Good afternoon. Welcome to the Swire Pacific 2020 Interim Results Announcement Analyst Briefing Live Webcast. Thank you for joining us. May we first introduce our speakers for today. Mr. Merlin Swire, Chairman of Swire Pacific. Ms. Michelle Low, Finance Director of Swire Pacific. Mr. Pat Healy, Chairman of Cathay Pacific and Swire Coca-Cola. Before we begin, we would like to go over the rundown for the briefing and the house rules. Today's briefing will be conducted in English. We will begin with a presentation by the management, followed by the Q&A session. Slides from the presentation will be displayed alongside the live video for your convenience. You are invited to submit your questions at any time during the briefing by clicking the Q&A box at the bottom of the window and filling out the submission form. We will then read these out during the Q&A session.
Now, we would like to invite our Chairman, Merlin Swire, to begin the presentation. Merlin, please.
Okay. Well, welcome, everybody. Thank you for joining us. We appreciate your interest. We will try and run through our presentation relatively quickly, so we have time for questions. Well, the business environment in the first half was pretty unique and unusual. COVID-19 has obviously dominated everything, and for us, the decrease in oil demand has also been problematic for Swire Pacific Offshore. I think the low point for us probably came in around mid-April, at the time when Cathay was carrying only 400 or 500 passengers a day, as compared to its usual load of 100,000 passengers a day. Cathay was not using a lot of fuel. At that point, the oil price dropped from $70 at the start of the year to $20. It was not a comfortable position for us to be in.
The upshot of all of this, as you can see in your pack, is that we've reported an underlying loss for the first half of HKD 5.4 billion. On a recurring basis, a marginal loss, which perhaps is better than some of us might have feared given the extraordinary circumstances. Just a comparison of last year and this year with regard to exceptionals and impairments. We have taken another very big impairment on disposed fleet. You see here also our share of the impairments that Cathay Pacific has taken on some of its subsidiaries, and in particular on 16 aircraft that it imagines will not be flying again. This contrasts quite sharply with last year, where if you recall, we booked a very large gain on the sale of Cityplaza Three and Four, which led to the very strong results last year.
It has been a very big swing. This is our return on equity slide. It is not a very encouraging picture, obviously. Perhaps the only thing that I should draw attention to here is the pink bar in 2020, which is to say that we have, at a statutory level, reported a negative revaluation on our property portfolio for the first time over the last 10 years in terms of the interim. In total, that is a negative fair value adjustment of HKD 2.6 billion, primarily driven by our retail portfolio in the U.S. and in Hong Kong. In the U.S. particularly, we have been affected by an almost total shutdown, lockdown in Miami for much of the second quarter. In fact, our office portfolio in Hong Kong valuations have remained remarkably robust.
In terms of the dividend, given the quality of our results and the significant uncertainties that we still face, we have considered it prudent to reduce the dividend. You can see we have cut the dividend at the interim by about 48%. In the context of our dividend policy, in the context of what our shareholders expect from Swire Pacific, this is a very painful decision, and it is one that is not taken lightly. We just feel it would have been imprudent to do otherwise. We will see in March, when we come to look at the final dividend, what the situation is, what the outlook is. We hope things will be more optimistic, and we will be guided accordingly at that point. This slide just talks to the recurring underlying profit by division, and perhaps I will just talk through the chart in the bottom right-hand corner.
As you can see, quite a lot of variability between our different businesses. Property, 8% down versus prior year. That is primarily driven by weak retail in Hong Kong, which is obviously an important part of our business, and very poor results from our hotel division. Leaving that aside, I think in the circumstances, it is a rather encouraging result from Swire Properties and reflects the quality of its assets. Cathay, the story is well covered over the last couple of days. It has obviously been a uniquely challenging and difficult time for Cathay Pacific. HAECO, you see there, we have reported a recurring profit increase in the first half. That was helped significantly by government support that we received in the U.S. for our U.S. business and obviously in Hong Kong.
There is something of a lag effect in terms of workload in that business, and we are seeing quite a decline in demand for HAECO services currently. Beverages has been a real standout. We have seen continued growth in both China and a solid performance in the U.S. The figure here is slightly misleading. It suggests a 26% increase in recurring underlying profit. That is largely a result of the fact that in the prior year, we had some one-off tax charges, which are not there in this half. If one normalizes for that, as Pat Healy will explain later, we still see profit growth on a recurring basis of 14% for our beverage business, which is really outstanding given the circumstances that we have been facing.
