Welcome to the live webcast of CK Hutchison 2025 interim results presentation. Our speakers today are Mr. Frank Sixt, Group Co-Managing Director and Group Finance Director of CK Hutchison ; Mr. Dominic Lai, Group Co-Managing Director of CK Hutchison and Chairman of A.S. Watson Group; and Mr. Kwan Chung, Group Chief Financial Officer of CK Hutchison Holdings. During the presentation, please feel free to put down your question in the chat box, which is at the lower right-hand side of the screen. The Q&A session will follow the presentation. Before I hand over to Frank, please also pay attention to our disclaimer, which you can find on page 2 of the presentation. We can start now.
Good. Thank you, and welcome everybody to this interim results announcement. I'll go straight into it. We'll go to slide 3 now. These are the high-level financial highlights. Of course, these are the reported numbers, so they are on a post-IFRS 16 basis. As we get into the rest of the presentation, it's usually presented in pre-IFRS format, basically because we think that's a better view from management's point of view to see through to the underlying performance of our businesses. If I could start on the left, you see that revenues are up a healthy amount, $8+ billion . Having said that, fully $1.3 billion of that is due to foreign exchange movements that were favorable, but it's still a good performance. If we go over to net earnings, that's the headline number, is of course the strong growth in underlying net earnings.
Again, I will, as we go through this, point out why it's a very, very nice number for the first half, but when you look through it and you understand it and you correlate it to cash generation and so on, it's still a good number, but it's not quite as terrific as double-digit growth would sort of imply. As we go through this whole presentation, you have to look at the reported number, which takes account of a rather complex non-cash write-down impact or loss impact coming from the Three UK merger, which Kwan will be able to way better than I describe to you as we go through this. EPS obviously reflects on a reported basis and on an underlying basis exactly the net earnings, and we've pitched the dividend at $0.71 a share.
That is an increase of 3.2%, which I hope you'll agree with me is reasonably and rationally thought through a decision by our board earlier on today by the time we get through this presentation. If we can go to the next page, these financial highlights and the rest, as I say, are in pre-IFRS 16 view, which is why the numbers are a little bit different. You first look at EBITDA and there you've got a healthy underlying increase. It's around $3.7 billion, but again, about 13% of that, so a couple of points of that are due to foreign exchange movements, which were largely in our favor, largely from sterling and from euros during the period compared to the first half of last year.
Same observation for EBIT, and again there about 13% of the movement on an underlying basis is attributable to strong GBPs, strong sterling, and strong euros. Operating free cash flow you'll see is up by $2.1 billion compared to the first half of last year, which is an 11% growth, but we'll be parsing operating free cash flow and free cash flow very closely in the coming slides, and you'll understand that what happened in the first half does not necessarily reflect what can be anticipated in the second half. Of course, we are taking, as the Chairman's statement outlook points out, a very conservative and cautious approach to the second half given everything that's going on in the world.
The good news is, of course, particularly with the cash inflow from the U.K. merger, our net debt ratio has declined quite a bit from 17% at the end of the first half last year down to 14.7%. It was 16.2% at year-end, so the ship is solid from a debt to capital point of view. If I move to the next page where we look at EBITDA, a couple of observations. First, on the pie charts on the left, I think the thing that stands out is the declining contribution from finance and investment compared to last year, but also, you know, is that Hong Kong has shrunk from 3%, if you remember the end of last year, to 2%. So Hong Kong and China combined 5%.
The decline in Hong Kong, Dominic will be talking about Parkn Shop, I think is looking a little bit better, but we've had some travails with Watson's, and Dominic will be dealing with that later on. If you go now to the right-hand side where we build up from 2024 first half EBITDA to the results that we're announcing here, as you can see, first Ports made a substantial incremental contribution. Happy to say that that is essentially all operations and it's reflected in cash flow. When we get to it, you'll see that the Ports earnings delivery is matched by almost the same growth in terms of operating cash flow and including the dividends received from its associates. So Ports is a very good news story in the first half, which we hope we'll see some continuity in the second half, but you know, we will see.
We live in an uncertain world. Retail, very, very, very good contribution, and again, that's an almost remarkable performance from almost everything except the health and beauty business in the mainland, which Dominic will be talking about in more detail. Infrastructure, again, you know, good growth in EBITDA contribution coming from everything from power assets to UK power networks to the new stuff that we acquired in the second half of last year, like Phoenix Energy and so on. That's good, solid stuff. We're very, very pleased. Obviously, Infrastructure made their own announcements, so they will have provided the market with quite a bit more detail than we have in this presentation. The CKH Group Telecom, again, I mean, looks very good. It looks like a roughly 9% gain before FOREX , so that's HKD 1 billion.
The thing to bear in mind is that that is a little bit skewed because it includes at the CKH Group Telecom group level fairly hefty gains that we made in treasury. Basically, 60% of that is treasury gains. The rest is real, is improved operations in the U.K. to some extent, in Italy, in Sweden, in Denmark, in Ireland. In fact, everything is somewhat improved except Austria, if I'm remembering right. You know, we shouldn't get carried away with what looks like such a high growth rate in EBITDA contribution because you don't get to make a lot of profits buying back bonds every day, and we bought back the ones that would give us those profits in the first half.
