Hello. Good afternoon. Welcome to the interim results presentation. It is my pleasure to introduce the speakers today. Mr. Ronnie Chan, Chairman of both Hang Lung Group and Hang Lung Properties. Mr. Weber Lo, Chief Executive Officer, Mr. H.C. Ho, Chief Financial Officer, and Mr. Adriel Chan, Executive Director. Can I first leave the floor to Weber to give an overview about the results first, and then we will open the floor for any questions.
Welcome. Welcome, everyone. I will not go through each number, but I just want to summarize our core leasing business, because this time around, all our revenue and profit are coming from investment properties. So I will focus more on the leasing part first. First of all, if you look at Mainland revenue in terms of leasing, the growth momentum continues. As we discussed six months ago, we saw second half of last year was already better than the first half, and this trend continued, and I would say in terms of absolute numbers, the revenue of Mainland improved by 7%, and the number actually is much higher than the second half of last year as well. So not only because of the growth of the same period of last year, but also sequentially, the second half further improved to the first half of this year.
In terms of Hong Kong, we already see a very stable growth at 3%, at 4% in commercial, 3% in office, and 5% in residential. Quite stable. Overall, because of the depreciation of renminbi of the same period of 6%, therefore our growth of leasing translate into Hong Kong dollars is only 2%. But if you look at the renminbi, the denominator currency in Mainland, actually the growth is very solid. I would like to also emphasize the company our team worked very hard this year. We have a lot of projects coming into completion. For example, Kunming Spring City 66, our mall will officially open on August 23rd. Our office will be handed over to the tenant for renovation actually in September. So basically everything on track.
For Wuxi the second office tower also actually in completion in a few weeks' time, and we are ready to hand over to the tenant. The Conrad Hotel in Shenyang we will officially open in early September and basically now is in the period of final testing with the hotel operator. On top and above, I think it is very exciting to inform you that our Grand Gateway AEI are moving along and on track in terms of the renovation. Our loft tower completed our renovation a few months ago and now actually the south tower underway. You will see in terms of store opening, B1 Zara already open. Cosmetic brands, including Sephora and all the other cosmetic brands will be open in a few weeks' time.
We are now focusing on the rotunda because we will expect all the big brands, including Louis Vuitton, Gucci, and all those luxury brands, will be open by December. Hopefully by then, the rotunda as well as the area outside will be fully ready for the Christmas time. The leftover will be the both wings which will be completed by 2020. I think this will give us a strong momentum in terms of growth for Shanghai. As well as the last one, I would say the Peak area in the Peak. We already opened four restaurants, one store on the ground floor. Then gradually we will open in August and by fourth quarter we will basically open the whole mall in operation.
When I go back to the Mainland, I would like to emphasize, out of the 7% growth on our rental revenue, 4% in Shanghai. If you look at the 4% in Shanghai, Plaza 66, the mall grew by 11%, with very strong sales of 15%. After two consecutive year double-digit growth, which proved to us that even at a very high base, if we are doing the right thing the brand can do more business as well as we can actually earn more revenue. However, it was disrupted by the short-term renovation of Grand Gateway, and that's why Grand Gateway have about - 4% in terms of revenue and therefore slow down Shanghai. I want to emphasize again that outside Shanghai now is our driver for growth. Look at the 7% of Mainland, outside Shanghai growing at 14%.
If you look at the mall, the mall grew at 16%. Just to mention a few, Palace 66 in Shenyang, Parc 66 in Jinan, Olympia 66 in Dalian, and Center 66 in Wuxi, they all post double-digit growth and strong double-digit growth. Even though we all talk about Shenyang before, Forum and Riverside in Tianjin, they are also posting a sales growth and single-digit revenue growth. I think outside Shanghai used to be, I would say last few times when we meet, you all ask us about outside Shanghai, what is your view? Now I will say, now we will see outside Shanghai will be the driver for growth for Hang Lung going forward. Chairman mentioned a few times to some investor, I would like to also mention to all of you, we see the future will be bright because of the five drivers.
