Earnings Call: H1 2021

Aug 4, 2021

Good afternoon, ladies and gentlemen, and welcome to the Hong Kong and Shanghai Hotels twenty twenty one Interim Results Presentation Audio Webcast. Thank you for joining us. The results announcement was posted onto the stock exchange website this afternoon. We will begin with a presentation led by our senior management team followed by the Q and A session. Slides will be displayed alongside the live audio for your convenience. You are invited to submit your questions at any time during the presentation by using the Q and A box on your screen. These will be read aloud during the Q and A session. And with that, allow us to introduce our speakers for today. We have Mr. Clement Kwok, our Chief Executive Officer Mr. Peter Bohr, Chief Operating Officer Mr. Christopher Ip, Chief Financial Officer and Mr. Martin Sawyer, our Group Director of Properties. Now we would like to invite our CEO, Mr. Kunnen Kwok, to begin the presentation. Thanks, Judy. Good afternoon, everybody. I will start with an overview of the first half results. In fact, no one will be surprised to hear that we were still materially affected by COVID during the first half and that was expected. So the results that we are reporting were more or less in line with our expectations. However, one of the issues is that we had been hoping that Hong Kong would start to open up towards the middle of the year. And of course, we know that Hong Kong businesses continue to be affected by the border closures and the stringent social distancing rules. Now this is a concern for us because the bulk of our earnings are derived from Hong Kong and so these restrictions continue to have a large impact on our overall group's business. And that applies not only to the Peninsula Hong Kong but to the Peak Complex and we have seen some weakness in our residential leasing business as well. So Hong Kong is a big issue for us. It remains a concern as we think about the outlook going forward. A lot will depend on whether these COVID restrictions get relaxed or not. If we look outside Hong Kong, the best market that we've had has been Mainland China where our hotels in Shanghai and Beijing have performed relatively well. And more recently, we've seen a lot of relaxation in the COVID measures in The U. S. And consequently we have seen recovery in our hotels in The U. S. On the other hand, business is still very weak as our hotels in Paris, in Tokyo and Bangkok and Manila are pretty much as good as closed at the moment given the COVID situation there. However, we managed to achieve a positive combined EBITDA for the six months, which is a better result than last year, albeit a small combined EBITDA but at least it was positive and we had a very small operating cash flow positive as well which already represent a very good turnaround from the year before. One of the things we've done is to compare our results for the 2021 with the 2019. And from that, one can see still a very substantial reduction in revenue for the group from a couple of years ago before the protests and the COVID situation started. But at the same time, we have cut our costs significantly. Course payroll costs being the largest item that we've worked on but overall the group's operating costs have been reduced by about 42% from two years ago in 2019. Key to us as you know are our projects. Are continuing to build in London and Istanbul. And here I would have to say that we're facing a challenging situation. Both of these projects have been affected by COVID in terms of site closures and labor restrictions and disruption to the supply chain. But in addition, we have encountered some technical issues in London particularly in relation to the basements of the hotel and there have been some further delays. Now we're still working on quantifying and mitigating the effects of those delays trying to obviously minimize the impact on both cost and program and we're working on those things but we are giving an early warning that there may be some cost or timetable overruns probably both in relation to the London project. The Istanbul project also has suffered from delays caused by COVID but the financial impact of those delays would be a lot smaller than in London. Myanmar unfortunately we're all aware that since the military intervention that we have stopped work on the project and we do not yet know what the plan is going to be for the future. A lot will depend on what happens to the country going forward and we're keeping that under continuous review. The Peak Tram, which Martin Soy will talk about a little bit more later, Also a challenging project, it's not an easy project from a technical point of view and it's been a complicated project in terms of some unforeseen ground conditions and getting all of the government approvals. But we are proceeding as quickly as we can still hopefully towards a completion by the year end. We monitor very closely our financial position in the light of the challenges that we face. We have plenty of financing facilities in place and even after taking into account all of our commitments on the projects including the possibility of some cost overrun, our cover against any future cash burn is very significant. It's at least three years. However, given the results that we're seeing, the Board has decided not to declare an interim dividend. That is not a surprise given the results that we're seeing. As always, we would like to remind people