Marine services, the first quarter started strongly with meaningful improvement over the prior year, and we were on track to continue to head where we were hoping to, and then things have headed the other way in the second quarter. Trading in industrials from small numbers, but the business most affected by COVID-19 there has been Swire Resources in Hong Kong. Well, in fact, there is not a great deal of change on this chart. On the property side, we do not have anything new to announce from the first half. But we are still actively looking at opportunities in China and are confident of the quality of the pipeline there. I should say that really the big news for us and a big focus of the second quarter, as you can imagine, was the big recapitalization of Cathay Pacific.
Swire Pacific participated at HKD 3.5 billion, having taken up our rights in the rights issue completely. But the full package was HKD 39 billion. The goal was to put together a package big enough to give all investors confidence that it would see Cathay through this crisis. I think we have achieved that. I think the Hong Kong government, we are extremely grateful to them for stepping up in the way that they have. I think it is a recognition that the Hong Kong government has confidence in Cathay and sees that Cathay plays an absolutely critical role in Hong Kong and in the Hong Kong aviation hub. So notwithstanding the very, very difficult circumstances, we were relieved and pleased by the outcome of that recapitalization process. Under HAECO there, you will see that in March of the year, we completed a small investment in the U.S.
That is an engine shop in Texas that services mainly narrow-body engines. It is an expansion of our global engine support business, and it is a recognition of the fact that more and more over time, engines are being overhauled while still on the wing, or they are taken off the wing and serviced near to the airframe rather than being transferred all over the world to shops such as the ones we have in Hong Kong and China. So we think that is a growth business and that acquisition has gone smoothly and the integration has been good, COVID-19 notwithstanding. It is not a huge investment, but I think it is significant. If you look at the bottom of this slide, we completed an investment in Columbia China Healthcare. This is our first investment in the healthcare sector, and we have taken a 13% stake in this business.
It is a business that is focused exclusively on the Yangtze River Delta. It owns hospitals and clinics and elderly care homes. It has some very strong partners. So, the other shareholder, the Columbia, the U.S. healthcare firm, and Temasek, who have a very big stake in the business. We are feeling excited by this investment, and we are keen to do more in the healthcare space. We see it as a growth area in China. We want to be part of that. We think our skills, our brand, our long-term approach are well suited to that sector. Okay. I think I will pause there and hand over to Michelle Low, who will take us through the first half financial summary.
Thank you, Merlin. This schedule appears to be a relatively busy schedule, but if I may just draw two points. The revenue cash generated from operations both declined, and we all know it is because of the COVID-19. For the revenue, particularly for HAECO business and also the retail business at Swire Resources, have been very much affected alongside with some drop in the hotel business as well. Worth noting is the net debt. The net debt increased marginally by HKD 2.6 billion to HKD 49.2 billion. The gearing ratio as at June end was 15.6%, and of which in fact is a relatively strong financial position, which I will run through later in terms of some other liquidity measures. The equity attributable to the company's shareholder dropped by 5% because of the sum of recording a loss in the year.
This is just a waterfall chart showing the movements of the profit number across the divisions, which Merlin has broadly highlighted. For the net debts, we have a HKD 2.6 billion increase during the period. The cash from operations, HKD 5.2 billion, which in fact is lower than last year. In terms of disposal proceed, unlike the same period last year, we have significant proceeds from the disposal of Cityplaza Three and Four. This time, the proceed is marginally relating to some sale of the fixed asset, plant and equipment. For the CapEx, we invested HKD 2.4 billion, and as Merlin mentioned, we have invested in the healthcare business and also invested in a small aircraft engineering business in U.S.A. The tax paid is a relatively high number because there have been some tax deferral from the inland revenue from last year and paid this period.
For the gearing ratio number, at the end of the period, it is 15.6%. As we seen through the period from 2016, we have continuing to improve our gearing ratio, with the help of disposal of some of our non-core assets. We will continue to manage the gearing ratio way forward. The cash interest cover, in fact, is not very representative because we have seen some drop in the EBITDA number this year and this period. So we have a one times cover. Weighted average cost of debts have marginally decreased to 3.3% because we have seen lower interest rates during the period, particularly relating to the HIBOR. We have also placed HKD 500 million debts for the public bonds, which was low at 3% earlier this year. The number I like to draw to your attention is the group committed facility number of HKD 38 billion.