The disappointment, of course, is finance and investments, and we'll be going through that in more detail when we look at operating free cash flow and free cash flow. The main drivers are, of course, Cenovus, who's a major underperformer in the first half compared to the first half of last year, and that correlates to their own reported results, commodity prices, and the amount of downtime that they had in any of a number of their upstream and downstream facilities relating to turnaround, legitimate maintenance, but it's still a bit into the first half for Cenovus.
We also are continuing to bear some losses out of things like the Marionnaud Group, even TPG in Australia, although in Australian dollars, it probably looks better when you look at the Australian figures, but when you look at our figures, it looks partly worse because of the decline in the Australian dollar over the period. TPG was a lesser contributor from our point of view. We did have one gain in there from the disposition by Hutchison Ports China division of an interest in an asset that Hutchison had, Shanghai Pharmaceuticals. That's kind of, you know, it's recurring in one sense, but it's also all in the first half, not spread into the second half. You're starting to see some of the reasons why I think we need to be cautious about the outlook for the second half against the strength of the performance in the first half.
If we move to operating free cash flow, again, same thing, wonderful headline, $21.8 billion, up 11%. You find right away that when you look at cash flow, finance and investment is way down, down 7 points. It was 14% of the group's cash flow in the first half of last year, and this year it's 7%. The pickups are in Infrastructure and in Telecom. One thing that you'll see as we go through the equation to the right is that it's a $2.1 billion increase over the first half of last year. Almost all of that correlates to lower CapEx and investment. That's in CKH Group Telecom, where CapEx was significantly down, and it's also in the investment side because CK Infrastructure made the investment in Phoenix Energy in the first half of last year.
I think I misspoke before and put it in the second half, but it was in the first half. Other than that, you know, operating free cash flow overall is a bit lion ball. If you go through it, Ports is great. The performance in cash terms and operating cash flow terms definitely matches whether you're looking at the contribution in subsidiaries or you're looking at the dividends received from associates. It matches the underlying operating performance, which was very, very strong. CapEx was about lion ball with last year. When you look at Retail, again, I mean, it is fundamentally operating performance, a little bit less in terms of dividends from our associated companies, but very strong nonetheless, and very, very conservative CapEx, so less than in the first half of last year. Again, you look at Infrastructure, I really already talked about it.
The big swing factor is the difference in investments. Phoenix Energy in the first half of last year, nothing similar in the first half of this year. You look at CKH Group Telecom, and I think we'll be going through that in much more detail. I point out that we shouldn't be confused by the headline number. Some of it, regardless of the fact that it's recurring because of the treasury operation, is nevertheless stacked into the first half and will probably recur in the second half. Lastly, Finance and Investment, as I said, really quite burdened from an EBITDA point of view, and Kwan will take you through this. Interest income was lower than in the first half of 2024. The Marionnaud loss was quite a bit higher than in the first half of last year. Of course, with Cenovus, a much lower contribution.
TPG, also a little bit lower. IOH, we're missing the dividend, so it looks worse than it is. The dividend actually will be, I think it was paid in July. That's right. This will look a little bit better in the second half because we'll roll the dividend into that. Moving on from operating free cash flow to free cash flow, you can see a very, very heady number of $31 billion. As you go down the graph on the left, you start with the operating free cash flow, subtract the interest and taxes paid. Not too much to report there. The increase in interest received is almost exactly offset by the increase in taxes paid in cash taxes, so not much to report there. On the other hand, when you get to working capital, that positive movement is very important to understand, and we'll go into that when you look at the waterfall diagram on the right. It does include a very substantial element of exchange impact.
One of the things that major foreign exchange movements do, if you have a lot of assets, for example, and we do in sterling and in euros, and they're in businesses that have lots of inventories or have lots of receivables, the sheer movement of foreign exchange will result in a very, very significant positive movement in terms of working capital. It is unsafe to assume that you have that same kind of movement by comparison to last year when we start looking at the second half or we look at the full year. If we go to the diagram on the right, as you can see, although we got down to $16.1 billion this year of recurring earnings, right smack in the middle, you can see the year-on-year exchange impact on working capital.
It was about +$5 billion this year, and last year at the same time was about -$2 billion . That's where that $7 billion comes out. You'll understand right away that if you don't assume fair winds or foul winds on a foreign exchange point of view in the second half, you're not going to look like $16.1 billion versus $8.9 billion. You're going to look modestly up, of course, but because the underlying working capital changes at $7.95 billion just reflect very good working capital management, which I think the group continues to stay focused on and do a good job on. Nevertheless, you should not expect it to be as dramatically improved. Then you add to that the incoming proceeds from the U.K. merger, and you have a very, very nice free cash flow profile for the half.
With that, I'm going to turn you over to Kwan who's going to take you through how that all adds into our financial profile.
