Thank you, and welcome to the 2020 CK Asset Interim Results presentation. My name is Gerald Ma. I will be conducting the formal part of the presentation, followed by a Q&A session led by Victor Li, our chairman and managing director, Edmond Ip , our deputy managing director, and Simon Man, one of our executive committee members. Underlying earnings per share for the first half 2020 came to HKD 2.27, it is a decrease of 35.5% compared to first half last year. Dividend per share, the board has declared a dividend per share of HKD 0.34, a decrease of 34.6% compared to last year. As at June 30, 2020, net book value per share came to HKD 92.72. Revenue for 2020 first half was HKD 36.3 billion, giving us an underlying profit of almost HKD 8.4 billion. We recorded two decrease in fair values from two of our sectors.
One being the real estate investment trust, HKD 1.3 billion, and investment properties, HKD 689 million, giving us the reported earnings of HKD 6.36 billion, or reported earnings per share, HKD 1.72. Looking at the table on the upper right-hand corner, you can see that 46% of our revenue from our principal activities was recurrent in nature, at HKD 16.8 billion. In the table in the bottom right-hand corner, 34% of our contribution or EBIT from principal activities, or HKD 4.6 billion, are recurrent in nature. Now, that number includes certain provisions on impairment that we took in the first half. Excluding those one-time exceptional items, that percentage will exceed 40%. In the bottom table, you can see that 34% of our contribution, or HKD 4.6 billion, came from Hong Kong in the first half, 51% or HKD 6.9 billion came from the Mainland, and 15% came from the overseas.
Turning to individual divisions.
Revenue from the property sales division exceeded HKD 19 billion, providing us with a profit contribution over HKD 9 billion, and a very healthy 46.2% margin. Looking at the contribution from different geography. From Hong Kong, HKD 1.77 billion, almost 29% margin, mainly because we had very few units booked in the first half of 2020. From the Mainland, over HKD 6.6 billion of contribution at a really good pre-tax margin of over 60%. A point to note is that the tax rate from the Mainland is much higher than Hong Kong, so that affected the bottom line contribution from these Mainland projects. Almost HKD 600 million from overseas contribution, mainly from the sale of Kovan in Singapore. A total of just over 2,600 units was booked in the first half of 2020, residential units that is. 72 commercial units and 576 car parks.
Major contribution from Upper West Shanghai, Harbour Glory in Hong Kong, Regency Hills from Chongqing, and Stars of Kovan from Singapore. Almost HKD 28 billion of contractor sales have not yet been recognized. About HKD 8.8 billion scheduled for recognition within this current financial year. In terms of contractor sales, up until June 30 of this year, contractor sales came to over HKD 15 billion. But if we fast-forward to July 24, contractor sales actually would come close to HKD 20 billion because of the successful launch of Sea to Sky. Over 760 units have been sold in the month of July. Turning to property rentals. Almost HKD 3.2 billion of profit contribution and a very, very healthy, I would say market-leading 91.8% Contribution margin.
Now, the drop of 11% is mainly due to the reclassification of pub rental income, which we had in 2019 after we acquired Greene King, the pub company, in November of last year. The contribution from last year recorded as investment property income was almost HKD 140 million. Major contribution in the first half came from Cheung Kong Center, over HKD 800 million. Whampoa Garden, over HKD 400 million. Hutchison Logistics Centre, over HKD 300 million. We have over 16 million square feet of investment properties contributing healthy, steady profits. In the first half, we recorded a decrease in fair value of HKD 809 million, mostly from 1881 Heritage, over HKD 400 million from 1881 Heritage, and China Building, about HKD 200 million. Turning to one of the more significantly affected division by COVID. HKD 992 million of revenue, HKD 33 million profit contribution.
Thanks to the steady occupancy rate of the serviced suites division, Hong Kong was able to still record a HKD 90 million profit contribution in the first half of 2020. HKD 57 million of contribution loss from the Mainland, giving rise to the HKD 33 million of profit contribution. We have over 15,000 rooms and serviced suites, mostly in Hong Kong. We have splitted up the occupancy rate to give you an idea of what has happened or transpired in the first half. Average daily hotel occupancy rate of 23%, compared to the first half of 2019 of 85%. That was even before the social unrest situation in Hong Kong. In the second half of 2019, the number was 60%, mostly affected by the unrest in Hong Kong. The first half of 2020, 23%.
