Earnings Call: H1 2019

Aug 7, 2019

Welcome. Good afternoon, ladies and gentlemen. First of all, I'd like to issue an apology from our CEO, Clement Kwok. He actually had eye surgery recently, So he is not here today. So I'm pleased to welcome you to the presentation for our 2019 interim results and these were posted on the Stock Exchange website earlier this afternoon. So sitting beside me, I believe many of you will know my colleagues, but to my left is our Chief Operating Officer, Mr. Peter Bora and on my right hand side is our Group Director of Properties, Mr. Martin Sawyer. As with previous sessions, we have a disclaimer for you to read, so please take your time to read that and assuming you've done so. So in terms of the 2019, the first half has been a challenging period for our group. We encountered global political and economic uncertainty with escalating trade tensions in some of our key markets. The political protests in Hong Kong continue and we are concerned about the impact of these on tourist arrivals as well as the broader economic stability in Hong Kong. Our revenue declined modestly during the first half of the year, impacted by the temporary service suspension of the Peak Tram as part of its major upgrade project as well as softer market conditions for some of our hotels. In light of this, the increase in our operating expenses was relatively well contained. However, considering the high fixed cost nature of our business, this led to a large percentage decline in our earnings compared to last year. Despite the political and economic uncertainty that we face, we remain committed to building a long term sustainable business. We continue to invest in improving our assets and developing our people with training, learning and development opportunities as well as investing in technology and digital capabilities to enhance our marketing efforts. Due to this approach, in February 2019, we're pleased that we were awarded Forbes five star ratings for all 10 Peninsula hotels, and we believe we're the only group in the world to achieve such rating for all of its hotels. We are progressing well with our three new hotel projects as well as the Peak Tram upgrade project. We continue to retain a conservative capital structure to help insulate our business against volatility, and our company remains strong, in terms of its financial position and its ability to weather any downturns. I'll now, walk through some of our key financial highlights. Before we move on to performance, I would like to note that the basis of the preparation of our financials for this first half has been amended as a result of the adoption of Hong Kong FRS 16 in relation to lease accounting. More details around this impact on our business can be found in the notes to our financial statements, and we have some fairly detailed disclosures there. So in terms of our performance, we did come out with a profit alert in June. And the key factors that contributed to that profit alert were really unexpected softness for some select hotel operations, particularly the Peninsula Hong Kong and the Peninsula New York, the peak tram suspension, which we had flagged as part of our 2018 annual report and then also the lower property revaluation gains that we saw, particularly on the Hong Kong investment properties, which of course is a noncash impact on our business. Considering the operating environment and the peak tram suspension, our revenue was down modestly at 2% to about 2,800,000,000.0 Our operating costs also were well contained at less than a 3% increase, which in light of the increased costs associated with supporting our three hotel projects and the Peak Tram upgrade project was quite reasonable. As a result of these two effects on revenue and also costs, our EBITDA overall, however, declined by about 16% to $610,000,000 In addition, the high fixed cost base nature of the depreciation charges, interest and the reduction in the revaluation gain contributed to a significant decline in our profit attributable to shareholders of about 60%. However, if we exclude those nonoperating items, such as the revaluation gains, our underlying profit fell 39% to Hong Kong, a 148,000,000. With the escalation of trade tensions and the ongoing Hong Kong protests, we do remain concerned about the outlook for the remainder of the year. And to protect our profitability and our cash flows, we are implementing cost saving measures and deferring all nonessential CapEx across the business. Turning now to the results of each of our divisions. Our hotels division remains our main contributor group results, accounting for about 77% of our combined total revenue and 59% of our combined EBITDA. Our rooms and food and beverage were negatively impacted by the political and economic uncertainty in some of our key markets we operate. Hong Kong, Mainland China, as well as The US were all impacted. And our arcade if I look at our arcade leasing over the period, it was relatively stable in the first