that the nature of our business is very long term in nature and despite the challenges that we're facing, we're really looking at and committed towards the long term in terms of standing by our investments and looking to realize significant value over time from the things that we have developed and built. Okay. So with that overview, I will ask Chris to actually fairly quickly run over the financial summary. Thank you, Clement. If we go to the page with the first half twenty twenty one financial results, you can see that our consolidated revenue fell by 5% to US1.26 billion dollars principally due to the decline in revenue from our Commercial Properties division. With various cost savings initiatives that Clement mentioned before, the group managed to reduce its operating cost by 12% and over 40% from 2019 to 2021 over the same period. As a result, despite a decrease in revenue, the group achieved a positive EBITDA of US6 million dollars and a positive combined EBITDA of US35 million dollars which includes results of our JVs and our associates, that's Shanghai, Paris and also Beverly Hills. The share of loss of JV and associates narrowed from improved performance of Shanghai and Beverly Hills. The 2020 comparative figure includes a group share of impairment of about US236 million dollars in respect of the Peninsula Istanbul. There's an unrealized loss in revaluation of investment properties and this is attributed to the arcades in Hong Kong, Beijing as well as New York as well as Peak Tower on weaker retail fundamentals although this equates to only 0.2% of the total value. The underlying loss reduced by a quarter to $375,000,000 and loss attributable to shareholders stood at $452,000,000 Over to our contribution by division. Hotels overall reported a 5% increase in combined revenue. The performance improved with the reopening of all Peninsula hotels as well as strong recovery of two hotels in Beijing and Shanghai. However, due to the lack of international travel and MICE business, RevPAR and revenue of the group's hotels remained low. With major efforts to contain costs, combined EBITDA loss was reduced by two thirds to negative $100,000,000 On the commercial property side, revenue declined by 16%. Revenue at the Rippels Bay complex, the largest contributor to the division declined by about 15% from decreases in both occupancy and rental per square foot due to the weakened demand in the luxury residential market. The Peak Tower also reported over a 40% decrease in revenue due to rental concessions offered to tenants and a significant reduction in visitors to the Sky Terrace from the lack of visitors to Hong Kong. All in all, EBITDA fell by 26% to US174 million dollars For clubs and services, revenue increased by 11%. This was largely due to the results achieved by Quail and Peninsula Merchandising which fully offset the decrease in revenue resulting from the disposal of Thai Country Club last year. The reduced EBITDA loss was by 20% to negative US39 million dollars On the cash flow summary, we can see that net cash generated from operating activities for the first half was a positive $5,000,000 that Clement had mentioned before compared to a negative $455,000,000 for the same period last year. Last year, there were rental concessions, staff bonus payments and also tax payments. Just over $1,000,000,000 was spent on new hotels and $150,000,000 was invested in existing activities which included the Peak Tram upgrade. The net cash outflow after taking into account all CapEx, interest and dividends paid amount to $1,400,000,000 On our debt profile, during the period, net borrowings increased by about $1,300,000,000 to almost $12,000,000,000 with an average committed facility maturity of almost two years. As mentioned by Clint before, the company is in a strong funding position now with about $7,000,000,000 of unused committed facilities as of the half of this year. The group also established its first green financing by converting its existing facility in euro 60,000,000 to a green loan alongside a small reduction in interest rate. This action reinforces the company's continuous commitment in sustainable luxury and going forward the group will look for opportunities to establish sustainability linked loans. The Group's net debt to total assets remained modest at 22% and we continue to monitor our overall debt cash flow positions and ensure that we are able to maintain prudent financial headroom. I'll now hand over to Peter and Maarten to talk about the operations. Thank you, Chris. Good afternoon, ladies and gentlemen. Our hotel performance varied across the globe. With ongoing border closures and travel restrictions, the Hong Kong market remains dependent on local demand. The Peninsula Hong Kong's overall revenue increased by 8% during the first half as we drove occupancy with a series of staycation offers and promotions resulting in a 79% rise in RevPAR. Food and beverage revenue improved as well but continues to be limited by government measures. We are optimistic for the second half as restrictions hopefully get relaxed and vaccination rates improve. Our banqueting team has achieved category of Zone D, which allows us large events for up to 180 people. The arcade was 77% occupied at the June. The renovation of the arcade basement, due to complete this year, will create a high end lifestyle retail area anchored by the new and expanded Peninsula Boutique and Cafe, which opened in May 2021 