Good afternoon. Welcome to CK Asset Holdings Limited 2023 Interim Results Presentation and Question and Answer Session. My name is Gerald. As usual, I will be doing the first part of the presentation, and Mr. Simon Man will do the second part, followed by Q&A session when our Chairman, Mr. Victor Li, joins us together with our Deputy MD, Mr. Edmond Ip. Without further ado, let's begin.
Revenue came to HKD 36.5 billion in 2023 first half, down 23%. If you look at profit attributable to shareholders from continuing operations, it came to HKD 10.331 billion. From an earnings per share perspective, it was HKD 2.88 compared to HKD 3.00 on an apple-to-apple basis from continuing operations from last year. Earnings per share was down 4%. Next page. Dividend per share. We were happy to announce a HKD 0.43 interim dividend, which was flat or essentially the same as last year. Net book value per share up 1.4% to HKD 106.73. 77% of our revenue is recurrent in nature, and 69% of our profit contribution is deemed recurrent as well. 39% of contribution from Hong Kong, 16% from the Mainland, and 45% from overseas. A pretty even and diversified spread.
Property sales division. Revenue was HKD 8.25 billion. Profit contribution, HKD 3.53 billion, down 56%, but with a very healthy margin of 42.8%. Major contribution from Laguna Verona, Dongguan, HKD 774 million. El Potrero, HKD 638 million. Hupan Mingdi, Shanghai, HKD 391 million. We recorded pretty healthy margins across all markets that we are in. 38.6% from Hong Kong, 47.3% from the Mainland, and 48.2% contribution margin from overseas. A total of 1,113 units of residential units were booked and recorded in the first half of 2023. In terms of contracted sales not yet recognized, we still have HKD 14.8 billion, of which HKD 4.4 billion would be scheduled for recognition in the second half of 2023.
In terms of calendar year contracted sales, so far, we have sold roughly close to HKD 9 billion worth of units. Turning to property rental division. We recorded a pretty healthy or solid overall margin of 81%, HKD 2.32 billion of contribution, down 5% from last year. Overall occupancy was over 90%. Overall occupancy from our Hong Kong investment property portfolio was over 90%, I should say. Major contribution from CKC , HKD 595 million, The Whampoa, HKD 333 million, and Hutchison Logistics Center, HKD 324 million. We have a total of 17.1 million sq ft of investment properties under management. Increase in fair value of investment properties came to HKD 2.7 billion.
Most of it was from the CKC II project, as it is very much close to completion and no longer an early under-construction project. We had to follow the accounting protocol and use the residual method to value the assets, and derive a pretty healthy fair value increase for the first half. Hotels and service fee operation. Happy to see a steady recovery in the first half, led by a very good increase in occupancy and a small increase in room rates. HKD 637 million of our profit contribution up 102% compared to last year and a decent 32.7% margin. As expected, most of the contribution was from Hong Kong. From 58% average hotel occupancy rate at the end of last year or full year of 2022. In the first half, the average hotel occupancy went up to 75%, and the average service suites occupancy exceeded 90%.
Property and project management, we have a total of 268 million sq ft of completed projects under our management and our contribution as steady as can be, at HKD 198 million, up 9%, with a healthy contribution margin of 43.6%. Turning to our pub division. Close to or just under 2,700 pubs. Three divisions, managed pubs, pub company, tenanted pubs, Pub Partners, and our distribution and brewery division. Our operation was obviously challenged by the well-covered inflationary environment in the U.K., plus a bit of bad weather in the first half. So contribution dropped by 32% to HKD 586 million. The comparison was also skewed by some disposal gain we had recorded last year, as well as some bad debt being written back in last year's results.
Infrastructure and utility asset operation is a list of our JVs and their respective joint venture of our percentages. We recorded very solid contribution from our infrastructure and utility division. You can see the healthy margins across the board on the right-hand side and overall contribution margin of 34.1% and a HKD 4 billion contribution from all of these assets. But a point you notice, Northumbrian Water, we sold 9% stake, bringing our joint venture shareholding to 27% from 36% last year. Had we not done that, the overall contribution actually would record an increase instead of a 3% decrease.