half. Combined, our EBITDA margin for the hotel division decreased by about three percentage points to 17%. Looking at our commercial properties division, our residential leasing business recorded gains, whilst the Peak Tower was negatively impacted by the aforementioned Peak Tram suspension. Our combined EBITDA division for the Commercial Properties division decreased by five percentage points to 55%, partly due to the factors I've already discussed as well as higher property tax and maintenance costs. Finally, our clubs and services division likewise was impacted by the peak tram suspension as well as softer retail sales at Peninsula Merchandising. Overall, the EBITDA margin for the business was 22%, which is down three percentage points from the 2018. Turning now to our cash flow. After tax net cash generated from operating activities for the 2019 amounted to $6.00 2,000,000, of which $242,000,000 was applied to fund our capital expenditure on our existing assets, the majority of which relates to the Peak Tram upgrade project as we continue to moderate our capital expenditure across our other assets. All in all, our operating cash flow still comfortably covers our existing assets CapEx requirements. In total, Kong, $611,000,000 was spent on our new projects in the first half, and a significant amount of the project expenditure was in fact financed by our operating cash flows. And as a result, our gross borrowings only increased by about $111,000,000 Our total cash flow will remain negative in the near term as we ramp up our capital spending in the three new hotel projects before we start recognizing the London residential sales in 2021. Despite our increasing investments in our new projects, our balance sheet and our cash flow metrics remain very strong. During the period, net borrowings increased by 8% to Hong Kong 6,400,000,000.0, and our net debt to total assets increased by one percentage point to 12%, predominantly due to the project payments. Despite the higher borrowings, our cash interest cover remains healthy at approximately 9x. Looking forward, we do have significant capital commitments for our projects, and as such, we expect our gearing levels to continue to increase. From 2021 onwards, however, these gearing levels will improve significantly as we look to deleverage, with the sales proceeds from London being able to be applied to, the amortization of the loans. We continue to monitor our overall debt and cash flow positions closely and believe that the best defense against any unforeseen volatility in business levels is to maintain liquidity and prudent financial ratios. In light of the environment, we are pursuing cost project wide or group wide cost savings rather, and as mentioned, deferral of nonessential CapEx. In terms of the dividend, we have declared an interim dividend of $04 per share, which reflects the decrease in profitability that we've seen in the first half. And with that, I'd like to hand it over, to Mr. Peter Bora to take us through our hotel operations. Thank you, Matthew, and good afternoon, ladies and gentlemen. A brief review on our hotel's performance. The Peninsula Hong Kong was the market leader in the rate in the first half. Overall, revenue declined 7%, partly due to an exceptional performance last year from a large nonrecurring group business. This factor, combined with increased supply in the Chimcha Chewy area of Hong Kong and a soft market overall for the luxury sector, led to a challenging environment in the first half. The office tower continued to perform well The arcade occupancy was at 83% The overall environment in Hong Kong for luxury retail remained soft In other Asia, the Peninsula Beijing reported positive growth in RevPAR following its major transformation in 2018. It was the rate leader in its competitive set. The Peninsula Shanghai was also the rate leader in the city. However, the hotel reported a softer 2019 due to intense competition and significantly increased supply since 2017. The Peninsula Tokyo had a strong first half with improved RevPAR positioning. We are optimistic for the coming year in anticipation of the Rugby World Cup in 2019 and the Tokyo Olympics in 2020. U. S. And Europe, the Peninsula New York had a challenging first half with decreasing revenue and occupancy. The Peninsula Chicago reported a positive first half, achieving market leader position in RevPAR and average rates. The Peninsula Paris reported improved occupancy and average rates. We have focused on driving groups and MICE business, and we were honored to welcome several diplomatic groups, including a very high level state visit during the first half of the year. And now I'd like to hand over to Martin to talk about the Commercial Properties and Clubs division. Thank you, Peter, and again, afternoon to everyone. Some highlights from the Commercial Properties division. Repulse Bay complex reported a positive first half with increased revenue and occupancy despite a softening market for the luxury