As I mentioned, the organic growth from our existing asset. Hopefully, we can continue to grow the existing organic growth continuously. Second one will be all the new project coming into fruition. As I mentioned, Kunming, Wuxi, and Conrad, and next year Wuhan will add into more space for us to rent and therefore will actually give us more revenue opportunities. The third one will be the AEI, as I mentioned, Grand Gateway and Peak Galleria. That will also give us a stronger growth momentum in the future. The fourth one we all discussed is sell down our residential houses and duplex in 23-39 Blue Pool Road as well as The Long Beach. At the same time, we will continuously explore opportunities to dispose some of the non-core asset.
Finally, we all discussed last time as well, is a lot of serviced apartment we are building in mainland, including Wuhan, Wuxi, Shenyang, and Kunming. We will continue to build those serviced apartment for sales in the future. These five, we believe that is our impetus for growth in the future, and I just want to summarize what we discussed before, and I would like to stop it here now.
Thank you, Weber. Would Chairman Ronnie any remarks to make?
No.
Okay. Welcome any question.
[Audio distortion] .
Okay.
Sorry.
Okay. We welcome any question from the floor. Please raise your hand and let us know your company organization name and your name as well. Morgan Stanley.
Thank you and congratulations for a great set of results. My question is related to six months ago, we were talking about summer is coming. The question is, has it come? Thank you.
Well, let me put some numbers to what Weber just said. We had six shopping centers outside of Shanghai on the mainland. Three of them, in terms of sales growth, retail sales growth, and rent revenue growth, have been upward of 23% to 25%, as much as 30% on both counts, both measures. Would you consider that as summer? The fourth one is a very solid one, always double-digit growth, but in the teens. This time it grew at 11% rent and 15% sales, I think it is. Then the other two, which are the weaker ones, and they are now all turnaround, occupancy and footfall and wherever you look at it is basically pointing upwards already. I think, I do not know how hot you want to be, but I think summer is here. More than that, sorry, not just the numbers that I gave you.
The momentum is really quite powerful. I would not be surprised that those kind of double-digit growth, maybe not 30%, for any longer period of time, but double digit. That may last for some time. Let me give you another half qualitative, half quantitative answer. In the last year and a half, and for the next couple of months, we have signed or are about to sign close to 60 leases with the 20 top brands in the world. The majority of them are outside of Shanghai. Of course, some went into Grand Gateway 66, as we all know. Some, we let them into Plaza 66 for the first time. But 2/3 of them or more are outside of Shanghai. I would say in whichever definition you have for summer, I think Do you agree with me? You guys agree?
I think summer is here for us, although it's only the early summer, and it's a long way to go.
Thank you.
Yeah. This is Mark from UBS. First of all, congratulations for the good results. I actually read through for the result. We actually see a strong turnaround for Shenyang and Tianjin. Maybe management can share what have we done to make the results have turned around, and what's your outlook for these two cities going forward as well?
Thank you. Thank you, Mark. First of all, Shenyang is not always bad when you look at Palace. We are growing at 20%+. Once you can find your own positioning, we are in the Street Zhongjie which we now are the destination for younger generation. Of course, those sports brand, like Air Jordan, like all those are helping us. At the same time, without reinforcing our positioning, it will be difficult for us to sustain. So we sustain two sequential six months already. So we believe that this trend will continue. When you talk about Forum, I think the problem that we are dealing with is the mall and the office. They are there and they have MTR station.
However, sometime we find difficulty to have those office people to shop in our mall because they only come in the weekday, but they will never come back in the weekend. Therefore, we have to find our own way to work hard to make sure that this become a place for shopping. Now with the Conrad Shenyang Hotel close to completion, that is another reason why for the people to come. We truly believe that a mixed-use complex will have a halo effect to build up the positioning for Forum. Going into the details of Forum, we are really fine-tuning day in, day out on the trade mix. Making sure that we got the right tenant coming in and therefore we can attract footfall, and the footfall will stay behind and therefore we can cross-sell them into the retail.