Now I'll turn over the rest of the presentation to Simon.
Thank you, Gerald. The group's interest in the listed real estate investment trust remains more or less the same at the interim period end date. 33.7% in the Hui Xian REIT, which own and manage a portfolio of 11.8 million sq ft of hotel and service strip properties, office and retail properties on the mainland. And a 26.3% interest in the Fortune REIT, which own and manage a portfolio of 3 million sq ft of retail properties in Hong Kong and Singapore. An 18.1% interest in the Prosperity REIT, which own and manage a portfolio of 1.3 million sq ft of office, retail, and industrial properties in Hong Kong. Hui Xian REIT is an associate, and we share a net rental profit of HKD 74 million and receive cash distribution of HKD 73 million during the period.
For Fortune REIT and Prosperity REIT, cash distribution received during the period amounted to HKD 132 million, were recognized as investment income. Please turn the page. For the group's gearing and maturity profile, at the interim period end day, the total bank and other borrowings amounted to HKD 49.4 billion and HKD 9.2 billion will be repayable within one year, HKD 31 billion within two- five years, and HKD 9.2 billion will be beyond five years. Taking into account the bank balance and deposit of HKD 43.8 billion on hand, the group carry a net debt of HKD 5.6 billion. Both the net debts to shareholders fund and the net debt to net total capital ratio were approximately 1.4%. And for credit ratings awarded by Moody's, it is A2 stable, and by Standard & Poor's, single A, stable.
For the group's land bank, at the interim period end day, we have a total land bank of 129 million sq ft. 76 million sq ft were under development. 17 million sq ft were held for rental. 9 million sq ft were held for hotel and serviced suite operation. 27 million sq ft was held for pub operation. By geographical location, 29 million sq ft was in Hong Kong, 67 million sq ft were on the mainland, and 30 million sq ft at overseas, mainly in the United Kingdom and some in Singapore and Ireland.
Pass it back to Gerald for question and answer.
Thank you, Simon. With the presentation being completed, we now turn to our Q&A session and our Chairman, Mr. Victor Li, has joined us, and you can continue to submit your questions online. I will try to group the questions together at the same time, read them out in order from more macro questions and then to the more technical questions. The first question we have, core profit seems a bit better and in line with market expectations. Are you happy with the first half results and any overall comments you may have? Chairman?
I think it shows that our solid foundation is serving us well. A near-term gap in development earnings was kind of expected. But we can see segments of our investment property portfolio are now in recovery mode. And we will have additional contribution from Civitas going forward. Happy to see that the rebound in performance from our hotel division, and most important of all, the solid performance and resilience of our infrastructure earnings. Pub division is facing some cost challenges, but we are hopeful that our strength and investment will allow us to come out stronger against our peers. Overall, given the state of the property market, I can say that we are where we want to be. And things are happening according to plan. That I'm quite happy.
In fact, if you exclude the one-off contribution from our sale of the aircraft leasing division in 2022, and take into account the positive impact of our share buyback program, our interim earnings per share would only drop by about 4%. I think this is quite okay. The larger macro environment is really uncertain, but our diversified approach to investment and financial discipline have served us well. It has made our company more resilient, and we believe as in past cycles, it is a very CKA tradition to benefit from this period of consolidation and emerge stronger than ever.
Thank you, Chairman. Again, I encourage you to continue to submit your questions. I see a lot of questions coming in. We will try to answer as many as possible. Second question, what are your views on Hong Kong's economy overall?
Sorry, Gerald. Just to supplement on that first point, I think it is important for our learned shareholders that they compare it on an earnings per share basis on our regular property income rather than all the one-offs and look at total rather than per share. Because I think last year's share buyback program is quite substantial.