Hello, Frank. The group's financial profile remained very strong and definitely improved and benefited from the net proceeds we received on the U.K. merger. As the audience will see, our liquidity improved with total liquid assets as of June, totaling HKD 137 billion, significantly up against the same period last year and also against year-end. Net debt has reduced to HKD 119 billion, and net debt to total capital reduced to 14.7%, a very low number. You can see also from the table that the group's debt maturity profile is very well-laddered with no significant refinancing requirement needed in the remainder of 2025. The group's average cost of debt for the six months has reduced to 3.4%, directly in line with the drop in interest rates. The group's financial profile, as I said, remains very robust. Without further ado, I should hand over to Dominic to talk about Ports.
Okay, yeah. Now you have heard from Frank and Kwan on the financial highlights, the financial profile, and the overall financial position of the group. Now, I would like to start by going into the individual businesses. First, on slide nine, we look at the Ports division. As Frank said, they are doing very well. In fact, the Ports division has delivered a very solid first half. Throughput increased 4% to 44 million TEU, and their throughput growth was supported by a 7% increase in HPH Trust, a 3% growth in mainland China and other Hong Kong, a stable Europe, and a 5% increase in Asia and Australia. The throughput grew 4% to 44 million TEU.
On EBITDA, you see in the middle, EBITDA increased 10% in reported currency or 8% in local currency to $8.72 billion with major contribution of 26% from Europe and 57% from Asia, Australia, and others, as you can see in the pie chart. Let's go into the lower chart, EBITDA year-on-year change. We can see the following. Starting from the left, HPH Trust, a 6% or $38 million increase, mainly attributed to good performance in our Yantian port, where throughput increased 13%. Next, for mainland China and other Hong Kong, we see a $29 million or 8% decrease. This is due to mainly a non-recurrent one-time insurance claim in last year, 2024, which doesn't occur or recur this year. If we move further on the right, for Europe, EBITDA increased 20% or $375 million.
This is mainly due to the increase in storage income in the U.K. , Rotterdam, and Barcelona. Storage income now plays, I would say, a very meaningful role in our Ports P&L. Now for Asia, Australia, and others, EBITDA increased 12% or $514 million. This is mainly attributed, as I mentioned, to increase in storage income in Mexico, and of course, good underlying performance in Pakistan, Panama, Thailand, and Middle East ports. All the ports are doing actually quite well operationally and also income-wise. For the corporate costs and other port-related services, we see a decrease of $224 million, predominantly due to, again, the non-recurrent one-off item in 2023. Of course, we are seeing an increase in efficiency in operation. That's why it'll bring down the corporate costs and other port-related service costs down.
Looking ahead in the second half, despite volatile global trade and consumer demand, the Ports division is expected to deliver good earning growth in 2025 as a whole through organic growth, contribution from expanded facilities because we have, for example, in Egypt, we have expanded facilities there, and of course, last but not least, cost efficiencies. Let's go to the next slide, slide 10. The Retail division also in the right Ports have a solid first half, as Frank mentioned, and I'm going to share with you some numbers as you can see on the chart. First, on store number, the Retail division continues to carry out the store expansion program whereby in the first half, they opened 415 new stores and closed 355 underperforming stores.
As a result, there's a net gain, and then the store number increased 2% over last year and stood at 16,935 stores at the end of June, as you can see on the store number chart there. The store portfolio split is about 51/ 49 between Asia and Europe. It used to be 50/ 50, and now it's just a sway, just 1% point. On EBITDA, as you can see on the center right, EBITDA for the first half is about HKD 8 billion, a 12% increase over last year in reported currency. The EBITDA split is 27% from Asia and 73% from Europe, as we can see in the chart. Now let's move to the EBITDA waterfall chart below, which shows the year-on-year EBITDA change of each subdivision. First, the Health and Beauty China.
This division, Health and Beauty China, is under a lot of pressure as a result of subdued consumer spending and the business investing profit margin to promote sales. Though that has an impact on the profitability and as measured by EBITDA. You can see that in Health and Beauty China, we see a decrease of 133% and a hefty 53% decrease versus the same period last year. Next, Asia, Health and Beauty Asia, EBITDA increased HKD 163 million or 9%, and this growth is primarily driven by good trading performance, particularly in the Philippines and Malaysia. For Western Europe, Health and Beauty Western Europe, EBITDA increased HKD 174 million or 5%, as you can see if we go from left to right.
The increase in EBITDA in Western Europe is driven by good sales growth in the U.K. , represented by Superdrug and Savers brand, and also the Benelux countries under the Kruidvat brand. If you move right to the Health and Beauty Eastern Europe, the EBITDA increased by 25% or $334 million. The growth is predominantly attributed to the good trading performance in Rossmann, Poland, which actually makes up a big proportion of the earnings in Eastern Europe. For other retail, which comprises our supermarket and electrical retail business in Hong Kong, as well as our manufacturing division, the EBITDA combined has increased by 63%. As Frank said, the supermarket business in Hong Kong is still under a lot of pressure because of competition, because of people moving on north to do the grocery.
I think the business has done a lot of things in terms of optimizing the store portfolio and reducing costs, so at least we can be competitive in some major items versus what's available in the mainland. The electrical business, under the Fortress brand, is doing well and reported good growth, and also manufacturing. All in all, the underlying EBITDA of the retail division increased 8% to $7.69 billion, and with a favorable FX translation impact of $284 million, the EBITDA for the first half is about $8 billion. Looking into the second half of this year, like the port and the retail side, we expect the operation in Health and Beauty Europe and Health and Beauty Asia to maintain the growth momentum despite economic headwinds.
