Ladies and gentlemen, thank you very much for attending the live webcast of CK Hutchison's 2022 interim results presentation. Today, our speakers are Mr. Victor Li, our Chairman and Group Co-Managing Director. Mr. Canning Fok, Group Co-Managing Director. Mr. Frank Sixt, Group Finance Director and Deputy Managing Director. Mr. Dominic Lai, Deputy Managing Director of CK Hutchison and Group Managing Director of A.S. Watson Group. Miss Malina Ngai, CEO of Asia and Europe of A.S. Watson and Group COO of A.S. Watson Group.
During the presentation, please feel free to raise your question in the chat box, which is at the lower right-hand side of your screen. The Q&A session will follow the presentation. Before i hand over to Mr. Fok, please also pay attention to our disclaimer, which you can find on page two of the presentation. We can start now.
This is Canning Fok. Let me start with the results. Let's turn to page three. It is about, you know, our interim result. Our net earnings. In summary, our net earnings for the first half of the year is HKD 19.1 billion. Our earnings per share is HKD 4.498, which represent a 5% increase from 2021. The net debt is at HKD 168.4 billion, which represent 20.5% gearing ratio.
But however, you know, one of our major cash has not come in, that it will come in with what we estimate to be sometime this month. That if that cash comes in and that gearing will be reduced to 17.5%. Then the more important, the dividend per share is 0.84% and represented a 5% increase and the same as the increase in earnings per share in the profit.
With this, we can turn to page four, and then we'll give you the operational performance of the company. Which, in our opinion, is quite resilient given this, quite a challenging six months r evenue up 8% at HKD 222.6 billion. It's just because of the currency actually go against us. If you look at the global currency, actually represented 13% increase in local currencies. EBITDA 38.2 billion +5%. Operating cash flow HKD 60 billion.
The EBITDA has grown 5%. The operational cash flow for last year, for last first half was HKD 17.7 billion. EBITDA was HKD 34.5 billion, +5%. Also if you use the local currency is +9%. It has quite a good result in my opinion for the first six months. If you go to page four, I would like to take you the ups and downs, how this increase in EBITDA comes from.
If you look at the left-hand side, then the above circle is showing you where this comes from. The below circle is showing you what businesses come from. It can be very clear that 49% comes from Europe and UK, and within the 49%, 21% is from UK. Of course the next biggest one is Asia and Australia and North America, which is 29%. Hong Kong is only 3% and China is 6%.
If you look at the business, you saw that the ports actually came up 16% this time. With infrastructure and telecom at 28%. One thing that I wanna put you to notice is the finance by the orange color, which is 17%. First half of this year, we classify Cenovus into finance and then of course the contribution is huge from Cenovus the first half of this year. If you look in detail where it comes from, we give. We start the chart with the post-IFRS 16. Then go into the pre-IFRS in which is the HKD 58 billion. Then end up in the pre-IFRS 16 EBITDA and then go back to the post-IFRS g ive you a full reconciliation.
You can see that we take away the one-off. Last year was HKD 6.2 billion, which come from the tower sale and less the write off of our investment in Italy so i t will give us a net positive, so we take that off. The recurrent underlying EBITDA was HKD 49 billion. We saw that this year the port is doing very well, HKD 1.5 billion more than last year. Then basically come from a good performance in North America. That is from Mexico, and then also good performance in Europe. You know, it doesn't really come from GU, but it come from storage income. Then, of course, a very good performance from our investment in OOCL.
The retail part, you saw that, a - HKD 231 million. Retail, it basically comes from a reduction of EBITDA from mainland China because of the lockdown situation in China. It is all overcome by Europe. Of course, the foreign exchange. There's a lot to do with that as well. Infrastructure, they have announced yesterday they came in at HKD 846+ million . That comes from a quite average from everything. It's quite a good improvement in the infrastructure side.
You got this negative from the telecom side, from the European telecom, the Three Group, Europe plus Hong Kong. From actually, you know, the other are quite stable, and then Hong Kong is very small. Actually basically all come from Italy, EUR 2.3 billion. However, you got to take away EUR 500 million from the tower deal because to make it equivalent, so that is about EUR 1.7 billion, which we will go into detail when we come to the telecom area.
HIT this time, you know, they are the staff. They overcome the shortfall in Europe and give a EUR 1.6 billion improvement. This is the result of the merger, and then we will go into details when we come to the HIT area. Of course, on the finance side, you know, you saw that the HKD 4.9 billion, and then, the, there's a shaded area is HKD 4.7 billion come from, improvement over last year. That has been a very nice, return for us. Foreign currency impact and HKD 2.5 billion.
End up with a HKD 53 billion, as a recurring EBITDA in the first half of 2022. Then, of course, you got the one-off gain. This majorly comes from the merger, increasing value in the merger, in Indonesia, Indosat Ooredoo Hutchison. Of course, something happened in Sri Lanka.
We chose to write down significant amount in Sri Lanka to come up with HKD 5.9 billion. The total EBITDA is HKD 55.8 billion. Add back all the IFRS 16 stuff, and you go to HKD 17 billion. This is roughly the summary in page five. Now we go to page six, which is the operating cash flow. I would ask our Group CFO, Frank Sixt, to take us through all the cash flows and debt situation. Okay.
