Evening, ladies and gentlemen. Thank you very much for joining us to the Sun Hung Kai Properties FY 2017 interim result analyst briefing. I am so glad to see so many old friends and some new faces here today. Thank you very much for your ongoing support. Seeing we have met here when we announced annual results in the last September, many unexpected events have happened and created a lot of uncertainties. However, I am pleased to tell you that Sun Hung Kai Properties continues to perform well despite all these uncertainties. As usual, in the next 20 - 25 minutes, I will walk you through the key financial numbers about the results and business update, followed by how we see the markets and our business prospect. Now, let us kickstart my presentation.
First of all, before diving into the details of the financial performance, let me bring up several key messages which underpin our performance and future growth. The first key message is that we have achieved very strong contract sales in first half of this financial year, and we also have abundant sellable resources in the coming months. We have sufficient land bank to satisfy our development need for the next five years, and we also have different sources of land banking. Besides, we plan to achieve high production volume of over 3 million square feet of residential GFA per annum in Hong Kong. In addition, we have a steadily growing and sizable rental income stream, which is driven by a well-diversified rental portfolio and well-planned new additions. On top of this, our strong balance sheet and seasoned management team position us well to seize opportunities in the future.
Our long-term strategy remains intact. Last but not least, we intend to maintain a sustainable dividend going forward. With this, let me go through the key financial figures of the results. Please note that all figures are in Hong Kong dollars unless stated otherwise. Overall, we have a very strong first half of this financial year. For the six months ended December 31st, 2016, the group achieved underlying net profits of around HKD 14.6 billion, up around 57% year-on-year. The substantial increase was mainly driven by much higher development profits recognized in both Hong Kong and Mainland China. Underlying earnings per share increased by 56% to HKD 5.05, while the reported earning per share rose by around 40% to HKD 7.40. Dividend, in view of the group's performance, the Board of Directors has declared an interim dividend of HKD 1.10 per share, up 4.8% year-on-year.
This table gives the operating profit breakdown by our key earning drivers. For this period, property development profits increased significantly by 237% to over HKD 8.3 billion mainly due to much higher GFA booked in both Hong Kong and Mainland China. From geographical perspective, property developments profits from Hong Kong rose 294% to HKD 6.7 billion. Whereas in the Mainland China, development profits grew by 116% to HKD 1.6 billion. Our rental business continues to perform satisfactorily. We continue to see growth in our rental business with net rental income rising to around HKD 8.3 billion, up 4% year-on-year. Net rental income from Hong Kong and Mainland China amounted to HKD 6.7 billion and HKD 1.4 billion respectively. Both were above last year by around 4%. Despite the decline in tourism in Hong Kong, operating profits from the hotel business grew by 5.5% to over HKD 700 million.
In total, operating profits during the period increased to HKD 19.6 billion, 47% above last year. For the group's financial position, we continue to adhere strictly to the prudent financial management discipline and maintain very strong financial position. As at the end of 2016, net gearing ratios stay at a low level of 8.8%, while interest coverage was high as 15.5x . Now, let's move on to the performance of our key business lines. First is the property business in Hong Kong. As at the end of 2016, the group's land bank in Hong Kong were over 49 million square feet, comprising 29 million square feet of completed investment properties and around 20 million square feet of properties under development. Majority of the completed investment properties are shopping centers and offices, and 79% of the property under development, or around 16 million square feet of GFA, is residential for sale.
We believe it will be sufficient for the group's development need for the next five years. On land acquisitions in Hong Kong, a premium residential site of 434,000 sq ft of GFA in Sha Tin was acquired and will be developed into a luxury accommodation. We should continue to stick to prudent financial management discipline and seek opportunities for land acquisition through various channels, including farmland conversion. On top of the 20 million square feet of property under development, the group also holds more than 30 million square feet of agricultural land in terms of site area, and they are currently under various stages of land use conversion. Property business. Let me move on to the property development business in Hong Kong. Property sales in Hong Kong were very strong in this period. Revenue jumped more than 200% year-on-year to over HKD 19 billion.