Compared to the serviced suites, over 90% in the first half of 2019 and the second half of 2019, and 86% average occupancy in the first half of 2020. Property and project management, steady as always, 43% of contribution margin, HKD 173 million of profit contribution. Aircraft leasing, another hard-hit sector by COVID. Travel restrictions around the world leading to a drop in travel demand. We recorded a HKD 733 million, an increase of 2% in contribution margin, mainly because we had HKD 195 million of disposal gain from the sale of eight aircraft in the first half. Mainly in the first quarter of 2020, we were fortunate to have closed the sale of eight aircraft in the first half, hence you see the contribution margin of 48.2%. As I said before, the normal EBIT margin in the industry without trading should be about 40%.
You should also note that the owned and committed aircraft, compared to December 31, 2019, has reduced by 18 aircraft. From 164 to 146, as we have also canceled a number of the future delivery contracts. The bottom three rectangular boxes, we now have 126 aircraft, most of them narrow-body domestic aircraft, hopefully first to be recovered after COVID. Average remaining lease terms close to five years and just over six years average age. Turning to the pub operation. We acquired this company in November 2019, just shy of 2,700 pubs across England, Wales, and Scotland. Three divisions, pub company, meaning we operate these businesses. Food-led, drink-led pubs across different locations. Pub partners division is mainly our leasing division, leasing to different operators.
And brewing and brands is the manufacturing production of a wide range of beer products, as well as our distribution channels to our own pubs, as well as over 10,000 pubs across the U.K. In the first six months, due to the mandatory lockdown since March of this year, almost four months of lockdown. You see the revenue numbers of GBP 3.8 billion is really roughly two months of business. With six months of overhead and non-cash depreciation plus impairment in line with the U.K. sector. Despite salary subsidy from the U.K. government, we recorded GBP 1.9 billion of loss. Within this GBP 1.9 billion of loss, roughly GBP 900 million was actually impairment of fixed assets, which we had to do in line with other players in the sector. Turning to infrastructure and utility operation. By far the brightest notes, a very steady contribution of almost GBP 2.5 billion.
I would say that DUET had a slightly 2% drop in contribution margin compared to last year because we had some one-off gain last year. And very, very steady and reliable performance from Reliance Group. And actually, a major improvement in contribution margin by ista because of the successful cost reduction measures undertaken last year, as we also recorded some growth in the first half. I will now turn to Simon for the rest of the presentation. Simon, please.
Thanks, Gerald. The group's interest in the three listed REITs remain more or less the same as last year, where 31.9% in the Hui Xian REIT, which manage a portfolio of 11.8 million square feet of hotel, service suites, office, and rental properties in mainland China. And 27% in Fortune REIT, which manage a portfolio of 3 million square feet of retail properties in Hong Kong. 18.2% in Prosperity REIT, which manage a portfolio of 1.3 million square feet of office, retail, and industrial properties in Hong Kong. For profit recognition, we take a share of the profit of Hui Xian REIT, which is an associate of the group, HKD 99 million for the six months period.
And cash distribution received from Fortune REIT and Prosperity REIT, total HKD 157 million has been recognized as investment income for the period. Altogether, total return from the group's investment in REITs, HKD 256 million.
Whereas distribution from the three REITs altogether, HKD 347 million, including HKD 190 million distribution from the Hui Xian REIT. During the period, the Fortune REIT and Prosperity REIT have to mark the market, and we recorded a decrease in fair value of HKD 1.380 billion. Whereas we recorded an increase in value of HKD 1 billion, same period last year. Gearing and maturity profile. At 30th of June 2020, the group's bank and other borrowings with maturities within one year amounted to HKD 12.8 billion. Within two to five years, HKD 47.6 billion. Beyond five years, amounted to HKD 16.3 billion. The total bank and other borrowings amounted to HKD 76.7 billion. If we deduct the bank balance and deposit of HKD 58.9 billion, that gives a net debt for the group, HKD 17.8 billion. If we take the net debt to shareholders' funds, it's 5.2%.