You will see a lot good restaurant coming into Forum these days. That is something we are working very hard on. Of course, ultimately we want more luxury brands to come into Forum and therefore stay tuned. We are working hard on that. At the same time, in Forum, out of the size that we have in the site we have more than half of the sites we can continue to build. Therefore, I think it's a time for us to work hard at making sure that we can build this, become a destination for shopping, for office, and then we can dominate in this market. Tianjin, again, same thing. We are working very hard to have rental reversion. At the same time, upgrade the tenant. Now if you go to Riverside 66 L1, you can see a lot more great brands coming in.
For example, Guess in, Fila, Nike, Adidas. They are coming in into the L1 and now contributing to our rental income as well as drawing the traffic for our mall. So I think all in all, we are working very hard day in, day out to make sure that we get the right tenant and therefore the footfall will improve, therefore the sales will come. Hopefully because of that, we can actually drive up the revenue.
Thank you. There is a question here from the webcast online. How do we see the retail outlook in the second half of 2019 in Hong Kong?
I think we can say that we believe everything is normal in Hong Kong today. If you look at our retail sales growth, actually we registered 6% growth in the first half. Not bad. We see a little bit of the slowdown in June, only a little bit. But in July we still need to gather more data before we can share with you. But when we talk to the tenant, especially on the day of protests, it has some huge impact in terms of retail sales. I would say, first of all, we need more time to monitor the situation. But I just want to give you reassurance that the turnover rent, in terms of the percentage of our overall income in Hong Kong, is very minor. It is single digit. That means we got a very high base rent already in our retail business in Hong Kong.
Retail accounts for 60% of our Hong Kong revenue. Short term, we do not expect there will be a lot of significant changes, but you never know. If they could not get the sales and they will not be able to survive, then it will have a trigger effect. But we don't see it happen in a very short term of period of time. That's why I can only say we will closely monitor. Hopefully by the year-end, we can tell you more about this. So far, we don't expect, to us, the impact is significant.
Thank you. Any question? Ken?
Hi. It's Ken from Citi. As chairman mentioned that summer is coming, can I ask when you can start to reward shareholders with dividends? I think your chairman's statement said that we need to wait for a while. I think a lot of investor concerned about- Secondly, regarding the disposal of non-core asset, can you update us regarding any timeline and scale? Thank you.
I'll take the first, maybe one of you take the second one. As I said, as bottom line grow, there's no reason why you don't pay more dividend. But do we do it at the midyear, whether you do it at year-end, that's another consideration. I'm not guaranteeing that we will do it at year-end. What if year-end, hell break loose? None of us know what will happen tomorrow. But nonetheless, the principle is very clear. We make more money, we share them with shareholders. That said, we are still probably one of the higher dividend yield real estate company today. I think most of them are what? Three, three and a half, dividend yield. I think we're already at roughly four. So, we are not behind. But on the other hand, we don't mind. I'm a shareholder too, so I don't mind getting a little bit of whatever.
For the non-core asset disposal, I think you should notice that we sold two properties. One in the group, which is one of the factory sites in the Lai Chi Kok. That actually realized a one time disposal. The other one basically is the car park, which we dispose in HLP, but will be complete in two months time. Therefore, the gain actually was shown in the valuation gain for now. So I think if you ask me whether we have a very clear timeline, I can only answer is, when the price is right. Because I'm sure as analysts, you all know that if I now want to sell more, it will be very difficult.
Because, when the time is not right, when you want to sell, the people will say, "Okay, lower price is okay, but higher price, it may not be the right price." I think we will continue to look at opportunities, and this is something we are working very hard on. But I cannot guarantee that how much we can sell by when. But we already have a list, and we would continue to look at the opportunities. But I cannot guarantee the time.
There is a question here regarding the level of gearing. Any comment on the current level of gearing? Also, what is the headroom for further land acquisition?