This strong growth was mainly due to substantially more completion and a very good real market response to Grand YOHO Phase 1, which is virtually sold out. The overall development margin was also satisfactory. On property completion, close to 1 million square feet of residential GFA was completed in this period. Another 2.6 million square feet of residential GFA are due for completion in the second half of this financial year. Out of which, around half a million square feet has been pre-sold. On contract sales in Hong Kong, the group has achieved strong sales of over HKD 22.8 billion during the period under review, or around 70% of our full year sales targets of HKD 33 billion. In January, we launched Grand YOHO Phase 2, and the units on offer to date were virtually sold out.
Together with other property sales, an additional HKD 3 billion contract sales have been made since January this year. We are confident to meet the full year sales target given our abundant sellable resources and strong brand name. This table shows the upcoming launches in the next 10 months in Hong Kong. These projects are located in various parts of Hong Kong, offering a wide range of product, from luxury houses to premium apartments with different mix catering for the needs of different customer groups. Moving on to our rental business in Hong Kong. Gross rental income in Hong Kong continued to grow steadily to around HKD 8.6 billion, up over 4% year-on-year. By sector, gross rental income from our retail portfolio amounted to HKD 4.6 billion, up around 4% year-on-year and accounted for more than half of the total.
Gross rental income of our office portfolio was close to HKD 3 billion, up nearly 7% year-on-year and accounted for one-third of the total. Overall, our rental business continued to enjoy positive rental versions with high overall occupancies of about 95%. As you all know, our retail portfolio comprises a combination of premium and regional shopping malls located mainly along railway lines with a total GFA of about 11 million square feet. Thanks to our proactive approach in managing these shopping malls, we were able to grow retail rental amidst the soft retail markets in Hong Kong. Here are some pictures taken in our shopping malls during the Chinese New Year promotional events, and you can see that these events have successfully drawn much traffic and were well received by our shoppers.
With respect to assets enhancement initiatives, we are currently carrying out major renovation works in three of our shopping malls, namely New Town Plaza in Sha Tin, apm in Kwun Tong, and Metroplaza in Kwai Fong. Upon the completions of renovation works, we anticipate stronger traffic and higher sales. On new shopping mall addition, YOHO MALL in Yuen Long is certainly one that should not be missed because upon full completion, it will become the largest retail hub in Northwest New Territories. At present, both YOHO MALL I and II are open with high occupancy and have recorded satisfactory performance. As for the 450,000 sq ft YOHO MALL I Extension, which is highlighted in the map, we are on track to open it in the second half of this year. So far, the leasing response has been encouraging.
The 107,000 sq ft retail space at Yuen Long station development, which forms the last component of this mega mall, which is highlighted in yellow here. We are in the process of finalizing its development plan. In addition to YOHO MALL, there are also several new shopping malls to be opened in the next few years, including remaining phases of PopWalk in Tseung Kwan O, a premium mall at Lam Tin Station developments and Harbour North in North Point. Now let's turn to our premium office portfolio. Our 10 million square foot office portfolio continued to do well. Occupancy rates of our office buildings such as IFC, ICC, and Millennium City, stayed at a high level. Meanwhile, we are expanding presence in Kowloon East through the redevelopment project on 98 How Ming Street, Kwun Tong.
The project will be redeveloped into a 1.2 million square foot commercial property, and a footbridge is planned to link between the project and Millennium City 6. The project is expected to create much synergy with the existing Millennium City cluster upon completion. This completes my presentation on the property business in Hong Kong. Now, let's move on to our property business in Mainland China. As at the end of 2016, total land bank in Mainland China amounted to about 66 million square feet, comprising over 12 million square feet of completed investment properties and around 53 million square feet of properties under development. Majority of our completed investment properties are shopping centers and offices, whereas 61% of the total land bank under development is residential for sale.