Yes. The second question is, what are your views on Hong Kong's economy overall?
In the short term, I think we'll be facing some storms. But on the other hand, Hong Kong has gone through many of such storms in the past, and I think the city will be okay.
I'm grouping the third question in three parts. What is your view on the residential property market right now as recoveries seem to be a bit slower than expected? And I guess they've heard we've just launched You've just launched The Coast Line II at a very appealing price. Would you advise people to buy a home now?
If you are referring to The Coast Line, it's basically similar prices as the price seven years ago. We've seen in past cycles when prices and transaction volumes were much higher in both Hong Kong and the Mainland. If a person wants to buy a home for his own use and he can afford it, then I think now is actually a better time than, let's say, three years ago. When everyone says the market is good and when the interest rate is low, actually the chance of interest rate rising is higher, and maybe one should be a bit more conscious. On the other hand, when so many people are bleak and interest rate is high, maybe actually the risk is actually lower compared to three years ago. The likelihood of interest rate dropping now is higher than it's going to go up further.
It's a much clearer picture than three years ago. Also, this is just my opinion. Land prices roughly have also dropped to a point that is quite close to the government's total cost of production of land, if you include all the infrastructure costs. So how much can it drop further? The chances are actually smaller than, let's say, a couple of years ago. If the question is on The Coast Line [Non-English content], the newspaper headlines I see in the last couple of hours was quite sensational. They compared it to us dropping a bomb in the market. I wouldn't go that far, but it's certainly a very attractive price. We generally like to sell things at market price or lower than market price so that we generate turnover.
And on the other hand, we also buy land when we see the trends are clearer. In the last one year, we've been busy also doing acquisitions. It is safer to buy land now than buying land, let's say, three years ago. It is always safer, in our view, to employ a counter-cyclical approach when it comes to investing. Whether people are buying their home or whether we're buying land is the same philosophy. I believe, I think I've answered that question.
Thank you, Chairman. Then, fourth question, I've also included a number of questions into three. In your view, is the health of the property market affecting the recovery of the overall economy? If it is such an important part of the economy, shouldn't the government do something to help the sector? Are you worried about the financial health of Hong Kong?
There's no question that property market is a big part of Hong Kong's overall economy. The health of the sector has a major impact on the economy, and there's quite a direct correlation. We've seen it many times in the past, that people's sentiment in the property would directly affect consumption and spending, and therefore the overall economy. I don't want to comment on government policies as they probably have to balance many factors. The economy may not be the only part of their total consideration. On the other hand, I'm not worried at all about the financial health of our government.
The Basic Law already provides a guideline on financial prudency, that we should keep the, I believe if I remember the wording correctly, is to keep the budget commensurate with the growth rate of its GDP. Maybe I'm not exact on the wording, but go back to Basic Law. I think the line is one or something, that the budget should be along the lines of our GDP growth.
The next question, could you comment on your recent announcement regarding the termination of the agreement for the disposal of the Borrett Road project?
I do not know what to add. We have announced quite a bit already. It is an unfortunate situation, but I should not really comment too much. It is really on the individual circumstances of the buyers, rather than market in general. I should not really comment on the individual circumstances of our buyers. But our team will continue as normal with the marketing of the project. All I know is that if anybody is looking for a brand-new home that is really close to Central with a good view of Victoria Harbour, I do not think there are many choices around. We are not talking about [audio distortion] rare demands, new homes with a harbor view close to Central. And it is already quite difficult. I am generally optimistic about these properties. It is all a matter of pricing.
Thank you. The next question, you have another HKD 4.4 billion in contracted sales to be booked in the second half. I think the full year development contribution will be much less than 2022. Are you concerned about that and the impact on your full year's earnings?
