To CKA's 2018 annual results presentation. I will try to go through the presentation swiftly, then we can open the floor for questions. Mr. Li will be joining us shortly. 2018 full year revenue HKD 64 billion, up 1% from 2017. Net earnings, HKD 40 billion, up 33%. Net earnings per share, HKD 10.85, up 34%. A slight difference as a result of our 4.1 million share purchase in 2018. Net earnings before IP revaluation and the disposal of The Center, HKD 6.53, up 20%. Final dividend declared was HKD 1.43, making the full year 2018 dividend HKD 1.90, up 12% from 2017. As at end of last year, the net book value per share was HKD 87.59. Since 2016, our company has embarked on a path that can be deemed as somewhat transformational. Our focus was to enhance the underlying quality of earnings as well as our asset base.
Since we have invested over HKD 100 billion in various businesses, in terms of industry, our focus was to discover and find resilient, defensive, somewhat non-cyclical businesses with macro predictability. Apart from the selection of industries, we also ensure and put particular focus on making sure that there is good diversification between industries as well as geography. Many of these businesses that we invested capital into have long-term growth potential as well as underlying earnings sustainability. And throughout the process, we never forgot to maintain our return discipline as well as financial discipline. Since 2016, about a two-year time period, we have been able to increase our recurrent profit contribution by over 50%. This is a good example of what we had done recently. In May 2018, we sold The Center, or 75% of The Center, for HKD 40.2 billion.
In June and October 2018, we bought the UBS London headquarter, as well as purchased the economic benefits of various infrastructure businesses. By using roughly half of the sale proceeds from The Center, we were able to achieve a net increase of the annualized contribution.
Half of the capital for 100% of the profit.
Right.
Yeah.
More than 100% of the profit. Other asset enhancement initiatives such as the redevelopment of Hutchison House will take place shortly, as well as the repositioning and refurbishment of Whampoa Garden Retail Arcade. That has been completed. In 2017, 33% of our revenue was deemed as recurring, and 42% of the profit contribution was deemed as recurring. These percentages are now up to 46% of revenue and 55% of profit contribution. Also, 33% of revenue and 20% of contribution are now from non-property sources. In 2017, 13% of revenue and 12% of profit contribution from overseas. Now the percentages are 27% and 24% respectively. Turning to divisional performances. Due to recognition of over HKD 25 billion of sales in the second half of 2018, the anomaly that we saw in the first half was corrected, and a healthy margin of almost 35% was recorded.
508 units were recognized in Hong Kong. Over 5,500 units recognized from the Mainland, and 39 from the U.K. So margin across regions were very solid indeed, as you can see. We got great contribution from Seanorama, HKD 2.6 billion. HKD 2 billion from Upper West Shanghai, and almost HKD 1.3 billion from Le Parc Chengdu. Of course, we had disposed of 50% interest in Century Link completed in January 2018, netted HKD 11.5 billion of proceeds and recognized almost HKD 7 billion of profit. We still have HKD 63 billion of contracted sales not yet recognized and over HKD 50 billion are currently scheduled for recognition in 2019. In terms of calendar year contracted sales, in 2018, roughly just shy of HKD 28 billion or about 4,400 units. Turning to property rental. That's a picture of 5 Broadgate, by the way.
Despite the sale of The Center, we only experienced 2% and 3% drop in revenue and profit contribution, respectively, in 2018 due to steady increases in contribution from various offices and Whampoa Garden, in particular from the retail division, as well as six months contribution from our new purchases in London and Dublin.
That should be caught up by the new hotel opening very quickly. Because we have about 1,200 rooms that will be added this year.
As you can see, overall contribution margin is still over 90%, a very healthy margin. Cheung Kong Centre gave us HKD 1.5 billion. Whampoa Garden, HKD 868 million. Hutchison Logistics Centre, HKD 577 million. We also got about HKD 284 million from the retail investments we have in the U.K. and HKD 231 million from six months of contribution from 5 Broadgate. We now have roughly 17 million sq ft of investment properties across the globe, 13 million in Hong Kong and two million each on the mainland and overseas.