If we take the net debt to net total capital, it is 4.7%. The group's current corporate rating from Moody's is A2 stable. From Standard & Poor's, A stable. The group has the land bank of a total 144 million square feet. 92 million square feet is currently under development, with 5 million square feet in Hong Kong, 83 million square feet on the mainland, and 4 million square feet overseas. Currently, 17 million are being held for rental. 13 million square feet in Hong Kong, 2 million square feet on the mainland, and 2 million square feet overseas. 9 million square feet is currently held for hotel operation. 8 million square feet in Hong Kong, 1 million square feet on the mainland. Besides, we have 26 million square feet which is currently held for pub operation in the United Kingdom.
In May, earlier this year, the group was awarded a government tender for the site at Anderson Road for a consideration of about HKD 4.9 billion. Not less than 1,000 units out of the total number of residential units, should be starter home units. They increase our land bank under development in Hong Kong. That comes to the end of our presentation. I will pass it back to Gerald for the Q&A session.
Thank you, Simon . Now we will move to our Q&A session. I will be the moderator. I will read out the question from each of the online participants. I will read out your name if you give me your name and the bank you are from. The first question comes from Ken Yeung of Citi. China's development margin was high in the first half at 60%. How do we see the margin for the HKD 12.9 billion unbooked sales?
Different properties have different margin. It is difficult to just give an average. But generally, our land bank was bought some time ago, and we are rather conservative in our acquisition model. So I am quite optimistic about healthy margin in the future years.
The second question is for pubs. When do we expect the pubs to be EBIT? So after depreciation, break even.
Maybe Gerald, you can answer that.
I think after the reopening in early part of July, there has been a ramp up in business. I think we can say that we are close to EBITDA positive now more. Hopefully, we are hoping that we will be EBITDA positive right about now. Then we move towards being able to cover depreciation. The direction as of now is positive. Of course, there are still a lot of uncertainties with respect to possible mini lockdowns here and there.
Maybe I can give a qualitative analysis of the pub situation. First, because we operate the property ourselves, depreciation is a bit an accounting thing, because if we rent it out, then we would not look at it as depreciation, whereas because we operate it is treated more like the situation in hotels. So that is why depreciation is more meaningful. At the end of the day, we operate as a cash business. Now going back to the operation itself, the one thing I am glad to see now, the virus situation in U.K. is still horrible. It is better than before, but it is still different degrees of second or third wave coming back.
But one thing we noticed is that as soon as it gets better, people really want to go back to pubs, and that as soon as the government allow us to open, the recovery pace is quite fast. It is more than an F&B or drinks establishment. It is really entrenched in the British culture that as soon as people have the chance and it is safe to do so, the pub is so important to most people's daily lives. So in that sense, I think we have got a good quality asset.
To give you an idea, which is almost counterintuitive, but because of the lack of tourists and also a lot of businesses or banks working from home, the London pubs, which used to be very, very popular, now are actually the quieter ones. Whereas the suburbs, the residential populated area, are doing really well. Some are actually doing better than pre-COVID. And so it is the London pubs, when people return to work, when tourists get to travel, hopefully they will come online as well. Another question from Ken is on the dividend. How do we interpret interim dividend being cut and what is the central policy?
I do not want to say a central policy that will guide us. But generally, we are looking at acquisitions, we are looking at new opportunities. This is a first part of the virus situation. We think that there are still a lot of challenges that will be generated around the world. And these challenges will generate opportunities for us. That is why we like to have a good war chest to look at new opportunities. We are still at an acquisition mode, be it mainland China, Hong Kong, on property side, or around the world on recurring income.
The next set of question comes from Karl Choi of Bank of America. While CKA's businesses were not immune from COVID-19, most of the operations remained resilient. Payout was only 15% of first half 2020 earnings. Any thoughts on full year payout if current conditions do not improve in the second half?
Sorry, I didn't get the last part.
If COVID does not improve in the second half, any idea on our full year payout on dividend?
I'm not going to make a prediction on dividend policy. All I can say is we're looking at acquisitions and we can well afford a higher dividend. But if we see growth opportunity, I think we'll reward a shareholder better with growth than turning into a infrastructure firm.