Which, as you compare to the end of last year, we have increased quite substantial liquidity by increasing the various bond and also the bilateral loan facilities. We also have been maintaining quite some cash. In fact, out of the HKD 22 billion, HKD 11 billion relating to Swire Properties, which are the proceed from their property asset disposal. Subsequent to June, we have pay our subscription money for the rights issue for Cathay of HKD 5.3 billion. In fact, we also have paid down some of the facilities relating to the second half number, which are the HKD 10.8 billion. In fact, we have already repaid by now. So we are expecting that we will continue to keep relatively healthy liquidity by trying to take the good opportunities of the relatively low interest rate environment by entering into more facilities or private placement or public issuance.
The debt maturity profile is relatively well spread. A snapshot of the capital allocation commitment. For the property, we have around HKD 16 billion, and these are investments which, in fact, we have already sort of made public. There is no new investment that we have been making in the first half. They relate to two types of place. They relate to Qiantan in Shanghai, and also the construction site next to the 28 Hennessy Road. For HAECO, included in the HKD 6 billion number, there is the Xiamen Airport relocation commitment there. Beverages continue to invest in their production equipment and their marketing facilities as well. With that, I will just also very quickly run through the overview for the Property division. The Property, in fact, will be doing their own analyst briefing later. Here, I will just give a very quick run through.
Underlying profit for the first half significantly dropped compared to the first half of 2019 because last year we had the disposal profit of Cityplaza Three and Four. Pleasingly, for the investment property, the recurring profit, we have slightly increased with the help of trying to contain operating costs and also lower finance charges. We have been continuing working with the tenants by giving rental relief during the period as well. For offices, the gross rental income has increased, and also there have been positive rental diversions. China, Chinese mainland, the gross rental income from retail properties have been affected by COVID-19. In fact, what we have seen, there have been very strong recovery since March. Overall, for the period, we have recorded lower retail sales and also continuing some rental concessions for some particular tenants.
Property trading, as Merlin mentioned, we have a project in Singapore that we are marketing that project, and there are also some residential units in Miami, which we are selling. In fact, that have been relatively slow. Hotel has been performing badly because of the COVID-19 with very low occupancy rates. Pleasingly, we disposed of two office buildings in July. The valuation of investment property has recorded a drop during the period. This is the waterfall chart relating to property, which is relatively self-explanatory. The pipeline of future completion. We will be seeing the completion of Capital Place 2 in 2022, and also we will be seeing Shenzhen completion this year. Also in China, there will be the Sunlit Moon West will be completed further on.
The capital commitment I have mentioned is around HKD 16 billion, which mostly relating to Hong Kong and partly relating to Shenzhen in China. For aviation, if I may pass to-
To me, I think first.
Yeah.
Well, thank you, Michelle. On aviation, I will talk about HAECO in a moment. As you can see, the HAECO results remarkably stable year-on-year in the first half. We have quite specifically taken a very big hit with regard to our share in Cathay Pacific's losses, both their recurring losses and some of the impairments that they have taken. I will pass to Pat to talk in more detail about the Cathay situation.
Yes. As we reported yesterday, obviously the first six months of this year have really been the most challenging in the history of Cathay Pacific. COVID-19 has really decimated the entire industry globally. Passenger revenue dropped clearly, very precipitously. In certain months at the low point, we were operating at only 1% or 2% of prior year levels. Obviously driven by travel restrictions, quarantine arrangements, et cetera, that were implemented globally in response to the pandemic. Cargo, on the other hand, was a relative bright spot. Although cargo volume was down, cargo capacity is reduced as the passenger network is reduced because under normal circumstances, about half of our cargo would be carried in the bellies of passenger aircraft. But despite the capacity reduction, yields were up very significantly. Revenue overall was up about 10% for cargo.