At the same time, various initiatives are being implemented to improve the performance of Health and Beauty China and also Health and Beauty Hong Kong. We'll also focus on expanding and nurturing our 175 million loyalty member base. At the same time, we would continue to expand our physical store network portfolio, which has a very short CapEx payback period of less than 11 months. The CapEx payback is fast, and we have plans to continue with the store expansion programs. From here, I'll pass it back to Frank to talk about the Infrastructure.
Okay. I think we can move pretty quickly through slide 11 because CKI announced their results yesterday, and so most of this is already, to some extent, old news. You do notice on the upper left-hand side that the net debt to total capital ratio did go up somewhat in the half. That is going to come down in all likelihood in the second half as you see the completion of the sale of Eversholt UK Rails, which in terms of enterprise value is around HKD 28+ billion . There's really no need to worry about debt increasing in CK Infrastructure. In fact, the war chest is getting stronger. Most importantly, they talk about this, and we always report it, the see-through net debt ratio.
If you go down to the asset level and you say how much leverage is there against the underlying infrastructure assets, most of which are held in associated companies, the short answer is 49%, which by any measure in the infrastructure investing world is very low. That's why there's a single A stable rating from S&P that remains very unchanged. Our regulatory resets this year have all been quite good, although in the water business, which is there are troubled waters in the water business in the U.K. , I think that's still in front of the CMA contesting the regulators' determination. Overall, there are no adverse resets. I think looking forward, we don't particularly expect any adverse resets. We've had a couple of quite reasonable ones in Australia. There's a couple more coming in Australia. It's really steady on as it goes.
As you can see, the reported NPAP, which was on a post-IFRS 16 basis, was up by 1%. EBITDA was up about 6% in local currencies, which is good. The result is that the company is very comfortable in maintaining its now very long established tradition of always increasing the dividend. This is probably the only company that I can think of, certainly in this part of the world, that has increased its dividend every period for the last 18 years since it started in 2006. On the next slide, I'm going to let Kwan, who will also be leading the CK Hutchison Group Telecom call later on this evening, take you through the fundamentals on telecoms.
Okay, thanks, Frank. This slide shows the 3 Group Europe, which actually is only focusing on the European OpCos and doesn't include the head office CKHT, CK Hutchison Group Telecoms. You don't see the treasury gain that Frank mentioned in the numbers, so it's important to bear that in mind. On the division basis, the 3 Group Europe has delivered a very steady underlying EBITDA performance with a 4% growth for the division as a whole in local currency. The one-off item you see on the right, the -$774 million, represents the fees and expenses relating to the merger of Three UK with Vodafone UK completed at the end of May this year, which of course brought in, as mentioned earlier, a significant net proceeds of GBP 1.3 billion.
The group and the team at VodafoneTh ree, the new merged entity, is of course working very hard and very focused to execute the investment plan and to deliver the plan's OpEx and CapEx synergy targets. That's something which we'll be focusing on and we'll be reporting on as we develop along the way. The rest of the Free OpCo is not taking it easy either and is undergoing a comprehensive review exercise to identify major opportunities to increase positivity and reduce costs over the next five years. I hope to give you more update on that as this develops over the course. If I can now turn over to the next page. This slide provides a lot more detailed information for each of the free OpCos.
For UK, the numbers for 2025 represent five months of Three UK's standalone results and one month of the group's share of the merged entity's results. For UK's underlying results, it is important to exclude the GBP 75 million of merger-related expenses that are shown there. Underlying EBITDA, you can note, is actually a 13% improvement year on year. I'd also like to highlight that the Three Sweden's results benefited from a foreign currency gain of SEK 114 million on the translation with intercompany loan with Three Denmark, so that's flattering the results a little bit. However, even excluding that,Th ree Sweden is still delivering an improvement year on year. The only one to highlight, which is the one shown a little bit red for the period, is Three Austria, which has, with the competition there, the competitive landscape has been really affected in its gross margin.
You can see total margin has taken a 5% drop. Three Austria management team is working very hard on this, and we hope to see an improvement hopefully as soon as the second half of this year. This is something that is a work in progress. On that, I should now hand back to Frank.
Okay, it remains to cover what we call the other operations, which is all stuff that you find in finance and investment rather than in the sector columns where they operate. The first on the left-hand side is Cenovus Energy. Difficult first half, as I mentioned before, and they've reported it and it's well absorbed by the market, but there was both lower commodity pricing overall and, of course, as I said, significant maintenance and turnaround activity, which won't be repeated in the second half. I think that commodity prices, depending, they are set to hopefully look better in the second half than they did in the first half. The output of that from our point of view is that the dividends were subdued. There was obviously no excess cash flow dividend to be distributed.
