Welcome to our 2019 Interim Results announcements. Let's get right to it. Revenues for the first half 2019 came to HKD 34 billion, up 41%. The number that I would like everyone to focus on is the earnings per share before IP revaluation and disposal, HKD 3.80, up 17%, as we purchased some shares last year. Dividend per share, HKD 0.52, up 10.6%. Profit before IP revaluation and disposal, HKD 14 billion. Profit attributable to shareholders, HKD 15 billion. Earnings per share, HKD 4.1. Net book value per share as of end of June 2019 came to HKD 90.08. Turning to activity analysis, 51% of our profit contribution is now recurrent in nature. In 2019, profit contribution by principal activities came to HKD 7, 885,000,000.
Another number that I would like you to take a look at is, if you annualize our recurrent cash flow from operations, excluding property sales and development, so j ust recurrent cash flow from operations on an annualized basis, it has now exceeded HKD 18 billion. It's just a number that I'd like you to keep in your mind.
The recurring income section has grown quite a bit over the years. This includes infrastructure, aircraft leasing, hotel division, which is growing very nicely. All those things put together, its operation cash flow on an annual basis is about HKD 4.80 per share.
Yeah.
Also remember, we purchased some shares. If you compare year-to-year, you have to exclude the shares that we have extinguished. The number of shares that is used is different in different years.
As you know, there's quite a bit of depreciation in hotels and aircraft leasing, but a lot of cash coming in, actually. Yeah.
This is cash, not EBIT, EBITDA, whatever. The new IFRS 15, IFRS 16 get everybody confused, so I go back to simple cash.
About 24% of our profit contribution in the first half of 2019 came from overseas. We have a pretty decent diversification and contribution now. You see 34% from last year, but remember last year, in the first half, we only had 500 units of property sales booking in the first half, so it's a bit skewed.
If I may, when I read from analyst reports earlier, some of you, b ecause last year for the same period, there are two major transactions. One is a development in Shanghai, which gives us almost HKD 7 billion of profit, and the sale of The Center, which gives us about HKD 11.8 billion. I n our books, the HKD 11.7 billion is seen as a one-off event. T he HKD 6.9 billion, we look at as an ordinary activity. That's why the percentage increase is different in our version compared to other people's version. Just to clarify, b ecause I think some press got it, include those two as exceptional.
Turning to the performance of each of the divisions. Property sales, in the first half, we were able to recognize a more significant contribution from this division. 39.2% margin is, I would say, is above our usual expectation. T his division has done really well in the first half.
This first half had no special deals, so it's as ordinary as can be, ordinary income.
1,109 units were booked in Hong Kong. 635 residential units plus 358 commercial units booked from the Mainland division. Only three units from the U.K. was booked in the first half. As you can see, the margin by geography, Hong Kong, 42.4%, really, really good margins and pretty steady on the Mainland. The dip in the overseas division is mainly because we only booked three units and had some one-off expenses. Phase I and phase II of the Tsuen Wan MTR project gave us over HKD 4.1 billion of contribution, HKD 977 million from Repulse Bay Road, and The Zumurud gave us HKD 887 million. There's still HKD 53.5 billion of contracted sales that we have not yet recognized, and very roughly about HKD 40 billion is scheduled for recognition in 2019, m ostly from Hong Kong.
Turning to property rentals, good performance from our office and retail IPs, as well as contribution from our newly acquired offices in the U.K. and Ireland, have successfully neutralized the loss of income from the sale of The Center and the redevelopment of Hutchison House, a chieving very good margins as well. The biggest contribution, of course, is from this building, HKD 816 million.
We should start calling it Cheung Kong Center Phase II .
HKD 438 million from Whampoa Garden and HKD 301 million from Hutchison Logistic Centre. We have a total of 17 million square feet of investment properties across mainly Hong Kong, the Mainland, and the U.K. A modest fair value adjustment in investment properties of just over HKD 1 billion. This is mainly from Cheung Kong Center. On our books now, after revaluation, it's just over HKD 26,000 per square foot , for your information.
