Those who are asking go for coffee. All right? Okay, good afternoon, and Welcome to Hang Lung Group and Hang Lung Properties 2017 interim results and presentation. It's my pleasure to introduce to you the speakers today. Chairman, Mr. Ronnie Chan; Chief Executive Officer, Mr. Philip Chen; Chief Financial Officer, H.C. Ho; and Executive Director, Mr. Adriel Chan. I give the floor to Mr. Ronnie Chan. Ronnie?
Thank you. I was in the U.S. recently and met a friend who is an investor in this company, who also teaches business at Syracuse University. He reminded me, he said, "Did you remember your interview at The Wall Street Journal in 2011?" I have no idea. He dug it up for me. It turned out that in 2011, that was the first time, perhaps, I said that the Chinese economy is slowing, and that I feel a little chilly. That was the first time. By June of 2012, I wrote in the chairman's letter to shareholders about the same. In the Chinese press, they call it [Non-English content]. What do you call it in English? Severe winter. Yeah. The severe winter is here.
A year ago, I began to say that, well, as the Chinese say, the duck in the water is the first to feel the spring when the water temperature begin to rise. A year ago, I said that I feel a little bit of something. Six months ago, I said, "I'm more certain, but I'm still not 100% sure." I think this time, a year later, I am more assured than ever that perhaps winter is over. That which was hurt the most during the winter was the luxury sector, luxury goods. We had a triple whammy. China was down and out as far as investors are concerned. The economy wasn't doing particularly great. Consumption was weak, and luxury consumption was really, really weak because of the anti-corruption and anti-opulence and so forth. So we got really hit on all sides.
Of course, we don't care because financially, we have basically zero debt, so we are fine. I think that after six years, from 2001, when I had that Wall Street article, until now, exactly six years. This is, by the way, the longest winter I've seen in the last 30, 40 years of economic opening. The last time was perhaps 1989, but by 1994, maybe, it was already warming up. That was only four, five years. Of course, the government did a lot to try to revive the economy that time. This time, amazingly, I would characterize it this way. Number one, it's not politically instigated, unlike 1989. It is policy related because of the anti-corruption, but it's not really political trouble that caused the economic downturn. This time it was really just economic policy had a problem. Just too much money for too long.
Then the anti-corruption. All these are policy-related causes of the economic downturn. The government apparently did not too much to try to resolve it. A little bit. They forced companies to shut down facilities. They forced them to bring down inventory. All those are really very reasonable government policy actions. Nonetheless, the winter did last six years, which is perhaps the longest downturn since 1979, when the economic reform started. I think it's a lot of very interesting phenomenon to this winter. I am happy to say that we do sense that the spring is coming back. But as Philip reminded the journalists an hour ago [Non-English content] . The official beginning of spring. Spring. The official beginning of spring. It doesn't mean that the summer is already here. What it means is that the winter is over.
That's, I think, very apt description of where we are today. But nonetheless, the luxury sector, which was hit the hardest, is the one that is recovering the most. Our tenants in Plaza 66, if you are only rising in sales by 15%, you're really underperformer. The best that I've seen from numbers that Philip provides me, it's 50-some percent year-on-year growth. So on average, 20%, 30%. Even our rent increase in Plaza 66 was 23% this time, and the tenant sales was 29% rise. So it seems to me to be for real, but as we all know, usually these kind of recovery are tier one city-led. Eventually, it will get to the tier two cities, but we just haven't seen it that obvious in tier two cities. But I suspect that it should be coming.
That said, I don't want you to immediately jump to the conclusion that our rent will leap by leaps and bounds. It won't. The reason is the following. The last couple of years, actually, we probably have suffered the least compared to our peers. That means our base is already quite high. So, I think that one should be cautioned not to jump to the conclusion that our rent increase will immediately rise significantly. Especially because tier two cities are still just beginning to recover. On the tier two cities, you have been told by me the last two years that Palace 66 is really the hero, have been doing very well. The two big problems were Forum 66 in Shenyang and Center 66 in Wuxi. I am happy to say that I think Wuxi is now we see turning the corner. Forum is still challenges.
But I think Wuxi, Adriel has been telling this to me for the last year. I just don't quite, haven't sink in. So I said, "Well, next week, let's go take a look myself." But anyway, I believe my colleagues are correct that even Wuxi Center 66 is, perhaps the worst is over. If Philip, Adriel, you disagree, please tell everyone later. Parc 66 is still okay. Some of the things, the numbers may not reflect everything. The numbers are quantitative, which is important, but a lot of qualitative things are not seen in the numbers. Sometimes the numbers, how come occupancy dropped? It has been rising for three years, four years. Why is it dropping now? Well, it just so happened that one tenant, which is a big user of space, in a very undesirable location in the shopping center, just moved out.
