown in the second quarter, and the overall tourism sentiment in Hong Kong remains weak. In March, as part of Art Week in Hong Kong, we held a major event to showcase contemporary art work as part of our global art program, Art in Resonance, including a piece commissioned exclusively for The Peninsula Hong Kong by local artist Kingsley Ng, which you see here on the left.

Our collaboration with the Star Ferry continues with our signature, Peninsula Afternoon Tea served onboard. Our hotels in the Mainland are seeing good recovery. The Peninsula Shanghai is the rate leader in the city and reported strong results and is starting to see a return of international visitors, although the luxury retail and food and beverage sector remains weak. In Beijing, we're seeing excellent results and achieved the highest RevPAR in the history of the hotel with a 27% increase year-over-year. The majority of the guests were from the direct domestic market, and we're also welcoming a younger demographic. Elsewhere in Asia, The Peninsula Tokyo is doing well, and this was driven by robust international business from the U.S., U.K. and Hong Kong.

Bangkok and Manila are stable, although we continue to struggle with the oversupply of hotel rooms in Bangkok. Looking to the U.S., where we have 3 Peninsula hotels. The Peninsula New York is currently undergoing an extensive renovation, which will result in a significantly improved lobby, rooftop bar and public areas as well as new guestrooms, which you see pictured here with the Peninsula proprietary technology. This renovation will be completed in September of this year. And as a result, we've been performing well with their available inventory, but our revenue for the period was down due to the work ongoing. Business was stable at our other U.S. properties, The Peninsula Beverly Hills and The Peninsula in Chicago. We also own an operator resort in Carmel, California, The Quail, which hosts our annual Motorsports Gathering and does very well in terms of ticket sales and sponsorship from the top automotive brands.

Momentum continues to build in our 2 newest hotels. The Peninsula London continues to attract positive reviews and rooms business momentum and banquets and spa are also performing well. Our rooftop restaurant, Brooklands, was bestowed with 2 Michelin stars after just 4.5 months of opening. So we're very pleased about that. The Peninsula Istanbul's momentum has been satisfactory and continues to gather pace and capture market share. Our various outdoor dining and event spaces are quickly becoming some of the premier destinations in the city.

At The Peninsula Paris, we reported stable performance. And of course, it's very busy with the Olympics at the moment. Peninsula Merchandising, revenue increased by 58% compared to the previous year, although our business was affected by the soft retail markets in Hong Kong and Mainland China. Of course, Peninsula Merchandising is known for the signature mooncakes, and we're seeing satisfactory sales for the season so far.

I'll now hand over to Ming to talk about commercial properties performance. Thank you.

[Ming Chen, executive]

Thank you, Gareth, and good afternoon, everyone. We own and operate The Repulse Bay on Hong Kong South side, which is our largest commercial property. Work is underway to enhance and upgrade the retail arcade. During the first half, The Repulse Bay had positive business performance compared to last year, with revenue increasing slightly. We're pleased to see demand from local moves and expatriates who are returning or moving to Hong Kong. With positive leasing renewals, we remain cautiously optimistic about the second half of 2024. The Peak Tower experienced a strong first half compared to last year, and revenue at The Peak Tower improved by 51%. We're exploring a variety of new dining and retail options to enhance The Peak Tower's appeal as a destination. And during the first half, we welcomed a new [ coffee ] tenant and held various promotional activities to appeal to families.

Business at The Peak Tram has been robust, with record patronage achieved during the Golden Week Holiday in May. Revenue increased by 73% compared to last year. Located at the Central Station, The Peak Tram -- of The Peak Tram is St. John's Building, where revenue decreased and occupancy dropped slightly to 86% during the first half of 2024 due to weaker office demand and new grade A office supply coming to the market in Central. We also own commercial properties in Ho Chi Minh City, Vietnam, as well as in Paris located beside The Peninsula Paris. And that property was fully occupied during the first half.

Now I'll hand you over to Clement to talk about the outlook.

[King Kwok, executive]

Thank you, Ming. So if I think ahead to the remaining months of the year, what are the most important factors for us. Of course, I think the most important is London and Istanbul and the buildup of those properties. As I mentioned earlier, the momentum has been very good in the last 2 months or 3 months. We're achieving very good RevPAR positions and much more income as compared to the beginning of the year. But of course, we want to see this being maintained. Generally, we would expect the second half to be stronger than the first half. The second half also contains The Quail Motorsports event, which earns a lot of revenue for us and also mooncake sales. And in the past, the second half performance had been stronger in the hotels division than the first.

But of course, the key question is still Hong Kong, right? And we're all aware of the situation in Hong Kong, which is weak. And we're really not seeing the long-haul leisure travelers coming from places like the U.S. Now I don't think that's going to change very quickly, but I've been saying, for instance, in the press conference today that Hong Kong really has to promote itself that I hope all of us Hong Kongers will convey the pride that we have in ourselves and the confidence and to go and influence the international community so that they would understand that Hong Kong is still a wonderful place.

But in terms of outlook, of course, we still have concerns about Hong Kong. China, I think we've touched on before. Of course, it's also affected by the sort of poor image that the Americans in particular are putting on to China and Hong Kong. But the difference with China is, I think, 2 things. One is that there is more domestic travel going into Peninsula Shanghai from other parts of China. And we're seeing the affordability of that domestic audience to be able to pay for a Peninsula product. And also in Beijing, there is diplomatic business, visiting governments coming to Beijing, and that business is helpful to us as well. So it's a bit of a mixed bag, but I would say that the most key elements would be the performance of London and the performance of Hong Kong. I think those are quite key.