Our net debt gearing is around 17%, 18%, and I think somewhere between 20% to 25% is quite reasonable. So that will give us the headroom for further land acquisitions, should there be any opportunities.
Thank you.
I am always looking out for something. I just don't know when I can buy. As you know, in mainland China, the strategy that we have taken. Oh, by the way, this year I wrote extensively, expanded on what had been written before on the strategy that we have. Which frankly, I don't know why, but well, I know a little bit why. Anyway, I just haven't seen anybody doing what we are doing exclusively. The way we buy land is really sporadic. It all is opportunity driven. Between 2005 and 2009, we bought quite a bit. Then two years, nothing. We bought one in 2011, one in 2013, and then we waited five years. When will the next one come? I don't know. But we do see opportunities out there. I do smell something. But when will it come to fruition?
It can be one year, it can be three years, I really can't tell. But as long as within our financial means, I don't see why not.
Okay. Sorry. DBS, Jeff.
Hi. I have three questions. The first question is related to the non-core asset disposal. You said that, when the price is right, you would consider selling more. Can you share with us the exit yield for the previous two disposal? The exit yield. The second question is related to the financing cost. I found that the interest capitalized increased substantially on the yearly basis. What are the reason behind? Should we expect similar interest capitalized for the second half? The third question is related to the new project. Can you comment on the leasing progress for those project in Wuhan, Wuxi Office Tower?
I will take the first two questions. The yield for the recent disposal is around 2.6%-2.7% on the passing yield. The reason for the changes in interest capitalizations is mainly because of there is an amendment to Hong Kong Accounting Standard 23 on borrowing cost. The gist of that is the standard, the amendments, clarified what to be included in the so-called a general pool of borrowings. In the past, only specific bank loans tied to a specific project under developments, then we capitalize those interests. But with this amendments to the new accounting standard, it means that everything else not tied to a specific project will fall into a pool of the so-called general pool of borrowings. The interest expenses of this pool should also be allocated and capitalized into those projects under development. That is the reason why.
The financial impact for the first half result is HKD 323 million.
The additional comment, not because of the accounting change, because we have more development under the PUD.
For example, like the land in Hangzhou, we will fully pay for that land CNY 10.7 billion. Okay? That is the project under development. The interest related costs on that project also being capitalized accordingly.
This will be ongoing. From now on, this is how it will work. This is just the beginning. Project development.
Sorry, what was the question?
New project.
Pre-leasing actually is very good in Kunming. We expect to open, I think, right now, I think we are at around 80% leased.
85.
85.
85, yeah.
85. When we open later at the end of next month, we should open with almost 70% open. Even though we should be at that point, hopefully closer to 90% leased, it should be about 70% open. Wuhan, I think we are now at around Are we at 40 yet?
Yeah.
About 40.
August 23rd.
For Kunming is August 23rd. Wuhan, the exact opening date to be decided, but it should be summer, so second or third quarter next year.
Just to supplement on that point. For the Kunming Mall, we already leased 85%, but there are many, many top-tier tenants, top-tier brands in it.
Okay.
Basically. Contrasted to Wuxi Center 66, when we first opened it, a lot of big names signed up, but not everybody moved in because the market turned south in 2012. You remember, huh? We opened in 2013. We had to wait until the winter is over, and then now they're all moving in. LV and whoever else, they're all there. Everything that is in that city that is worth having there, basically we have it already. Spring City 66 in Kunming, on the other hand, the day we open it will be just like Wuxi. Two things going for it. Number one, everybody who sign up will be in there. Number two, it's the summer. It's not the winter, like when we first opened in 2013. I think that all those things means that from day one, we will be getting the top line.
Now, obviously, the bottom line will take a little bit of time to come through, but at least day one, the top line will be there. Even Wuhan, I don't want to say too much, but Wuhan, the competitive landscape in Wuhan is tougher than in Kunming, that's for sure. That said, I think the chances are good that we will open Wuhan next year with a very lovely shopping center with names that every lady in this room would be very familiar with. I hope.