For our property development in Mainland China, we also saw strong recognized property sales as in Hong Kong, with 113% year-on-year revenue growth. The strong sales were mainly from Shanghai Cullinan, The Woodland in Zhongshan, and two office towers in Guangzhou. On property completion, the group completed 4.6 million square feet of attributable GFA, of which 3.7 million square feet are residential and virtually sold out. Another 0.7 million square feet of attributable GFA are due for completion in the second half of the financial year, including the first phase of Shanghai Xujiahui Center project. Important to note is that over CNY 5.3 billion property sales are yet to be recognized. Contract sales in Mainland China was over CNY 5 billion, equivalent to over 80% of the full-year sales targets. In Hong Kong dollar terms, contract sales amounted to HKD 5.7 billion.
In the next 10 months, major residential projects to be launched include townhouses and luxury apartments at Shanghai Arch, Grand Waterfront Phase II in Dongguan, and The Arch Suites in Chengdu. Now, let me take you through our rental business in Mainland China. Gross rental income from Mainland China grew by 4.5% year-on-year to HKD 1.8 billion, accounting for 17% of the group's total gross rental income. In renminbi terms, gross rental income was CNY 1.6 billion, up around 12% year-on-year. In the next few slides, I will give you a quick update on the latest developments of our major investment properties on the Mainland. Let me start with the Shanghai portfolio first. The Shanghai IFC in Pudong, its two quality office towers are virtually fully leased with strong rental reversion. Its shopping malls also register robust rental reversions and respectable growth in tenant sales.
For Shanghai ICC in Puxi, One ICC recorded high occupancy and positive rental reversion, while Two ICC is expected to be nearly fully let by the end of this year. Its retail portions, iapm Mall, posted robust growth in both retail sales and traffic in the period. The recent opening of Podium Garden on Nanjing Road further enhanced customers' shopping experience. Going forward, we will further increase our presence in Shanghai with our wholly owned mega project, Xujiahui Center project, which is now called International Trade City, ITC. One ITC, the first phase of the development, has 170,000 sq ft of office space, which is expected to be completed and handed over to tenants in the first half of this year. The leasing of office is progressing well with potential tenants ranging from local enterprise to well-known multinationals.
The 340,000 sq ft shopping malls at One ITC is scheduled to be opened in 2018. The leasing has started with good responses. Phase II consists of 320,000 sq ft of office space and 43,000 sq ft of retail space. They are due for completion in FY 2018. Nanjing IFC, another major project in the pipeline, is supposed to be a new commercial icon in Nanjing core business area. This integrated development is situated atop an inter-train station of two metro lines in the Hexi business core. Pre-marketing for its 2 million square feet premium offices and 1.1 million square feet shopping mall has started. Entire project is expected to be completed in late 2019. In Guangzhou, Parc Central and igc were opened in 2016. Over 80% retail space have been leased. With tenants moving in, gradually we saw sales and traffic of both malls ramping up.
Next, I will go through the performance of our hotel operation. Hotel business in Hong Kong has been under pressure amid declining tourist number. The good news is that there are already signs of improvement in the tourism sector towards the end of 2016, and our hotels were able to sustain high occupancy. Besides, healthy growth in F&B business and more room available at Royal Garden, help offset decline in RevPAR. On the other hand, with increasing visitors arrivals in Shanghai, The Ritz-Carlton Shanghai, Pudong continued to deliver notable growth during the period under review. On new hotel additions, we will be adding two new hotels to our portfolio by the end of 2018. One is Hotel VIC in North Point, which is part of the group's developments on North Point waterfront, offering affordable luxury accommodation.
The other one is Premium Hotel in Sha Tin, which is a sister project of Royal Park Hotel. Before finishing my presentation, let me share with you how we see the markets and our business prospects. With respect to the residential market in Hong Kong, active primary market is expected to continue as home buyer confidence remains high. The leasing performance of Grade A office is likely to be varied by submarket. Sustained demand from Mainland China firms and limited supply in central will support rents in CBD. In Kowloon East, quality offices at prime location with good management and single ownership are expected to outperform. Retail sales are showing signs of stabilization. Performance of regional malls will be backed by resilient domestic consumptions. In Mainland China, residential market activity is likely to remain relatively slow in the short term amid restricted measures introduced recently.