That one incident will affect the occupancy. But it doesn't mean that things are turning to the worst. No, actually, it is still, I think, moving in the right direction to recovery. Really, the ones that are struggling is Forum 66, that we still have to fix. But I'm happy to say that Parc is okay. Center is okay. Of course, Olympia 66 is too new. The numbers are also. Again, numbers is just nothing but numbers. Important, but not everything. For example, 13% of the shopping space has never been opened. It's phase two. So, in the case of Center 66, you say, "Hey, the occupancy is not that good.
It's only 80 something, 84%." But what is not in the number is that 9% of the space have been taken out of function because of the building of Office Tower 2, which required that space in the shopping center for the construction purpose. That's out of the market, actually. If you take that as rented, then the number is not, from my memory, not 84, but 93. I just caution everyone for don't be fooled by just the numbers. Talk to us, and we will give you more color on really what's behind. I just want to give you a descriptive narrative of how we see our portfolio. Tianjin is okay. Tianjin, I think the management team has taken a lot of actions to address issues. You may see a temporary fall in rent, but that is really for a very strategic reason.
Again, the same point. Numbers is just one of the measures you should use. Let us know, and we'll tell you what is the qualitative story behind it. Hong Kong retail, I think perhaps it is at the stage of Mainland China of a year ago. A year ago, I told everyone that we think Mainland retail, in particular high-end retail, may be warming up. I think there are some signs of that in Hong Kong. That said, a lot of numbers that reflects happenings of the past 12 months are just coming out. For example, you will hear many of our peers saying that they have to lower rent anywhere from 15%-30%, right? You say, "Hey, what you say, Ronnie, is not congruent with what I read.
What I read is cutting rent by 15%-30%." Well, that is really a result of the weakness of the market of the past few years. It's just a reflection of reality. Whereas what I'm telling you is perhaps, it's more our experience in the front line, touching, feeling the market. That said, again, I offer a note of caution in that the last couple of years, whereas Hong Kong retail has not performed well at all across the board, especially street front shops, as we all know. We had done, frankly, very good, given that tough economic condition. We were growing at 8%, 9%, 10%, in spite of the tough market. That's because of the good work that Philip has led in a lot of asset enhancement initiative since 2011. We really avoided the down market, so to speak, in Hong Kong.
That's good. The bad thing is that we were able to raise rents when everybody else was slashing rent. We raised rent because of the AEI that we did, which also mean that our base is now a lot higher. You said, "Hey, how come, Ronnie Chan, that you say the market is recovering, but it's not reflecting in your numbers? Your numbers are not rising by the same magnitude as your optimism." Well, that's because we have been doing very well, growing at 7%, 8%, 9%, 10% per annum in retail rents in the last couple of years of very, very difficult market. So don't say that Hong Kong is underperforming now, because the market is recovering and your numbers are not reflecting. It's for good reason, although it is a little counterintuitive.
These are the kind of things that it's no sense explaining to the journalists too much. They won't understand. They don't care. They just want a soundbite. But you guys are the experts, and you guys care for the real situation. So I'm happy. I always enjoy this meeting. I never enjoy the meeting with the press. It's just something that you have to do. I assume that in the future, I don't have to attend those kind of crap.
You said that on record already.
On record. Yeah. Anyway, it's okay. I think this is a much better forum to really drill down into some serious business. I think that's what I'll say. Another point is, offices are really doing quite well everywhere, including in the mainland of China. In fact, the reason we did office originally was because in the mainland of China, was because we have to do it. The government made us do it. And we know that we don't mind doing it. It helps our shopping center. And as long as we become the best office tower in the city, there's always room for a couple of blocks in each of these cities that we're engaged in that is truly class A offices. And that's exactly come to pass.
That's exactly what happened, both in Center 66. Well, first of all, in Shanghai, of course, but Shanghai is full of other. Everybody else is building good offices, but in Wuxi and in Shenyang, we are creaming the best tenant. Our tenants reads like who's who in top Chinese business and top international business. They are all our tenants. Again, you say, "Hey, occupancy hasn't gone up." Well, because a lot of those P2P tenants of ours in the last couple of years, they have been replaced by the government. In some cases, the government kicked them out. I mean, not kicked them out. The government barred them from doing business in certain places. There was this one case in Shanghai. Anyway, you may say, "Hey, I don't see it reflected in the number of occupancy." Right?