Over HKD 4 billion of fair value recognition. Cap rates utilized by the professional valuers ranging from 4%-8%. Main contribution from Cheung Kong Centre, HKD 1.4 billion. As we announced the redevelopment of Hutchison House, we had to recognize HKD 2.7 billion of revaluation surplus from Hutchison House. We also enjoy the HKD 11.6 billion of recognized profit from the sale of The Center.
Hotels and service suites, 37.3% profit contribution. Continued improvement in room rates and occupancy gave us a boost. EBITDA margin was close to 45%. GOP per sq ft is now HKD 26 per month. Last year it was HKD 20. Annualized yield is now 23.3% over carrying value. The hotel team did their best to minimize operating loss from the mainland and The Bahamas. Conditions are still difficult, but fortunately, the good performance from the Hong Kong hotels more than made up the difference, giving us HKD 1.9 billion of profit contribution. Including the two under development, new hotel and the hotel extension. We have 18 hotels and service suites. Approximately 15,000 rooms and service suites altogether. 2018 average occupancy, 90.1%. Last year it was 89%. We have completed the sale of The Bahamas hotel and recognized a profit of HKD 675 million.
Steady contribution from our property and project management team, 42% margin. The only big change is in the first half of 2018, we increased our shareholding in the Hui Xian REIT Asset Manager to 70%. The fee income is a bit more. Turning to aircraft leasing. Again, normal margin is roughly about 40%, and we recorded HKD 1.2 billion of profit contribution. As can be seen here, our contribution is well-diversified from a number of regions. 125 aircraft owned, 38 airlines or lessees, and still 38 more committed positions to be delivered in the next coming years. Total attributable asset or aircraft value, roughly HKD 27 billion. We had HKD 4 billion of contribution from our infrastructure and utility division. It is the first full-year contribution from these various businesses. In 2017, the contribution was HKD 1.9 billion.
As I noted in the first half, DUET's EBIT margin dropped from 44% - 37% this year because of adjustments of last year results after change of depreciation policy. Basically, you are shortening the useful life. Reliance and ista margin was basically roughly the same as last year. Ista, you will recognize that the margin is lower than what one would expect from an infrastructure business. There is a timing issue in this, as the team is working to streamline the underlying operation and focusing efforts on expanding in only profitable regions. It will take a little bit of time. Turning the next few pages, I would invite Simon to present for us.
Yeah. Okay. The group continued to hold interest in three listed REITs, 32.4% in Hui Xian REIT, which we accounted for as an associate. We take up a share of profit of HKD 218 million from its reported profit. It has decreased from last year of HKD 549 million, because the Hui Xian REIT result has been affected by their translation gain or loss of its Hong Kong dollar borrowing at the year-end dates. But we received distribution in the amount of HKD 583 million from Hui Xian REIT, and that is quite steady consistent.
For 27.3% Fortune REIT and 18.5% Prosperity REIT, we received the distribution from these two REITs in the amount of HKD 320 million, which has steadily increased from last year's HKD 312 million. For these three REITs all together, there's about 16.1 million sq ft of properties in Hong Kong and on the mainland, which are managed by these three REITs.
Our debt profile, our total debt is HKD 69.5 billion. HKD 1.8 billion would be due within one year, HKD 61 billion in two to five years, and HKD 6.7 billion beyond five years.
We're talking 3%, 4% net.
After netting off the substantial cash balance, HKD 56.7 billion, our net is only HKD 12.8 billion. If we take the simple net debt to shareholders fund ratio, it's 3.9%. If we take it to our traditional net debt to net total capital ratio, it's slightly lower, 3.6%. For credit rating, we got A2 stable from Moody's and A stable from Standard & Poor's. Land bank summary. At the year-end date, we have a land bank of 130 million sq ft. With 104 million property under development, with 4 million sq ft in Hong Kong, 96 million sq ft on the mainland and 4 million sq ft overseas, mainly in Singapore and in the U.K.
