Earnings Call: H1 2018

Aug 3, 2018

Hi, everybody. Good to see you all and welcome. I think what we should try and do is to make the presentation fairly short and succinct and then people can ask whatever questions they have. I think many of you would know me. I'm Clement Kwok. I'm the CEO. Peter Bora, COO at the press conference today, we pointed out that Peter has been with Pininfo for thirty seven years. Martin, who runs all of our non hotel properties and operations, Martin has been with us thirty three. And then Matt is our CFO, who's been with us just take away one of the digits. All right. Disclaimer, you can read it yourself. Highlights, basically good results. Where were the results driven from? I think Peninsula Hong Kong. In terms of earnings growth, Bangkok had a good earnings growth. In terms of income contributors, the biggest ones are still the Peninsula Hong Kong, the Repulse Bay, the Peak Complex and Tokyo. Beijing, good growth because it was fully opened back in August. So we've still got a bit of both a full year effect and a buildup. Effectively, we've opened a new hotel. And that means different clients, different room rate level, having to market to a different client segment, which is actually the client segment we're more familiar with, would be like the Peninsula Shanghai sort of segment. But that takes a little bit of time. We'll talk a little bit about the continuation of our three projects. You know about them, but actually good progress. They're all under construction. And we of course would like to emphasize that our underlying earnings went up by 41% for the first six months. All right. Matt, go. Okay. Thanks, Clement. Good afternoon, everybody. So key headline numbers on this slide, revenue was up 10%. Overall, we saw positive contributions from the vast majority of our continuing operations. Our revenue growth was 10%, our EBITDA growth was 18%, so some good margin expansion, some good cost containment there. So 18% margin growth to HKD64 million. And as I mentioned, the margin increased slightly. What I would say about the margin is we typically have a higher margin in the second half than what we do in the first half as well. So we're slightly skewed to the second half. Increase in non operating items is the fair value adjustment going through. That's Hong Kong $391,000,000 and it's principally across the Repulse Bay complex. There was no change in cap rates across the investment property portfolio, so that's predominantly on the back of stronger results. And our profit attributable to shareholders was $644,000,000 but I suspect most of you guys, as we do focus on underlying profit, which as Clement just mentioned was 41% higher than last year, coming in at HKD255 million. If we look across each division, hotels continue to be the main contributor for the group's results, 78% of revenue or of the combined total revenue of the group and 60% of the combined total EBITDA of the group. As Clemens already touched upon, a big part of the increase in the revenue for hotels was the return of Peninsula Beijing to full inventory that happened in August. And then we also saw strong performances from both Peninsula Hong Kong and Peninsula Bangkok. Both of those properties recorded double digit RevPAR growth. What I would say is the markets in both of those locations has been strong, but we've in fact outperformed the market as well. EBITDA margin for hotels increased by one percentage point to 18%. Turning to commercial properties, it also performed well. Repulse Bay recorded slightly higher revenue over the period, but we also commenced rental or leasing of our newly renovated property 21 Avenue Clabert, which is the office property which is adjacent or predominantly office and it's adjacent to the Peninsula Paris. This division was slightly impacted by the closure on a period on period comparison, we did close down one to five Grosvenor Place that was contributing in the 2017. That was obviously closed down because it will be redeveloped as the Peninsula London. So revenue growth for commercial properties was 2%, but EBITDA growth was 7%. Clubs and services, we saw an increase in revenue, but we and that was mostly coming from the Peak Tram and the Thai Country Club, but EBITDA was flat as we invested in our merchandising business. Overall, the EBITDA margin for the company was 23%, up one percentage point from the same period last year. And as I mentioned, we should see or generally what we see is a slightly higher contribution in the second half. Turning to capital expenditure. The theme with respect to capital expenditure is as I have spoken before and as we talked about in the 2017 final results. So basically what's happening is we are shifting our capital expenditure from existing assets to the new properties. So you'll see and that's manifest in the numbers here, But you'll see that existing assets the numbers come down significantly as we accelerate new properties. So our after tax net cash generated from operating activities was $646,000,000 and that represents an increase of 40%. About $200,000,000 of that was applied to fund capital expenditure on existing assets. That still includes a number of special projects, the largest of which has been the creation of a new bar on the rooftop in Chicago. So that was an area which wasn't generating any income previously, and we've built a bar on that. And Peter Bora will introduce that subsequently. It also includes the Peak Tram and a few other special projects. For the first half of this year, $678,000,000 was spent on the three new projects. So as said, I that's accelerating and that's up nearly 100% over the same period last year. Despite the fact that we are having more and more capital being allocated to new projects, I'm still pleased to report that our balance sheet and our cash flow metrics remain very strong. During the period, our net borrowings increased by about 6% to HKD5.8 billion and net debt to total assets increased by one percentage point to 12%, largely due to those stage payments for projects. But despite slightly higher borrowings, our cash interest cover has improved. It's sitting at a very healthy 10.7 times and that's on the back of stronger earnings. Looking forward, we, as previously mentioned, do have some fairly significant capital commitments across the three new hotel