Welcome to the CK Asset 2018 interim results presentation. We'll try to do this efficiently this time, as many of you need to attend the next presentation for CK Hutchison, and some of us as well. Result highlights: 69% increase in earnings per share gives us the total profit of HKD 24.75 billion. HKD 6.69 earnings per share, up 69%. Earnings per share before IP revaluation and disposal, HKD 3.26. Net book value per share comes to HKD 84.45. Happy to report that there's a 12% increase in dividend per share, HKD 0.47. We also recorded a 44% increase in recurrent profit contribution. Out of the HKD 24 billion revenue, HKD 15 billion is considered recurrent in nature. Out of the HKD 9.7 billion of profit contribution, HKD 7.4 billion is considered recurrent in nature, up from HKD 5.18 billion.
There's much better balance in terms of our income diversity from a geographical perspective, both on the revenue and profit side, over 30% from overseas as at the interim result date. At the divisional level, for property sales, we recorded modest first half margin due to schedule completion and recognition mostly in the second half of this year, so don't be too alarmed. In Hong Kong, HKD 210 million profit contribution and HKD 1.6 billion from the Mainland and HKD 380 million from overseas. In the second half, there should be a number of completions that will have a higher number for the second half. The top three projects contributing to the property sales profit contribution would be Laguna Verona, the Harbourfront Landmark, and The Zumurud. We have contracted
half of The Zumurud. We have contracted sales not yet recognized of over HKD 78 billion, mostly in Hong Kong. As I said earlier, out of this number, hopefully at least HKD 15 billion-HKD 16 billion would be in the second half. But it's all subject to completion of development and purchase. We dispose of the Century Link property, the 50% interest that the group holds. Recorded a CNY 10 billion revenue number or HKD 11.5 billion revenue number. Disposal gain was booked in January.
This should be actually part of regular property sales.
As we dispose of our interest in this property, before completion, we recorded a HKD 6.9 billion disposal gain. For property rental, very, very steady, achieving over 90% contribution margin, which is, I would say, ahead of most of our peers in terms of the margin percentage. Top three contributors would be Cheung Kong Centre, Whampoa Garden, and 1881 Heritage. Despite the sale of The Center, we acquired a number of overseas properties. We still have 17 million square feet of investment property in total, excluding our investments in the REITs, which we will cover later. Very small fair value change in investment properties, mostly CKC, Whampoa Garden. There is a corresponding drop in fair value for 1881 due to the smaller rental contribution. As I alluded to earlier, The Center, this disposal was completed in May. It was sold for HKD 40.2 billion. Disposal gain, HKD 11.6 billion recorded in the first half.
We acquired and closed the transaction in June. 5 Broadgate, a UBS U.K. headquarter, which was built in 2015, and the lease is all the way until 2035. The acquisition consideration was GBP 1 billion. Hotels and service suites recorded a 27% increase in profit contribution. There is revenue increase plus margin expansion, so there is a trending very, very nicely. Including hotels under development, we have now 20 hotels and service suites in Hong Kong, the Mainland, and overseas, and over 16,000 rooms and service suites. Occupancy was very steady, 88.8%. 274 million square feet under management by our property management team, and close to 70% of the contribution from Hong Kong. Very steady division. For aircraft leasing, it is a small growing division. Recorded HKD 596 million of profit contribution. We now have 121 aircraft and focus mainly on narrow-body, highest demand aircraft, 116 of them.
There are five wide-body aircraft. Average age 5.4 years and average remaining lease 5.3 years. There is a drop in contribution margin compared to 2017. But if you look, in 2017, we recorded a bigger than usual one-time gain for the sale of an aircraft in our joint venture. If you take that one-time gain out, it is roughly 43%. As I said before, it is always around 40%-42.3%. We had full six months contribution from our three infrastructure JVs, DUET, Reliance, and ista, contributing over HKD 2 billion of profit contribution in the first half of this year, and very healthy contribution margin as well. I will turn it over to Simon to talk about the rest of the presentation.