to strong demand. Second half outlook is positive, with one of our anchor tenants expanding their space and the number of new tenants signing contracts. The office tower was 94% occupied and the outlook is stable. The China market saw strong recovery led by domestic demand. The Peninsula Shanghai posted an 89% increase in overall revenue with RevPAR up 193% year over year as the hotel experienced rapid recovery from local COVID cases in January. Robust demand for events and groups also returned in the second quarter, which drove our catering business. The hotel remains the rate leader in the city and RevPAR leader for the second quarter. The Peninsula Beijing reported a 69% increase in overall revenue and an 83% increase in RevPAR despite a slow start to the year when a second wave of COVID affected the city. The arcade was 92% occupied, having secured a new luxury lifestyle tenant for the entire lower level of the hotel. In The United States, the Peninsula Chicago and the Peninsula Beverly Hills experienced a positive first half starting in March with the lifting of local travel restrictions and an increase in rate of vaccinations. The Peninsula New York reopened on the June 1 with strong room rate and robust group business. We are optimistic for the second half however, the labor market remains challenging with staff shortages in hospitality and restaurant sectors. The Peninsula Paris reopened on the 03/01/2021 for rooms business and has gradually expanded the services with the relaxing of government restrictions and curfews. International guests are returning to Paris very slowly mainly from The Middle East and The United States which helped drive suite business in June 2021. Elsewhere in Asia, due to resurgence in COVID cases and continuing social distancing measures, the performance of the Peninsula Tokyo, the Peninsula Manila and the Peninsula Bangkok remain heavily affected despite our efforts to drive staycation demand. The Peninsula Bangkok has temporarily closed from mid April and we plan to reopen the hotel later in the year. And I will now hand over to Martin to talk to you about the Commercial Properties and Club division. Thank you, Peter, and good afternoon, everyone. Starting with the Repulse Bay complex, we reported a weaker first half compared to last year. Residential revenue and occupancy declined due to the very challenging environment in Hong Kong, especially the lack of new arrivals from overseas. With the government's social distancing measures, our F and B outlets and catering continue to be affected by the restrictions on large functions and events. The Repulse Bay Shopping Arcade reported a fairly stable occupancy and revenue. The Peak Tower experienced a very challenging first half. Revenue and occupancy declined and we had to offer rental concessions due to the continued border closures and lack of international visitors. Visitors to the Sky Terrace also declined. We've implemented a number of sales and marketing strategies to continue to drive local business and to encourage local residents to visit the Peak Tower, which remains open during the renovation and temporary suspension of the Peak Tram. St John's building revenue fell slightly, but occupancy remained stable at 97%. Moving to Vietnam, the revenue of the landmark also fell slightly. Office revenue and occupancy remained stable despite intense competition, but residential revenue and occupancy declined year on year. The COVID-nineteen situation in Vietnam has worsened significantly at the time as we speak and we're concerned about the outlook for the second half. Revenue at 21 Avenue Clabert in Paris remained stable. In the Clubs and Services division, the Peak Tram upgrade project made good progress in the first half, although it has been negatively impacted by unforeseen ground conditions and the pandemic, which has affected the planning of the works and the manufacturing of our new tram cars and equipment. As a result, there was a delay in the second phase of service suspension, which commenced on the June 28 with the retirement of the fifth generation PIC tram. The tram reported a 14 increase in revenue from a higher patronage during its last month of operation before the suspension, and we expect to launch the sixth generation tram by the 2021. At the Quell Lodge and Golf Club, revenue rose by 66% with a significant increase in average rate and RevPAR compared to pre COVID levels despite the shelter in place restrictions in California for several months in the 2021. We're also proceeding with the Quail, a motorsports gathering in August, which is considered one of the world's leading concourse events for classic motoring aficionados. Revenue at Peninsula Merchandising doubled mainly due to stronger online sales, robust wholesale and travel retail business in China and contribution from our Japan stores. In May, we opened the new Peninsula Boutique and Cafe in the basement of the Peninsula Hong Kong arcade, and this has been a popular attraction for Hong Kong residents. Early orders for the Mooncake season have been satisfactory, and we're cautiously optimistic for the outlook in the second half. I'll now hand back to Clement to talk about our development projects and the outlook for the remainder of the year. Thanks, Martin. I touched on these projects a little bit earlier already, but let me give a little bit more information. The Peninsula London project has suffered delays due to the COVID impact