Well, that's just because, how come you tread water? That's because we had to kick out some of those P2P, and they are replaced by people like, I don't know, ABB and UBS. UBS is here. Anyway, UBS and PricewaterhouseCoopers or whoever. The likes of those kind of names. China Life Insurance Company and Bank of China. Really good names. I think we have grown to like offices.
I think it's an asset class, as long as you can dominate in a good market, such as what we are beginning to do in Center 66 in Wuxi and in Forum in Shenyang, then it's not a bad thing. The return obviously is not as lucrative as high-end malls, but neither does it require so much effort and time to manage them, and it's pretty steady stuff. You are a lot more defensive in those places, in offices than shops. I think that's another thing that I should mention. Finally, we sold out on The HarbourSide. We should celebrate. First time we start selling was in 2003.
Four.
2004? 2004, right. So it takes 13 years. Somebody told me, I don't know if it's true, but anyway, somebody told me that that may be Hong Kong's most profitable single real estate project ever by anybody. I think the gross profit was something like HKD 17 billion-HKD 18 billion, which is not bad. So we sold out, and The Long Beach is almost sold out. We only have 35 units left. With luck, we will get rid of them pretty soon. In which case, that brings me to the last point. I know that some of you have been hallucinating about raising dividend. I know that a lot of companies will listen to you guys. I suppose the Hang Lung mind is just a little bit too independent. It's not that we don't listen to you guys. As you all know, many of you are old friend of mine.
You know that we do listen to you guys, and we do take advice from you guys. But there are times that, if we don't think it's to the best interest, we won't do it. I am really two-minded about the 2015 or 2014, 2015, one penny drop. 2015, I'm really two-minded about it. That wasn't management's recommendation, but the non-exec directors all felt that we should send a signal. Man, we got clobbered by you guys. But it's okay. It's a responsible way to do things as far as I'm concerned, from management's perspective. But we have to balance shareholders' desire. Not shareholder interest, because shareholder's interest is management's interest in this case. But at least your desire to see higher dividend. Our dividend yield is not bad. What, 3.75% or something like that. So, it's decent.
But this morning, H.C. presented a paper to the board, which I thought was very interesting, and that is in the last 20 years, our shares outstanding has grown by 80%. We grew from 2.5 billion shares to now 4.5 billion shares. And so even if we don't increase dividend per share, dividend grew by 80%, total dividend paid out. Not to mention that in the 2000s, we did raise dividend a lot, in those years. Because we knew that there's a lot of residential apartments in Hong Kong that will be sold at a very good price, so we don't mind paying 100%+ of our recurrent income.
And you look back, almost half of the years in the 2000s, we paid over 100% of our rental income. But on the other hand, as the sales of apartments wind down, we still only have 18 units plus the 350. Sorry, 35 in The Long Beach and 16 units in Blue Pool Road. That's still worth, I don't know, HKD 5 billion or whatever it is. But nonetheless, we have to take that into consideration before we raise any dividend. So anything else, Philip?
I think it's been very comprehensive. You did say you want to add color to the figures. I think you did. No, I think there's very little I can add except to say it is absolutely true. You can't tell the whole story from the figures. In some cases where you see there's a slight change in the occupancy rate, for example, some of that is actually deliberate because we want to get the better tenants who replace those who are not very desirable.
And that's in one of a few big malls in China, we're doing that. And also, looking at the growth figures, which Ronnie mentioned, in Shanghai, for example, now obviously, I must admit that a little part of it might be due to the Renminbi weakness, so that people will actually shop less overseas and probably shop more in China. I can't really quantify that, and I don't think it's going to be the only substantial reason for the growth. Obviously, there's also a consolidation effect whereby if you had 10 shops of the same brand and they close a few, then obviously sales will be more concentrated onto the remaining lot.
I don't think that is also the only reason why sales have gone up. In fact, talking to the tenants, talking to the brands, many of them are still very keen to get more space in, say, Plaza 66. So I find that to me is the major criterion in what the demand would be like. It's absolutely true, as Ronnie Chan said, Shanghai probably is a good barometer of things to come. You don't expect the order to change at this point in time. The first day of spring is still pretty cold, I would say. But you know it will get warmer.
Okay. We welcome any questions from the floor. Let us know your name and the name of the organization. CLSA.
Good morning. For the colors. Actually, there are some numbers where just the numbers can't really explain what's going on. So would appreciate if you give more colors there. First thing is that in Grand Gateway, you said that retail sales dropped 5% year-on-year. So is that apple to apple, i.e., is that just a non-closed floor space comparison? Also secondly, in Plaza 66, your occupancy has gone from 93% December last year down to 89% by June. Again, is that apple to apple comparison? Then 29% retail sales growth, is that apple to apple? Again, thanks.