That being said, the long-term outlook remain positive. We expect continued demand through those downturn for top-class office spaces in first-tier city, while premium malls at prime location in first-tier cities will continue to outperform. As for the business prospect for property development, we will leverage on abundant sellable resources and continue to offer a wide range of products and launch project for sales once ready. Satisfactory development margin is expected. As I have mentioned, we have sufficient land bank for next five years' development needs, and we are going to complete over 3 million square feet of residential floor area for sale per annum in Hong Kong over the next five years. While adhering to prudent financial management discipline, particularly in Hong Kong, through different channels, we continue to see opportunity for land acquisition, particularly in Hong Kong, through different channels, including the conversion of farmland.
On the prospects of our rental business, rental income is expected to grow steadily amid positive rental reversions and sustained high occupancies. We shall strengthen our rental portfolio with a strong pipeline of new growth drivers. In the next five to six years, we plan to complete 50 million square feet of attributable GFA, which is around 35% of our existing portfolio in terms of floor area. In addition, we will continue to review and monitor opportunities for non-core asset disposals. With our seasoned management team and other important attributes shown in this diagram, we are well positioned with strong fundamentals to create value for our shareholders and continue to move forward in the years ahead. This conclude my presentation. Thank you very much for your attention. And I think our senior management has already arrived.
Please join me welcome our senior management to come up on stage for the Q&A session. Thank you.
Before we continue, I would like to introduce the panel to you. From your left, Mr. Brian Sum, whom you have already met. Mr. Christopher Kwok, Executive Director. Mr. Allen Fung, Executive Director. Mr. Victor Lui, Deputy Managing Director. The center is Mr. Raymond Kwok, Chairman and Managing Director. Mr. Mike Wong, Deputy Managing Director. Mr. Adam Kwok, Executive Director. Mr. Eric Tung, Executive Director, and Mr. Frederick Li, Group Chief Accountant. The question- and- answer session will now begin. Please signal for the microphone if you want to ask a question. Also, please identify yourself and the name of your company before starting your question. Video of today's briefing will be uploaded to our corporate website. May I now invite the first question, please?
Thank you. I am Eugene from UBS. I got a question for management on the land acquisition side. We have seen a lot more participation from developers from Mainland, and they have been quite aggressive in bidding for the land tenders. Can management share their view on the company strategy, especially when we look back in the past 12 months, the company has not actually been that active in land acquisitions. First of all, will the company lower its margin expectation, if they were to participate in land tenders. I saw management in the presentation, farmland conversion has been mentioned a couple of times. Can you share more or elaborate more on whether the company is close to any farmland conversion? Because usually, farmland conversion, it is quite slow.
Are there any other alternatives other than just land tender and farmland conversion, such as maybe JV projects or with redevelopment? Those are my questions. Thank you.
Okay. Probably you are aware that more recently, some mainlanders are very aggressive in bidding land in Hong Kong, land tenders winning. You probably know the most recent Wong Chuk Hang tender is won by China-related companies as well. Hong Kong is an open market, is an international city. I think it is an open market. We welcome it. We must embrace the situation. As you rightly pointed out, we are not just relying on open tenders. We are many ways acquiring development opportunities, including conversion of farmland, conversion of some urban lots to increase the development intensity. Obviously, we are very diligent in bidding public tenders. We are very diligent pursuing various conversion cases with government. We are also very strict on financial discipline, although diligent, but we are very strict on financial discipline, and we have to observe the discipline in buying land.
We are happy maybe to take this opportunity to advise. There are two or three pieces of land are very close to conclusion stage for those premium conversion land modification cases. When the time is suitable, we will announce the results. That means we have solid cases, and we will announce those cases very soon.
Thank you, Mr. Wong. Next question, please.
