NWS Holdings Ltd

HKEX:659

Earnings Call Transcript 2021-Q2

[Unknown Executive]

Good evening, everyone. Thank you for joining NSW Holdings Financial Year 2021 Interim Results Analyst Presentation. First of all, let me introduce our panel members. Mr. Gilbert Ho, Executive Director; Mr. Jim Lam, our newly onboarded Senior Director of Finance; Mr. Ben Wong, Director of Corporate Development and Investment. And I'm covering today's NC.

Today, Gilbert will first walk you through the key highlights of our company's strategy. Then Jim will present to you the financial highlights, and Ben will explain the performance of individual business segment and then followed by the Q&A session. If you have any questions, please enter your questions into the text box on the left-hand side of the screen.

Without further ado, let me pass the time to Gilbert. Gilbert, please.

[Chi Hang Ho, executive]

Thank you very much, Catherine, and good afternoon, everyone. Welcome to NWS 2021 Interim Results Analyst Presentation. Let me start with the strategic road map, what we have done over the last few years because I think it is very important that we actually look back what we have done to drive the value for shareholders via acquisitions, noncore disposals and sustainable progressive dividends.

If you look from 2018 January, we have disposed a number of our noncore assets, including BCIA, a number of our ports, our Transport business and most recently, in January, we disposed off our Environmental business. We also have added some senior management team, which are more capital market focused to be more in line with our shareholders.

In addition to noncore disposals, we have done our business portfolio revamp for future growth, including the acquisitions of FTLife in a number of roads in China. We also redefined our businesses into core business and strategic portfolio so that the investors will have a more clear road map of how we developed our business going forward. And more importantly, we have changed our dividend policy from the historical 50% paid out to a sustainable and progressive dividend policy, which is in line with our entire New World Group.

So in the next page, you can see our business transformations. In 2018, our business were segmented into infrastructure and services, namely our Roads, Aviations, Environment, Logistics, Construction, Transport and Facilities Management. Now in 2021, we have divided into core business, which is our Road business, Aviation, Construction and our Insurance. And we have our Strategic portfolio, which is our Logistics and Facilities Management.

So I have already walked you through the key changes over the past 3 years. And I want to highlight that even though we have done a number of acquisitions in excess of over $2.7 billion, we have maintained a very healthy gearing ratios of 26% as of the December 31, 2020. We have also disposed our businesses at relatively good valuations. Take an example, we have sold our Transport business and our Ferry business -- the Transport business at over 300% -- 300x PE and our Ferry business at around 15x. And the recent disposal of our Environmental business at around 16 to 18x.

We have recouped over around $16 billion of cash through our disposals. And with our acquisitions of FTLife and our Roads, we have accumulated AOP contributions of over 1.3 -- $1.5 billion over the last few years.

We will continue our portfolio optimizations, to further strengthen our own fundamentals. As you can see in the next page, our newly acquired business together with the disposed businesses have actually added altogether around $500 million AOP net. And we have a very dynamic balance sheet with value crystallization since 2018 with around $16 billion.

So in the next 3 years, we will continue our transformation. We will look to future growth on our Roads, Modern Logistics as well as our Insurance. For our Roads, we look to partners with SOEs and major PRC investors in China regional clusters, including the Central China as well as the GBA.

In Modern Logistics, we will invest in the traditional warehouses and also the most in-demand cold chain and also the technology and VAS relating to the logistics. This we will focus also in China, and we will also look into other regions such as the Southeast Asia.

For Insurance, we will continue to develop our own business. And together with New World development, we will enrich our customer base with the ecosystem to develop a New World Group.

We will also focus our business development in the GBA area with the applications of the China license in near term. We will continue to monitor opportunities to unlock value to continue our noncore disposals. So in terms of the investments, some key investment criteria is it has to have strong growth prospect and also attractive risk-adjusted returns. As with most projects NWS has, we want to have solid recurring cash flow and -- as well as the income generated. Last but not least, we aim for high single digit to double-digit return on capital deployed.

Going back on our dividend policy, we started our sustainable and progressive dividend policy in 2019, supported by a very strong balance sheet. As you can see, we maintained our dividend for $0.29 in the first half of 2021. So some might ask, when we will have a progressive dividend, meaning increase in our dividend?

I want to answer all of you upfront, we will look at our dividend when we have a portfolio optimization on the progress of our portfolio optimization, also look at the business environment as well as the business growth as well as our AOP. Altogether, will lead to the DPS growth going forward.

I wouldn't go through the next page in details, but I would like to highlight to you the ample cash we have on hand of about $11 billion and also the unutilized committed bank facilities of over HKD 18 billion. We have a very stable debt maturity profile. We have 17% of our debt that will be matured in the second year. And after that, it'll be 49% in the third to fifth years. As I said, the net gearing ratios dropped from 31% to 26% now.

