Welcome to the 2016 annual results analyst presentation for CK Asset Holdings. I will let our Deputy Managing Director, Mr. Edmond Ip, kick off our presentation, followed by Sir Simon Man, our General Manager of our accounts department, and myself, taking you through the rest of today's presentation.
Okay, good afternoon. I will just go through basically three slides, and my colleagues will handle the rest. Okay, the first page. Pretty good results. Revenue group 18.9% and profit before investment revaluation up 15.5%. Investment property revaluation down a little bit from last year. Therefore, profit attributable to shareholders increased 13.4%. I should say, obviously, it is not directly comparable because 2015, as you all know, after the merger, we only had seven months of the old Hutchison property and 12 months the old Cheung Kong property. But this year, obviously, merged together full 12 years. So it is not exactly comparable, just to put in that context. The net book value per share at the end of last year was HKD 70.6 per share. I should emphasize that this is clearly undervalued because all the hotel and service suites and development properties are on the books at cost.
I would think the true NAV would be substantially higher. On the dividend side, the board has just declared a final dividend of HKD 1.15, combined with the interim dividend of HKD 0.38. The full-year dividend would amount to HKD 1.53 per share. This represents a 9.3% increase over that of 2015. Fair to say with promise we will increase dividend when we did the reorganization. I think we have delivered the promise. Compared to the earnings per share of HKD 5.05 per share, that gives a payout ratio of just over 30%. I think this is a pretty solid payout ratio, particularly in the context of us having spent quite a bit of money in the last few months buying back shares as well. As of today, we have spent about HKD 3 billion buying back, what is the number? Close to 60 million shares.
HKD 3 billion is roughly half of the last year's total dividends. So if you put it in that context, the sort of return to the shareholders is a lot more than the dividend that we just talked about. Next page. On the geographical split, for the revenue, Mainland accounted for 53% compared to Hong Kong's 46%. On profit contribution, Hong Kong, obviously, because the margin is higher, Hong Kong reversed its position with a higher makeup of 58% against the Mainland of 42%. In terms of operating margin, I think the Mainland was about 30% and Hong Kong was 47% for last year. Next page. On the segment analysis, as you would expect, property sales accounted for the majority of the contribution, both in terms of revenue and profit. On revenue side, property sales accounted for 81%, and on profit contribution, 67%.
I would say that the recurring income base now, if you look at this chart, now accounts for about 33% of the total, so it is becoming more and more meaningful. As you know, we have been buying some infrastructure assets or posed to buy infrastructure assets and some aircraft leasing. I would think that the recurring income base is likely to continue to increase over the years. Gerald?
Page six of the presentation. Property sales 2016, HKD 17.67 billion. Property rental, HKD 6.78 billion. Hotel and service suite operation, HKD 1.51 billion. Property and project management, HKD 267 million, and aircraft leasing, HKD 84 million. Interest in REITs gave us HKD 347 million. As you can tell, the 2016 pre-tax recurrent contribution, if we include interests in REITs, has grown to roughly HKD 8.99 billion. This is more or less the EBIT number. 2015 was HKD 6.5 billion. The equivalent number was HKD 6.5 billion. Just reiterating Edmond Ip's point earlier, the recurring income is becoming more substantial. Looking at the divisional performance. Overall, our sales division recorded a solid 31.1% pre-tax margin. Hong Kong's achievement was 34%.
Please continue.
Thanks. Margins from the mainland came in at 29.6% for the full year. Not as high as 2015, but an improvement from 27.2%, which was the margin in the first half. Top Hong Kong profit contributors were Heung Yip Road, HKD 1.9 billion; The Beaumont II, HKD 1.8 billion; Yuccie Square, HKD 1.31 billion; Stars by the Harbour, almost HKD 920 million. From the mainland, Millennium Waterfront, phase one and two from Wuhan, HKD 4.2 billion. The Harbourfront Land Qingdao, HKD 1.34 billion, and Laguna Verona from Dongguan, HKD 1.05 billion. Recognized or booked unit count in Hong Kong, roughly 2,163 units, and the mainland 9,771 units. This is contracted sales not yet recognized. We have, at the end of 2016, almost HKD 49 billion worth of contracted sales which has not been recognized or booked. This bodes well for future years.