Hotels and service suites, 36.9% of a very healthy margin, HKD 876 million of contribution in the first half. That's from a hotel operating profit per square foot perspective is HKD 23 per square foot per month. The annualized yield on the carrying value is 21%. The Mainland hotel team is still trying to mitigate the operating loss for the two remaining hotels that we own. Conditions are still rather difficult. Overall, HKD 876 million of profit contribution.
Approximately 15,000 attributable hotel rooms and service suites. In the first half, average occupancy rate of 89.5%. The soft opening of Hotel Alexandra, 840 room hotels in North Point should take place in early 2020. Steady performer, as always, from our project management and property management unit. Aircraft leasing, HKD 717 million profit contribution. The 46.1% is on the high side. We booked a bit of a disposal gain from our joint venture unit. The normal margin, as I stated many times before, is around 40%. A good mix of geography or continents for this division. We now have 135 aircraft owned, average age 5.7 years. Av erage remaining lease term, 4.9 years. Infrastructure and utility assets operation. Changes in the Hong Kong dollar exchange rates versus euros, Canadian dollar, and Aussie dollars have affected the Hong Kong dollar-denominated reported income a bit.
As you know, these currencies against the Hong Kong dollar depreciated anywhere from 4%- 8% compared to last year. T he contribution is still very decent, overall, HKD 2.5 billion. In general, DUET is doing slightly better than our expectation. A change in depreciation policy last year will keep EBIT margin around or close to 40%. Reliance is largely on plan with steady improvement. ista, to be honest, is slightly behind plan as we are still rationalizing operations to focus mainly on the seven countries that the company is pretty dominant in. I believe the next few pages, I'm turning over to Simon.
Oh, thanks, Gerald. The group continued to hold interest in three listed REITs, 32.2% in Hui Xian REIT, which holds 11.8 million square feet of properties on the Mainland for rental income. 27.2% in Fortune REIT, which holds 3 million square feet of retail commercial properties in Hong Kong for rental income, 18.4% in Prosperity REIT, which holds about 1.3 million square feet of commercial office properties in Hong Kong for rental income.
Reported profit for the period amounted to HKD 322 million, w hich are made up of our equity share of the profit of Hui Xian REIT, HKD 166 million, and c ash distribution received from Fortune REIT and Prosperity REIT, HKD 156 million, w hereas distribution from Hui Xian REIT amounted to HKD 260 million. This gives us the overall total distribution from all the three REITs, HKD 416 million. Next week, we kind of gearing and maturity profile.
At 30th of June 2019, the group has a total debt of HKD 61.2 billion. HKD 3.7 billion would be due within one year, HKD 51.3 billion would be due within two to five years, and HKD 6.2 billion would be due beyond five years. Cash on hand amounted to HKD 59.4 billion. This gives us a net debt of HKD 1.8 billion as at the interim period end date. If we take the net debt to either shareholders' funds or net total capital, both ratios will give approximately 0.5% only. Our current cover rating from Moody's A2 stable and from Standard & Poor's A stable. Regarding our total land bank at 30th of June 2019 is a total of 127 million square feet.
We have already taken out the projects that we have completed, and there are still almost 2 million square feet completed property, the sales of which still yet to be recognized either in the second half year or next year. We have about 101 million square feet under development, 17 million square feet of investment properties, 9 million square feet of hotels and service suites. During the first half year, we have paid premium for our Yau Tong Inland Lot No. 45 project , which would increase our development bank portfolio by some more than 400,000 sq ft .
Hope you were positively surprised by our results. We are now ready for your questions.
Congratulations.
The mic's coming up. Thanks.
[inaudible] from Merrill Lynch. Congratulations on a good result. You've got now more than 50% of profit from recurring nature, 24% profit coming from offshore, which, right now, is looking exceptionally wise. I think shareholders really appreciate the impact to earnings per share from the buyback. You have negligible debt. I was wondering, Victor, if you could give us your outlook for the major markets in terms of the opportunities for the major markets that you're operating in, and then how that would compare to the opportunity in your stock at the moment, and also where we might see offshore and recurring income in a couple of years' time.