Sorry, I was trying to check the figures. I just got the first question of Grand Gateway. I believe it is not apple to apple.
It is not.
It is actually because of the fact that we have closed about nearly 20% of the entire mall for renovation. As I said, we are more or less completing the renovation in Plaza 66, and the results are already very obvious. The uplift was very welcome and very productive, I would say. The work on Grand Gateway has just started, and the whole annex building is now closed, and that is about 19% of the entire area. So the 5% drop is actually much less than the area closed for the time being.
Also the RMB.
Sorry. If we excluded the 19% area closed on a like-to-like basis, the retail sales of Grand Gateway actually went up by 7%.
For the rental income for Grand Gateway, if like-with-like comparison, net off of the renovated area, actually + 9% for Grand Gateway. If included, - 7, okay? That was quite an effect because of renovation. At the moment, we have about 19%, one nine percent, of the space offline at the moment.
It will be higher. As the refurbishment program proceeds, it will go up to 30.
Just to give you an idea, the entire area that will be affected by Grand Gateway's renovation will be close to 30% at the peak.
Hi. Thanks, managers. I got three questions. First, on Plaza 66. I remember when we were visiting the mall earlier this year, the occupancy was actually above 90%, and as I see in the numbers, it is now 89%. Is it just a timing issue, or there has been some changes in the tenant or commitments? My second question is on the office market in Shanghai. I have noticed that the occupancy of the office has dropped. Have these spaces been backfilled? My final question is actually related to Hong Kong. In the statement, the management mentioned that you are closely monitoring the residential market in Hong Kong, and backed by the financial strength, you might build further or land bank when opportunities arise. Are you looking to buy in Hong Kong? Thanks.
Okay, your first question about the mall occupancy rate. There is a restaurant, Tim's Kitchen, I think it is called.
Yeah
that has moved out. That has obviously affected a little percentage of it.
Or asked to be moved out.
Yeah. Well, I'm trying to be polite.
I'm not polite.
Yes. There will be a little bit more space coming on stream because the last bits of renovation will produce some very beautiful and appealing space. If you look at it by closer to the end of the year, I think you'll see a very, slightly increased figure there, too. A similar situation happened in the office tower. There is a P2P institution, shall I say, that has been kicked out, not entirely by us, by the authorities, I would say. They occupy quite a bit of space. I think it's up to six floors there. They have been basically barred from doing business. We're now looking for a new tenant. I'm not worried about filling up that building at all. There's also a slight impact on KPMG moving from one tower to the other, but that's basically a transitional issue, not a problem at all.
Somehow, the numbers this time has a lot of anomalies in there. I gave you a couple of examples. You guys pick out others. Turn out the answer really has a very legitimate and clear reason behind it, which is for the long-term good of the company.
Maybe a quick comment on Hong Kong. You may have noticed over the past half year and actually starting from late 2015, we have been putting in bids from time to time on plots that we thought would be very good plots. Unfortunately, we did not win anything because we have a very solid foundation for the way we calculate what price we are going to put in. We will continue to do that if we find plots that we find appropriate, but only at a price that we also think is appropriate. It depends on the market.
In this regard, would you like to talk about the redevelopment program in RMB? AIC, yeah.
In the Mai Hong Industrial Building in Kwun Tong, we have now increased our stake to above 84%. We have the intention to redevelop the site in due course, and we will continue to buy the remaining owners.
We originally held about 73% of that project. Now it is up over 84%. Justin?
Which then also affected the way that property was reevaluated by the valuer, and hence it bumps up the valuation because of change of use.
Thanks. Justin Kwok with Goldman. Perhaps two questions. The first was actually follow on the discussion of H.C.'s spot paper on dividend. If you have a discussion on flat DPS and then more share count, when you reconsider use of cash, will you be considering lowering the share count?
What?
More buyback.
Oh.
in a way, when you use the cash.
You guys are so predictable.
Yeah. Well, actually, the second question from your statement, in a way that you mentioned that you're bringing new trades to the shopping center and also bring more Food & Beverage to high floors of shopping mall. I just want to get a sense on what you're actually seeing, what you're doing. Would that, at the end, be high occupancy but lower average rent to your shopping mall eventually? Or what do you think is actually complementary, or is it okay to kind of safeguard the aggregate revenue in a way? Thanks.
Well, I'll answer the first one. I'll let somebody else answer the second one. Same answer as before, we have no intention to buy back our shares. Hang Lung Group has been buying back Hang Lung Properties shares. Now we're at, what, 56?
55.