That represented really an imbalance between very strong demand and a relative lack of capacity as airlines around the world cut flights. On the cost side, net fuel was significantly down. Consumption way down, obviously. But also interplane prices were down with the collapse in the oil price, partly offset by hedging loss, but still representing a net gain for us in terms of net fuel. Non-fuel costs per ATK were up quite considerably. Basically, when you reduce capacity reduction as dramatically as we did, our costs are not all variable. We have elements of fixed and semi-variable costs, which mean that we cannot reduce costs in direct proportion to capacity reduction. As we would expect, we did everything possible to reduce all non-essential spend, including reaching agreement with Airbus to defer orders of A350 and A321neo.
And we're still in negotiation with Boeing on deferrals of the 777-9 program. The half year results for Cathay also include HKD 2.5 billion in impairments. That's 16 aircraft, which are unlikely to reenter meaningful service plus some allowance of CDO assets. The final point, as Merlin Swire referred to, the recapitalization program completed successfully yesterday. So obviously, we're very thankful, very grateful to all shareholders and Hong Kong government for their critical support during this difficult period. This next slide shows key financial data and operating statistics. I won't go through line by line, but just to highlight a few key numbers. Passenger revenue, down 71%, but cargo revenue, as you can see, up 10%.
If you look at the cargo statistics in the right-hand column, you can see that the cargo revenue is driven by a combination of lower volume, but very significantly higher yield because of the imbalance in the market. And overall, an attributable loss of HKD 9.865 billion for the half year.
Thank you, Pat. Just quickly on HAECO, the headline number is very similar to last year, but there's a lot of variance within the different operating divisions. Perhaps if you focus on that table at the bottom left, I'll just talk through it quickly. HAECO Hong Kong saw a big reduction in profitability, driven primarily by the line services business in Hong Kong, where there was dramatically reduced demand. You can see that in the chart on the right. The yellow line shows line service movements, which is predominantly in Hong Kong, and that's had a big impact on profitability. HAECO Americas, which has been losing money for a number of years, reported a profit in the first half.
That's not primarily driven by demand and work, which has been weak as you would imagine, but reflects the fact that we did receive quite a lot of financial support from the U.S. government, and that has been largely booked in the first half. HAECO Xiamen and TEXL, our GE engine shop in Xiamen, are both down somewhat, reflecting customers choosing to defer maintenance to a certain extent. But HAESL in Hong Kong, which is the Rolls-Royce engine joint venture, has continued to show growth. There has been a big backlog of engines requiring maintenance. And as we look forward into the second half, there are some problems with the Rolls-Royce Trent XWB engine, which should lead to continued decent workload in that shop.
Overall, it's been a decent first half, but I should caution that in any case, when you have a big reduction in commercial airline operations, there is a lag effect, before maintenance starts to slow up. For HAECO, we are very dependent on wide body business rather than narrow body business, and we do expect international wide body travel to recover more slowly than narrow bodies, which tend to operate within domestic markets. The outlook for the second half is not as promising as for the first half as we see that lag effect starting to come in. Pat, over to you on the beverages.
Thanks. Profit at Swire Coca-Cola increased by 26%. But as Nolan explained earlier, that's actually a 14% increase if we back out the impact of some one-off tax payments in the U.S.A., from the prior year. I think even at that 14% level, in view of the very challenging conditions for the first half of this year, I think that represents a very strong performance by the operating teams. I think the profit increase of 12% in the Chinese mainland is especially worth noting when you consider that Wuhan is in Swire Coca-Cola territory. Our teams were very much at the epicenter of the outbreak in the very early days of the pandemic, and dealt with that situation with real professionalism. Revenue overall in China, down slightly, but more than offset by cost savings. A strong result in the Chinese mainland.
Hong Kong was the worst hit, in fact of all of our markets. Obviously very soft economic conditions. The retail economy really still reeling from the social unrest in the second half of 2019, and then compounded obviously by the impacts of COVID-19, including the lack of visitors, which the pandemic has resulted in, who are obviously an important contributor to many of our customers and channels. Taiwan as a market was relatively unaffected, so we were able to continue the quite impressive growth momentum that we've driven, I think, consistently in that market in the last few years. In the U.S.A., the results skewed by that non-recurring tax payment from last year. But even without that, a strong performance in the U.S.A., with good revenue growth that we'll come to on a later slide.