But I just want to draw your attention that for three projects in Hong Kong, the Ocean Pride, Ocean Supreme, My Central, and Borrett Road Phase One, because it has been completed in 2018, so we have taken it out of our land bank already. That is some 2.3 million sq ft already. Then profit will be recognized when we manage to deliver the units. So that is the time when sales will be recognized in 2019. The investment properties, we have a portfolio of 17 million sq ft, which was highlighted earlier. For hotel and service suite, we got about 9 million sq ft in Hong Kong and in the mainland. The next slide highlights the property acquisition in 2018. in August, the group successfully won a public tender for a joint development with the MTR C for about the Wong Chuk Hang MTR station.
In September, the group, together with another developer, reached an agreement with the government for land exchange at Siu Sau Tsuen, Tsuen Mun.
So that is the end of the formal presentation. Let us open the floor for questions.
A couple of days ago, we concluded the Yau Tong premium negotiation, and we just paid the deposit for it already. So questions?
If I may, I like to ask a question by one of the audience joining from our live webcast, because last year I didn't bother to ask.
I.
In the presentation it says 23.3% yield over carrying value for our hotel. Why it's so high?
Oh, that's because of a very funny accounting system. Earlier, Gerald noted that we have approximately 15,000 hotel rooms. Because in hotels, every year we never reevaluate the property. Instead, actually we depreciate not only the FF&E, we depreciate the building and the land. Which means that on our books, the average cost for that 15,000 rooms is approximately now, under HKD 2,000, about HKD 1,500, HKD 1,600, HKD 1,700, in that range. So which is about approximately, depend one hotel, not that we want to, but let's say we sell one hotel, 90% would be profits. A lot of hidden. Some people actually, not criticize, but point out the fact that our valuation for our investment property is earning on the conservative side for malls and office buildings. But actually the biggest value gap.
Is in the 15,000 hotel rooms. That gap is 90% of the value, plus or minus. I'm not going to pick on 90%, but we never revalue them. But the cost is extremely low. Some of them has dropped below HKD 1,000 on our books, a few hundred dollars per square foot. So that's something that maybe analysts can help our shareholders understand, that it is a very unique accounting principle applied to hotels. The funny thing is, sorry, the funny thing is because we categorize a lot of our service apartment, because of Hong Kong rules on zoning, into the hotel category. Which means that even for long-term, say, service suites, they are now carried at approximately HKD 1,000 per sq ft in Hong Kong.
It's a very detailed explanation. I hope you're happy, Jack. Next question, please.
It's funny talking to someone I cannot see.
Hi. It's Ken from Citi. I still remember last time you talking about the risk-adjusted returns, so basically measuring. When we asked you why you don't buy Hong Kong land bank, you said that, "A couple of you evaluate everything, in terms of what is the best in terms of the risk-adjusted return, then you choose that." But after that you buy couple, the Wong Chuk Hang site and then another site. Then recently there are more noises saying that you are converting some of the hotel into residential. Are you seeing Hong Kong residential, the risk-adjusted return getting better?
No.
Than?
No. We go really on property. We calculate on a site-by-site basis. There's no change of strategy, that we're very unemotional about this. The calculation is really based on if Gerald found a project in U.K. that gives a better return than The Center, okay, it's an arbitrage. If a certain piece of land we view that the margin is better than another business in X country, of course we'll go on property. So it's really safety margin, and the return. Very unemotional. So we're not making a particular prediction.
How do you see the Hong Kong returns now for the land bank?
Actually, Hong Kong property is very difficult to provide guesstimate. Because on one hand, supply is not huge, so we're not exactly pessimistic. But the demand is still continuous there. Prices are not cheap. But there are many things around the world that can affect Hong Kong's economy overnight. Trade wars, a lot of things. You can have the news in five minutes and it will change the interest rate, job prospects. Job prospect is the thing that affect property most. China's economy would affect a lot of people's livelihood. A lot of those things, I don't think anyone can pretend to say that they have the crystal ball for it. That's why this year we focus very much on not only earnings, but the quality of the earnings. So quality, what does quality means? It means, can it stand adversity?