Hong Kong property market will continue to be volatile and cyclical. That's our oldest business, so it's something that we'll continue to do. At the same time, we would increase our recurring income base. I think this HKD 4.80 per share, maybe of cash flow from operations. We've achieved our recent target, but I want to increase that further. We do have the muscle to increase further. We are very low geared. Also, as we increase the recurring income base, it gives us more stability and more base to increase dividends because it's more stable, rather than simple property development. If it's cyclical in nature, it's very difficult to base a dividend cash flow stream from property development. That's still part of our traditional business that will continue.
[inaudible]
I don't have an exact percentage. I think this is the beauty of CK, because at any time when, let's say, Hong Kong has special opportunity, then we can move to move property very easily without increasing debt. At the same time, when we're making acquisitions on recurrent income projects, they are rather large. I call them lumpy. The minimum size is usually a few billion dollars , or euro, or pounds. A few billion is the minimum entry. T he larger it is, the better the opportunity for companies like ourselves, CK, with the experience and the muscle to handle. W e'll continue on both. It really depends on how the opportunities unfold itself. China will continue to be an important market for us, too. F rom time to time, people will ask us questions as to whether we're increasing or decreasing China's investment.
My reply is that it's really IRR- based. We're rather impartial on that. Don't forget, if you look at the whole CK group, I think among Hong Kong-based companies, we should be, China's among them, we should be the largest investor going to China. Still the largest. Sometimes it goes up, sometimes it comes down, b ut we're still the largest.
Hi. It's Ken from Citi. Can I ask regarding the basis for you increasing the interim dividend? It seems quite generous, 10%. Is it because what you first mentioned regarding the operational cash flow, HKD 18 billion? Is there a linkage to that part? T his is the first question. S econd.
Sorry. Let me understand correctly. What we're saying is that cash flow from operation is now HKD 4.80 per year. We 're now having a dividend of HKD 0.52 for the half-year , which gives us very good security base. If we increase further recurring income, there may be more dividends.
Is that pegged?
That is the—
—I mean, in correlations, in the same magnitude regarding your growth of the [inaudible] .
I got no ratio. No. I don't want to bind myself. Look, CK, we will always be seizing new opportunities. I'm not a REIT, we're not a REIT. We're not a utility company, b ut we deliver the cash flow for a stable dividend stream, as well as the muscle for new acquisitions, in both property and acquisitions of recurring income [inaudible], w hether Hong Kong, or China, or overseas.
As mentioned, the war chest, you are quite large regarding the gearing. How do you see the opportunity? Because in the first half, it seems to be quite quiet in terms of that kind of recurring income asset acquisition. D o we see more opportunity in the second half?
That's why you're trying to ask me to make predictions. Whether it's property or whether it's these new acquisitions, I can't find the other word other than that they're lumpy. If today, you have a $7 billion deal or euro deal, it would be easier for us to handle than a $ 2 billion deal because we're fewer competition, b ut then I cannot do this on a six-month basis. These things don't happen every six months. They happen every 18 months. Y ou have to keep, have enough money in order to make these acquisitions. The larger it is, the less predictable they are. In the meantime, we've already achieved what we set out to achieve, which is even if we do nothing, there's HKD 4.80 that's sitting there. Whatever happens, we'll be on top of that.
Rest assured, we are all working very hard to continue to build up our recurring income base.
No. All executives want to help me invest that money. We won't be sitting still.
I would encourage you to ask more questions. Don't wait until the second session.
What is the second session? After I'm gone?
After you.
After I'm gone.
Okay.
Okay.
Clearly, it's an interesting time in Hong Kong at the moment, and your company had a history of acquiring in periods of volatility very well. I wonder if you have any observations on the current environment or if you're seeing any changes in the market that might indicate that there are more opportunities on the horizon, or if you would be taking a wait-and-see approach still.
I wish we could have frank conversations on this, but this is something that—
Me too.
—I should keep close to my chest, and you don't see me coming. That's the whole point about buying and selling. Property is buying and selling. My job is to have a very, very good poker face. I'm sorry. That's my job description. Hopefully, we buy without people knowing that we're buying or sell without people knowing that we're selling. That's our job. Property is about buying and selling. It m ust be. B e it China or Hong Kong, but this is our operations base. Sometimes it goes up, sometimes it goes down, b ut this is home base. In the meantime, even if we're not speaking, they said that a steady income stream to keep things going. Please.