The final bullet point there is to make the point that yes, of course, we've been focused on cost savings, in view of the disruption and the downturn that we faced in several of the preceding months. But what we haven't done is to slow down on any critical investments which are important for our future long-term growth, so infrastructure investments. If you take cold drink equipment placements in the Chinese mainland, for example, despite the huge logistics disruption that we faced, all of our cold drink equipment placements remain on track, according to our previous plans, which again is an impressive performance by the team. This shows, firstly, the breakdown of attributable profit by region. Strong growth in the Chinese mainland and Taiwan, as you can see, driving that overall growth in attributable profit.
And if you look at the circular chart in the top right, you can see the impact of strong revenue growth in the U.S., so the U.S.A. now accounting for 37% of overall revenue in the division. And bottom right, I think it is also worth noting the solid growth in EBITDA and good growth in EBITDA margin, so 1.3 percentage point improvement to 11.3%. Now EBITDA margin being a key metric for us as we seek to grow value over time. Then one final chart. Just a couple points to highlight here. First, the fact that we continue to see revenue growth outstrip volume growth very consistently across all regions. And that is very much the result of a consistent specific strategy to grow revenue faster than the volume by managing the brand new package mix and pricing strategies.
Secondly, EBITDA margin, as I mentioned, so good improvement especially driven by improvements in the Chinese mainland and Taiwan.
Thank you, Pat. Well, turning to Marine services, it has been a very frustrating time for the team at SPO who have been doing a fantastic job in very difficult circumstances. The first quarter was really encouraging for the business. We were continuing to show growth in revenue as the recovery was taking shape, and then things changed very quickly once COVID-19 had the dramatic effect on the oil price that it did. And we have seen exploration and production companies canceling projects, deferring projects. And this has again retarded our view of when the recovery in this sector is going to be fully present. And that is what has driven the further impairment. The business is reacting to this. We are planning to put at least 28 of our vessels into stack by the end of the year.
We have regrettably had to make a number of redundancies, and we are continuing to manage the business as tightly as we can for cash. But I cannot deny it is very disappointing.
For the trading and industrial divisions, there we record a recurring loss in the first half, and this has been disappointing. If you look across the various companies, the bright spot is the Taikoo Motors in Taiwan, which continue to record an increase and the performance is relatively stable. Also for the first time, we included the healthcare, which Chairman Merlin has alluded to. We invest in the healthcare 13% share we account for as our associated company. For the retail business for Swire Resources, in fact, that is the worst affected because of the COVID-19, that retail business.
Okay. Well, I think we can probably go to questions now. I have a slide here that lays out the outlook as presented in the documents you have got with you. Why do not I leave that on screen rather than going through it, and we will take questions.
Okay. Thank you. Thank you, Chairman. Members of the audience can submit your questions by clicking the Q&A box at the bottom of the window. We will now begin the Q&A session. The first question comes from Jonathan Cardigan of CLSA.
It is about Columbia China Healthcare. Can you give more detail on the Columbia China Healthcare asset and what it does? What was the financial consideration and what stakes do you have in the business? Also, are you a passive investor, or is there a more active role in managing the business?
Okay. Thank you. Well, the stake is a 13% stake. The total consideration was $70 million, of which I think $56 million has been paid and another $14 million to come. As I said earlier, it is a very focused healthcare business just in the Yangtze River Delta in Shanghai and the surrounding cities, with hospitals, both general and specialist hospitals with clinics and with elderly care homes. What we like about it is, of course, the sector, but also the quality of the other investors in that business. Temasek have got a lot of healthcare businesses invested in China and elsewhere and are a very strong shareholder for the business, and Columbia brings a lot of expertise. So we do not have a management role. It is a passive investment. But we have good visibility on the business, very good relationships with the other shareholders.
And we hope that through this investment, we can learn a great deal about the sector through an investment in a business that we very much like the look of.
Thank you, Chairman. The next question is from Adrian Arn, an individual investor.
Given the subdued share price in Swire Properties, is there any consideration for privatization?
We have no such plans.
Right. Thank you. Next question is on dividend. Will there be change in dividend policy due to the economic recession?