If it can stand, if it has a geographic diversity, if it has an industry diversity, it's higher quality. At the same time, if it's countercyclical, even better. So we balance that with our property portfolio. At the same time, we have the war chest to do a lot of things if, be it property or other things, when the opportunities arise. Lots of room for making acquisitions. Another thing that I mentioned earlier in the press conference, maybe I'd like to reiterate a little bit more, is some people, especially the media, would like to look at success or failure on M&A. We never look at it that way. One of the motto that we carry with us is, we never bid to win. Let's say, one division looked at 10 deals, and they concluded three last year, let's say.
Another division looked at two deals and concluded two deals, let's say. The second division has 100% success rate. The first group only has 30%. I like the first group better because it's got three deals. The second group has got two deals. So we're rather unemotional about ratios on these things. We'll be actively looking at things. Nothing bid to say that we must win it. We would not be clouded by the emotion of saying, "Ah, it would look like a success," or, "It would look like a unsuccessful bid." That's not how we look at it. This is not war. This is just making office.
Another question.
Did I answer you?
Hi. This is Raymond from HSBC. I have two questions. Number one is about the recurring income target. Say, like, in 2016 you mentioned you want to achieve over 50% of the growth in terms of recurring income, and it is very successful. And congratulations on this one. Can you share with us that, what would the next target that you want to achieve in the next, like, two to three years' time? This is the first question. The second question.
Can I answer that question first?
Okay. Sure.
Because we have advantage when deals are large. This is strength of CK Group. When deals are smaller, our advantage is not as big as in larger deals. All deals, I use this word internally, I call them lumpy. They are big lumps. We like big lumps. If I set a ratio and my counterparty know that ratio, it is very dangerous for my negotiation. So I shy away from answering your question. But we purposely focus on larger or more lumpiness, be it property or recurring income. But we have lots of room to maneuver between the two because our debt profile, it is so low. So we can look at mega projects, whatever the industry. And they can be unsolicited. And unsolicited doesn't mean it is a battle. It is just an offer, an extra choice. Okay?
I think the answer just given by Mr. Li has answered Mr. Scoons' question from the web. But he has a second question, is what if the market does not provide these opportunities or good enough opportunities? What will you do with the money?
Oh, these things happen in cycles. This is a happy problem. If it turns the other way around, if you don't have enough money and the market have cycles. I don't pretend to have a crystal ball. But over time, we have good feng shui here at Cheung Kong Centre. Well, this is the most expensive building in the world. 225 per sq ft . Look at your chair.
Thanks. Fan Tso from Merrill Lynch. Just want to ask if there is any change in thinking about your investment in infrastructure. Because I think CK Hutch said that the return may not be as good after some tariff resets in 2020 onwards. Or will you be only focusing on more the so-called unregulated assets? Thank you.
No. I think yesterday I wasn't at the CKI meeting yesterday. I think that's one of the questions being asked when I look at the recordings of it. There's certain attractiveness to regulated assets. But if you look at infrastructure, you cannot look at year- to- year. The cycles are different. In infrastructure, because resets happen between five to eight years. So you should look at five to eight years' average versus the five to eight years' average in the previous regime. And in each investment cycle within the regime, there is a cycle that happens because of the investment profile. For the first one, two years, the second two years, third two years, within the regime period. So, the analysis is different. When it's non-regulated asset, it's year-to-year comparison. With regulated, you should look at five to eight versus the previous five to eight.
You need to have good patience to do those things. It's a whole telephone book number crunching.
I think we also said yesterday, don't look at it as very arbitrary. I mean, determine the WACC of the regulatory return based on formula, based on certain parameters. I mean, the regulators are being pretty pushy these days for political reasons, obviously. But there's a range. All they do is the low end of the range. So it's not the end of the world. I mean, we can manage.