55-point some. That's fine. If you guys don't want it, give H.C. a call. We'd love to buy back our own shares, but just not with P buying P, but G buying P.
Maybe-
Go ahead, please.
On new trades, one thing that we have seen is Macro first, we have not significantly increased the amount of F&B in our malls. Actually, in most of our malls, it's quite stable. For example, in Grand Gateway, I think we're around 22%. That hasn't changed in years, nor have we felt the pressure or need to. More or less the same goes in other malls. I think the maximum that we have is a tick under 30%, which is very reasonable, especially considering some of these guys out there who are over 50% F&B. Another observation is that, for F&B, we have seen them being able to accept higher and higher rents.
F&B rents have been going up. I'm kind of going out on a limb here. It seems to be systemic the way that people are consuming in China. They are more and more willing to pay for quality F&B and experiences. For example, in Tianjin, we're adding a cinema and also in Wuxi. This is an example of us increasing the types of trade. If you look at the average ticket prices, those are also going up. We're comfortable with the amount of services and F&B that we have.
Isn't that the cinema Adriel mentioned for Tianjin is actually replacing a food court. It's not really replacing valuable rental space. At the end of the day, I think my criterion of judging a leasing team is a vision to have the right tenant mix and to materialize that vision. I just do not want a lot of footfall with no revenue. The line I've always been using is, "Don't give me the show, I want the dough."
Here is a question from webcast. So much been talking about the future of retail and department store amid the rise of Amazon or online shopping and things like that. Any views on this and how it might affect Hang Lung's future expansions strategy?
Everyone has noticed by now that Amazon are buying space or renting space in the real world, so tangible physical retail space. Alibaba has done the same. They bought, is it Intime or is it Intime? I think the online players have realized that in order to grow their pie any larger, they need to go offline. Whether or not 22% or roughly 20% of household spending is parity for online to offline, 20% to 80% in China, or whether or not 10% to 90% is that golden ratio in the U.S. is totally up for grabs. But at the end of the day, these online players are looking offline. They realize that there is a lot of value in offline retail. That's where we excel. That's where we think that we do better than them.
We'll continue to do that, and especially the high quality, high value retail in the cities that we are in. In terms of affecting our expansion, maybe, I don't know if Ronnie Chan and Philip Chen want to pitch in. We're still looking. We're still very bullish on China. If there is a good plot of land in a good city, we'd be happy to invest, and we don't see the Alibabas or the Amazons of the world affecting those decisions yet.
Any other questions, Nicole?
Thank you. Back to Plaza 66. In the announcement, you have 29% sales growth there. If we strip out the return of the basement, which took something like 15% plus of space, does it mean that like-on-like sales growth was more like 15% or more? Number one. Number two is, I think you are putting some of your Hong Kong New Territories shopping malls onto the market. How strongly do you feel this is the right market to sell those?
Which territory?
Is it Tsuen Wan or
All. It is on the market.
Yeah. Thirdly, is that some of the numbers that cannot really explain itself. Palace 66, your occupancy went from 89% up to 93%, then down to 88%. What explains that rollercoaster thing? Thank you.
Sorry, did you say Palace or
Palace.
Palace. Please repeat. I think you sort of Palace at Hong Kong and Palace. Why not talk about the Hong Kong disposal? There has been something about the Hong Kong disposal. There are actually a question about here. At what yield you would consider to sell some of your assets in Hong Kong?
It really depends on the type of assets and its locations, really. For example, the yield that we would consider acceptable for industrial building in a pretty fringe area compared to the yield that we requested for a regional mall would be quite different.
As regarding the retail sales for Plaza 66 Mall, actually year-on-year, the growth was at 29%. Actually, the basement was offline for about nine months. If we strip that out, it would be still about 20% up, same period of time. The rental was up about 23% throughout the year, year-over-year.
If I remember correctly, I think on Palace, I think it's exactly what Ronnie Chan said. There was a large tenant sort of in a far corner, which vacated, and I think that's what caused sort of the blips in the occupancy.
Just one lease.
In and out.
In and out.
It is normal in and out.
No big deal.
That is all? Not quite, huh? Eugene, yeah.
Yang from UBS. I have a very general question. If we look at the operation of the mall in the tier two cities, overall it was not doing well. Except the general weak retail environment, what are any other factors that, like internal operations, that company can do better to make it perform better? Are we better positioned to benefit from the retail market recovery? Thank you.