Thanks, Canning. The next few slides I'm gonna focus on operating free cash flow, moving through to free cash flow and then the overall financial KPIs of the group. We always start with operating free cash flow, which is basically EBITDA, right? Excluding one-offs, and what we're calling these days, EBITDA after leases or before IFRS 16. As you can see, right? That was HKD 16 billion compared to HKD 17.7 billion in the first half of 2021. The one-offs that are excluded, right, were HKD 5.1 billion in 2022, HKD 6.3 billion in 2021. These are the net comparisons of pre-IFRS 16 outcomes.
The main reason for the difference actually is the merger in Indonesia, where Three in Indonesia was a subsidiary before the merger o f course, we now hold a 40-some-odd% interest, in effect, right? In an associated company. What you have is essentially EBITDA going out of the consolidation and investment, right? Being reflected in the increased investment below t here's a bit of a shift, right, in categories.
You know, nothing alarming in terms of the actual underlying cash flow profile i n fact, the overall impact of the Indonesian transaction is very healthily positive from a financial point of view. I think Canning will be taking you through that later. If you look over to the right-hand side, right, the thing that I suppose leaps out again, right, is the very small contribution to operating free cash flow, right, from telecom. Again, that's largely due to the deconsolidation of the operating free cash flow contribution from Three in Indonesia.
Of course, as yet, we've not received dividends from Indosat Ooredoo Hutchison. But that is something which we think will probably happen in the reasonably near future given the very good operating performance of the merged company. Now, if we move on to slide seven, you're looking at the same operating free cash flow definition, but you're looking at it by division.
Overall, I mean, I think the picture is really quite good. Ports is substantially up in terms of its operating free cash flow year-on-year with a bit of a significant reduction among other things in capital spending in the first half. Much of which may be made up in the second half, and I'm sure Canning Fok will be talking about that.
You know, close to 20% increase in operating free cash flow as against the first half of last year. Retail we'll be discussing in detail. Marginally down from the first half of last year, but again, certainly nothing that rings any alarm bells. Infrastructure contributions very, very solid across the board from all of the infrastructure investments under CKI, and our co-owned infrastructure investments. Very good news on the infrastructure front. CKH Group Telecom marginally down.
Some of the EBITDA decline is very much offset, right, by reductions in capital spending compared to the first half of last year, which is a good trend. And then, of course, HAT, the effect of the deconsolidation, right. And when you add it all up, right, we get to our HKD 17.7 billion for 2021 and HKD 16 billion for 2022 i f you took out the deconsolidation effect, right, effectively we would have been up 9% rather than down marginally a gain, at the operating free cash flow level, pretty solid performance and no real concerns emerging.
If we go to slide eight, we now take it from operating free cash flow, and we take a look at interest, working capital changes, investments in telecoms licenses, right, and others, which is things like capitalized customer acquisition costs and cash that went with the merger in Indonesia, for example. You end up with a free cash flow, a real all-in free cash flow of just over HKD 6 billion, HKD 6.1 billion.
That's a very actually healthy improvement, right, on the profile in the first half of last year. Pretty good tight cash management overall. The right-hand side of the page reconciles that y ou basically start with the reported first half 2021 free cash flow of HKD 39.9 billion. Of that, HKD 38.4 billion was the cash proceeds from tower asset disposals in the first half of last year under our agreements with Cellnex.
Really the underlying free cash flow generated by the businesses was HKD 1.446 billion in the first half of 2021. Then you waterfall that through to the HKD 6.1 billion total for the first half of 2022. You first have to take out the, and again, this is the deconsolidation effect of the Indonesia HKD 3.6 billion. Then you add back good increases in dividends from associates and joint ventures, you know, pretty well across the board t hat's a picture which we expect is gonna be improving even further right in the second half with the likelihood of dividends from both IOH and from Cenovus.
Interest and taxes paid were lower t hat's largely because of lower overall debt level w hat we've been doing, right, is gradually paying down gross debt, leaving net debt more or less unchanged w e'll talk a bit more about that on a later slide. Working capital changes. Working capital at HKD 1.9 billion better in 2022 than 2021 from a cash management point of view. That's very satisfactory C apEx reduced by $3.7 billion compared to the first half of last year.
Offset somewhat by the again Indonesia merger effect of investments in associates and joint ventures and telecom licenses which we acquired in 2021 in the first half, which we did, of course, didn't require significant telecom licenses this year, right? And miscellaneous other movements, which takes you to a free cash flow performance of HKD 6.1 billion v ery good improvement for the first half. If we move to the next slide, which is slide nine, and this is really just the I suppose financial KPIs generally for the business. If you start on the far left, our cash was at just under HKD 120 billion, cash and cash equivalents rather.
We've had some meaningful pickups on the cash managed balances out of that, which is about HKD 70 million of that pie. Now we've had to pick up generally about 40 basis points right on our return. The spread against our average cost of debt, which is on the lower right-hand side at 1.8%, which is up a little bit, but is partially offset by the returns that we're getting on our cash and cash equivalent assets, which is good. We have lengthened our maturity profile from 4.8 years to 5.2 years. That's reflected in the maturity profile as it is shown d ebt has been reduced, of course, to HKD 285.5 billion.
We redeemed a perpetual US dollar bond of $1 billion principal during the half. You'll notice that the net debt, right, has stayed roughly the same t he gross debt significantly reduced. Net debt to net total capital ratio has ticked up to 20.5%. There are a couple of major reasons for that o ne is, of course, total capital includes the perpetual that we redeemed. Obviously, total capital has been coming down, and net debt has been staying stable t hat's part of the reason for the increase.
The other reason is that in shareholders funds, right? There's an adverse driver of about just over HKD 10 billion in unrealized foreign exchange losses, foreign exchange translation losses, which move through reserves. You put those two together, and you end up with a 20.5% net debt to net total capital ratio.