Well, I don't think there will be a change to the policy. Our policy is clear that our goal is to have sustainably growing dividends and to pay out half of our earnings over the cycle. We have done that over the last 5 years. If you look at our payout ratio for the last 5 years, it is around 48%. Over the long term, it will remain our policy to try and do the same thing. For now, 2020 is a very unusual year. It is creating all sorts of unusual outcomes in our P&L. We will have to see where we sit at the end of the year. When we come to look at the final dividend, we will be guided very much by the outlook at that point. We will be looking forward rather than back.
What state the business will be in, how confident we can be in an economic recovery, it is too early to say. Our fundamental policy is not likely to change.
Thank you, Chairman. The next question is on beverages. The beverages business in China has recovered strongly in the second quarter. Can you give more color to the recovery?
Yeah, sure. Thank you. Obviously, the first 2 months of the impact of COVID-19, really, so February, March, pretty much the period immediately after the Chinese New Year festival, was extremely challenging. As I mentioned, we have a bottle in Wuhan, so the impact on the team in Hubei was extreme and obviously very distressing at that time. They did a wonderful job, really focusing on the safety and health and wellbeing of their staff and their communities, and came through with a very small number of people impacted directly by the epidemic. I think that what we saw during that period were some pretty dramatic channel shifts. As you would expect from rapidly changing consumer behavior, certain channels effectively just closing down, restaurants, et cetera, entertainment venues. Whereas the online channels, so e-commerce of consumable goods and also supermarkets, saw relatively strong growth.
The recovery picture really varied from channel to channel. I would say that by around the end of May, mid to end May, the overall revenue performance was very close to prior year levels. We still saw differences in the channel mix and also differences in the package and brand mix. There was a much stronger showing for sparkling beverages, for example, relative to other categories. Certainly by the early summer, we were back on track versus prior year performance.
Thank you. The next question. In the current environment, are you going to take advantage of potentially depressed valuations to acquire businesses in other various markets?
Well, I think the first thing I would say is that we do have the financial strength to do so, notwithstanding the pressure the group is under and the very poor earnings. The balance sheet is really very strong. Gearing 15%-16%, and huge amounts of liquidity, both in Swire Properties and at the center. I think we're going to be disciplined. We're going to focus on our core businesses in terms of investment in the coming year. Having said that, we have great opportunities in our property business in China. I know I've been saying that for 18 months now, and you haven't seen much yet. But we're continuing to pursue some really interesting opportunities there. I think the brand and reputation that Swire Properties has built in China with consumers, with city governments, and with luxury brands is getting stronger and stronger every year.
I think it's giving us access to lots of high-quality opportunities. That's not to say they will necessarily be at depressed prices, but we are very focused on investing in really high-quality assets. We're not going to be chasing opportunities just because they're cheap.
Right. The next question is from Carl Choi of Bank of America.
What kind of oil prices do you think is required to stimulate demand enough for SPO to turn around? Any plan to dispose the unit when market conditions have recovered enough to redeploy capital?
Well, on the question of what oil price is required, that is a very difficult question. We were seeing a strong recovery, well, a steady recovery in the business last year and in the early part of this year when the oil price was
HKD 55, HKD 60, HKD 65. So that is the sort of level at which I think we would begin to feel confident again. Of course, for every year, every six months that goes past where there is not a big recovery in offshore oil demand, the risk of oil supply shrinking in a way that creates a price spike increases. So we still think we are going to see a decent recovery in offshore oil demand within the medium term. It is very hard to predict when. As I said earlier, I think the business has very high-quality assets. We are making it leaner. We are selling old, less effective vessels. I think the business will be in good shape to serve the industry when the recovery comes.
Next question is the last question. It is from Churchill Capital.
How should we be thinking about buybacks? Could it be a consideration in the second half if we see improvement in operating performance? What are some of the factors that would drive the decision to conduct buybacks in B shares as against in A share? Thank you.
Michelle, I think I will leave you to answer that question, please.
Okay. Yes. In fact, this question has been asked quite a few times here. In terms of the share buyback, we are always of the view that this is one of the options for capital deployment, and we have been assessing the various investing opportunities and also against the share buyback. At this point of time, we are still considering that we wanted to reserve firepower for our investing into new projects or new acquisitions.
Okay. Thank you. Thank you, Chairman. Thank you, Pat and Michelle, and also thank you all your questions. A copy of the slides will be made available for download in our website later this evening. This concludes the Swire Pacific 2020 interim results analyst briefing. Thank you again for joining us.