projects as well as the Peak Tram upgrade project, and we would expect that our leverage would steadily increase over the coming years. But I would stress that the funding for all of these projects has been locked in, so we feel we're in a fairly comfortable position. We continue to monitor our overall debt and cash flow positions closely, closely and our policy has not changed on that in any way. We continue to believe that having a conservative balance sheet insulates us against any potential earnings volatility. And then finally, just to conclude my section, we have declared an interim dividend of $05 so that's up $01 from $04 last year, and again, reflecting our confidence and a strong first half. With that, I'll hand over to Mr. Borat. Thank you, Matthew. Good afternoon, ladies and gentlemen. I shall be quickly highlighting hotel by hotel. The Peninsula Hong Kong is celebrating its ninetieth anniversary in 2018, and we're delighted to report a very strong first half of the year with revenue up by 9% to HKD660 million. We will be organizing a variety of community activities and programs and also have displayed some amazing Votero artwork in the lobby already. The luxury retail market is slowly recovering and recent momentum has been positive and a number of new tenants and renewals have been successfully signed. At the Peninsula Shanghai, we remain the RevPAR leader and the average rate leader in that city for the 2018 and revenue has grown by 2% to RMB249 million. And Sir Elias Terrace, which is part of the Shanghai Hotel, has been named as one of the best bars in China and in the world by Communist Traveler. The Peninsula Beijing, as mentioned before, has undergone a complete transformation with an extensive renovation converting its previous five twenty five rooms to two thirty elegant suites, which are the largest in Beijing and amongst the most spacious hotel rooms in China. Following the renovation, the hotel's RevPAR and occupancy has showed very positive growth. And for the past several months, we have been the rate leader in our comp set in Beijing. Revenue has grown by 53% to RMB124 million. And we're also delighted that we were the recipients of the first ever BREEM GOT Good certification in Beijing for the newly renovated building, which is a significant achievement aligned with our strategy to promote sustainable luxury. At the Peninsula Tokyo, we have reported an improved RevPAR positioning, average occupancy for the first six months of twenty eighteen with revenue up by 4% to JPY6 billion. And the suite occupancy has been particularly high during the peak Sakura season in February and March. The Peninsula Bangkok has reported a strong recovery in the 2018 with a double digit growth in RevPAR and occupancy following the end of the mourning period for His Majesty's death. The Peninsula Manila experienced an improved 2018 with revenue up by 3%. In The United States, the Peninsular New York has reported a positive first half, with revenue up by 6% to USD 42,000,000. The hotel is celebrating its thirtieth anniversary in 2018 and has designed a series of curated experiences for our guests. The hotel is also showcasing an art exhibition celebrating artists who were prominent in the 1980s, including work by Andy Warhol. The Peninsula Chicago reported positive results in the 2018 with revenue up by 6% maintaining its position as the RevPAR and average rate leader in the Linde City. And as mentioned by Matthew, we were delighted to open last month a stunning new bar called ZBar on the roof of the current ballroom, and the reaction from the guests and the press has been extremely positive. At the Peninsula Beverly Hills, the hotel was once again voted as the best hotel in The United States by Global Traveler Magazine. Magazine. The hotel has reported a slight drop in its financial results over the previous year, which was in line with the market and particularly due to increased competition from the immediate vicinity of the hotel. Revenue decreased by 8% to USD 38,000,000. The Peninsula Paris reported a better 2018 with revenue up by 6% to €30,000,000 And food and beverage revenue was robust, particularly from the rooftop restaurant Lois Oglon, which offers wonderful views over Paris. And now over to Martin to talk about the commercial properties. Thank you, Peter. Good afternoon, everyone. Our largest commercial property is, as you all know, Repulse Bay Complex, has had a satisfactory first six months. We saw a stabilization of the luxury residential market in Hong Kong and revenue is up by about 1%, $313,000,000. The Peak Tower performed very strongly with increasing visitor numbers in the first half and revenue up 3% to HKD100 million. The revenue source of the Peak Tower is commercial leasing and also the open air rooftop Sky Terrace 428. St. John's Building at the lower terminus of the Peak Tram was fully let during the first half and revenue increased by 3% over the first half of last year. In Vietnam, the landmark reported an increase of 1% in revenue in local currency terms despite a highly competitive residential market in Ho Chi Minh City. As Matthew already mentioned, the renovation of 21 Avenue Clabert next to the Peninsula Paris was completed at the 2017. We've successfully leased the entire office building and one of the two retail spaces and we're in negotiations for the other retail space. In the clubs and services division, Peninsula Merchandising increased its revenue by 6% over the same period last year, driven by new marketing campaigns and increased business at the Peninsula Boutique at Hong Kong International Airport. We also launched a new had a brand relaunch, Journey to Treasure, which we think will also improve brand awareness and sales. The Peak Tram revenue increased by some 7% in the first half based on improving tourist arrivals and the price increase. We recognized that long queues to board the tram are an issue for many visitors and we are working on a full upgrade project for the Peak Tram system and all its facilities. And we hope to be announcing the details of that $680,000,000 investment sometimes towards the end of this year. I'll now hand back to Clement. Thank you. Thanks, Martin. Well, the projects have not changed. They're the same as what we were doing the last time you spoke to us. The Peninsula London, of course, is in a spectacular