Thank you. HSBC. Raymond.
Hi, management. I got two questions to ask. The first one is regarding the serviced apartment. We actually see the very clear timeline in your presentation material this time. Can you actually share a bit more color on the pre-sales of serviced apartment in 2021, 2022 on this one? That's the first question. The second question is about your China commercial business. With a very good performance of retail sales business, can you share with us more color on the occupancy cost and the expected occupancy cost in the coming, like 12, 18 months here? Thanks.
Maybe I'll start. We expect to start being able to pre-sell in Wuhan first. The first tower of the serviced apartment is up to level five in terms of construction. There will eventually be three towers. The second one that we should also be able to start pre-selling around mid to late 2021 is Wuxi. Wuxi is currently under construction. We've just started the excavation works. That will be the second batch. Also starting around 2021. Thereafter, it'll be Shenyang and Kunming. The sales pace, obviously we're still a few years away, but I don't expect the sales pace to be particularly brisk. What we're selling is the high end of the market, the top luxury apartments in those cities. You're not going to be selling them en masse. Those will be very selective, very high-priced units.
That's in line, of course, with our broader strategy.
Lastly, he asked also about the occupancy cost.
It will be in the range of 17%-22%, 23% across our whole portfolio in mainland China.
Actually, it is coming down. You appreciate that because of retail sales going up.
But I keep saying, occupancy cost is not a metric that I look actually very closely at. I would like it to be high and probably higher than most of you are comfortable with, just because what we build is really the top end. A lot of people, they are in our malls not just to do sales, but also for marketing. I think that they can withstand a much higher occupancy cost in our malls than they can in other malls. As a standard, I would not use this really to compare us to others. I would expect us to have a higher occupancy cost, and I would push my team to have a higher occupancy cost.
I always have a problem. Why do analysts think that a, sorry, I am a man, so I have to use a woman as an example, but you can reverse that if you want. Why should a beautiful woman cost the same as an average-looking woman? That always baffles me. As if there is a standard that one size fits all. Everybody has to be at a certain level, huh? I do not speak with experience, but I speak with observation, that certain women are just more expensive. Hey, they are pretty like those in this room, so what can I say? Right? Yeah. Higher.
Any further question? David?
Thank you. David Ng from Macquarie. Just one quick question on Hong Kong. There have been recent news that one of the fashion brand, which is a major tenant of your portfolio, is seeing some difficulties in trying to find someone to maybe sublease. Of course, that may be just a pure rumor. But those leases were signed at the peak of the market five years ago. So sooner or later we have to face that issue that some of these rental were at a relatively high level. Any particular thing, maybe not particularly on this tenant, but for that category of tenants, any particular strategy that you may switch to something that can generate higher traffic but maybe lower rent? That's one question. Second question is just on Hong Kong redevelopment projects, roughly CapEx that we should expect next few years and the timeline of the development.
Thank you.
I would say I could not comment on rumors. On an ongoing basis, we continue to work with our tenant. If they have difficulties, we will find ways to see how sustainable we can work together as a landlord and tenant. I think in terms of CapEx expense on the redevelopment, maybe H.C., you can mention.
All the land costs for the redevelopment projects in Hong Kong have been paid. The future CapEx would mainly be a construction cost for the two project, totaling less than HKD 1.5 billion over a period of three years.
Thank you.
Those projects we expect to be complete in 2022 and 2023.
If I may just supplement my answer earlier on. In fact, for the two development projects in Hong Kong, one of those we can start pre-selling in 2021, so the cash will start coming back.
Any further questions? We can accommodate two more. One question on the screen is the recent protest in Hong Kong, would that affect how we should position our Hong Kong portfolio in the longer run? If you look at our business today, 52%, 53% mainland and 47%, 48% Hong Kong. Both are important to us and total rent. Both are important to us, and we will continue to drive opportunities for growth. Of course, the recent issues will definitely have an impact on the retail sales. As I mentioned, hopefully the impact will not be significant on us, but we will continue to monitor closely. Thank you. Any last question? Okay. Merrill Lynch.