residential across the city. The Peak Tower was fully leased for the 2019. Revenue was down by 7% due to the temporary closure of the Peak Tram, which also had an effect on the Sky Terrace 428. St John's Building was fully let during the 2019 and revenue was stable. The landmark in Vietnam reported stable revenue and occupancy despite intense competition in the residential sector. We have successfully leased the entire office and two retail spaces at 21 Avenue Clabert in Paris and revenue increased by 6% compared to the same period last year. In our clubs and services division, as we've mentioned from April to July, we temporarily suspended the service of the Peak Tram to enable us to carry out construction work as part of the previously announced upgrade project. In the 2019, revenue decreased by 31% due to the suspension, which had a significant impact on our group earnings. The upgrade project is scheduled to complete early in 2021. The second planned service suspension will continue to negatively impact our earnings in 2020. Revenue at Peninsula Merchandising was 1% lower than the same period last year due to softer retail sales. Peninsula Merchandising is planning to expand in Asia and will open new boutiques in key cities and drive online sales. Quail Lodge and Golf Club revenue increased by 7% year on year as golf memberships and golf rounds improved. I'll now hand back to Matthew to talk about our new projects and the outlook for the remainder of the year. So in terms of our new hotel projects, the picture on your screen is the development progress of the Peninsula London. So as it relates to the Peninsula London, construction is progressing well. We held a topping out ceremony on the June 19 this year in London. But because of the top down construction methodology that we have deployed on this project, we did get to the top very quickly, and the belowground excavation and structural works will continue for some time. In London, we've also commenced some private marketing of the apartments, which are in the development. As a reminder, we have 26 apartments for sale there. And we're pleased with the exchanges of contracts that we've received to date. Our ambition is for this hotel and these residences to set a new standard in luxury and service in the London market when it's complete. With respect to the construction budget, and we have flagged this, that we have faced some significant cost pressures from recent tender returns, and a thorough review of the budget is underway. In terms of the Peninsula Istanbul, it is situated on a prime site overlooking the Bosphorus and within walking distance of the old town. This is a complex project involving four buildings, three of which are historical and are at various stages of restoration, and that project continues. The Peninsula Yangon is the smallest of the three projects. It also involves restoration of a historic building. It's an eighteen eighties historic building located in the heart of Downtown Yangon, and similarly, we're pleased with the construction progress to date on that project. In terms of outlook, we do remain concerned about the impact of the situation in Hong Kong and what impact that might have on our business, given the given the large proportion of our income that is earned here in Hong Kong. We do take some comfort, however, from the fact that a considerable portion of our earnings in Hong Kong do come from more stable rental based businesses, including the hotel arcades and the commercial properties division, which at least insulates us from a more severe short term impact. We also have a conservative capital structure and a strong balance sheet that will help us weather any ongoing economic downturn. But I do want to reiterate that despite the market uncertainties, we remain committed to building a long term and sustainable business, and we're going to continue to invest in our assets and our people. Whilst the Peak Tram will again be suspended in 2020, the end result will see an improved queuing and waiting areas with entertaining entertainment features for up to 1,300 passengers. And the new tram cars will be able to carry two ten passengers, which is almost double the current capacity. Elsewhere across the business, we're implementing new strategies in the hotel division, for example, to help drive our Chinese mainland business. We're looking to enhance our food and beverage strategies, and we're looking at overall data analytics to improve our decision making across all of our businesses. As Peter mentioned, we are very optimistic for the Peninsula Tokyo as Japan prepares to welcome the Rugby World Cup later this year and the Tokyo Olympics in 2020. So overall, we remain optimistic for the long term. We have a highly motivated and dedicated team of people working for the company, and we are confident that the business will benefit from a largely upgraded asset portfolio as well as the opening of the three new hotels in London, Istanbul, Yangon from 2021 onwards.