Just to mention that the mainland figure does include HKD 11.2 billion of revenue from the sale of Century Link. The booking or completion is subject to fulfillment of various conditions. We do not have a timing for that at this point. For your information, 2016 calendar year contracted sales, approximately, and I use the word approximately because it is based on December or January exchange rates. In Hong Kong, HKD 14.2 billion. The mainland, HKD 54.5 billion. Singapore, almost HKD 1 billion, and the U.K., HKD 0.16 billion. So altogether, almost HKD 70 billion worth of calendar year contracted sales in 2016. Next page, property rental.
Overall margin for our IP portfolio is still at a very high 91.3%, with great contribution from Cheung Kong Centre, HKD 1.4 billion; The Center, almost HKD 900 million; 1881, HKD 842 million; Whampoa Garden, HKD 762 million; and from the mainland, Shanghai Westgate Mall, HKD 398 million.
Average occupancy rate of our major assets is well over 97%. There is a bit of a lag in 1881, as we did not have many expiring leases in 2016, so there should be a little bit of a pullback to better reflect the past retail conditions or high-end retail conditions when the reversions come in in 2017 and 2018. Overall, I think our well-diversified IP portfolio should be more resilient when compared to our peers. HKD 1.26 billion of reval fair value increase. The moderate net increase in fair value mainly comes from The Center, CKC, Cheung Kong Centre, and Whampoa Garden. We have a total of 17 million square feet of investment property as of 2016. Turning to the hotel and service suite division. We have roughly 15 hotels and service suites in Hong Kong, four on the mainland, one in the Bahamas, total over 16,000 rooms.
The hotel operating profit yield on carrying costs is roughly 16.9% right now. Margins 31.1%, an improvement from the first-half margin of 27.6%. Hopefully better days will be ahead. As you can see from the comparison of room rates, it is still a challenging time for the division, but the environment is not deteriorating too much further. Overall EBITDA margin is roughly around 40%, which is actually not too bad. 23 million or 252 million square feet of floor area under management by the group, and a solid contribution as always by this division. Only HKD 84 million of contribution from the new aircraft leasing division, as we only started investing in aircraft leasing in the second half of 2016. We have 73 aircraft leased to commercial airlines at the end of 2016. I will turn the next two pages over to Simon Man.
Interest in REITs. The group has interest in three listed REITs, namely 32.4% in Hui Xian REIT, 27.7% in Fortune REIT, and 18.9% in Prosperity REIT. Contribution to profit for the year amounted to HKD 347 million, which include distribution received from Fortune REIT and Prosperity REIT, and a share of the profit of the Hui Xian REIT, which it is accounted for as an associate. It shows a decrease in contribution when compared with last year, because before the restructuring in 2015, cash distribution received from Hui Xian REIT was taken up as income. We only started equity accounting after the restructuring in June. The equity accounting, obviously, would be less than the cash distribution we receive from the REIT. Total cash distribution received from the REIT this year amounted to HKD 871 million, a lot higher than the profit we book in the accounts.
The next page, regarding gearing and maturity profile. Total bank and other borrowings, HKD 70.2 billion. If we deduct bank balance and deposits, HKD 62.6 billion, it gives us a net debt of HKD 7.6 billion. If we take the shareholders' fund, HKD 270 billion, and get the net debt to shareholders' fund ratio, it will be 2.8%. If we add back minority interest to get total equity and add back the net debt to net total capital, the net debt to net total capital ratio would be 2.7%. For maturity profile, the total bank and other borrowings, HKD 72.2 billion, HKD 4.4 billion would be due within one year, HKD 56.9 billion would be due within two to five years, and HKD 8.9 billion would be due after five years.