Again, you know, partly due to our prudence and partly due to adverse foreign exchange movements overall on the balance sheet, although the foreign exchange movements on debt itself were actually favorable. Again, I think as Canning mentioned, we do expect to receive some very significant proceeds, about EUR 3.7 billion in all from Cellnex at some point during the course of this month.
That will take the net debt to net total capital ratio down right away to about 17.5%. I think that's pretty well all that I have to say on the financial profile of the site. Canning, I think it's back to you to talk about ports.
Now, ports this year is a very good story. On the far left-hand side, we just remind you that we have 293 berths, 52 ports in 36 countries. This year we moved 42.4 million TEUs, which is a slightly decreased 1% decrease over last year. The major reason is that because of the congestions and others. It works actually slower than last year.
However, if you look at EBITDA, it went up by 8% to 15%. It is, you know, I think the question you ask, why is this happening? I said, basically, there's only two reasons o ne is that when the port is congested and then the container stay in the port much longer. Then as a result, actually our storage income actually went up by 15%.
That actually, you know, almost up to 11% to 12% of our revenue comes from storage income. Also, of course, you know, the business in Mexico is very good. The movement went up by 30%. That gives very good earnings for that division. That will show. If you look at the EBITDA growth chart, you got first half 2021, the result is almost the same. Hong Kong is down, Yantian is up. Almost the same.
The Mainland China basically because of the shutdown in Shanghai. It was made up by some government subsidies and some better performance from other ports in China, so that, you know, the movement is more significant. For Europe, actually for Europe, the container movement is okay now, almost the same, increased a little bit. However, the major income is that it come from the storage income s o it give rise to a favorable HKD 40 million increase in EBITDA of the business then o f course, I said it before, the Mexico one is included in Asia, Australia and others.
This HKD 418 million is mainly due to the Mexico, very good performance by these divisions. Of course, you know, one of the very good things happening to us. You know, investment with OOCL, not only that it gave us good income, but also good dividend and also good increase in share price. So that just on the equity part income, it gave us, you know, almost HKD 500 million out of the HKD 16 billion. So that the underlying EBITDA goes to $8.4. But because of the exchange, the strong US dollar, and then we had to give some back in the foreign exchange.
So it's a very good story. The EBITDA stream is just what I described. This year, we expected the port will be at a very good year in 2022. We can go to the retail part, and then we have the main board director h e also serve as the CEO of the retail part. Dominic, can you take page eleven.
Okay. Slide eleven. On retail, of course, you know, the first half of this year has been a turbulent period for China. The rest of the business are doing quite well, and I'll elaborate more. I'll talk to this slide in more detail. From the left side, you know, with an asset base of HKD 27.5 billion and over 16,200 stores, the retail division remains the world's largest international health and beauty retailer.
Operating in 28 markets under 12 retail banners and with a very strong loyalty member base of HKD 142 million, one of the largest in the world. What's more important is that 65% of the division's total sales come from these 142 million members, illustrating the power and effectiveness of our loyalty programs.
On exclusive sales participation, which include our own brands and private labels, as well as exclusive products from AS brand, has reached 36%, with China being the highest at almost 50%, creating strong differentiation and uniqueness for the business in the eyes of the customers.
In the meantime, our offline plus online strategy continues, and this O+O strategy has proven to be very effective in increasing the customer lifetime value as well as sales growth. For your information, O+O sales has registered a very nice 48% year-on-year increase for the first half of this year. On store number, it appears on the surface that it is flattish year-on-year at 16,244 stores.
However, this number doesn't adequately illustrate the store optimization program that we have gone through, during which we continue to open new stores in good and strategic locations. In fact, we opened total new stores of 833 year-on-year, not first half, but year-on-year. At the same time, we also closed those non-performing stores upon lease expiry or exercising the break clause. Total year-on-year closure amounts to 795 stores, with a net increase of 38.
As a result, by doing this program, we are continuously optimizing the overall quality of our physical store portfolio, which is crucial in carrying out our O+O strategy. An average payback period for the new stores opened will remain healthy at less than 13 months so p ayback less than 13 months. The split of these 16,244 stores is about 50/50 between Europe and Asia.
Now on EBITDA. On EBITDA is reported at HKD 6.03 billion, representing a decrease of 10% in reported currency and 3% decrease in local currency. The decrease is predominantly due to Health and Beauty China, which I will talk about in a minute. The EBITDA split is 62% in Europe and 38% in Asia, more or less the same as last year. The waterfall EBITDA change chart on the top right shows the year-on-year EBITDA change of each division in the Hong Kong dollars. First, for Health and Beauty China. Here we see a sharp decrease of HKD 929 million or 60% from last year, and this clearly needs explanation.
In China, if you look back, the COVID situation in China was relatively stable in January and February this year. However, the situation rapidly deteriorated in March, resulting in the largest and most severe outbreak. Many cities across China were partially or fully locked down for weeks or even months. At its peak, almost 600 of our stores were temporarily closed, as well as some of our warehouses.
As a result, this led to a 30% footfall decline. In terms of sales, total sales for the first six months of the year, including online sales, has dropped a hefty 17% year-on-year, thus resulting a 60% decrease in EBITDA. 30% drop in footfall, 17% drop in sales, and 60% drop in EBITDA.
Looking ahead, the second half performance in China should improve with the easing of the movement restrictions. This is China. Next. The next part is for Health and Beauty Asia. With the gradual relaxation of the epidemic restrictions in various countries, EBITDA increased 33% or HKD 374 million, notably in Malaysia and Philippines. Health and Beauty Asia is doing quite well.