If I remember correctly, only Wuxi and Forum are down, right, in the Mainland out of the tier two cities. So, two out of four. Is that right? Because we have Wuxi, Tianjin. Sorry, Tianjin and Parc. Actually, one thing that Ronnie Chan mentioned earlier is that Wuxi, we think, has turned a corner. Right now, what we're seeing, I think is more of an interim transitionary period. But I have full confidence in that mall and in that city. We've brought in LOEWE. We've brought in a couple of new tenants, and it's actually the first floor. Luxury sales are quite robust. So I'm very confident about Wuxi. In Forum, as Ronnie Chan mentioned also in his earlier introduction, it has proven challenging. We brought in a new general manager in February.
I think we're giving her some leeway to do what she needs to do in Forum, and I think that she's the best GM that we've had. I know I spoke with some of you earlier this year, and I spent nine days on the ground there. What you see in the streets and in the malls and the shopping centers is a little bit different from what you hear, what you read in the magazines. Everyone's talking about Dongbei negative growth and how everyone is down and out. But I think high street has not quite felt it the same way. The people you talk to, you go to the restaurants, they're still full. People are eating out. People are consuming. Somehow, the government has managed to stop that, draw a firewall between sort of the industry and the consumers.
You mentioned that there are what lesson we learned, huh? What are the causes for the difficult time in the tier two cities. Some of those problems are fixable. Other problems are more difficult to fix. The ones that are fixable, we are fixing. The ones who are less able to be fixed, we are finding ways to not mitigate, but at least minimize the problem. I'll set you one example in each of the two categories. The fixable ones is that because we grew so fast, our management team just couldn't catch up. Frankly, in some of those shopping centers, we have to change general manager two times in the last, what? five, six years. The reason is because they are all new to the company.
We only had Shanghai. How many back benches do you have for general managers? Mind you, each of these general managers are really managing a small business of a couple hundred million RMB every year. I suppose for a lot of people, that's not that small of a business, that we have a revenue of, say, CNY 300 million, CNY 400 million a year. We just have to keep training up and hiring managers. I think that with each hire, hopefully we do better because we know what doesn't work. We learn from previous mistakes. Those are problem that is fixable. Just like Adriel mentioned, we have this new General Manager at Forum 66. We are supporting her to the animals. Adriel spent nine days there personally just to show support and leadership. That's fixable.
The one that is less fixable are some of the hardware problems. When it was designed, when it was built, and when it was laid out. We have issues of that sort as well. Those are harder to fix. You have to find more creative ways to manage, not to fix, those problems. What are they? You never hear it from me. We just know it ourselves, suffer it, and address it. Hopefully, we get smarter as we go on so that we don't make the same mistake twice.
Joyce.
Thank you. This is Joyce Kwock from Nomura. Just want to have a question on your general attitude on land purchase in China, specifically in China, to build another Landmark 66 project. Okay. Because on one hand, there are signs of recovery in retail. On the other hand, you still got quite a lot to build, all the way, say, till 2024 or whatever. You still got like 36 billion of outstanding CAPEX. I personally think that you guys can have enough growth drivers just by building and developing and optimizing your existing land bank. What's your view? Have you spotted any interesting land bank in China?
I have one question for you. You're the only one that spell your last name that way. How did it come about?
Yeah.
Your family spells it in an unusual way.
My father got it wrong, so I inherited it.
Yeah. Must be. Anyway, I just got a note from some of my staff just now, that they want me to go see the leader of a city that I've met before. These kind of purchases, the way we do it, at least. The way other people did it, was easy. You just throw money at it and then buy crap or whatever, right? The way we buy it, just a lot more difficult. We brought it upon ourselves. We have no one to blame but ourselves. As far as we're concerned, that is the only way to buy. If you want to be in the high-end commercial field, that's the only way to buy. So, just very frustrating. So my staff want me to go see the party secretary again. There's a reason for that. We're just pressing ahead.
We won't tell you where we're going. We won't tell you where we're looking. We're looking a lot of places. Frankly, some of the pieces that you probably read about in the newspaper, all have been through our hands. In fact, some of those properties, if we had wanted, it would have been ours, and in fact, at a lower price than what you see in the newspaper these days. Because we just don't see those as high enough in our echelon of desirability, we just rather restraint from acting. To buy is easy. To buy well is difficult. Well is not just dollar, how cheap it is, but really how good the piece is. So we are pressing ahead. I just don't know when we'll win another one. History show that we buy one piece every 24 months, maybe, since 2004, 2005.
And well, if I can succeed to buy one piece every two years, I am a happy man. These are pretty sizable projects. As long as we buy right, our future is assured. This morning at the board meeting, again, we were talking about how a non-executive director expressed the view that the downside of this company is very slim. The way that we can get into trouble is very slim. Rather, the upside is very lucrative.