So I have talked enough about the transformation as well as what we would do going forward. I will take you through the business at the moment. As I said, our core business involve now Roads, which has 15 toll roads in China. Our Aviation business, Goshawk Aviation. Our Construction business, which include Hip Hing Group as well as our investment in Wai Kee. In our Insurance, FTLife Insurance.

In our Strategic portfolio, we have our Logistics, which include ATL Logistics Center, CUIRC as well as the port in Xiamen. Facility Management, which include Hong Kong Convention Center, Gleneagles Hospitals and Free Duty shops. And the last one, which we considered as a discontinued operations is our Environment business, which is SUEZ and Derun Environment.

So you can see in this page, we have actually had a very strong rebound with potential yet to be fully reflected. In our Roads business, we already see very strong rebound since the toll fee resumptions. For Insurance, we are actually very well positioned for a strong rebound upon PRC border reopening. And in our Aircraft Leasing business, we've already seen stabilizations in the airline operators with the support from the governments and also the financial market. And with the vaccine start to roll down, we will assume the travel will be resumed very soon.

I will pass it on to Jim to give you some highlights on our financials.

[Jim Lam, executive]

Sure. During the period, the revenue of the group increased by 26% year-on-year to $14.2 billion. The increase was driven mainly by the two 6 months contribution from FTLife during the period versus only 2 months of contribution in the same period last year.

Total attributable operating profit, or AOP, of the group increased by 46% year-on-year to HKD 3.3 billion. I will go through the AOP performance for each segment in a few moments. Despite the very robust growth in AOP during the period, we recorded certain nonoperating losses in the results totaling HKD 2 billion. Such nonoperating losses mainly include: first, HKD 1.33 billion remeasurement loss, resulting from the reclassification of an investment to an asset held-for-sale.

Second, our share of asset impairment loss and provision for expected credit loss from Goshawk with an amount of HKD 416 million. And finally, a remeasurement loss of HKD 128 million in association with the disposal of our stake in SUEZ NWS and Derun Environment. As you know, we cite an FTA to dispose our stake in this 2 associate and joint venture in January 2021. As a result, we have decided to reclassify such investment into asset held-for-sale at the end of December 2020.

Profit for the period was HKD 903 million, representing a decline of 50% year-on-year. Stripping out the distribution payable to the holders of perpetual capital securities, the profit attributable to the shareholders of the company was HKD 612 million, a decline of 60% year-on-year, which is consistent with our profit warning announcement published last month.

The basic EPS was $0.16 -- HKD 0.16, a decline of 59% year-on-year. As Gilbert just highlighted, despite the fall in EPS, we have decided to maintain the interim EPS at $0.29, which is the same as last year, which shows our commitment to the sustainable and progressive dividend policy supported by a very solid balance sheet. The adjusted EBITDA for the period was $3 billion, which represents a small decline of 4% year-on-year.

In terms of the AOP performance by segment, the core business as a whole registered a 13% increase in AOP to HKD 2.3 billion and the Strategic portfolio as a whole saw a 3.2x increase in AOP to HKD 1 billion. Within core business segment, the Insurance segment saw 1.9x increase in AOP to $462 million, which again was driven mainly by the full 6-month contribution of FTLife.

For the Roads, due to the rapid traffic recovery after the resumption of the toll fee collection and the appreciation of the renminbi, it saw a 12% increase in AOP to $1 billion. During the period, the toll income of our portfolio increased by approximately 8% and the renminbi appreciated by an average of 3% to 4% during the period.

Within the Strategic portfolio, the Strategic Investment segment registered the strongest increase of 14x increase in AOP to $752 million, which was driven mainly by the increase in fair values of some of our investments due to a buoyant stock market as well as the strong AOP recovery of some of our investee company, including Tharisa and Hyva.

I will pass over to Ben to walk you through the operational performance of each segment.

[Ben Wong, executive]

Thank you very much, Jim. I will quickly walk you through the various segments. First, start off with Roads. We have seen swift recovery with positive outlook with AOP increasing 12% year-on-year with our traffic volume up 9%. And as we previously discussed, we are still discussing with the government on the compensation measures for the toll fee exemption that we have extended last year. And for the outlook, we continue to look for new opportunities, including the stress opportunities and opportunities with good growth prospects and areas as Central China and GBA. And we are also keen to look for partners such as SOEs and major PRC investors in the Road section.

Looking into Aviation, we have seen signs of stabilization such as if you look at our AOP contribution year-on-year, it's up 1%. And if you look into the industry as a whole, we have seen stabilization regarding air travel bubbles and various support from the government and also financial market on the funding side.