They were slightly better than last year, but relatively small amounts and on a weaker Canadian dollar. From a cash flow point of view, less of a contribution to CK Hutchison . Having said that, we do have a program of selling Cenovus stock to match the dilution impact or the accretion impact, actually, of their ordinary course share buyback program. If you know North American companies, it's very, very common that shareholder returns are structured in part in dividends, but in a much larger part, particularly in a low price environment, in share buybacks. It's very difficult for a major shareholder to participate in a share buyback by an issuer in Canada and the U.S. The alternative is really just to match the sales to the buybacks, which is what we have been doing. That brought in another $926 million in proceeds in the first half.
I don't want to leave with the impression that Cenovus is, by any stretch of the imagination, not a good asset for us. It is a very good asset. It improved its credit profile a bit by redeeming some preferred shares during the year, and as a result of that, it actually got a credit upgrade to Baa1 in March of this year. As I said, the outlook looks reasonably positive for the second half, and we'll see what happens there. IOH, Indonesia, battling a very difficult market in the first quarter, very much intensified competition, and from our point of view, also a lower rupiah year on year. You put all of that together, and it was a weaker contribution to us. Having said that, their average revenue per user and the data usage that they're seeing are all very solid.
They have some extremely interesting initiatives in AI data centers in partnership with NVIDIA, which I think is very creative in terms of looking towards the future and not just towards the past as a telecom operator. They have increased their dividend payout. As I say, that's not reflected in the first half because it got paid in July, but they've taken the payout ratio up to 55%. This is, again, a very good associated company. There aren't all that many telecoms companies or facilities-based telecoms operators that actually have profits and distribute dividends, and this is one of them. TPG in Australia, I mean, it has really gone through, I think, a very transformational period.
You don't see it in the contribution to our financial performance, partly because of the weaker Australian dollar overhanging everything, and partly because, although revenues have been growing, they've also been absorbing some of the costs of the expansions that they've been doing. Probably the most significant transaction they did last year was to get into what's called a market arrangement with Optus, which gives them essentially the same coverage in the outlying territories as Optus has, which was significantly more than TPG had. TPG does not have a coverage disadvantage at all anymore. As a result, we're starting to see significant improvement in terms of both customer acquisition and pickups in revenues. It's just that you don't see that yet being reflected in earnings contributions because there's some costs associated with implementing that agreement.
They've done a major brand refresh, and of course, most recently, they've announced a very, very important transaction with Vocus, where they sold assets which I guess you would consider them as non-core to the ongoing TPG story and the ongoing TPG opportunity that brings in AUD 4.7 billion of net proceeds. A significant chunk of that they've, I think, already announced is planned to be returned to shareholders, which is good news because obviously the return on investment is going to look a lot better with the investment being materially lowered. They're also offering a very creative reinvestment program, which will only be taken up by minority shareholders or whoever they assign their rights to reinvest to. What that does is very important.
It increases the liquidity in the stock because, as you probably know, 50%+ is owned by Vodafone and ourselves, and then you have the TIO family, and you have this whole Pat group as major shareholders. The company has too small a float, so they've used this opportunity, I think, very, very wisely, to start moving down the path of expanding the float, which basically means that they should trade better because it's, you know, one of the reasons that they have not traded as well as they could is simply because there wasn't enough shares to buy for significant players and institutional investors. Lastly, HUTCHMED. HUTCHMED made their own announcement a few weeks ago, and they did reset some guidance somewhat down from where it had been. That is not by any stretch of the imagination, you know, a company disaster.
Everybody knows on the commercial side of pharmaceutical sales in China that the government has changed a lot of the rules, and that has resulted in a level of instability which has resulted in a little bit less sales. It's not the end of the world. It will find its appropriate level. In the U.S., you know, the U.S. government has insisted on lowering drug prices to, I think, public hospitals and a few others. I'm not quite sure what programs, but again, that's impacted on sales into the U.S. They had one operations-related issue with not getting out to market a drug that they manufacture, which was expected to start contributing in the second half and will be delayed by, I'm not quite sure, a year. They announced it in their revised guidance. On the plus side, I mean, this is one of the most cash-rich biofarm companies ever.
It has the ability to continue to grow quite aggressively, and with $1.4 billion U.S. dollars. They're accelerating their own R&D, looking at potential complementary targets. Most interestingly, leading in terms of the antibody-targeted therapy conjugates, which is really a mouthful. They're quite fascinating because those target cancer medicines specifically to the patient's cancer by riding in effect on the behavior of their antibodies. The distinction with HUTCHMED that is quite fascinating is that HUTCHMED's cancer drugs are almost all small molecule drugs. They're not battleships, you know, like chemotherapy usually is and so on. They're very, very precise. The ability to get them even more precisely to the target cancers looks really quite promising. That's in preclinical trials now. I think they have announced that. We would expect clinical trials to start following quite shortly.
Again, not the best half for HUTCHMED, but by no means is there anything to fret about in terms of the solid underlying value of that company. I'll take you last to slide 15, which is sustainability. I think in the interest of time, I will leave you to read it. The good news is we're just continuing to make progress, whether it's on emissions reductions. We're now in effect scope 1 and 2, 20% down against our 2020 baseline. That's real stuff. Our disclosure processes have continued to move with the times. Whether it's the CSRD in Europe or the International Financial Reporting Standards, we've done the work and we can meet them. You see that in our sustainability report, which I would urge you all to read.