as we mentioned before that affected the construction workforce and the supply chain. And there have been significant delays in the basement due to technical issues. Despite these challenges, we continue to make as good progress as possible on the superstructures, guest rooms and the residences and we're still trying to bring the project in with hopefully as little delay as possible. In order to address the delays and the associated cost implications, I actually decided to send a large team of HSH project executives to bolster the London project teams. So we've had up to eight to 10 people from our group teams being in London to support and help the project teams in London to address challenges in different areas. And we hope that these steps will help to contain the cost and timing implications. We are still looking at an opening date for the Peninsula London of during 2022, but we have not been able to confirm the final timetable yet. The Peninsula Eastern Board has been similarly affected because of the pandemic implications, although the situation has eased a little bit and some of the curfews have been lifted. We have made progress. We've handed over Buildings 1 And 3 for Fithout and Buildings 2 And 4 are close to being handed over. Again, we're still hoping to complete this project in 2022. And as mentioned earlier, undoubtedly there have been some delays but the cost of such delays are not so significant. In Yangon, we have as mentioned earlier stopped work indefinitely for the time being pending monitoring the situation in Yangon. The final slide is on outlook. And of course, nobody would be surprised for us to say that it's difficult to predict given the COVID situation. A lot of our business will depend on when these travel restrictions can be eased so that international travel can resume. We have seen pockets of optimism, some recovery as I've mentioned in China and The US but even for those we've seen some cases of the Delta variant starting to emerge. We are hopeful that COVID can remain under control in Hong Kong but we do need to see our borders reopen to both domestic Chinese and international travelers for any sort of full recovery for us. In this difficult market for hospitality, it's not a surprise that the supply of labor has come under pressure. Employees have started to look at options outside hospitality and we have seen cases of people moving outside hospitality into other industries. This is a challenge that we're aware of and of course seeking to address but ultimately you're fighting against a demand and supply situation and it is certainly a factor that will come into our lives. We've done well in terms of our retail arcades. We have positive leasing renewals and new lifestyle options which have opened in the Peninsula Arcades in Hong Kong and Beijing. So we see some positivity there. In the longer term, we believe that the opening of the Peninsulas in London and East Temple will further enhance our brand presence. And as mentioned earlier, we're hoping to deliver those projects with as little further impact on budget and time as possible, but we're facing a very challenging situation. Again, we're looking forward to the reopening of the Peak Tram, which we hope will make a significant difference to our business. Again, that requires Hong Kong tourism to recover before we can see those sort of numbers. Clearly, the Peak Tram expansion project had a very attractive investment case associated with it. But whether that will be realized or not will depend on this return of tourism. Overall, we have maintained a strong balance sheet as you are aware. We have closely managed our operating costs and we are closely managing our financing cover and our liquidity position. And as we have said earlier, we continue to be a very long term looking and a long term committed business. So with that, we would be happy to take any questions that you have And I understand that the questions are being sent in to us, Julie. So will you act as the MC for questions, please? I will. Thank you, Clement. First question comes from Bank of America, Billy Ng. Wondering if we can provide any on the ground color regarding situation in China. Are the RevPARs in Shanghai and Beijing significantly impacted by the Nanjing outbreak in the last few days? And are we seeing that as worse than what we experienced in January and February? Judy, it's interesting because just this morning we looked at a graph which tracked different COVID outbreaks with the impact on our business and that graph was actually done for Peninsula Shanghai. And what one sees is that of course when there are outbreaks of COVID, our business is affected and of course the worse the outbreak, the worse that impact is. I think we have to be prepared that this will occur from time to time. I don't think we think that COVID has been completely obliterated. And so we do have to manage situations where there will be some outbreaks and we have to manage through that as best as we can. Now the current one so far has not materially affected our business. There may be a small number of cancellations but we're watching it. And as I said, we have to be prepared that these things will recur from time to time. Thank you. Next question comes from Jamie Chen of Rondo Investments. What are the major reasons driving stronger room rates in the second quarter, particularly in Hong Kong as well as The U. S. And Europe? Peter, do you want to? For the