In terms of the collection rate, yes, we have seen collection rates stabilizing at 76%. And if you look -- if you break down further detail, second quarter was at 68% and Q4 was at 82%. And in terms of aircraft utilization rate, it's at 99%.

So in terms of outlook, with the vaccination and rollout campaigns around the globe are set to enhance confidence in international and domestic travel, we remain cautious and prepared for recovery.

In the Construction segment, we have seen AOP decreasing year-on-year 21%, mainly due to less gross profit recognition for the first half. But in terms of the full year, we remain confident that we will be on track. And if you look into the new contract awarded for the first half of '21, we have seen $1 billion new contracts coming in.

And again, looking at our portfolio, we have seen a well-balanced portfolio and sources of project with 64% and private and 36% government. And for the outlook, we remain positive over the mid to long term, particularly support and strong demand from the government and private sector and Hip Hing's first-rate track record. And we have also utilized new construction technology to mitigate some of the margin pressures that we can be a bit more efficient in terms of managing our projects.

Looking into our Insurance sector, it has delivered consistent performance and with potential yet to be fully realized. As Jim had mentioned, the segment AOP is up 1.8x to $462 million with the full period contribution year-over-year. And if you look into our market -- our performance against market, clearly, FTLife has outperformed the market in terms of APE, particularly in -- as we have seen in Q3 and also the Hong Kong business.

Looking into our solvency, it's still very strong, again, well above the minimum requirement of 150% at 553%. We have seen the embedded value growing 16% to $20 billion. And in terms of agents, it's still above 3,000. So on the outlook, with the raising awareness on health care and insurance protection, it presents a lot of growth opportunities. And if you look into the MCV of our customers, we are well positioned for growth when the border reopened.

Looking into the Strategic portfolio. In terms of Logistics, we continue to hold very unique and resilient -- unique assets and resilient business. If you look at the AOP, it remains stable.

If you look at our crown jewel ATL Logistics Center, it has delivered strong performance and almost fully occupied at a very stable average rent growth at 1%, despite a very difficult market. CUIRC has recorded remarkable throughput growth, 30% and also AOP growth at 41%. Our New Guangzhou terminal is under construction and is expected to commence operation in 2021. And if you look at the ports in Xiamen, AOP was down 8% due to the changes in mix with cargo and more transshipment.

So all in all, in terms of outlook, business is expected to remain strong. We continue to seek opportunities to further invest into Modern Logistics to capitalize on the rapid demand in Logistics under the new economy.

In terms of Facility Management, we have continued to put our efforts to improve the business performance. If you look in terms of our AOP, it has improved 11% year-on-year. And if you look at our GHK, it's ramping up rapidly and AOL has narrowed. Our outpatient and inpatient up 18% and 31%, with our increased effort in marketing and also relocating our service center to New World Tower in Central, partnering with another telecom giant rolling out the virtual outpatient clinic via DrGo.

And we have also seen regularly utilized beds up from 190 beds to 204 beds.

In terms of CEC, our convention center, unfortunately, it has reversed from an AOP position to AOL position due to the COVID and the stringent measures -- social distancing measures. But we have -- with the improvement of the COVID situation, we have seen some gradual recovery of certain events coming back. So we're looking forward to once the social distancing measures relaxing, our performance should recover swiftly.

In terms of Free Duty, 3 outlets remains closed, and we have also implemented stringent austerity measures to reduce our AOL. In terms of the outlook, we are well positioned for a border reopening and ready to capture opportunities once the cross-border travel resumes.

In terms of Environment, as explained by Gilbert earlier, we have announced the disposal of SUEZ NWS and Derun Environment at a premium valuation. And if you look into the ForVEI, the solar panel in -- solar farms in Italy, it will be reclassified into Strategic Investment going forward. So in terms of our segments, we should have one less segment going forward to improve. Hopefully, more clarity for the investors, our strategic planning going forward.

And in terms of ESG, we continue to focus on ESG and try to improve our disclosure as well as more ESG focus. As you can see, we have won the Best Corporate Governance Award 2020 by the HKCPA. We have -- we continue to uphold a very high rating overall AA+ under the Hang Seng Corporate Sustainability Index.

And in terms of sustainability financing, we have recently just announced our sustainability-linked loan with Bank of America for HKD 1 billion.

Some of our key initiatives for the climate resilient measures such as initiated transition risk assessment towards low-carbon economy in 2021. We have also, as just explained, we have second sustainability-linked loan with Bank of America for HKD 1 billion. So we remain committed to our ESG initiatives and align with New World Group's ESG measures.

And with that, we will conclude our presentation at the moment, and then we will go to Q&A.