Thanks, Gerald. The group continued to hold interest in real estate investment trust in Hong Kong. 32.5% in the Hui Xian REIT, 27.4% in Fortune REIT, and 18.6% in Prosperity REIT. The three listed REIT altogether own and manage a total of over 16 million sq ft of hotel, service suites, office, retail, and industrial properties in Hong Kong and on the mainland. For profit contribution, Hui Xian REIT is an associate of the group, and we take a pro-rata share of Hui Xian 's reported profit, which is HKD 197 million for the period. For Fortune REIT and Prosperity REIT, we take the cash distribution received as income, which is HKD 157 million compared with HKD 153 million last year. Together, we book contribution for the REITs HKD 354 million, compared with HKD 393 million last year.
Because of the accounting standard IFRS 9 requirement, now we have to take the fair value change of our investment in Fortune REIT and Prosperity REIT. We recorded HKD 503 million mark-to-market gain in the same period last year, whereas in this six months period, we recorded HKD 268 million decrease in fair value. That causes the fluctuation of the return on our interest in real estate investment trusts. The next slide presents Total Gearing and Maturity Profile. At 30th June 2018, the group's total debt was HKD 61.2 billion. The maturity profile spread over a period of 10 years. HKD 1.9 billion will be due within one year, HKD 54.6 billion will be due within two to five years, and HKD 4.7 billion will be due beyond five years. Then we deduct cash on hand, a total of HKD 55.2 billion, give us a net debt of HKD 6 billion.
We do the net debt to net shareholders fund ratio, it would be 1.9%. If we take the net debt to net total capital ratio, then it would be 1.8%.
Getting to zero very quickly.
Yeah. Our current corporate credit rating assigned by Moody's is A2 (Stable) and assigned by Standard & Poor's is single A (Stable). About our land bank summary. We have a total land bank of 142 million square feet. For property under development, we have 115 million square feet with 5 million square feet in Hong Kong, which we have already taken out two projects. The Seanorama in Ma On Shan and the 90 Repulse Bay Road, since we have already obtained the occupation permit for this project. 106 million square feet on the mainland. 4 million square feet overseas. For investment property, a total of 17 million square feet, which we have highlighted earlier. For hotel and service suites, we have a total of 10 million square feet, mainly in Hong Kong. 8 million square feet in Hong Kong. So that summarize our land bank position.
Give us a total of 142 million square feet. Of course, this has not taken into account our property interest for the listed REITs in Hong Kong. That concludes our interim result presentation. We welcome any question you may have.
Okay. Maybe I give you my way of reading our results also.
We're taking a rather conservative angle in doing, for example, a property valuation. Just to quote an example, this building on our books is about 26,000 sq ft. Okay, this is on our books. We keep it very much on the low side. All the hotel portfolio is not revalued. Some of them are carried at a few hundred dollars a square foot on our books, and this is by design. That is why when you look at revaluation, the revaluation profit this period is extremely small. The other thing is, excluding The Center sale and excluding all the revaluation, ordinary business grew by about 20%. That's the way I look at it, 20% ordinary business growth.
The recurring income has grown to a point now. This is excluding all acquisition that we are doing or will be doing in the next six months, excluding all the new acquisitions, but just on existing portfolio, roughly on recurring income, we are already about HKD 4 a share. On existing rental and utility type investments, we are already before HKD 4 a share. We will also take a rather conservative view in terms of the taking of profits. Earlier, Gerald mentioned the project in Argyle Street , The Zumurud.
Zumurud.
Even on that project which has been completed, we are only taking profit for approximately half of the units. All the major products on Ma On Shan, Sheung Wan or Yau Gai. In English, Ma On Shan, Sheung Wan, and Oil Street. Those are not yet booked at all, and that will be coming very quickly. Those are practically, majority of them are sold already. We are taking an extremely conservative view also on the hotels, especially the hotels, I should say. And 1881, also the rental is already on back to a healthy level. But we are also keeping valuation rather conservative. So, the growth in recurring income will continue. We are finding healthy margin there. But at the same time, property continues to be an important part of the group. So if I may start with questions. Any questions?