Thanks. Justin Kwok, Goldman. Perhaps a question on the dividend. I guess investors will be happy to see a healthy increase this year. I just want to get a sense on what is management guidance for this year in terms of the payout ratio, in terms of the trend, as the run rate for the earnings seems to be on the high side. In the medium term, as we just gone through the presentation, there is a good pipeline of investment properties to be completed across Hong Kong and China. So in the medium term, would management consider actually peg the dividend to the recurring income rather than to a payout ratio on the overall earnings? Thank you.
Our dividend, we have increased our interim dividend by 5% and has always been our policy for dividend payout to be between 40%-50%. In the past so far, whenever we have a dividend pattern, even if long-term future, even if earnings are down, we want to still maintain our dividend. In short, I think, there's no intention to change our dividend payout policy for the time being, yeah. We are building 50 million square feet of investment property. That means what we need to put in the construction cost too, right? Also, we're working hard to bid for land. Each time when there's a big site coming up in Hong Kong, we are working hard. But of course, I think as Mike Wong said, we need to exercise market discipline, yeah.
We want to be a long-term player, and we want to make sure that we have good liquidity. Even when the market comes down, we have plenty of money to buy land. That's our objective, yeah.
Hi, Karl Choi from Merrill Lynch. A couple of questions. First, can management give a little bit more colors in terms of the positive rental reversions you saw in Hong Kong in retail and office? Give a little bit more sort of magnitude and quantify, and also the outlook. Also, I suppose, related to that, what you are seeing in terms of retail sales outlook for Hong Kong. Then second question is specifically related to Kowloon East. There is a lot of office supply coming up. Just wondering whether you are seeing any impact on the Millennium cluster in terms of either rent outlook or occupancy. Thanks.
Kowloon East, yeah.
Okay, sure, yeah. Yes, we all know that in Kowloon East area, we have seen some burden of occupancy for those newly completed developments. For our buildings in Millennium City, our take-up is underpinned by existing renewal, relocations, and even some consolidation within the area. Our portfolio is much benefited as nowadays modern tenants are very demanding on landlord, especially project quality, project management. Our buildings are enjoying a very high occupancy in the range of 97%-98%. We are happy to see that there will be more supply coming up in the land sales in the Kai Tak area, but actual completion won't come out at least four to five years later. In the meantime, office supply is quite stable in the range of 2.5 million square feet per annum. Overall, we are very confident on the future performance here.
On the rental reversion for 2016, our rental reversion is in the mid-teens. For 2017, for office and for retail, I think rental reversion would be positive. I would say range between 5% - 15% for both the office and for retail. Yeah.
Griffin from Citigroup. What is our overall strategies on non-property business, and do we have any plan to sell or buy any non-property business or asset? Thank you.
I think we reiterate the position that we think we have a good portfolio of non-property businesses, and many of them actually have good potential to grow. So our strategy is to grow them with a variety of means, including M&A. We will consider various means to try to grow them. We have no plans to sell off any of those assets because we do think that they are quality assets. I think an additional point is that some of these businesses actually do have good synergies with the group as well. For instance, SUNeVision does benefit from the fact that Sun Hung Kai is a very good constructor of data centers. For instance, our supermarket, YATA business benefits our properties as well. We think there are good synergies as well, and that is an additional reason why we are not thinking about selling those businesses. Thank you.
Thank you very much. This is Joyce Kwock, and now at Nomura. I have got a question related to the family or the major shareholder's stake in Sun Hung Kai. I think that this stems from a recent announcement after Chinese New Year post on the stock exchange that some 7% of a stake being transferred to an offshore company. Can I just confirm the stake by the major shareholder? Is it something like what the media quoted as around 24%? This is the first part of the question. The second part of the question is, what do you think at this level of stake of around, let us say, 24%, is that adequate from a major shareholder's viewpoint? Especially when we compare that number to the other major property or conglomerate companies in Hong Kong, let us say Cheung Kong, Wharf, Henderson Land, et cetera.
The major shareholders, which is typically the founding family, has much higher stake than 24% than what I believe Sun Hung Kai's founding family is holding right now. Thank you.
I think the family holds more than 40%. Your 7% may be referred to Walter's stake. I think for Walter, I think this is his intention still to hold a share for long term, but I think our family holds more than 40%. Yeah. Thank you.