Next question from Karl Choi. How is the aircraft lease payment collection in the first half, and what's the risk of some provisions? I guess I can answer that question. I think we've been fortunate that over 70% of our contracted revenue are being collected as usual. We have 30% that are receivables working with our lessees on deferred arrangement, either hopefully extending their lease as a condition, or charging deferred interest if we can. As I understand, this percentage is quite a bit better than the other industry. I think mostly it's because of most of our aircraft being narrow bodies for domestic use, which is needed right now. The risk of write-down of provisions, we will only know towards the end of the year. We'll make a decision then, and it all depends on COVID. But as of now, there isn't any indication that we can provide.
Next question is, given the low interest rate environment that has led to a lower regulated return on infrastructure and the pandemic, how will CKA adjust its buying or acquisition strategy and the type of assets we may choose?
That's difficult to answer because, at the end, we look at investing on a project-by-project basis. While infrastructure rates may be cut, they still offer a very quality income. We're not going to give our formula away because we're still negotiating on one or two acquisitions. But we treasure quality as much as we treasure the exact return.
Next question from Sarah Cooper of Bank of America. What is our see-through gearing? Our see-through gearing net debt to net total capital is 12.4% right now. From John Lam of UBS. I think we answered the question on dividend policy already. What's the latest situation on the Hong Kong hotel business?
Well, we're different from other firms in the sense that our hotel business have two divisions. One is daily rates. Another big division are monthly. That's why our results, if you compare our hotel results to other hotel operators, I think we'll look a bit better because our long-term leases gave us very stable income that is not much affected by the recent situation. I mean, the virus situation. Even if we talk about the daily-rate hotels, as soon as the government allow restaurants to open, hotels can achieve roughly cash flow break even, when the restaurants can open. Unfortunately, in the last two weeks, even the restaurants are closed. That would generate more difficulties. But I think for us, our hotel income is, in a way, underwritten by all the long-term leases in our service suites.
With low gearing and also the disposal of the Chengdu power project giving us more cash, will CKA accelerate or actively look for buying opportunity?
Yes.
From Justin Kwok of Goldman Sachs. On capital management, how should investors look at dividend payout and policy? We talked about already. The cut in dividend payout, does it indicate that we are on a cash preservation mode rather than a stable dividend per share payout at this point?
This is early part of our reaction to the virus situation. I don't think I want to form a pattern yet. It's too early to say. Generally, I think we like to maintain a dividend policy that would return cash to the shareholders. It's just that in the first six months after the virus situation, we err on the conservative side. But we're definitely looking at new acquisitions. The acquisitions generally would be either in our traditional lines or recurring income, both of which we have a tradition of returning cash back to shareholders. So I think in the midterm, I don't want to talk about the immediate short term, but in the midterm, the aim is to contain a healthy dividend policy.
Justin further wants to know that in terms of deployment of growth CapEx, he saw that we bought a site recently in Hong Kong, and which direction we are going towards Hong Kong or the rest of the world.
I'm looking for margin. Irrespective place, we have confidence in China, confidence in Hong Kong. But at the end of the day, we are looking for margin. For example, the recent acquisition in Anderson Road gave us a margin that is healthier than anything we've seen in the last two, three years in terms of development and profit margin. I'm looking for margin. For example, a few pieces of land in U.K. will be in more active phases of development. Those would also generate in London. Those would also give us a healthy margin.
From Joe Ho of Rondell Investments . Do we plan to reduce investments in aircraft leasing business given the COVID situation?
I think at the end of the day, it's margin and the return. If we can buy aircraft that is inexpensive with a quality tenant, with a long-term lease, definitely I wouldn't rule that out. But I think the returns will be healthier in the near future. Again, it's not our habit to make a strategic decision, say I like one country versus another country, or one type of business versus the other. It's more analysis based on safety margin, profit margin, and the country risk involved.
How much contracted sales in the first six, seven months from Hong Kong mainland and overseas? We mentioned earlier that up till almost the end of July is roughly HKD 20 billion, about HKD 12.5 billion from Hong Kong, over HKD 7 billion from the mainland, and HKD 0.29 billion from overseas. Next question is from [Crystal Lee] of Metro Securities. The cancellation of the Hong Kong SAR special status by the United States. Plus the suspension or cancellation of the extradition treaties by so many countries with Hong Kong in the current political environment, how do you think it will affect the property market going forward?