question in terms of room rates, in Hong Kong, we were able to launch some packages which had a better offering and allowed us to slightly increase the rates. So we offered some suites and obviously that helps driving rate. In The United States, we were able to start to receive some delegations from The Middle East, particularly in our hotel in Beverly Hills. And hence, in the month of July, they had one of the highest rates in the history of the hotel, which is celebrating its thirtieth anniversary this year. And again, in New York, we were able to receive some very important individual bookings as well as some very good corporate bookings, which were allowing us to get some good rates going. So we're encouraged by that. If I may go back to China, what's to note is that the Chinese consumer behavior has changed dramatically and booking pace is now within twenty four hours. So we receive bookings for the day arrivals for sometimes up to 15% of the occupancy. So in order to answer your question, the first question, we really can't say we've been impacted yet because we don't get bookings weeks in advance anymore. So it's just on the day for today. I think as a more general point, Peter, we have seen enough evidence that fundamental demand and wish for people to use our product remains very strong. Every time we see that the circumstances improve and people feel safe to travel, you see quite a strong recovery. So that is not in doubt. The question is simply when do the restrictions get released so that people can go and satisfy this demand that they have. We also continue to reach out to a lot of our loyal customers and their response is, We will continue to travel. What we're looking for is safety, security and hygiene. These are three topics that we treat incredibly seriously and want to give our guests as much comfort as possible that if they stay with us that we meet those demands. Thank you, Peter. One follow-up question from Billy from Bank of America. Given The U. S. Normalization, do you think we will be able to see positive EBITDA in the second half in The U. S? Well, first of all, it's very difficult to forecast earnings and in fact, one is not allowed to forecast earnings. So we have to be careful about that. But what I would say is that even if there was positive EBITDA as a percentage of the earnings contribution of the group, Asia is actually a more important earnings generator. So in terms of the overall impact on the group's results, as I mentioned earlier, really Hong Kong is the biggest factor. Thank you. We have no more questions at the moment. I'd like to just give it one hundred thirty seconds to see if there's Sure. Any Any more questions from anyone? Please type quickly. Well, Judy, I think overall, to me, these results are pretty much in line with expectations. There's no huge upward surprise or downward shock. I would like to think if anything people would see these results as being a reasonably good path towards the starting of a recovery. That if anything I would see these results as being a little bit more positive than negative in terms of getting back to an EBITDA positive, cash flow positive and so on. So I hope the results would give generally people comfort that we're managing the situation as best as we can although as we keep on saying, the outlook depends so much on COVID. Thank you, Clement. We have one more question from Mr. Mustafa Bolabol of Al Rashid. Are you facing labor supply challenges only in The US and Europe or is this a global issue? I would say that so far the challenges are greater in The U. S. But that's partly because we're seeing more recovery in The U. S. So we need more staff. And so let's say Peninsula Chicago with its business recovering, they're having to find staff that they're struggling with. But we expect that this issue will not only be in The U. S. We expect that it will apply to other markets, Hong Kong as well as business recovers because it's the relative economics of the attractiveness of working in different industries that people look at. One more question coming from Shanda Liang of Gabelli. London has been on the focus for HSH as I have followed your company for three years now. I understand that labor shortage and working condition in London is a challenge. Just want to ask, are we working on the interior room or still a lot of major works still need to be done on London? We are already well into the interior fit out of the rooms and you can see completed bathrooms and stuff like this. But one thing I should explain is that the way in which the London hotel is being constructed is that we're building up and down at the same time. So we're going up from the ground, which are mainly front of house areas, but at the same time we're going down into the basements for the back of house areas. And so actually our concern is much less with the above ground areas which are going quite well. The concerns are more with the below ground areas where it's sort of heavy equipment and stuff like that that the teams have been struggling with. Thank you, Clement. I think that's all the questions that we have for today. So thank you, everyone. If there's any further questions, please do write to us at our IR inbox. Please note that our slides as well as a recording of this session will be available for download on our website later today. With this, it concludes our interim results analyst presentation, and thanks, everyone, for joining us.