We talk about the allocation of the green bond proceeds from the bond that we issued in 2024 as a green bond. You can see that we easily spend. In fact, I think our spend that would qualify as green spend this year overall is going to be in the area of $2.3 billion out of our total group spending. We are not on the back foot by any stretch of the imagination when it comes to sustainability. That's reflected by and large in reasonably good ratings. We got Sustainalytics from when we started with them being a severe risk down to at least being a fairly steady medium risk. With MSCI, we're steady as of the reset in July at BB, and that's a scale that goes from CCC to AAA. It's not a bad place to be at all.
With ISS, we're a C+ on a scale that goes from D- to A+. On the Hang Seng Corporate Sustainability Index, we're at AA, and that's a typical D to AAA index. That is good news as well. On the Carbon Disclosure Project, we're really quite on the front foot there. We have a B from them in a D to A rating system on climate. We have a C on forest and a C on water security, which are their areas. This is the first time participation in those were issued in February of this year. I think we'll stop there, and we'll move to questions and answers.
Thanks. We will now begin the Q&A session. Once again, feel free to put down your question in the chat box. The first question: Will future dividends be based on reported or recurring earnings?
Dividends are always a board decision for the period. They do take into account underlying performance. They take into account financial fundamentals. They take into account balance sheet, cash flow, debt ratios, credit ratings, etc., and shareholder returns. I think the one thing that I can say quite positively is that we will generally not take into account non-cash accounting earnings losses for the very simple reason that if you stop and think about it, when you have a non-cash earnings loss, it's basically because the cash was spent in some prior period and is being carried on a balance sheet at a higher cost than what you're realizing or what you're valuing. It would not make sense because basically the cash flow effect has already been recognized in prior period results.
Thanks, Frank. The next question: What are the strategic actions on store planning and product portfolio H&B China is taking in order to improve performance?
As we talk about the Health and Beauty China business, of course, you know, it's under pressure for reasons that I mentioned. At the same time, we are doing a lot of actions, taking a lot of actions and planning so that, you know, we can really, you know, improve the performance of this division. We are transforming the business with a robust strategy that integrates our 3,600 stores across 500 cities with, you know, the stock stores or fulfillment centers. The stock stores and fulfillment centers are those very simple structure, small, you know, units which help to deliver, you know, at a very short notice the goods that's ordered online, you know, from the customer. At the same time, you know, our loyalty member base, you know, is moderately increasing with high retention rates, high loyalty, you know, among the customers so that, you know, we're happy.
The transition to dark stores, you know, as I mentioned, you know, has temporarily impacted margin because, you know, as you know, the online sales model on takeaway platform is with a lower margin. If we do more of that, you know, that will affect the margin adversely. This strategic initiative ensures we remain aligned with the customer's expectations, such as delivery within 30 minutes. You know, this is almost a norm. We try to shorten it. As our all-plus-all strategy, you know, applies, you know, physical stores remain a core to this strategy, which has been proven to be, you know, effective and allow our stores to provide differentiated customer experience. I think, you know, as the economy recovers, you know, we are confident that this approach will drive long-term growth and position us, you know, as a leader in the retail industry.
Thanks, Dominic. The next question: It has been mentioned in the EGM circular in 2024 that the group is required to reclassify from equity to P&L an FX loss previously recognized and accumulated in other comprehensive income included in equity, estimated to be HKD 8.6 billion upon completion of the U.K. merger. Why is the nature of the one-time loss different from previous disclosures?
That's such a simple accounting question. I think we'll get Kwan to explain it.
Thanks, Frank. Both the $1.7 billion loss on disposal as well as the $8.6 billion net exchange loss just mentioned. In the September 2024 circular, a total loss of $10.3 billion was based on information available at the time and inherently subject to change. The difference was mainly due to the group's transition from Hong Kong FRS to International Financial Reporting Standards, which impacted the exchange reserve to be recycled, as well as the final valuation for the merged entity at today's value and actual foreign exchange rate at the time of completion at the end of May. All this came up to this different number.
Thanks, Kwan. Next question: What is the group's investment strategy, especially if net debt comes down significantly? Given the mature profile of the group's businesses, would the group invest in more new areas to jumpstart growth or return more capital to shareholders?
Yeah, I think we'll continue to stick to our knitting, and I think a way that we're pretty well known for. We are interested in investing in growth and value-accretive transactions. We've done quite a bit of that over the years, and we've overall managed to deploy capital in ways that delivered good returns on invested capital. We'll continue looking to do that. We will be staying close to our own businesses. I would say that most of the opportunities in new areas actually come out of our own businesses. If you look at the reinvestment profile going forward for the infrastructure businesses in the U.K. or in Australia or whatever, you know, there's a tremendous opportunity at very attractive returns to continue to deploy capital into evolving needs.