Which I agree with him wholeheartedly. I know that you guys are investors, so you have time limits. You calculate by IRR, all that stuff, which is just the nature of your business. That is not the nature of our business, necessarily. We do care for that, but timing is not the most important thing for us. We just have to be very deliberate and very persistent, stick to our guns, stick to the principles, and execute it, hopefully more flawlessly than before.
Philip, would you like to talk about the GFA uplift in 2019?
Well, as you said, George, I think we have purchased a few good pieces of land, and we still have a lot of land to be built on. At the moment, as you know, we are putting Wuhan, Kunming, all that. If you look at the schedule, we would be finishing all that by 2019 for Kunming, followed by Wuhan, probably end of the year for Wuhan. Around the same time, around the same year, we would open the Conrad Hotel in Shenyang, together with six extra floors for rent at the top quality building in our office tower in Shenyang. Around that time, I think, depending on how successfully you push the team to speed up, we will finish the Wuxi office tower, too.
So that would be a good addition to the Wuxi property. So that is around the same time. In 2019, we should also see, closer to the second half of the year, the completion of the renovation of the Peak Galleria. That's a very small project compared to all the four projects I have mentioned, especially compared to Kunming and Wuhan. That would be a bumper year.
Peak Galleria?
Peak Galleria, yeah. I mean, that's 2019, too.
Oh, sorry. Yeah.
Yeah, that's-
Grand Gateway.
Did I not say Grand Gateway?
I thought you said one of the two. I forgot which one. Both of them.
Yeah. Grand Gateway, we also back to full operation by then. It will be actually a bumper year. It will be very good year by 2019. Obviously, when you finish and open, the HKD won't keep pouring in immediately. You will actually see the growth and the trajectory in due course, but that will be another, I think, good milestone for Hang Lung.
Okay, a question from Singapore. Retail sales of your ex-Shanghai malls all up. When do you think that that will translate into a higher rental revenue, given that the retail sales all up in the last six months or so?
Well, Plaza 66 already had quite a bit of growth, right? 23% already in the last period.
Yes. They are asking about the non-Shanghai malls.
Non-Shanghai. Oh. It will take a bit of time. As you know, we have actually reviewed our rental contracts very prudently in the last few years. So now they are actually much more well-staggered and much more rationally timed and phased between. So if you take an average, obviously some trades like cinemas, you have a much longer lease. Some have much shorter leases, some shops. But if you take an average, we say about 25%-30% of our leases are due every year. So I think once you have that, then you should see a gradual bump up on the rental. Yeah.
Okay. Question over there.
Thank you. It's David from Macquarie. Three questions. One, along the line of the China rental margin. It has been stable at 65%. But we all know that Shanghai has a very high margin for a long time, kind of implying for recently more even like not making much margin at the operating level for the other shopping malls outside Shanghai. If revenue, that takes time to ramp up. Any thoughts about controlling the cost? We do see that the staffing level for your China assets is much higher per asset than your peers. Anything that we can do to improve the China operating margin? That is the first question. Second one on Hong Kong, kind of smaller question. Car parks. You start to sell some car park at The Long Beach.
In the annual report, you did mention, I think like 390 in The Long Beach and like 400 something at AquaMarine, but we do not know how many of those are residential car parks sellable or whether some of these belong to the shopping mall. Any rough idea how many of the car parks are actually sellable? That is the second question. The third one is for Wuxi, a small site acquired. Can we consider that as a bonus site with not much incremental land cost that you can quickly develop and get some service apartment for sale and some cash inflow very near term? Thank you.
Oh, I see. Yeah.
Shall we talk about the car park sale, George?
Let's talk about The Long Beach car parks. We have more than 300 car park space at The Long Beach that can be sold. We have already sold 140. We are continuing the sales program over the next few weeks. The number of car parks that you quoted at AquaMarine, about 80% of those are residential car park space that can also be sold. I do not think we are in a hurry to sell the AquaMarine car parks yet because we still see the monthly rental of those car park space still have much room to go up further. Do you want to talk about the Wuxi site first, Adriel?
In Wuxi, you are very sharp. We did take possession of the second site, which we purchased at the same time, roughly. We are doing planning right now for what we will build on that site, which will, in all likelihood, as we have said all along, include a service apartment portion.
Cost control, Philip.
Yeah.
Margin.
Yeah. First of all, we have a very stringent cost control program in the company. We actually have a thick report of operating cost, which is on my desk every month. We have actually, since yesterday, recruited a very senior Executive Director who will take over the service delivery area, which includes the facility management, property services, customer service, and security, that sort of area, which is basically a cost center. He will have a very better system and better scrutiny of all the costs in there. Obviously, we don't want to just save cost. No company will be successful simply by saving cost. It is really something that we have to be clever in our cost. We have to really not affect the appeal to the customer. In fact, we have to enhance our appeal to the customer.