If I look at the non-hotel side, I think Ming that things are generally looking more positive in terms of Repulse Bay. I think we're seeing quite good rental demand. We're seeing some growth, even some foreigners taking out some new leases. The Peak continues to have good momentum. And one key thing, of course, on the property side is the continued sale of Peninsula London Residences, both in terms of getting in the proceeds to reduce our interest costs. But there are 6 unsold apartments that we are working on selling as well. So of course, it's never easy.

I still think this year is a bit of a sort of transition year as we get the new hotels up and running. But of course, the good thing is that we always look very long-term. And also, we maintain a good, steady financial position and liquidity buffers, which is why we have received the A rating from the Japan Credit Rating Agency.

So finally, as I said earlier, this will be my last set of interim results before I retire at the end of October. And I just want to thank all of my colleagues that we have had such a wonderful journey together.

[Unknown Executive]

Now we'll open the floor for questions. So there's this first question from the webcast. When do you expect the remaining 6 apartments to be sold?

[King Kwok, executive]

I would say that at the moment, demand is quite good. I think some people are waiting until the results of the U.K. election.

[Unknown Executive]

U.S. elections.

[King Kwok, executive]

U.K. and U.S., but I mean...

[Unknown Executive]

We had U.K. elections.

[King Kwok, executive]

I know but they were waiting until the U.K. elections took place. And actually, recently, we have seen many more viewings in -- for the London Residences. I am not worried at all about these residences. If you've been to visit them, they are magnificent. The space is beautiful. They have good ceiling heights, very good space, fantastic location. Some of the apartments overlook Buckingham Palace, some overlook Belgravia and the quality is really superb. So we're not willing to compromise at all on pricing. Actually, this is Ming's responsibility. And she's a pretty tough person. So we are getting some -- I think we'll be getting some good deals done, but there's certainly demand that a lot of viewing is at the moment.

[Unknown Executive]

Another question from the webcast. Can you please comment on the profitability of Peninsula London and Istanbul since opening?

[King Kwok, executive]

I think I've said it, haven't I? Clearly, the profitability is not good. If you have the depreciation and interest, and I explained that we're still trying to build up the EBITDA. But clearly, our business plan is, a, to increase the EBITDA as we increase business. Gareth, I think, in the past months, Peninsula London is -- RevPAR...

[Gareth Roberts, executive]

#2. Yes, July, we were RevPAR #2, and we saw -- we saw a very strong business in July, and we're seeing the same in August.

[King Kwok, executive]

But the amount of revenue of Peninsula London for July is the highest of any property we have in the group, right? So we are seeing that revenue coming through. But of course, London has a big fixed cost base. It was expensive to build, so depreciation is high and interest. But as I said, we're hoping the interest will progressively come down as we get the residential apartment sales because the proceeds of the sales are being applied towards paying down the debt in London. So that is the equation. And it will take a while to stabilize, I think. But with a bit of luck, I think that transformation could happen quite quick as the revenue ramps up and interest comes down, and that equation comes together.

By the way, the other factor here is that, generally, when you open a new hotel, you want to make sure that you don't make any mistakes in terms of the quality of the product and the surface. And what that means is that you're opening with quite a full staff complement. Now of course, you want to maintain a good quality of service. But at that stage, you have not yet had time to work on any staff efficiencies either, right? And that is something we're beginning to work on as well. That as you get settled down, you're working on both the revenue line and the cost line to improve those margins. So yes, I mean, in terms of potential for rapid investment -- rapid improvement, I would say London is the #1 potential.

[Unknown Executive]

A follow-up question. Is there going to be a new hotel in the near future?

[King Kwok, executive]

No. Because at the moment, we have devoted so much attention and investment in resources into London and Istanbul. Clearly, the priority is to make sure that those properties stabilize. And if you look at our balance sheet, then we don't want to add any more gearing for the time being. The other thing that I've always had the philosophy, and this is even when I first started with the company, is sometimes people get excited about wanting to build new hotels and saying, we want to expand in lots of places. But do not forget that quite often the best potential for creating more value is to look carefully at your existing properties, which are the properties that you know the best and then to make investments in those existing properties to earn a return. And because those are the properties you know well, quite often, actually, the risk of making those investments is actually less. So we are -- as indicated here, we're looking at some of our existing properties as well.

[Unknown Executive]

One last question from the webcast. What is your view on the outlook of Hong Kong?

[King Kwok, executive]

My view of the outlook of Hong Kong is positive. I think Hong Kong has many, many advantages going for it, such as great professionalism, very good infrastructure. It's a place that things can get done. It has a very strong financial services sector. It has strong legal sector, trading and all the rest. To some extent, of course, the fortunes of Hong Kong are a little bit tied with the fortunes of China. And I understand that there's a bit of a downturn in China at the moment. But I really believe that if you look at China, it is still going to be a fantastic, if you like, manufacturing and production center for the world. And I do believe that, yes, I mean there might be some shorter-term issues in the real estate sector and so on, but I think the overall outlook, I continue to believe that China will be a very competitive place in terms of production, which is very important.

And Hong Kong, of course, goes along with that. Now of course, it's very -- it has also been very important in the past that Hong Kong being an international financial center, would also enjoy good relationships with Western countries. And that at the moment, and we all understand why is also going through a difficult period. But I think provided Hong Kong keeps on -- keeps on working on its own economy, Hong Kong keeps on growing, creating value, making value for itself and China is growing as well, I think sooner or later, we'll find that these things will start coming back in our favor.

[Unknown Executive]

Do we have any questions from the floor?

[King Kwok, executive]

No questions from the floor? All right, then, thank you very much, everyone.

[Unknown Executive]

Bye. Thank you.

[Keith Robertson, executive]

Thank you very much.

[Unknown Executive]

If you have any other questions, you are welcome to send your questions to the e-mail box of Investor Relations.

[King Kwok, executive]

Thank you.

[Keith Robertson, executive]

Thank you.