For Health and Beauty Western Europe, where trading conditions have more or less returned to normal, the EBITDA increased HKD 437 million or 17%, mostly in U.K. Western Europe is doing fine. For Eastern Europe, we have seen very good trading performance in investment entities in Poland, Czech Republic and Hungary. However, this good performance has been partially offset by the negative variance in Ukraine due to the Russian-Ukrainian war.
Net-net, the EBITDA in Eastern Europe has only increased 4% or HKD 38 million year-on-year. You know, if you look at, in summary for our health and beauty business, which accounts for over 97% of the retail division's EBITDA, this chart demonstrates that the significant EBITDA decrease in health and beauty China has almost been compensated by increases in other regions, resulting in only 1% drop in EBITDA in local currency for the group. Lastly, for the other retail, we see a bar of a HKD 151 million drop. In fact, our PARKnSHOP supermarket business in Hong Kong and others are doing well.
However, the EBITDA increase were offset by negative variance in our Watsons Water and beverage business in China, which was similarly affected by the lockdown and movement restrictions. Also included in this HKD 151 million number are the non-cash one-time asset write-off in Ukraine and closure costs in Russia.
At the same time, with a relatively strong Hong Kong dollar, we have to record a HKD 464 million FX translation loss, resulting in a total EBITDA of HKD 6.03 billion for the six-month period, a 10% drop from same period last year, as I mentioned.
Lastly, on EBITDA margin percentage at the bottom of the slide, with the exception of health and beauty China, where the EBITDA margin percentage has been eroded to 6% for reasons that I mentioned, all the other divisions have been able to either maintain or even increase their EBITDA margin percentage. This is the overall summary on retail, and I will now pass to Frank to talk about infrastructure.
On page twelve, right? Of course, CKI reported their results yesterday, and it was really, I think, quite well-received t hey reported earnings of HKD 4.4 billion for the first half, which was up by 46% from the first half of 2021. Now, of course, they will have gone through this in their results presentation, but the first half of 2021 was distorted by some very, very large U.K. deferred tax revaluations, right? Due to the proposed increase in U.K. tax rates that's coming down.
The pipe or may not be w e'll see what happens with that once the conservative leadership race ends, and we have a new prime minister l eaving that aside, there was quite a distortion year-on-year f rom our point of view, I think what we see is CKI and its underlying infrastructure investments doing exactly, you know, what they need to do, which is being very resilient and generating very good cash returns, right? Regardless of the fair or foul winds that may be blowing in the overall economy.
When you parse down into the results and you look at the EBITDA, which was flat at about HKD 14.8 billion, HKD 14.9billion. That was actually up 6% in local currencies t he difference being, of course, you know, fluctuations mainly in sterling but also in the pound and the Australian dollar.
What was really quite rewarding about it was that the contributions were up almost across the board. Very, very few units that had any level of decline at all, and those declines were insignificant, relating to the first half of 2021. That's really a very good sign that this business does what it's supposed to do, despite overall economic headwinds.
Obviously, stable earnings and stable dividend. A dividend increase announced yesterday. In terms of regulatory resets, the U.K. process is well underway for the 2023 reset and is basically unfolding in line with expectations. Everything else is set fair until the timelines that are noted in the bars on the right, at the lower right. I'll stop there and hand it back to Canning to talk about the telecoms division.
Well, the telecom divisions in the first half of this year actually have mixed results, which I will go and explain. If you talk about the revenue, actually in the local currency, it is HKD 9 billion. It's minus 9% on the reporting currency. Because a lot of the reduction come from foreign exchange, actually, you know, on the local currencies, all is more or less, you know, only minus 1%, less than last year t hat, you know, the revenue side as a whole. On the subscriber side, actually, they are doing quite well. And then on the net ARPU, they are also doing quite well.
And then- One thing that the profile of our business is different because in the 4G business and before, we are always short of spectrum. We have less spectrum than our competitor, so you know, we are competing at a disadvantage i n the 5G scenario, we have actually quite a lot enough spectrum to fight with them. In fact, you know, in Italy, in Austria, in Ireland, and also in the U.K., we are now reported by external testers as the fastest network in those countries t his is quite a good thing happening to us.
In terms of EBITDA, actually, you know, it's HKD 11 billion, and we recorded a 21% drop. Okay. Let's look at the waterfall chart. We started with 2021 EBITDA. Then because that, you know, we sold our tower this year to equalize it. This HKD 14.7 billion will be before HKD 14.2 billion, because almost HKD 600 million we have to pay more to the tower company.
You know, we are comparing with this HKD 14 billion and then where does the reductions come from? That if you look at it's almost all the other countries. It's almost better or a little bit more or less the same. Okay. Except for Italy, we recorded a 23% drop in the EBITDA. This is basically come from both drop in gross margin and then there are some a little bit increase in operating expense.
The reason of drop gross margin, actually, you know, some very good thing happened in Italy. We have. You know, last year we reported that there was a drop in the wholesale revenue and then, and of course, you know, the strategy previous before is to let the remedy taker take our customer at low price and then we receive better revenue from them, from the wholesale price. But as the network build out and then this strategy we have to reverse.
What we have seen that because as the network build out and their wholesale revenue drop, and then we are working very hard on our base so that the you know so that our base revenue, A, is to stabilize and B, to increase to cover the shortfall. Indeed, this is happening especially you know we see that in the Q2 of this year, the increase in base revenue and is actually almost is you know more than enough to compensate the drop in the wholesale revenue.