Now, that is a very interesting statement because when you think about our business nature, in a way, we have a very high fixed cost operation, right? God forbid, but you even have a mall of only 30% occupancy, let's say. Once you open your doors, even if there are no tenants, no customers, nobody walking in, you still have to pay for the electricity bills, the air con bills, the heating bills, and your staff walking around, and the cleaning bills, et cetera. That is the fixed cost. Unlike running an airline or a taxi company, you can just stop operation. But if you do a mall, you just cannot do that, right? Once that line is passed or your revenue exceeds that line, it's all cream. I've been actually insisting that we should push the top-line revenue.
That's important because once you pass that line, the higher you go, the better profit you make, right? The more flexibility you have. That has been the strategy. As you can see, during the difficult times in the last few years, we have been actually doing pretty well, whilst keeping a very stable operating cost. In fact, increasing efficiency there. We've actually improved our margin in many cases. But the challenge obviously is there's a minimum. You have to turn on the lights and turn on the air con.
Thank you, Philip. We still have time to get two last questions. Adriel?
What's really nice about that actually is we issue a sustainability report, which we're about to issue our I think it's our Is it our fifth now or our fourth?
The fourth.
Fourth standalone. Thank you. A lot of these savings actually also flow through to the sustainability report. Less electricity, less water, and things like that. In that respect, it's a very nice bonus.
Okay. Two last questions.
I have a question on the Dalian project. If we look at the numbers, the mall is 50% higher than Tianjin, but the rent is 40% lower. My question is-
50% higher what?
By the size, GFA.
Oh, oh. Okay.
Yeah. The rent is 40% lower. So what is going on in the Dalian project? What is the challenge there? What action we are taking to address the issue, and when we can see the turnaround of the project?
Well, the Dalian mall is actually not 50% bigger than Tianjin, in actual sense, because de facto, at least 13% of the mall actually is not yet open. We want to keep a portion of it closed, because we do not want to fill it by some fast food joint or fried chicken joint. Otherwise, you ruin the positioning of the mall. So in view of the situation in Dalian and the supply and demand situation, we thought it would be better to do that. So we actually closed a large part of the first floor, for example.
Now you can appreciate the lower floors actually account for better revenue opportunities. So it is not a straight comparison against the two cities, which is, I think is not a sound comparison anyway. The fact that Dalian has got this special condition, I think, you should be aware of that. What are we trying to do? We are actually doing a lot of things in Dalian. It officially opened September.
Last year.
Yeah. We are actually strengthening the management team. We actually have got pretty good sales manager in there now. It is the leasing manager, who is new. We are talking to a lot of brands and see what we can do to actually enhance the tenant mix in Dalian at this point in time. It will not be a short haul. It still takes a bit of time, given the size or the volume of the mall. It is 220 something thousand square meter. It is quite sizable.
Okay, the final question over there.
I have two questions. The first one is what is your property sales schedule for Blue Pool Road and The Long Beach for the second half year and next year? Also you mentioned that there is some possibility that you will sell some residential in China. Is that put on the schedule already? The second question is that your CapEx each year is still HKD 5 billion? If it is true, then what is your expectation for the net debt to equity ratio? Because it is currently very low at 1%. Will it increase because you have a dividend like HKD 3 billion to pay out each year and underlying earnings are around HKD 6 billion. So will that increase? Thank you.
Long Beach and Blue Pool Road are two very different products. For Long Beach, we have published the price list. Everyone can see it on the website. Those are actually sort of on sale at the moment. Blue Pool Road, we have to adopt a different sales strategy. When we come across the right terms, the right price, then we do not mind the sale. Your next question is on-
I always tell my colleagues, "Do not be too greedy." Our profit margin is something-
50% on that
It is pretty good.
Here is to the sale.
So.
Thanks, again. On CapEx, over the next five years also, the annual average is about HKD 5 billion. I mean, it could be lower at four-something or six-something. But on average, say it is about HKD 5 billion, if we continue to build out the existing land bank. I think you are right that at this pace of our capital expenditure program, the projected net debt gearing by the end of the year five could be as high as something like 20%. This is not the first time we say that. We say that all along. We just continue to use up our existing cash to pay for the construction program. So there is a good reason why we sit on the amount of cash. In case there is land banking or land acquisition opportunities, we got heaps of financial resources to do that. So that is the projected situations.
Okay, this concludes the presentation today. Thank you very much for joining. Thank you.