Corporate rating. We have a pretty strong rating from S&P and Fitch, A-, and Moody's A2, upgraded to A2 in the middle of last year.
We're moving towards zero debt.
I would say that our rating actually should be a lot stronger, if you look at all the rating metrics.
Okay. One point of clarification, since Simon Man is working on the REITs one. When you look at the land bank on a portfolio, we have a very pretty conservative accounting policy for land banks. The investment property holdings through the REIT is not included in our total land bank. Agricultural land that we are holding that has not started a development yet is not included in our land bank calculation. If you include those numbers, the land bank portfolio is actually much larger than the amount that is shown here.
What you see on this page, as Victor says, 135 million square feet of total land bank. Even we continue to exclude the agricultural land, and if we put back in all the project under planning or investment property and other hotels, the land bank will go to 165 or 166 million square feet. That still excludes the agricultural land bank that we have.
Okay. For example, the huge Oriental Plaza in Beijing held through the REIT is not included in your investment property portfolio. But we have a percentage of it in beneficial interest terms.
This actually concludes the formal presentation, so I will open the floor for any questions you may have.
Questions? Gerald has explained it so well.
[Foreign language]
[Foreign language]. There is one question. The gentleman in front.
Yeah.
Mike?
Yeah.
Yeah.
Thank you. Hello. Thanks. Justin Kwok, Goldman Sachs. Perhaps my question is on the dividend and also the capital management. It is good to see that dividend has increased YoY on absolute basis, but it seems that the payout ratio was actually declined slightly. I just want to get a sense on how the company look at the dividend policy and the dividend itself going forward. Are you going to focus on the payout ratio? Are you more focusing on the much higher recurring income base that you are going to have with more infrastructure or aircraft leasing income coming in? How are you going to guide us, and including the share buyback. Any view on that and your-
If I answer your question on share buyback, I am going to lose my job.
Thank you.
I have my corporate secretary here reminding me on the corporate governance. I think looking forward, we would like to increase a bit of our recurring income. Property will continue to be one of our important businesses. We are not deviating from that. It is just that, within the Cheung Kong group, we have a bit more flexibility and opportunity. If we are obligated to buy exactly the amount of land that we have sold through the condominium sales.
I do not think that is a very good strategy. From certain times in our history, we buy more land than what we have sold through condos. Certain times we did the reverse. So we have the flexibility of practicing that. This has always been the tradition of Cheung Kong. We have not deviated from our tradition. The temptation, of course, I have to tell you about the future, but then my competitor will also know about it. So, excuse me for not going into absolute detail, but we would like to have some recurring cash flow so that we can balance the ups and downs in the property side. I would not exclude an opportunity when I suddenly want to buy more land and sell down our recurring income, or vice versa. This is the balancing act. Edmond, sorry.
I just want to add one point. You talk about reduction in payout ratio. Last year was 31%. This year is 30%. So it is not as if it is a big reduction, but like I said earlier, if in conjunction with share buyback, I think we are returning more capital to shareholders compared to last year. So 30%, around that area, I think is hopefully sustainable. But again, we have to look at all the other factors.
Okay. Other questions? At the back.
Hi, this is Praveen from Morgan Stanley. One question on the Hong Kong property residential market, if you can talk about, especially in light of Chinese developers buying more land recently. You have avoided not buying that much land for the last couple of years. Can you talk about what is the thought process there in the sense it is becoming more difficult than before, and your land bank is depleting in Hong Kong, I would say, for the three years ago versus now. Would there be a time when you will only have rental income-generating assets and no land bank left in Hong Kong? Excluding the agricultural bank, obviously.
The bottom line is we need to deliver profit to our shareholders, not square footage. That is not our duty. The duty is not just to increase the amount of land, but to deliver profits. When the safety margin, I wouldn't even call it profit margin, the safety margin is too low for development, I think it is our job to slow down a bit. At the time when we see the margins higher, we should increase our land bank portfolio because when the margin is healthy, you call it land bank. When the margin is not as healthy, it is unsold inventory. You cannot get either way.