Rather than relating to those factors, I think I would just comment on the property market. Generally, I think the Hong Kong property market will benefit from a lack of supply from the government. There is basically very little stock that is available for sale. There is basic need from regular citizens just because of formation of family, low interest rate. So we see healthy demand. Actually, the surprising factor is that during the second half of last year, larger units tend to move slower. But in the last couple of months, we see a pickup in demand on slightly larger and more expensive units. This is more obvious during the launch of the Sea to Sky.
We got a pretty good response on the three or four-bedroom units looking at the harbor view, and the volume of sales on larger units are better than originally anticipated by the market. So there is a bit of optimism. Some people see the recent reaction as negative, depending on which newspaper you read. But some people will see that as a positive depending on, again, which side you are on.
From Sandra.
I am not going to comment on politics, sir.
From [Sandra Chang] of Hong Kong Commercial. I guess the current global environment, any further thoughts or indication or hints on business and asset mix within CKA, whether infrastructure over other type of businesses?
I start to repeat myself. It is really margin. Let us say if Hong Kong property market gave us the opportunity to have healthy margin like what we just achieved in Anderson Road, then we will do more of it. But if the margin is lower than infrastructure, then we will go on infrastructure. If the margin in mainland China is higher than Western Europe, maybe we will look at mainland China also. It all really depends on the safety margin, profit margin, and we look at it on deal-by-deal basis. The good thing about us is that we have got the war chest and also the experience in all these markets. Around the world, be it U.K., Singapore, the 18 cities in mainland China, Hong Kong, we consider them all as home market. It is not a foreign market to us. They are all home markets.
I want to thank all the audience for their active participation. There are many questions, but I am not going to repeat the ones that Mr. Li have answered. Bear with me. From Praveen of Morgan Stanley, who thinks that the CKA stock is very attractive and very cheap. When the company will decide to start buying back shares again with so much cash?
If I answer this question, I should be fired. I still want my job.
Patrick Wong of Bloomberg Intelligence. There has been a lot of write-up about our property business in London, the latest piece of land in Convoy Wharf. Can you share more background and details about that particular project, so they do not have to read from the newspaper and not know whether it is true or not.
A lot of the hype recently around that project is artificially created. That project, the land was bought almost 10 years ago. It went through a very tedious and long planning process. I repeat, absolutely nothing happened recently, in terms of a change in the project. It has always been going on. Somebody repackaged it as news, because nothing happened. It is a project that started many years ago. The detailed planning on architectural drawings have been on my desk every week for the last five, six years. We are going to start phase I pretty soon. But nothing happened in the last one month that will allow it to be called news.
And-
I was very puzzled. Why is it suddenly in the spotlight?
Patrick wishes to know your views on the London residential and office market.
That's a big one. I think London has really many sub-markets. If you overgeneralize it's very dangerous. It's like Hong Kong. It's many sub-markets. But I think London, there will be new opportunities coming out because the prime minister has just announced some changes in his approach to planning and planners in general. The relationship and the balance between housing supply versus detailed planning and the time to execute them. We're going to study that policy carefully and work with local authorities to see if we can generate more housing.
From Kenyon of Citi. After the sale of Chengdu project, are we planning more disposal of large projects?
I think we're rather opportunistic in terms of our acquisition and sale. We're in the business of buying land, building them, and selling them. In this case, in Chengdu, for example, the sale is basically sale of our unfinished product. It's no different from our regular condo sales, except this one is a buyer buying more wholesale. That's the only difference. Because the amount is large, it attracts a lot of attention. But it's really part of our regular business on sales. If you look at that sales volume and average it out with our 10 years average, we're very much in line with our normal volume of sales, even if you include this transaction. Our business is to sell condos, buy land, construction, and go through a rather long detailed process.
A lot of the projects we're involved in are larger because we specialize in urban planning and creation of new neighborhoods. That's why, usually it takes a few years before we can even break ground, not because of us, mainly because of the detail, working with local authorities on planning. This is the same be it, U.K., China, Singapore. We like mega projects, and that's our specialty.
Next question is with regard to CKA's recent involvement in Golden. The question is, are we looking at potential M&A, and why did the company decide to send Gerald to the company?