One of the reasons why the water industry is so controverted right now is, of course, because the infrastructure is old. There are more people. There are different weather patterns. Things need investment, and those investments attract very attractive returns. You see that CKI is in the frame on many significant potential investments. I'm sure that we're talking about that yesterday. From time to time, we also divest of things that bring in cash that strengthen the war chest. On balance, it's always the same. We will be looking for accretive growth opportunities largely emerging from our own businesses, but we'll always do it in a way that is consistent with our prudential financial profile and a cautious approach, both to CapEx and to new investment and rigorous cash flow discipline to maintain the strong financial profile that underpins all of our businesses.
Thanks, Frank. The next question: Is regulatory or antitrust approval from China required for the proposed Ports transaction?
Sure. A transaction of this scale has implications for many states and many regulators, and that includes China and the U.S., but also the U.K., the EU, and several other countries. When we made our incident information filing on July 28, we reiterated that we will not proceed with any deal that doesn't have the approval of all of the relevant authorities. Of course, with exclusivity having expired on 27th of July , we are into a new stage of our deal, and that includes, as we have said, discussions with a major strategic Chinese investor. I believe that there is a reasonable chance that those discussions will lead to a deal that is good for all of the parties, ourselves included, and most importantly, that will be capable of being approved by all of the relevant authorities.
It is taking much longer than we had expected when we announced in March, but frankly, that's not particularly troublesome. The Ports group are having a very good year. They're generating stronger earnings and cash flow than we had expected when we set this year's budget. In any case, you need to understand that with a deal of this size and complexity, closing, which is the time at which you actually transfer the sold assets and you receive the purchase price, would not in any case occur this year, even if binding arrangements are agreed this year, and frankly, even if they had been agreed in the first half of this year.
Okay, since I think a lot of you are very interested, and also it's a very important message that we want to pass to the market, I will repeat or translate what has been said in English so that our Chinese and Cantonese-speaking audience will understand.[Foreign language]
Thank you. Thanks, Frank and Dominic. What are the uses of the GBP 1.3 billion of cash that CKHGT received from the merger?
Okay, yes, Frank. CK Hutchison Group Telecom actually used some of the proceeds to buy back GBP 485 million of its own sterling bonds. Clearly, the balance has further strengthened CK Hutchison Group Telecom's liquidity and financial profile. That offers flexibility for the group as well as for CK Hutchison Group Telecom to determine the best use of the liquidity to create the maximum value for both CK Hutchison as well as CK Hutchison Group Telecom, which clearly may include deleveraging by reducing the gross debt at CK Hutchison Group Telecom, keeping that as cash as a natural hedge for the outstanding sterling bonds, or repatriation for CK Hutchison, subject to, of course, our own promise to keep the leverage ratio to the 2.5 for other corporate usage.
Yeah, I think that's important. You know, we've always said to the CKHGT stakeholders, who are mainly bondholders, that we would maintain, you know, effectively a mid-investment grade level rating. Right now, you know, net debt to total capital ratio in CKHGT is down below 2%.
minimal.
Yeah, there's probably a good possibility that the repatriation option will be part of the picture, but there's no huge rush since it's a wholly owned subsidiary as we sit here today.
Yeah.
Thanks, Frank and Kwan. Next question: Are the real free draft determinations for NGN and WWU in line with CKI's expectations?
I think they will have discussed this yesterday, but yes, they are, and they reflect appropriately changes in parameters like interest rates and inflation rate assumptions and so on. Both of the gas companies will submit their revised proposal in August, and the final determination will be released by the end of the year. We think that the outcome is going to be very satisfactory.
Thanks, Frank. When do we expect to see the cost synergies from the U.K. merger?
I think, you know, some of them, particularly in the commercial area, start to come in in relatively short order. For example, consolidation in the retail footprint, combined marketing efforts, albeit under different brands, but with the same, if you want to think of it, back office and buying power and all the rest of it that goes with it. Consolidation of networks and IT stacks takes a little bit longer, but it will happen over a relatively short period. That's all part of the undertakings to the CMA and to the regulator in the U.K. , actually. We expect that by the fifth year after completion, the combined business should be delivering operating cost and capital synergies at a run rate of about GBP 700 million a year. The only thing that I would add is that some of the non-cost synergies are delivered very, very early.
You're seeing that already with the improved coverage that old Three customers and old Vodafone customers have just from the very preliminary network integration activity, which allows customers to use either network, whichever is best where they are. That relieves a lot of congestion or other knot spots and all of that. That's already happening. You can't really quantify it, but I think it is a significant enabler to make sure that VodafoneThree stays the largest mobile operator in the U.K. .
Thanks, Frank. What is the expected impact of Trump's reciprocal tariffs on HPH operations?
May I take this question?
Yes, please.
Yeah, of course, you know, President Trump's reciprocal tariff is attracting a lot of attention and discussion. Although I must say that, you know, the reciprocal tariffs have not been finalized at this point. However, as far as our Ports business is concerned, given the geographical diversification, we do not expect any significant impact on the overall volume, despite there may be a different impact on the U.S. export volume of different countries depending on what their final reciprocal tariff terms turn out to be. It is still in flux. The volume of Ports is generally quite stable. For example, I can say that even during the COVID years, we have only a single-digit drop. This is evidence of the resilience of the operation.