Hi. Hello.
It is working.
Hello. It's Kuan Yan from Citi. I have a question regarding your buyback policy. You have been doing quite a lot of buyback last year but not doing till now for this financial year. Is it because you have budget for the APA acquisition and then you don't plan for. Or basically maybe you are going to resume after today?
I shouldn't talk about buybacks publicly. I presume you know that. All I can say is we see very strong value in this company. If you look at recurring income, property backing, revaluation of property, we're on the conservative. Just do a proper market, put a market value on the hotels. We now had approximately over 20% of all rooms in Hong Kong in our hotels. So, that number maybe the world has noticed, because we try to be as low profile as possible, and very often not all the hotels are called Harbour Plaza. So, it's 20% of all rooms in Hong Kong, approximately that. If you do a valuation, this company has good value. Now exactly when we're going to do a buyback or major shareholder buying, that's not for me to disclose at this meeting.
We have enough money to do both APA and other things.
Any more details to share on the Hutchison House redevelopment? Is it going to block Murray Road project?
It is going to-
block the view of the Murray Road project, you said?
It is okay. Well, but actually, I am more interested in more details on the Hutchison House.
I cannot say it blocks anybody because it is outside, and to put it this way, the Hutchison House is already there. I do not think the neighborhood redevelopment ever anticipated that they have a sea view. Our plan was approved quite some time ago, so it is public information, which means that whoever bought or auctioned or tendered for the piece of land know the shape and size of Hutchison House long before the government even put the Murray Road land for sale. It is public information. That plan was approved some time ago under previous building code guidelines.
You would like to know more detail development?
We have already made an announcement. We have already made an announcement of all details yesterday. Maybe Wendy later on can give the full package.
Yes.
Of the construction cost.
I do not memorize the exact number, but I think it is 41 stories high. But the stories do not mean anything because the headroom is quite high over there. It is under the old building code. The external look will be very similar to this building. There will be two very similar buildings in Central. Every unit will have sea view, relatively smaller floor plate for different clients than this building. Large floor plate move here, smaller floor plates can move there. The Hutchison colleagues will move here. Other questions?
Mr. Li, thank you for the highlights of the results. You mentioned about the recurring earnings is HKD 4 per share. You declared dividend of HKD 0.47 on the HKD 4. Should we expect that payout on the-
HKD 0.47 is half year though.
I know.
Yeah.
We should expect roughly HKD 8 per share on a full- year, or maybe more?
No, HKD 4 is annualized.
Oh, annualized.
Annualized.
How should we look at it in terms of should we expect a 50% payout on the recurring earnings or something more than that?
Well, I think the group has a history of making good acquisitions. Within various companies and group, if we dividend out all the money, why do shareholders even need the management team? The management team is supposed to look for deals. It depends on the acquisitions pace of the company. Now we are in the middle of several acquisition targets right now. Some of them are known, some of them are not known yet. It all depends on our acquisition strategy. We have the resources. We have the resources, we have the low debt. We have the resources, we have the low debt, but we are busy also.
I think some of you already mentioned this. You were pleasantly surprised by an increase in interim dividend. In the past, sometimes we held firm on interim dividend. There is a 12% increase, so that is what you said in the call, right?
Maybe put it this way. The trading profits coming from property developments are rather volatile by nature, and especially in the Hong Kong market. Recurring income give us a stronger foundation to play the cycles so that we do not have to. We would like to be in property development, but we do not have to buy exactly the same amount of land for the same number of condo. Sometimes we can buy less, sometimes we can buy more, and the recurring income give us that buffer zone for us to make a judgment on the market. Okay. Other questions?
Thank you. I have two questions. One is just numerical number on DUET. If I look at half- on- half, it seems that the DUET profit dropped from HKD 1 billion to HKD 864 million. I am not sure if it is accurate. Not year-over-year, but
no, I believe
half- and- half. Is there any reason to believe why that happened? The second question i—
Maybe I answer that in a qualitative way, maybe Gerald later on can give you the numbers. Qualitatively, DUET is happening exactly as budgeted. We are very happy with the purchase. The synergies are coming through. My guess is it depends on, in a six-month period, whether you expense the merging cost or not. That is my guess, but the fundamental of the business is very good.