location right on High Park Corner. Actually, if you happen to be going past London now, you will see this massive site with actually, the first core has already been built. It's a massive core. And when you're driving around High Park Corner, you'll see this very large site. And you will actually also see the prominence of this position. It's really very, very it's in a very prominent position. Just to remind you, in that building, we are developing 189 room hotel and 26 luxury residential apartments with a project budget in the region of GBP650 million. Well, based on what I said just now, construction is clearly well underway. Demolition has been completed. As mentioned, quite a few cranes on the site working on the foundations and superstructures. And completion is currently scheduled for 2021. Between now and completion, we do intend to undertake some private sales of the residential apartments in London. But that is really a process that we're just preparing for now and that will actually be done on a very selective sales basis. Peninsula Yangon, again in an extremely good location right in the center of Yangon. You're aware that this was the old Burma Railways headquarters building and therefore is close to the Central Railway Station and next to Scotts Market. That one will have 88 guest rooms and the setting will be almost like a city retreat with obviously the high ceilings of the existing building, the garden terraces, the tropical landscaped gardens and outdoor swimming pool. Our investment there is around HKD126 million. We will have a 70% interest and we'll have majority control. And that project is expected to be completed in 2021. Istanbul, the location is right on the Bosphorus. It is unique in the sense that it is not only on the Bosphorus, but it looks over to the old town. So from that location, one can see the Blue Mosque, the Hagia Sophia, the Topkapar Palace and really there's not another location that is both on the Bosphorus and that you can look over onto the old town. Our investment on a fifty-fifty basis is budgeted to be EUR150 million. And again, that one is already under construction. It's quite a tricky project because you're dealing with three existing historic buildings. You have to preserve them, renew them, connect them, build a basement that links through them and there's also a fourth new building to be built. We've had some unforeseen site conditions and we've had some heritage building issues. And because of that, the timetable has slipped a little bit and we're now showing 2020. Now we're obviously aware that Turkey has faced some uncertainties in recent times with economic, political and security issues. And we of course have continued to monitor those developments very closely. Actually, we're seeing some recovery in Turkey Anecdotally, I think a number of Turkish businesses are reporting quite strong recoveries already. And of course, for a project like this, we always have to look very long term. We invest for the long term. We think long term. And on that basis, we continue to believe that Istanbul is a city with very good long term prospects for both business and leisure travel. On to outlook, of course you know that our most important market is Hong Kong and there at the moment tourism and the high end retail market have recovered and improved and the high end residential leasing market is stable. I think the words I used at the press conference today were at least stable and probably a bit optimistic over and above stable. Of course, we believe that our strength comes from the quality of our products and services. And irrespective of the market conditions, we believe this differential makes us more competitive as well as having the long term relationships with our hotel guests, but also with the retail tenants and you will see that over the past few years of uncertainties not that we've had no turnover, but generally we've kept our tenants quite stable in the arcades. In The U. S, Japan and the mainland Chinese, the outlook looks relatively stable. Of course, this trade war is on everybody's minds and I was asked about that at the press conference. Clearly, the type of business we're in, we want as much trade and investment as possible. So if this trade war is going to reduce trade and reduce inward investment, clearly that would have some impact on us. I would say that we haven't seen any of that at the moment. We have not felt that impact. It's difficult to predict what that impact might be. But of course in general we are pro free trade people. The Peninsula Beijing, I made the point that it's effectively a new hotel, building a new type of clientele, although the hotel has a very famous reputation which has been around for quite a long time. So we have that benefit but we are still having to build new client basis accounts. For instance for your corporate accounts you have to sign them on an annual basis. It takes time to build up accounts like that. So I foresee that the growth of Beijing will continue and will take a few years to build up. We've made the point here that our business is also affected by geopolitics in The Middle East. We have significant Middle Eastern client bases in properties like Paris, New York and Beverly Hills where from time to time if they have travel policies or what happened in Saudi Arabia, we do get some impact from that business. We manage that the best as we can by going into other markets and working through diversification. But we will have some impact from that sort of those sort of issues. The best defense against all of the uncertainties that we have in the world nowadays is to maintain a conservative financial position, which is why you see that we maintain a conservative level gearing and that interest cover level including our cash interest cover level. Obviously, we run lots of models to forecast what the numbers will look like with the continuing spend on the three projects. And we of course go through various downside scenarios as well. And I can say to you all of those look fairly comfortable. So with our long term outlook and the new projects that we're developing we remain confident and positive about the future but we do appreciate that the world remains uncertain and we have to manage through the shorter term fluctuations that we inevitably will encounter. All right. Thank