Yeah. Also, the value put on a very secure asset. I think the world focus more and more of the quality of the earnings. So I can talk generally about the group, be it CKHH, CKA, or CKI. The quality of the earnings in the face of a very volatile political, economic climate is being more and more valued by investors. So that's, even myself as investors, I value quality, especially now.
Sarah.
As you think about your diversification, anything you could say in terms of the international exposure and the level of comfort you have there, or whether it is just all bottom-up by opportunity. Obviously, there was press around some London land banks. Any update there?
We are quite balanced right now. For example, the opportunity. Now, I am digressing into CKHH area. But the opportunity for the Italian acquisition is not something that can invent overnight. But the partners want to sell, that presents an opportunity. But the beauty of the group is, then CKHH would like to divest of the infrastructure portfolio, fit CKA like a glove. That is the beauty of this whole group.
Thanks. Justin Kwok, Goldman. So, I think in your earlier slide, you mentioned that the recurring income pie for your segment profit is now reaching 55%. But it seems that your payout ratio is more or less running at around 30% to the profit, in a way. So, with this recurring side moving up, is it time for reconsidering the payout ratio? Or how do you see the payout policy or the dividend policy on the broader side?
We aim to increase dividend over time. But I think we are not turning CKA into a CKI. I do not know if I am guessing your question right. CKA will continue to be CKA. There is a clear distinction.
Praveen? Okay.
Am I being asked to leave?
No.
Hi, Mr. Li. This is Praveen Choudhary from Morgan Stanley. Thanks very much for the presentation. You have different businesses as well as similar businesses across the three, four listed entities. But if you look at CKH and CKA together, for example, this year you made around $8 billion , give or take, of net profit.
More.
I'm taking out all the exceptional items.
Okay
Like selling off The Center, which I am not sure every year you can do. But even then, it is a lot of money we are talking about. How should we think about the sustainability of this earning, as well as the strategic direction, whether you want to keep all those listed entities separately or combined, and anything else?
You are asking so general. First, I think the figure should be $10 billion. The two added together. We never try to push it past the HKD 80 billion figure. So it is just short of HKD 80 billion, but if you divide US dollars, it is $10 billion. But that is just for fun. But the strategy should be that we shouldn't be too focused on just looking at delivering profits on an annual comparison.
One thing I would like to use an example is that if we are farmers, then the crop from year to year is very important. But I don't think shareholders pay us to be farmers focusing just on year- to- year. The more important thing is the value of the asset, especially for CKA, which is properly related. Why would I push a building out for the market when the market is not ready just to show the profit?
If I can sell it at a higher price, we miss the year-end. So I am not going to be obsessed with. I like profit to grow, I like to show shareholders numbers, but not going to be obsessed with the figure on P&L for a year. I think the more important thing is the quality of the earnings leading to the value of the asset. That would be our guiding principle. So the value of the asset would be the earning potential as well as the quality of the earnings. And both are equally important, but we feel that we can put more effort into the quality side. I don't think it is a short-term thing. The whole world would be becoming more stressed. Politically, I am not going to elaborate on that area, but you guys all know. Okay?
A lot of surprises that people in this room, put our minds together, may not be able to guess absolutely accurately. So quality means quality. So we think that investors will appreciate that. And so far, when we look at the history of the group, that quality will reflect in value. Now, is that reflecting on an annual basis, weekly basis, monthly basis? I don't know. But I shouldn't be obsessed with, I use the word vanity of the year-to-year thing. Okay? I like a $10 billion or $8 billion figure. I like that too.
But the feeling is to sit on my hands and not remind myself that that is not what shareholders pay us to do, just to beat of the glory of one day. It is the value of the assets. That is the important thing. And the quality of earnings. I am repeating myself with that. That is our motto.
Okay, she asked me to go. Any pressing questions you can ask Edmond?
No, let's end.
The official webcast will end now. Thank you for joining us and.