Fan Tso from Merrill Lynch. Just a quick question on Kunming. Now we are 85% leased for the mall. For the remaining 10%-15%, are they mainly on the ground floor or are they scattered? What's the management's thought for the remaining percentage? Are you waiting for a few big names, or you want to maximize the rental level? On the office, you also mentioned pre-leasing is in good progress. It would be helpful if you can share a rough number or are these tenants mainly MNCs or locals? Thank you.
No, I think when we print the booklet, it was 85%. As of today, it's 87%, 88%. By the time when we open, hopefully it's already 90%. I think I'm very confident that in the next few months we will lease over 90%. When you open a big mall like this, you always have some scattered space. You would like to select the tenant. Sometimes it's our choice to wait. We would like to make sure that the tenant mix is right. As chairman just mentioned, by the day when we open, our tenant rates, of course, will be lower than the leasing rates because the tenant needs some time to renovate. But by the time when we open, this mall already include all the important brands in the cities.
You will see when we open some of those that are still doing renovation, we have already those brand holding come up. Therefore, we already can show to everyone that first of all, it's all listed, and second, it's only the time that they need time to renovate. Our strategy continue to be, we would like to be the best mall in town. Our office is the best office in town. Now we are working on the best serviced apartment and best hotel in town. Because Kunming will be very likely, this is a one-store city. Those brands, they will be with us. If we are doing well, they will continue to be with us for a very long time to come. That's why we want to make sure we get the right brands to come in.
Those single digit leftover in terms of occupancy, we would like to make sure that the brands coming in are the right brand we love to have. That's why we are very confident that in Kunming, we will bring all the best thing to the Kunming people and also showcase Kunming to the world. One of our slogan in the marketing, of course, we don't have English, but we want to say, we will bring the best to Kunming and bring the best of Kunming to the world. That is something we would love Hang Lung can do in Kunming.
We just started to rent. Sorry. We just started to rent in the office tower. Let me make a general statement. Outside of Beijing, Shanghai, the rents will not be exorbitantly high. I wish it were, but it never was meant to be. The most important is really something that you mentioned, and that is the quality of the tenant. We just started to rent the office in Kunming just very recently, so we are only, I don't know, 8%, 10% or whatever leased right now. You look at the case with Center 66 in Wuxi and Forum 66 in Shenyang. Number one, we are the highest rent in the city. Number two, we have the best tenant. Bank of China, Canon, and Siemens, UBS and many of your names are in our place.
I don't want to mention too many because the best of you all are in our place. So, it's the quality that is important. Sometimes, when we first opened Center 66, the office tower, it was really at a very tough time. Remember between 2012 and 2017, the whole market was really bad, right? We just lease it, but knowing well that some of these tenants are not the long-term tenants. So we have been changing tenants now that the summer is here. We are really trading up the quality of the tenant. In the interim, you may have a little bit of vacancy, but it's okay. Both of those are about 90% leased today. Our belief when we first started this journey in the late 2000s is that even in those tier two cities, there will always be room for class A office buildings.
In almost every city that we are in, and certainly in Shenyang, certainly in Wuxi, and certainly soon to be in Kunming. There's just no office tower that come close to our quality. When that is the case, you just cream off the best tenants. Frankly, rent is not that high. To these guys, pay another HKD 0.50, pay another HKD 1, so what if they get the most prestigious office tower. It become a virtuous circle where you have the best property and then the best tenants come, right? They will bring other top names into your tenant roster. So I think it's a very good business. It's not going to make me super wealthy. That helps the shopping center down there. Right. It's very stable and it's very easy to manage. Shopping centers are really tough to manage.
You have to be on the foot every day. The office tower, once you lease it, you're basically home free for the next two years. Just make sure that they're happy. We know how to do that.
Thank you. It concludes the presentation today. Thank you very much for joining. Thank you.