As I said earlier, things are happening according to plan. The lower level of contracted sales basically is a reflection of our disciplined land acquisition approach in prior years. If we had bought a lot during those times, the project might actually be at a loss in today's market and with a higher debt level and constrain our ability to generate cash flow. So, to us, the focus is really on the quality of the underlying earnings and the overall health of our balance sheet. In terms of development business, the most important thing really is the cost of entry per square foot and the safety margin on the project would be more important than maintaining a sort of steady contracted sales period because then that would make us feel more like a contractor than a developer who is going to play the cycles of the market.
We have to make a judgment as to when to buy, when we are lighter in assets and when we want to be heavier in assets. We have been practicing what we have been preaching and, recently we have started to buy a few pieces of land and the entry cost is much, much lower than have been possible in the past years. All I can say is things are happening according to plan.
Next question. Overall Hong Kong office vacancies have remained high. Do you expect further drop in property rental contribution for your investment property portfolio in 2023? Any update on CKC2 pre-letting?
We have a drop in our rental contribution of roughly about 5%. I think there is still pressure for offices and high-end retail. But mass market retail and industrials are doing quite well. The overall occupancy of our Hong Kong investment property portfolio is over 90%, and we will try our best to do better. With the rental contribution from Civitas in the second half of this year, we will be able to further diversify our income stream. Completion of CKC2 is expected to be around the end of the year. It is topped up already, and pre-letting efforts are ongoing. We hope to see a solid contribution from this iconic building in the future. I think the product will look better, and people can feel the quality of the project when it is completed.
Almost every single unit will have a full view of the Harbour and it is actually two towers within one building, so the flexibility in floor plan, I think it would set a new standard in Hong Kong.
Thank you. The next question. CKA is participating in the social housing sector in the U.K. through the acquisition of Civitas. Are you interested to do the same in Hong Kong?
Actually, in U.K. we have been doing social housing for over 10 years, so it is not something that is unfamiliar to us. On top of that, it is not only the U.K. we have been doing social housing. I personally started doing something in Canada, I think 20, 30 years ago. We are familiar with non-market housing in U.K., Canada, and several other countries. Whether we will participate in this sector in Hong Kong or not really depends on the return. We do not like or not like one business. I think we look at the financial discipline. So, if the returns are commensurate with international standards, then we can look at it. If it is lower than we do the international one more. Thank you.
You recorded a HKD 2.69 billion revaluation surplus. Could you elaborate on that?
Actually, it is not as much as a revaluation as a completion of construction. Much of the revaluation gain was really just CKC II. Normal accounting rule dictates that we must value the building as it is close to completion rather than a site under development. We cannot continue to value it under a site in development because it is already topped out. We will just start looking at it as a completed property, minus a bit of remaining construction cost. But the valuation of this building is still, I think, one of the very lowest in the city at under HKD 35,000/sq ft . It is following our tradition on always carrying our property valuation at rather conservative pricing.
Thank you. The next question, could you explain the drop in EBIT contribution of your pub operation and what is your outlook for the business?
Gerald, can you help me answer that question?
Well, there is a combination of reasons. Essentially, the growth in revenue that you saw was largely due to price increases, multiple price increases that we had put in to combat inflation. Volume is still below pre-COVID, about 9% below. Overall, the increase was not enough to mitigate all of the inflationary pressure related to labor, food, drink, supply chain, and utilities. The comparison with 2022 was also affected by some one-off items. in 2022, we had some disposal gain, we had some reversal of bad debt provision. I think the outlook is that the inflation looks like it is easing a bit in some areas, and we are hoping operating conditions will be much improved in the next few months.
We are doing what we can to work harder and transform the operation work, the assets a little bit harder, and hopefully to drive better returns going forward. Hopefully, we will come out of this environment better than some of our peers.
Maybe I can supplement a little bit on the pub sector. I do not know whether our analyst friends are aware of this, but in most residential areas, in each area there is a restricted license. Normally, in an area, they will not allow more than one or two pubs in that sub-area as an urban planning. In a way, there is a barrier of entry. On one hand, we are running pub as a service operation. On the other hand, it is very much a property business with us owning the shops ourselves. Every two, three weeks, actually, we are buying and selling pubs in the U.K. It is a very organic acquisition and disposal happening at the same time. It is very similar to property.