Also at the same time, we work with some a lot of this wholesaler MVNOs, so that you know we can give them some more business and then they give us some more income. I think this is happening. On the expense side, of course, this year there are more spectrum costs, renewal costs, which is the cost of not our actual cost, but the cost of the spectrum. Also some of the expense that some of the income that we have last year from some legal settlement they're non-recurring. Actually the increase in cost is quite minimal amount. This account for the HKD 1.7 billion downfall.
Looking forward, I can see that the margin side and it will be continues to improve. I think that we are on a what we call a smile, and we are on a turning point now, and I'm very positive on it going forward. Sweden is doing very good and improving, and then I can only report good things about our Swedish team t hey are doing well. Denmark is, you know, almost there.
The lockdown have some effect because they traded on travel icon, and then of course the lockdown have some effect on them, but this change very fast. I think in the second half they will catch up with this small decrease. Austria continues to well, a very solid company and Ireland, and again, it's a solid company i think this, they come out from the lockdown.
That on the second half they should be able to make up. Of course the currency have a huge effect on us, almost $1 billion. That this accounts for how they do. EBITDA margin 31%, 34% to 35%. It's a little bit reduced because of affected by the tower deal. You know, we get back a lot of money. I f you move to page 14, it is basically a summary of what i said.
I think that if you look at Italy, you know, and then you know, EUR 1.5 billion gross margin versus EUR 1.58 billion. I think this one is already beginning to stabilize in the second half and in the first half. I would hope that this gap will be reduced in the second half. With the base income will continue to improve, and then the wholesale income will stabilize. Of course, we are very good in controlling operating expense.
One thing that we noticed is that we are in the process of building our 5G network. You see that, you know, there is an increase in the depreciation y ou know, if you look at the total amount, HKD 9.5 billion in the first half this year versus HKD 9.1 billion last year.
As a result, you know, as we build out the you increase your depreciation expense immediately, but the income come a little bit later. That this is why, you know, this is something to note, but not a cause for concern t hen also, if you look at the CapEx, as I said, last year, it has been reduced from last year. If you look at the file to the right, the CapEx is HKD 8.2 billion, HKD 8.7 billion versus HKD 11 billion last year. Things are actually doing what we want. Of course, you know, as we build the network, the depreciation come first and then income come a little bit later.
We are not optimal, we are in, you know, ready to build up our revenue base to show that it will earn money from this 5G investment. Okay w ith this, I will return. Next page is Indonesia. Is it page 16? No, we go to page 15 first. I think this is about our tower deal. I think I'll let the expert talk about it. Frank, can you go back to go over page 15.
Thank you. Thank you for the flattery. Look, there's only one milestone left to be complete, which is the closing of the UK tower assets deal. Just as a reminder, that deal itself represents proceeds in euros of about EUR 3.7 billion, which EUR 1.4 billion paid by way of Cellnex shares w hich should be around 5% of Cellnex's issued share capital based on the current price environment, and the balance coming in in cash. Now we said before that we expected this to complete during the course of this month.
There are essentially no conditions outstanding or agreements outstanding between Cellnex and CK Hutchison Networks and CKH Group Telecom. Everything is done and dusted between the principals. What is yet to be completed is the final stages of the CMA approval of the remedy taker arrangements between Cellnex and its remedy taker.
The stage that we're at is where formal documents are submitted to the CMA, the Competition and Markets Authority. There are four documents in the transaction as of last night, three of them had been submitted and were under review by the CMA and the monitoring trustee. One more document to come, which we expect will be in the next few days. Once the CMA has signed off, all of the conditions of closing are set, so we will move pretty expeditiously towards closing.
Just to recap, that will mean that we will have brought in total proceeds of about EUR 10 billion. A small minority interest in that of about EUR 500 billion to our partner in Scandinavia. Split EUR 8.6 billion in cash, EUR 1.4 billion in shares. We estimate right now that the disposal gain on the UK transaction will be in the area of EUR 2.1 billion. It is an estimate at this point, so we'll be running that to ground, hopefully in the second half results. That would take the total gains that we've reported, right, on the transaction to EUR 6.4 billion. On that, I think, I'll pass back to Canning Fok to talk about our merger in Indonesia.
Well, this is the result of the work over, I would say, almost three years work, and then it is one of the not an easy things to do. We talked with almost everybody in the market, and then the end result, we are able to come to a conclusion of Ooredoo now our partner, to do this joint venture. As I said before, in-market consolidation is the most accretive business one can do. If you look at it, you know, before and after, you know, under active customer base, before is HKD 44 million, after is HKD 96 million. HKD 52 million more than before.
EBITDA before was HKD 810 million, now is HKD 2.4458 billion. EBITDA before was losing money, now is HKD 770 million. That actually, you know, now the two companies getting together, one management team and merging and then two sets of income. Really is very, very accretive. There's a lot of synergy too. The management team there is doing so well t hey told us that the first is synergy i f you look at the target, actually, you know, for the whole year, actually in the first half, they have finished the whole year synergy.
They will not stop there, I'm sure. In the second half, they will bring equivalent amount of synergy to the party, so to the company, so that it is a very good situation. What are the benefits to us? You know, we clearly stated in the right-hand side.
A is a very highly accretive transaction j ust for the transaction itself will bring us, you know, a net of HKD 5.1 billion profit, net of the write-off of Sri Lanka, which is about HKD 1 billion. Okay. Then, of course, before we were losing money, now we are making money, much better growth, 200% growth, and 1,000% in EBITDA and then from loss to net earnings. It is one of the very good things happening. Of course, the performance is very strong.