I must warn that, other than the volume, the more concern is on the supply chain disruption, because it happened a few years ago, that disrupted the trade. We are the beneficiary in terms of our increase in storage income, which we just mentioned. Storage income is becoming, I would say, a meaningful part of the P&L. If there is any disruption in the supply chain, the containers will stay longer in the yard, and then compensate for the drop in the throughput under a downside scenario.
Thanks, Dominic.
I think I just add one thing to that, which is that the recent development with the new 90-day truce between China and the U.S. on trade, which expires on November 10, is, you know, I think probably a good augury for our Ports business because that falls right into the Christmas inventory goods sort of shipment period between China and the U.S. You might see some strengthening from that, which would be a good thing, not just for our business, but it would basically mean that the price of toys wouldn't go up so much in the U.S. Kids will be happy and parents will be happy, which may have been part of the motivation for the deal. Anyway.
Thanks, Frank. Next question. Can you help us walk through H&B China's sales performance in Q1 and Q2 for us to better understand the momentum in the first half?
Yeah, again, on Health and Beauty China, I think there's a fair question to ask because people, all of you, want to know about more Health and Beauty China. I think the best way to describe the sales performance in Q1 or in Q2 is to look at the comparable store sales growth. In Q1, our
company's sales growth was slightly positive, yet we have a low single-digit decline in Q2. Q1 was positive, Q2 is slightly negative. There has been a downward trend in average weekly sales and sales growth in the same period last year. As for the first half, at the same time, with the things that we are doing currently, we expect for the second half, although we will continue to see headwinds, particularly with consumer demand, we are doing everything that we can in order to mitigate challenges and remain financially sound. On the operations side, they're sharpening the value proposition, the product categories, and optimizing the store footprint. They're doing a lot of things to really address the challenges. Thank you.
Thanks, Dominic. Next question. CKI is actively pursuing growth opportunities. What will be the geographical focus for CKI in terms of project M&A going forward? Will CKI consider to invest more in unregulated businesses rather than regulated ones going forward?
Yeah, I'm sure CKI will have talked about this at their results announcement yesterday, but one thing you have to remember about CKI is that it is an operator, not just an infrastructure investor. That means that the choice of opportunities includes looking at how they can create synergies, whether it's with our gas operations in the U.K. and our gas operations in Australia, or whether it's with water operations or pipeline operations or whatever. You're always looking at opportunities to benefit from actually operating synergies, from being operators in the business for the long term. We're not an infrastructure investment fund that has a timeline on which to either buy or to sell assets. Of course, we consider both regulated businesses and unregulated.
Some of our very, very good businesses in CKI , like ISTA, I mean, are unregulated, but they're very, very good businesses. As long as it fits our investment criteria, we look at either.
Thanks, Frank. Is the group considering a spin-off of its telco business in Europe?
I think we answered that at the last AGM, I think. You know, we regularly look at all of the options and we try to enhance the long-term value of businesses that our shareholders can touch and feel and benefit from. These include options, of course, in the telco business. At present, we haven't made any decision to go down any particular transaction path with our telecoms assets, but when we announced the ports transaction, basically the valuation that was put on the ports was greater than our equity market capitalization at the time, and today it's still 75%. That tells you that there is a lot of value in our underlying businesses and assets that is clearly not being reflected in our share price.
It is a big part of our job to figure out how to get tangible benefit of that over time to our shareholders and to rectify the fact that they own a lot of assets indirectly through their stock, which they're not getting value credit for in their share price.
Thanks, Frank. Next question. How is the current competitive landscape in Italy following Fastweb's acquisition of Vodafone Italy?
Okay, you know, I'm not going to elaborate too much on this because CKHGT is going to do its own interim results announcement presentation later on this evening. I'm sure the Italian guys will go into much more detail. I think overall, less fragmented competition does mean that the opportunity to grow the B2B sector, for example, is probably quite a bit better than it was. I know that they're hard at work at that. They're also developing a lot of associated businesses, which they call Beyond the Core. I think that there's a level of stabilization in WindTre customer base that reflects a level of stabilization in the market from having a less fragmented ownership structure amongst the operators. I wouldn't say more than that.
Thanks, Frank. Next question. Could you provide insights into CKH 's incentive framework in relation to sustainability and ESG performance? How is target attainment linked to compensation outcomes?
Yeah, this is important. It's something that we're just really at the beginning of, but most of our businesses have long-term incentive programs and short-term incentive programs that are programmatic. They're based on achievements to targets. What we are doing is we are building on the division appraisal system, if you want to think, that we developed for ESG reporting purposes, and trying to translate that into some specific metrics that can become targets and that will guide what your opportunity is on a short-term incentive plan or a long-term incentive plan. We will do that with things like, of course, GHG reduction targets. We'll do it with people-related metrics like training hours. We'll do it with diversity objectives like the percentage of women in leadership roles.
We're trying to come up with metrics that suit and that can be incorporated into the drivers of our short-term and long-term incentive plans across as many of our businesses as we can.
Thanks, Frank. Due to time constraints, we have to conclude our webcast today. Our IR team will respond to the unanswered questions. Thank you very much.
Thank you.
Thank you.
Thank you.