Okay. It's David from Macquarie. I guess a quick question on the purchase of the economic benefits, 40% stake from, I guess, CK Hutchison. Quite a different arrangement, I guess, in terms of basically collecting the interest income and dividend income rather than taking a direct equity stake in these projects. Is it kind of like a one-off strategy, or will we see more of this type of arrangement, especially in between the different?
It's really logistics. There's no special reason for it other than the logistics and the ease of concluding it. It's technicalities, various regulatory, tax framing, a whole lot of things. I t's really the formalities of closing the deal and to make it happen in a short time. It's a really individual circumstance. We just line up where the equity is and where each company should focus on business they are good at.
The occurrence of this transaction, is it on the back of the difficulty of acquiring something externally? Like is this something that is always kind of a plan B that if attractive opportunity is not available outside, then there is always opportunity that you can purchase maybe from CK Hutchison or the other—
No.
—REIT companies.
Because I think our appetite is much larger than that. That one deal, I can't call it small. That would be too proud of me. T hat's one deal. That one deal doesn't satisfy CKAH's appetite. It's one of the many, so it cannot be a strategy.
Just one question on Hong Kong property.
You look at our balance sheet and what we can do. Relatively speaking, I can't say it's small, but relatively speaking, that's small.
If I remember correctly, it' s a bit of a win-win between the two parties. We have lots of cash in Hutchison, clearly, the gearing is a little bit higher. Do n't forget, they did the Italian deal, so they wanted to reduce the gearing as well. That's why we needed to do a deal on a timely basis, and that's why we do the economic interest.
It's an independent deal. They're the existing partners. We're already the partner, but existing partners buy out the other partners so that this management can concentrate on the larger share. Just makes sense, that's all.
Just one quick question on Hong Kong property. We do have some, you guys do have some major project lining up, which we have seen in the media that promotion has happened, but you know, the pre-sales permit hasn't been obtained yet. Is it a reflection of something structuring with the government that some delay in terms of issuing permit, much slower than what you experienced maybe in the past two years?
No. Project construction is very individual. Getting sales permit today is a whole logistic process, so w hich form you submit, at what time, what people come to see your, r eally, fire, safety, all those things. I t's not unusual, it's not unusual. It's the same as what happened before. I wish it happened faster so that we deliver more flats to the market. We've seen those before. Nothing unusual.
If you don't mind, one final question. On the other high-end luxury project on Borrett Road, which you have already obtained the pre-sales permit, but the launch hasn't happened yet. Is it just because it's a luxury project that you rather take your time to sell it smoothly?
No, it's not. We want people to see the actual finished product rather than buying it from a brochure. It's nice. It's the best address. It's difficult to get a better address below the fault line. W e feel that we can't really describe it on a brochure. Y ou have to be there. T hese are users, it's not speculators. These are users.
Thank you.
A few questions from our webcast audience. This is from Justin Kwok of Goldman Sachs. Whether we have an intention, eventually, to pay at least 50% of our recurrent income as dividends. I think [Li] already answered the question.
Well, hopefully, it's not that. Hopefully, it's that we can use our money to acquire more recurrent income so that it's not a percentage of recurrent income as dividends, but that dividends continue to grow as our profit grows because we use the money for better acquisition. Because if I pay it all out, I have no money left for acquisitions.
The second question is on the upcoming high-speed rail station commercial site.
Yes, we're looking at it.
Any news?
Yes, we're looking at it.
Third question is, any early signs of impact on hotels in Hong Kong in general due to recent events?
The good thing is, because of our market positioning, we're not in Central, so occupying Central doesn't hurt our hotels. Harbour Plaza is very focused on return customer who know Hong Kong well. To some extent, we're affected, but I think we're affected less than other hotel groups. That's one, because of the location projects. Second one is that we got a lot of long-term stay. A lot of our hotel rooms are leased to people who are living in Hong Kong for a few months. Our return customer ratio, I think, is one of the highest in Hong Kong. People that continuously stay with us, so they know the area well. These are frequent travelers to Hong Kong. If they're long-term stay in Hong Kong, one or two months event doesn't affect them.