Thank you, Chairman. The next question is on hotels. What is your outlook for your hotel division?
Well, they are definitely recovering after going through such a difficult time. But it is still lower than pre-COVID levels. An improvement in average hotel occupancy rate from 58% to about 75% was encouraging but not quite pre-COVID level. But the service suite division has been doing well. Its occupancy is always over 90%, and we expect to see a steady kind of continual recovery. Our operational capability as daily hotels as well as long-term stay service suites has served us well during the past few years. This will continue to help us optimize and balance contribution from the division going forward.
We will take on a couple more questions. The next one is on infrastructure. Your infrastructure and utility operation contributed more than 35% of your principal activity earnings. Do you have plans to expand this sector further?
I mentioned earlier that things are happening according to plan. One of the plan is business diversification. It enables us to maintain a stable financial performance during cyclical times. It is actually a very basic investment principle to not put all your eggs in one basket, and that's what we've been practicing. The cash flow from infrastructure, from pubs, from our investment divisions are now supporting us in many ways. Thank you.
The next question, the financial troubles of a major U.K. water company, I think Thames Water, have made headline news. Does similar interest rate or pressure impact Northumbrian Water?
To answer the question, no. Financial discipline is the core of everything we do, and Northumbrian Water is no exception. The debt level is very manageable, and the financial performance was actually better than 2022. If you take account of our shareholding going down to 27% this year from 36%. Maybe I should mention also that Thames Water was placed first in terms of customer measurement of experience across all water and wastewater company in the U.K. in the last year. This is a very treasured operation target in that industry and they should be proud of it. I think they also have sort of the highest trust score in the annual customer survey by Consumer Council for Water. They are doing quite well.
CKA's gearing has remained very low. Could you share with us your capital deployment plans?
How should I say this? I go back to what I said earlier. Things are happening according to plan. We are happy with the quality of our balance sheet. Our land bank cost is low relative to our peers. I think we're at a good place. We have the choice. Again, I'm using some words that I'm using every day. The choice to be selective in terms of what and where we want to do going forward. We're always on the outlook for more deals and more land sites. But at the end of the day, we are patient and there's no must-win. We just compare our IRR from one deal to the other. The focus must be on profit and safety margin, cost of entry, and especially when the cost of capital is higher than ever. But we're in a good place. We're in a good place.
The last couple of months when we move on Civitas, we can handle a bit of that scale with comfort and ease. That's something good. Thank you.
Any further plans for share buyback?
I can't comment on the future, but if you look at history, we've been consistently buying back our shares for quite a while now. It's a good way to enhance shareholder value, especially the fact that we have a healthy balance sheet. In the first half of 2023, and please correct me if I'm wrong, Simon, we're spending close to HKD 1.3 billion-HKD 1.4 billion, buying back over 30 million shares. 31 million shares, something along that line.
That's right. The next question will be the last one, and I'm smiling because I'm not going to ask the chairman some of the personal questions that you guys are putting in. Let's remain on topic. Last question is on our EPS drop, 19% or 4% if you exclude the sale of AMCK. You have maintained a flat absolute DPS compared to first half 2022, despite the drop. How should investors interpret this, and what is your dividend policy going forward?
We've always been saying this, the key drivers of our dividend policy will continue to be our long-term view on profitability and growth prospects. I think our ability to maintain a steady policy despite being in a cyclical, and I can say especially in the property market, a tougher environment is, I think, stronger than our peers partly because of our diversified approach and partly because of our discipline. Things are happening according to plan. Thank you.
Thank you to everyone who has joined us, and thank you for our management team for staying with us. We will let our Chairman go to the CK Hutchison analyst meeting. I will end the Q&A session at this time. Thank you very much for joining us again. We will see you next time. Bye-bye.
Thank you.