Well, you're looking at his vice chairman. Obviously we're looking forward to discover areas of synergy. I think Cheung Kong and Golden are very different companies. I think that difference may generate synergies. I think we're going to work hard on it. It's work in progress. I don't think I should answer on behalf of Golden. We'll announce to the market as soon as we've got something concrete. Work in progress.
The next question from Karen Kwan of Deutsche Bank is actually for Mr. Edmond Ip .
For you.
Edmond, you did not call your perpetual security in May of this year. Why? Any plans to call these bonds in coming November? About $1.5 billion of it. Please comment.
Well, with the rates trending down, I thought we made a very good decision not to call it the last time. Going forward, we still have a little bit of time to decide, but clearly the situation today is very conducive to doing something. That is all I can say. We will be watching it very carefully.
Desmond Foong of Morgan Stanley Singapore wants to know the SFC space that will be vacated at the end of this year. I think what he really wants to know is the general vacancy rates of Grade A office building in CKC and also in Central in general.
I think there is a pent-up demand. You shouldn't just look at vacancy rates. Everybody is frozen right now. Some of the things that should happen is just not happening, just because people are freezing their business activity. So it is inaction rather than no demand. Very much like the F&B business. Once you open up, people who have not eaten out for a long time will eat out very quickly. So I think that the demand is being held back. I would not call it vacancy as much as inaction right now. So anybody who should expand are not expanding. Anybody who should move are not moving. So it is frozen. Half the world is frozen.
Alvin Wong, CLSA. Is it possible or any plans to convert some of the pubs, especially in London, into residential development?
Some of the what?
Some of the pubs in the U.K. into resi, residential development.
Well, that's always a worry from our pub operators. I don't think there's an immediate plan, but from our various business, from infrastructure to pubs, there are lots of opportunities. The question is, the fact that there's an opportunity, does it mean that you have to knock it down and rebuild it immediately? Just look at Hutchison House. Hutchison House has been with us for a long time, and it's due for development a long time, but when is the best time to do a redevelopment? It's possibly now because the rent that you could have lost is actually the smallest. The same thing with hotels. What is the best time to do interior decoration or renovation? It should be now. Because in normal days, you have to give up an income for renovation, and now we don't. It's empty anyway for half of the hotel.
I think we are sitting on a lot of opportunities. But when are we taking advantage of it? The fact that it is there and we know about it doesn't mean it has to be immediately.
Sarah Cooper of Bank of America. I think it is more a statement than a question. It is just saying that she thinks nothing is more attractive than our shares. At the present time, I would say I agree with you.
Well, our family is agreeing with you.
Jevon Jim of JP Morgan would like to have a bit more color from Mr. Li on the retail and office rental concession. Because the market is frozen, what sort of magnitude, how bad can it get? In terms of-
Sorry, you are talking about office rental?
Both office and retail on lease expiry. If we have to reduce to retain tenant, how bad can it get?
I think the mix of tenants will change. It is not like Hong Kong hasn't seen this before. If you are in the core areas, if you are talking shopping, you are in Tsim Sha Tsui, or you are in the middle of a residential district, then those in peripheral area will move to the more central area. So the mix will change. Some of the super luxury items may have to be reduced in size a little bit, but then other businesses will move in. The same with offices. People who are pushed out of Central because of the high rent may want to come back to Central. So the area that will suffer are those in the periphery. I do not want to say particular areas, but areas that benefit because of high Central rent, I think will suffer more than Central itself.
The last question. Carl Lok Chen would like Mr. Li to answer in Cantonese for some reason. It is basically the current economic COVID and political environment. What is your view on the Hong Kong property market? In Cantonese, please.
[Non-English content]
Last question then we'll be done with this session. Thank you for your participation. It's just the upcoming tender on New Central Harbourfront Site 3. Any comments?
Well, it's easy to keep a poker face with your face mask on. We'll definitely work on all sites in Hong Kong. Look at our war chest. Look at our experience. Hong Kong is our home. We work on Hong Kong, China, overseas, all based on one simple principle, margins. So we'll be calculating and working on our drawings. Thank you. Allow me to move to CK Hutchison Holdings Analyst meeting.
Yeah, actually this concludes our presentation and Q&A session. We hope all of you will stay safe and hopefully we can see each other in person again. Thank you, Mr. Li, Mr. Ip.