We are not only that, you know, we improve the branding on both sides, but also that the network coverage and rollout, we are now building a world-class network that will be comparable to the market leader, Telkomsel. Not only they can do that, but also they can do it by their own money. There is, you know, they are self-financed. There is no need to send them any money. For the first time, we don't need to send any more money to Indonesia, which is very pleasing.
Of course, you know, with the kind of profit, you know, we are kind of looking for a dividend from them, and let's wait and see. If that come true, that will be the first time that we receive any dividend from Indonesia. Very good. Thank you very much. Sri Lanka still working well under this extraordinary circumstances. Vietnam is also in a very stable manner t his is very small compared to Indonesia. Now we can look at sustainability. I think Frank, he's very interested in it, and then I will let him take his turn.
Thank you. I think we are very pleased with the improvements overall in our sustainability activities and particular decarbonization activities. The way that we responded relative to our family of employees and our stakeholders and customers throughout the pandemic. Really our focus on sustainability, I think has yielded very tangible results on the ground since the major refocus in 2018, 2019, on the area. We have seen as a result some ESG ratings improvements.
Finally, just in May, MSCI upgraded us from B to BBB . Still work to be done there, but nevertheless, I mean, a recognition that all of the horrible things that they thought about us as an Asian-based conglomerate weren't necessarily true. Sustainalytics, of course, lifted us from high risk to medium risk.
We are now ranked ninth out of the 112 conglomerates that they rank globally, which is a good thing. You know, however, we still have work to do there because it is, I think from a sustainability point of view, better to understand each of our major business divisions, right, on a standalone basis, compared to their peers, rather than to be stuck in the lump of a conglomerate rating mechanism, which is the case both with Sustainalytics and MSCI y ou know, their ratings are what they are and y ou will have seen our 2021 sustainability report, which we released in May.
Which I think reflects both good progress, but also clearer targets and activities going forward. A lot of net zero transition opportunities, a lot of definitions of short- and medium-term milestones for emission reductions. We also issued our first green bond impact report relative to a bond that we issued in 2021. We will have completely covered the proceeds from that bond by several times in that report.
We've been improving again on all metrics, our ability to sort of track our investment and our performance across all of our divisions in sustainability a t the bottom, you get a flavor of some of the things that are going on in the divisions i n the Ports division, of course, the most important program is to move away from diesel and towards electric, and to the greatest extent possible, towards electric from clean energy sources.
A lot of automation improvements, productivity improvements, and so on, which at the end of the day, reduce the carbon footprints, right, of the port operations themselves. They have hired outside consultants to put together with them, right, their realistic net zero transition plans and their Scope 3 reporting and their climate risk assessments, which of course, is important in terms of the risks represented potentially by climate change to the assets and businesses of the Ports group.
Retail has done its Scope 1, 2, and 3 emission reduction targets and is at the point of looking for validation of those targets from a Science Based Targets initiative, which we would expect we will have by the end of this year. Has launched a major greener store framework globally, which I'm sure they can talk about in the Q&A. A lot of initiatives in terms of product ranges moving towards more sustainable products. Of course, a lot of stuff on the non-carbon side, right, as well, in terms of being one of the best places to work or one of the most supportive and diverse places to work in retail all around the world.
CKI will have reported on this yesterday, but they're engaged across the board in so many of their utilities, including pipelines, electricity distribution, et cetera, on the decarbonization projects. Of course, they've committed to phasing out coal-fired generation, both through Hong Kong and in Canada, before 2035.
Lastly, the Telecoms group has done its Scope 1, 2, and 3 emissions reduction targets a gain, those are with the Science Based Targets initiative for review now. Has upped the game in terms of renewable energy procurement, and is implementing the Task Force on Climate-related Financial Disclosures recommendations, including scenario analysis to identify climate-related risks and opportunities for the telecom business.
Really, I think, an area in which we have and continue to up our game. We're starting to, I think, be recognized and differentiated from the pack. With that, I'll hand you back to Canning to go through the outlook slide on page 20.
If you turn to page 20, I will not go through each business because we have all talked about it. Just in summary, I think I just want to emphasize that, you know, we still continues to produce solid earning. What we will emphasize is the in-market consolidation and network sharing that will produce a lot of upside for our business in the telecom side, in addition to our operating focus.
A lot of people ask us about share buybacks, and I have talked with the Chairman, and he will answer you in the Q&A session, and that, you know, after the completion of the UK Tower deal, then, you know, we will continue the buyback y ou can ask the Chairman on that. On about the retail F&B in China, I think the recovery will be slowly.
You know, what does that mean? That means that we will have a lot of time to get our operation ready for the next phase when everything starts opens up so that on the second half, I will expect it to be better than the first half. You know, we will not be back to normal so fast. The most important last thing is that it is continuous of the nature of our business. We are conglomerate of different business. One business down, we pick up by the other business to continue so that we can propel our earning and dividend.
Another example is the foreign exchange down and then our oil company comes up. Okay? Of course, when China is having a slowdown, but then Europe is picking up to come to help. When the traffic is down and the store is gonna come up so t hen i think that this diversity from business and also from geography is certainly a major plus for ourselves. With this I'm finished with this page, so then I pass it back to Kyle.