Thank you, Mr. Kwok. Next question, please. Gentleman on the second row.
Thanks for taking my question. This is Praveen Choudhary from Morgan Stanley. I have two questions. It is related to government policy. One could be very positive for developers and one could be negative. My question is, on the negative side, the property prices according to CCL index is at all-time high. It is around 13%-15% higher than the bottom. Do we expect some kind of policy action similar to what we saw in November? Will that impact or cool the market? That is one on the policy side. The other policy question is, while everybody says that the market is very free in Hong Kong and Chinese developer or Chinese companies can buy the land, at the same time, you are not allowing mainland people to buy the property, and we are putting a 30% stamp duty.
I am not sure should we make a similar arrangement and allow Chinese people to buy the property as well as land acquisitions happening? That will be very positive for existing developers. My question on both the policy questions. Thank you.
I think on the government policy, I think it's unlikely that government would introduce even higher stamp duty, unlikely. We expect there will be more land being supplied in the market, which is the correct solution. We welcome the government to supply more land. Regarding the 30% stamp duty, I think it is the politician's decision. It seems in London, Singapore, they have all applied all these tax, even in Canada.
Thank you. This is David from Macquarie. Three questions on China. First, in terms of the land banking strategy. Of course, the land market seems to be overheated for a long time. What's the strategy? Are you going to buy more land? What type of cities would you focus on? Second question regarding ITC. Notice in the PowerPoint saying that the preleasing progressing well. Any other further color you can give us? What type of tenants? What kind of roughly the rental level for both Phase 1 and Phase 2? I guess final question is more in the long term. When everything completed, I guess, you have 35% more square meters of the IP in holding. Any rough idea, maybe for China only, what kind of rental income when everything is mature in the long term? Thank you.
Let's address it, and you can address it. Then second, ITC and area. Yes.
I will address your first question, and to some extent, the third question. I think the first question is on land banking. The expensive land in China is a prevalent problem. In a way, all the China capital running to Hong Kong to bid land is because the land in China is even more high priced than the Hong Kong one in some ways. Honestly, we do not see that going away anytime soon. Because of that, I think of course, we will keep an eye on future land acquisitions. Hopefully maybe some off-market transactions instead of just land tender. Let's just say the market continues to be crazy, very hot for the next year or so. We will just focus on more execution at this point. There is no point letting go of your financial discipline at all.
For ITC, there are four sites. For Site 1, we actually have completed all the construction, and we will hand over to the first batch of office user around April. For the shopping mall, which is 300,000 sq ft, will be open by next year, 2018. Site 2, we will be coming on the market a year later in middle of 2018. That will be followed by Site 4, which we are doing the construction work for the foundation work at the moment. We will start the superstructure work of the Site 4 by the end of this year.
Sorry, with the last question, just reminded in terms of rental contribution in China, I think upon the full completion of ITC, our rental will almost double, is our estimate. That is upon the full completion and that will be-
2022.
2022, 2023 by phases. The full completion will be 2022, 2023. So we are quite optimistic because we are 35% of new stuff giving.
I wanted to check your view on the interest rate environment, especially U.S. Fed rate. Few months ago, Allen talked about how they want to raise the rate to 3% by 2019 from currently roughly HKD 0.50 or 0.5%. So that is 2.5% increase. I am more interested about your cap rate that you are using for valuing those buildings or the commercial assets that you have. If the rates go up so much, would that reduce the value of the asset and your book value, et cetera? Is there anything you can do to preserve that? Thank you.
The cap rate we have applied for the bulk of our investment properties is very conservative, is between 4%-5%, yeah. We have plenty of room, even if interest rates go up, have plenty of room for us not to reduce the valuation. Yeah, there are plenty of room. Yeah.
Thank you, Mr. Kwok. This is the final question and the briefing is coming to a close. Ladies and gentlemen, thank you for coming. Hope you enjoyed the presentation and find it useful. There are some refreshment outside. Please stay and enjoy. Thank you very much and see you next time.