Last year, of course, in the first half, DUET only had, I think, a little bit over a month or even less than a month, comparing to a full six months, as Victor correctly put it. When you first start to create synergies, there are some one-time items that you have to expense.
The second question is related to the percentage of the business that comes from recurring income. Clearly it is much, much higher than half, which it seemed like we were trying to target first. Now it is much higher. The fact that we have not bought many lands in Hong Kong, but we are selling-
We bought some. Some, not a whole lot.
Not a whole lot.
Less than what you are selling, let us put it this way.
Which means that, going forward, your profit from development business continue to remain much lower. Do you think at some point in time this company becomes 100% recurring income business?
Depends on the market. We have the resources to work on property. It's a decision not made by management as to whether I like one business or whether we like another type of business. It's just margin. It's like you're asking me whether we like Australia more, or whether we like U.K. more, or whether we like Hong Kong more. So matter of margins. Our job is to create return for shareholders in the smallest risk. Same return, one business has high risk, one business has smaller risk, we go with the smaller risk. The same risk, one has a higher return, we go for the higher return. So it's really driven by the deal and by the margin created. If we can achieve the same or similar return on an IRR basis, return on equity on similar risk. Similar return on a lower risk, doesn't matter.
By the time money comes as dividends and profits to shareholders, it doesn't have any color.
It's David Ng from Macquarie. Further question on the infrastructure business, which has been doing very well. Can you just give us guidance? The margin that we see in first half, is it basically the stabilized numbers? Should we expect further volatility in terms of the margin of these couple business? Anything that related to the overall worldwide trade dispute or things like that, would that affect this margin, or is it a very strongly regulated, stable margin going forward?
No. Three work on that separately. The margin is a very funny measurement because we look at IRR basis. The IRR of the recurrent income is as we expected. The growth will be steady, but year- after- year, going up. It's happening exactly according to budget. We have no surprises. It will continue to grow.
One way you can categorize this, these are all dominant businesses in their respective sectors, so high predictability in terms of revenue stream. As a matter of when we manage these operations, what type of new values we can create. To that extent, these are more predictable margins than other highly intensive businesses.
Just to quote, a news recently happened. If you look at, let's say, Reliance. I think there is news already about a similar deal happening in Ontario. The valuation put on that company versus our original purchase price there is quite significantly uplift. That maybe give you an understanding of how the world sees these businesses.
Yeah.
Just one number, I do not know whether you can feel free to disclose. In the press release, you have the actual interest and finance costs, which is kind of group in total, as well as the taxes. But for the PowerPoint presentation, that is before interest and before taxes. How should we look at these two elements associated with this? Maybe just as a total of all these kind of infrastructure utility business, what kind of interest, expansion, and tax going forward?
Ces.
I guess by practice, people look at EBITDA. That is before interest. So, that is why we have to show those before interest numbers, so you know how to sort of analyze them. But at the same time, we need to show the total interest down below. That has always been the tradition, and probably the same with our sister company, Hutchison, so I do not know exactly what you want to look at.
The way I look at a deal is on an IRR basis. If it is on IRR basis, on return equity, the numbers match or exceed properly, then we are more infrastructure. Likewise, vice versa. You have a question on trade war, right?
Any impact that you think will be happening on your business outside Hong Kong?
Actually, Hong Kong group, including [HH] and this company, is now more and more recession-proof. There is Chinese word on when there is danger, there is opportunity. Actually for us, we have an excellent war chest. Also the businesses are as resilient as can be to turbulence in the market. Having said that, so far, now I am commenting on CKH H stuff, but even on businesses that the rest of world sometimes feel that may be impacted, like container terminal, we have not seen anything yet. I am sure there must be some effect somewhere, but because of the diversification we have, if we were only U.S., China, maybe the effect would be more. But because of the diversification we have, let us say one country buy less from another country, the goods will be sourced from another country, which we also have port in.