Thank you, Mr. Fok. We will now begin the Q&A session. Once again, please feel free to raise your question in the chat box, which is at the lower right-hand side of your screen. The first question is quite a long one. The question is, for many companies, business has not been normal for the past couple of years with inflation in some countries, military conflicts, different degrees of pandemic restrictions, as well as currency volatility. How has the group been affected by these issues?
Well, that's a big question. CKHH is a global company. Of course, we are affected by all of the above. Another way to look at it is, what you described is exactly where our strength lies. These last few years have shown us that the advantage of having a diverse portfolio with a global presence.
The geographic diversity of our asset allow us to deliver an overall steady underlying performance and continue to strengthen our balance sheet and remain on track to return to pre-COVID profitability levels. Allow me to elaborate. While, let's say, a particular risk may be an issue for one industry at a particular location or market, another industry operating somewhere else in the world may be experiencing very positive circumstances.
Every year we see many such examples of resilience across our portfolio, which we think it's normal. They balance out each other. This is our intrinsic strength, and it's the advantage on generating the balance and supporting our business. We have many treasures within the group. In Chinese, I call them baobei. They'll continue to produce shareholder value and especially during stressful times. These gems, I call them gems, shine through. Maybe a few examples.
Canning and Frank have mentioned them earlier. The last six months, we've seen a weakening pound and euro exchange rate. We have a number of businesses there, and they are affected by high energy prices. However, on the other hand, the group also benefit from these high prices through our holdings in Cenovus. Another thing to point out is that we have very limited exposure to the floating rate borrowing. I think, correct me if I'm wrong, Frank, but I think we have only 25% of our total borrowing that is exposed to a floating rate.
That is correct.
Yeah. They're rather unaffected. A couple years ago, our retail group was very much affected by lockdowns in Europe and was supported by the mainland market. The last six months, we've seen the reverse. The lockdowns in mainland China earlier this year was offset by the very good performance in other regions.
We anticipate the Asian operations will continue to improve in the second half. I mean, this continues. The trade disruption because of conflicts in Ukraine and the pandemic restrictions are offset by higher storage income, mainly in Europe, and the very good results in Mexico.
EBITDA and EBITDA increase in local currencies in ports and Cenovus helped us offset the higher depreciation of the increasing 5G networks in telecom. Our telecom merger in Indonesia is a big plus, which helped the non-cash impairment in Sri Lanka. This is the balance that we managed to strike in Hutch. A big question to come, sir, on that. Thank you.
Thank you. Mr. Chairman, I have received several questions for our telecom operation. May I group them together?
Yes.
Um, the first-
Maybe Canning Fok, you can help me have the answer on telecom.
Okay. The first question is, can you comment on the performance of Three UK and Wind Tre? Okay. Actually, Three UK has quite a good performance since second half last year and then the first half this year. Actually, you know, not only that the subscriber base grows, but the EBITDA actually grown by about 4%, if you go back to the presentation. Because, you know, we have been spending money to build out the network because the Three, they still have the smallest network in UK. On the 5G side, we have enough spectrum w e are trying our best to catch Aup so that...
As we build out our 5G network depreciation expense, so that you saw that the EBITDA actually dropped from UK. Actually this company is going in the right direction. I think it's a matter of timing before they catch up with the depreciation in EBITDA. Also, you know, I will continue to be optimistic about their good performance in the EBITDA line. Going to Italy, as I mentioned before, you know, it is a, you know, we are in the middle of a changing strategy from relying on wholesale income to supporting the revenue from the base.
Then actually this is happening i f you see that the base customers' revenue is actually stabilizing and actually going up in the Q2 of the first half. We feel confident that this will continue to. This will continue. Then the wholesale revenue, you know, because the remedy taker has built out their part of the network and when it went down and that affected the wholesale revenue. I think it has come to a point of stabilizing now a lso, we are working very hard with other MVNO so that we can increase their scope, so that we can have more revenue.
One thing that is very important is we continue to w e have the best network in Italy, and then we not only 4G, also 5G. We will continue to work hard to monetize the 5G network. Also one of our strategy is through a network sharing. I think you have heard that in the market w e are working hard, we are working with Iliad so that we can do the rural network sharing together. That will be helpful to the financial performance of the company. Thank you.
Thank you. The next question is, any update on the progress of Three market consolidation in U.K., Sweden and Denmark?
Canning, please continue.
I think as a strategy of CK Hutchison and in market consolidation is something that we see as a huge opportunity to improve the financial performance of this company. We have been in talks, you know, actually, with our competitor in all these three places.
You know, I don't want to comment on the progress of the talks, but I would say that, you know, as soon as we have something to announce, we will announce. These deals, if it is successful, will be highly accretive, will create huge value for this, for CK Hutchison. This is something that we are actually actively pursuing.
Thank you. The next telecom question is, how do you view the merger in Indonesia?
That must be Canning's continuation.
Thank you, chairman. Actually, I have said it during the presentation. You know, two companies together is very good. You know, all the subscriber base is better, profit is better, the financial performance is better. Actually, you know, before we were losing money, now we are making money. Before we are putting cash in, now we don't need to put any more cash in.
The company has enough money to do their own network. I think, you know, we are building a network that will be so. We will be proud of Indonesia. Fourthly, you know, they are making good money. And then there's a., i don't want to predict, but I can say that there will be. I'm looking forward to receive dividend from them. If that happen, it will be the first time we receive cash back from Indonesia. I'm looking forward to that, so. Yes.
Thank you. The next question is on capital allocation. What is the priority of the company's capital allocation? Will CK Hutchison resume share buyback in the second half of the year?