Mainly because they've signed up four months, six months leases with us on suites and rooms. That gives us some stability also. So far, I've seen the number hurt a little bit, but not in a great, great way. These things in Hong Kong we've seen before. It comes and goes.
Justin from Goldman, you are just upstairs. You should join us in person next time. We should increase their rent. Another question from Phillip Zhong of Morningstar. It's about additional share buyback at this price point.
You guys are really putting a trick to me so that I lose my job. If I say this, I shouldn't be CEO. These are all the options we'll consider. We've done some.
Patrick Wong from Bloomberg. The group has a strong track record in acquiring large-scale projects in the U.K. Any plans to further expand in the U.K. in the second half, given the risk of a hard Brexit?
I don't think we're focused on U.K. in particular. We're very, very disciplined on the IRR and cash flow return on various project. After we've done the cash flow exercise, we put a country risk to it. To a certain extent, the country risk is reflected already in the local interest rate and currency already. With the long experience of operating in various countries. We're in 52, t here are risk in all the 52 countries, different types of risks. T he beauty is that they balance out each other. I think we'll follow that tradition on really very number- focused, with no romance or sort of board-level strategic decisions. I like certain countries more than others.
Last question from the webcast audience. Kwan wants to know from Bloomberg, wants to know whether we expect to see any effects on property sales given the current situation.
There is already some impact. There would be some impact. There should be some impact. I think the mood of buyers are very much wait-and-see . T hat's quite obvious in the market. Unless it's the really low-end type, then people have an urgency to buy because they're getting married next month or something like that. For medium and up, in terms of pricing level, it's fair for customers to wait and see. Having said that, Hong Kong has seen these things before, and we've gone through many of these waves. Hong Kong buyers as well as developers are both seasoned investors.
Any other questions from the floor?
Maybe just on M&A. Some of the countries that you operate in have seen some pretty volatile stock prices. Any increased appetite? I know in the U.K., for example, a lot of names smashed pretty badly in the last few days, that the valuation and the IRRs that you look for are getting more interesting to you now?
I wouldn't focus on U.K., but if your investment banking division has any recommendation, I welcome a conversation.
Keep coming.
Keep coming. Basically, the way I look at it is that we're panning for gold, and if I pan with both hands, the chances of getting gold is better than panning with one hand. W e're panning with all our hands to go through deals and select the ones that we like.
I know you're very bottom-up IRR- focused, but any views at the moment on various asset classes?
I wouldn't look at it. It's not the type of asset. I'm not so subjective. I think the market, in terms of immature economy and local politics, will continue to be volatile, be it Hong Kong or France or Germany or U.K. There's always a local volatility. We like to focus on businesses that are more resilient to volatility. I think we've said this for a couple of years now that we want to improve the quality of our earnings and therefore the quality of the asset. We 're very focused on this. What does quality mean? Quality means come hell or high water, the cash still comes in. Okay? For example, we have different ranges of hotels from three and a half to a five-star property. T he more resilient one actually is the four-star . More resilient than the super five.
We have super fives, but they're not all in our portfolio. T he fours are more, in terms of quality, i t's not whether it's prettier or the chandelier is better, or whether the food is better, i t's the price, location, and the cash flow resilience. That's why we're one of the few hotel owners who operate all the restaurants, all the rooms, all the interior designs, all the purchasings in-house. From F&B to wine, it's all in-house. Again, that's resilience because our costing can be better controlled. We're now starting to supply our own wine to our own hotel from our Australian vineyards.
Desmond from Morgan Stanley, Singapore. Can we get an update on the potential redevelopment of the Hung Hom hotels?
It's not an urgent topic on that one. It's still giving us yield. T here's an upside on redeveloping some of the hotels as offices. I t's not an immediate decision that we need to make. T he plans are there. It's like the old Hutchison House or CK Center Phase II . The plans were submitted six years ago and was approved six years ago. That 's why when we want to push the button, we can push the button immediately.
Any more questions?
No. Can I be excused? The next slide.
Thank you very much for coming to our results presentation.