The diversification by itself is also a defense mechanism. In a way, what we have done over the years on diversification and putting them more in recurrent income is now serving us very well, both in asset and in HH. Okay?
If I may, just one final question, but on the Hong Kong development property. You mentioned Zumurud, despite being completed, only half of it has been booked. Is that more due to the cash received from the customers that has been some of them is after completion?
No. Sometimes more on what we call accounting-wise, what we call a completion. Occupation permit to us is not quite a completed. For some other people, maybe to take occupation permit is completed. For us is a full-blown living. We are taking a rather conservative angle on the timing of booking of profits.
Simon can explain to you in more detail later on the accounting implications.
The numbers are very good already. What can I say? The numbers are pretty good already.
[inaudible]
Hi. Alfred from Bank of Communications. Just one question regarding the office market. If I look at The Center, a disposal is normally what we do when we see the market is peaking out. But then if I look at the Hutchison redevelopment and also the one in Hung Hom, that's something we do-
The same deal more.
Well, just to try to make it short, if we look at a disposal like The Center, that's something we do when we see the market has peaked out. Then if we look at redevelopment, like Hutchison House and Hung Hom, that's something we see more upside in the market. So what's your view on the office market? Are you seeing it peaking out or you see more opportunity coming in?
My homing. The way we look at it is, again, I go back to very boring numbers on yield and IRR. The Center is rather simple. We sold at below 3% cap rate. With the same money, we can achieve a much higher IRR, so it's a good trade. The London property gives With half the money, we can achieve similar returns. Actually, less than half, we can achieve similar returns. So that's a good trade. On a redevelopment, if office can achieve more than whatever existing use, it's a good trade. So we're very focused on shareholders' return. It's not whether management like or not like. We like high IRR and low risk. So if a lower risk and higher IRR, we do it, without carrying too much emotions. I think shareholders would agree.
Right. May I have one more follow-up? Is for Hutchison House or Hung Hom as well, would the redevelopment is for a long-term rental or it's open for if there's sales opportunity?
Hutch House is not for sale. To answer that. Hutch House is not for sale.
Okay.
But the Hutchison colleagues will be moving to this building.
Thank you.
So that I don't have to walk back and forth. That's a side benefit and not the main reason.
Can I ask two questions about the dividend?
This mic is very soft. Can you speak louder?
Oh, sure. The first question is about what you said in the last result, that you aim to sustainably increase the dividend. Is that still going to hold, which means that-
I think it's looking better day by day.
Okay.
As we develop our recurring income base. Because there's more comfort zone. If we ever said, okay, if we are lucky enough that we would say, Ah, dividend maybe not as much. I'm not saying it would. That means we must have some really good targets, really good acquisitions, that we fall in love with. Which then, it's a day for opening champagne also.
The second question is that this is going to be the first full- year where we have you as the Chairman. Is it sort of a signature of your style?
Let me put it this way. I've been the MD and Deputy Chair of this company for as long as I can remember. I'm part of the furniture in this company already. The reality is this company, the transition this period is rather ceremonial, in my opinion. Because my motto is to make sure that all my colleagues and our customers and all the people that work with us feel that as if nothing has changed. I think we're almost there. Okay.
Yes.
That this is a father and son partnership, and I hope this will continue as a father and son partnership. We take different roles at different time.
But this is the first time you raised interim dividend for a long time.
Are you happy? You're not happy. You're happy and you don't want to
It's a nice surprise.
It's nice surprise. Thank you. So that's all I can say. What else? Thank you. Okay. I think the main reason is not don't make it into a personnel change or anything. It's mainly because the strategy that is laid by father and son and the team together is now coming to fruition. Therefore, we have the money. Therefore, we have the stamina to pay a high dividend. At the same time, we can comfortable and smile when the world gets more and more volatile, like today's stock market. And we have a good watch list. We're not hoping things are wrong, but in case things are not go exactly as the world hopes it to be, maybe it's an opportunity for us also. Okay. Other questions?
Anything else?
If not, some of you and I have to move to the 17th floor. Thank you.