The top priorities, engaging in earning a cash flow accretive telecom in-market consolidation. We've said that many times. We'll prudently open new retail stores with quick payback. We'll also look at new opportunities in infrastructure projects under CKI. After the completion of the tower sales, we will allocate some of the capital for debt repayment and share buyback. Regarding the share buyback, CK Hutchison intends to buy its own shares after the completion of the UK tower sale, which we expect it soon. The pace of the actual buyback will depend on market conditions.
Okay. Thank you, Chairman. Mr. Chairman, there are several questions related to our retail operation. May I group them again together as
Yes.
Ask?
Maybe Dominic, you can answer the questions on retail.
Okay. The questions are as follow. What was the reason for the EBITDA decline of Watsons China? And should we expect Watson China to show better performance in the second half compared to 2021. Also, can you comment on the store opening policy in China?
Well, thank you, chairman, for letting me try to answer these three questions. As I have explained in my earlier slide presentations, the COVID situation in China was relatively stable in January and February this year, but deteriorated rapidly in March, resulting in the biggest and most severe outbreak in terms of geographical coverage and restrictive measures.
Many cities were fully and partially locked down for weeks or even months, including the Tier One cities such as Shanghai, Shenzhen, and Guangzhou. Those are the big footfall and sales generator for the group. At its peak, you know, around 14% of our China portfolio or 590 stores were temporarily closed.
More importantly, the consumer sentiment in the country was for sure affected because we see similar shopping mall traffic drop both in infected cities and in cities not infected, i.e., whether it's the city is infected or not, we see similar footfall drop in the malls. It is, in our view, a sentiment thing as well. Overall net, the overall footfall declined by 30%, resulting in 17% decrease in sales and 60% lower EBITDA in the first half. This is the EBITDA decline part.
The way forward, if we look ahead, we expect the second half performance to improve with the easing of the movement restrictions. We have already seen some improvement after we reopened Shanghai. The condition, I must say, is still challenging, as the recovery of consumer sentiment will take some time.
At the same time, you know, our Chinese, our colleagues are not sitting there doing nothing, but they continue to leverage their strength on OPASO, own brand exclusive, as well as CRM to improve their overall profitability. While the market is down, while the footfall is not there, they are working and prepare for the market to reopen.
The last part or the last question is about the store opening policy. In fact, we have been focusing more on quality rather than quantity. While we are opening new stores in good and strategic locations for short payback period, we also are closing those non-performing stores upon lease expiry or even exercising our break clause.
This store optimization program actually help us to continuously upgrading the overall quality of our physical portfolio, which is crucial in carrying out our OPASO strategy. To shed some light, we have opened 67 new stores in the first half and have closed 191 stores in the first half, resulting a net decrease of 124 stores. This program continues to cleanse and improve the portfolio quality. You know, these are the answers to your three questions. Thank you.
Okay. Thank you, Dominic Lai.
Can I add on that question? The situation being tough in China is not a secret. It's not only affecting us. It will be affecting also our competitors. Our competitors will also have additional problem of potential cash flow and morale issues.
Yeah.
Whereas, the A.S. Watson Group in China would have the support of the whole A.S. Watson Group with international business- also all CKHH. In terms of our relative competitive position, when things get tough, is actually, to a certain extent, beneficial to our competitive advantage. If I may add to that, Dominic.
Yes. Yeah. No, that, those are valid points.
We do expect better results in the second half.
Yeah, we'll tough it out.
Yeah. Thank you. The next question is about our port's operation. Do you expect supply chain disruption will be relieved in the second half with throughput growth resumption?
I think supply chain disruptions will soften in the second half. The continuous throughput is expected to have some modest growth in the second half.
Thank you, Chairman. That is a follow-up question for the port division. What was the annual growth of storage income in the first half? What was the overall sales represented by storage income?
Okay. Frank, again, please correct me if I'm wrong, but I think our storage income increased by over 50% in the first half against the same period last year.
Yes, that's correct, Chairman.
Yeah, accounted for about 10% of our total revenue of the port business.
Absolutely.
The growth of the storage income in the second half should be modest, due to the easing of supply chain disruptions.
Okay. Thank you very much, Mr. Chairman. Due to the time constraint, we will have the last two question. Okay? The next question is, when does the lock-up period of the company's stake in Zalando expire? How does CK Hutchison view its investment in Zalando?
Okay. Remember the investor in Cenovus includes CKHH and also personal investment by the family. If I remember correctly, the standstill agreement should expire in early 2026. January 2026. Some of the terms are more relaxed from July 2022 onwards. This would give us the flexibility to dispose some of Cenovus shares n ow, i wanna be very clear on this. Currently, Cenovus is a valuable strategic investment both by CKHH and personally. I think I've answered that question. Yeah.
Yeah. Thank you, Chairman. Okay, the last question today is: Can you elaborate on the investment opportunities to CKI sponsored by ESG?
Now, this is my area. We are important participants in the infrastructure sector, and in many parts of the world. It is our business to help governments achieve their decarbonization goals and net zero targets. I don't look at this as a, as much as an obligation as a new opportunity.
A few examples of such include providing leadership in the development of hydrogen economy in our gas networks. Increasing renewable energy connections and digitizing our electricity networks. Also decarbonizing the power generation portfolio through phasing out carbon-fired generation. The list goes on and on. There are lots of opportunity within or next to the CKI portfolio. Thank you.
Okay. Thank you very much, Chairman. This concludes our live webcast today. Thank you very much for joining our presentation.
Thank you.
Thank you.
Thank you.
Bye. Thank you for your support. Thank you.