On the same point, many investors have been surprised that you have been investing that money into infrastructure assets, probably because the returns are higher, which is fair. I think they are asking whether you promised during the separation of CKH and CKP to stay with property.
As I said, we have not deviated from property being our main business, but it is also our duty to look at shareholders' return and the safety for every auctions or bids or acquisitions that we make. The cash flow from recurring income is not unlike the cash flow from, let's say, an investment property. We'll keep it as our war chest for future acquisitions. It's a timing game. Today, when using a very colloquial Hong Kong Cantonese term, when the flour in making the bread is more expensive than the bread itself, it's against my basic logic to be saying let's chase after square footage. My ultimate duty must be cash flow and profit to shareholders.
We don't have an exact match on the square footage sold through condos, then we have to exactly purchase back exactly that amount of square footage in the land acquisition process. Recently, we have also paid premium in converting some agricultural land into developable land. Except that's not reported in the press, but we're doing that. So we're increasing that through that venue. Also, we're looking at possible new projects in Hong Kong that may involve large amount of capital. But then in order to do that, you need a war chest. Okay. So, I think we're just doing timing. Exactly what we've been doing for the last 20, 30 years.
My last question-
Can I add one point as well? Maybe a little bit sensitive, but anyway. At the time of the reorganization, everybody tells us, "You split in two, the pure property company will be very well received," but look at what happened. The result tells us even as a pure property company, you still have a major discount, like I said earlier. Major discount. Today's market price compared to true NAV is a major discount. So I can't explain it, but maybe we should try to do something different, get more income, pay more dividend, maybe the share price goes up. So that's another rationale for doing something different.
Well, I agree the discount is wide. I do not disagree with that.
If we deliver cash flow, if we deliver profit or share price, either one.
Yeah.
That is our job.
One last question on this one. Are you surprised about the current strength in the sell-through of the primary units and the ASP? Or do you think in the market, in Hong Kong residential market, in the primary sales, are you surprised about the strength, or you think the local market will remain deep and can continue to show this kind of strength even though s ince November, the stamp duty increase has made outsiders to buy less.
I think with mainland developers buying land at record prices, give condo buyers an excitement. That excitement translate into good condo sales. I am not complaining. We continue record the sales and record above budget prices, and I think that is just good news for us. Okay. But whether we are going to translate that into land acquisition, that has three years, four years or more down the road. That is another question. Other questions?
Thank you. David from Macquarie. Just on the acquisition question again. There are easily like 20, 30 bidders for land auction these days. A lot of names never heard of. Actually, even some of these Hong Kong local small guys also coming out to bid for land. I assume that situation may continue for a while. To keep a large war chest of cash for future acquisitions, of course, is a good thing, right? But we need to be sure that your upcoming targets are not going to see tons of competitors bidding up the price. So the question is, what give you the confidence that Cheung Kong has that advantage or niche, that there are some targets that do not see so many of your competitors being able to bid for it, and that you can get a reasonable price for that? What is the niche?
We shouldn't adopt a must-win policy, must get the piece of land policy. If we have that, it is very dangerous. I think our policy must be to provide good and healthy return to shareholders. If it can be fulfilled through land or development, that is good. If we can fulfill through other means, money is money. There is no difference in terms of whether it is coming through an investment, or whether it is through a property, or whether it is through a development. Whether it is a Beijing development or a U.K. Actually, the U.K. sales in condo London, we will be doing quite good margin there. Money coming back to Hong Kong, whether it is from London or from Beijing, same money.
Just kind of two more question. One, as you mentioned, U.K., seems that the property price bottoming out over there, even though currency may still be uncertain. Is it a good chance, especially with the group's expertise in that area, in that geography, that it is a good time for Cheung Kong to buy more assets or land bank in the U.K.?
We actually have a pretty good land portfolio in London today. Because the land was acquired a long time ago, it is through a lengthy rezoning process. The margin there is actually, even after tax, after currency, still quite a bit larger than the Hong Kong portfolio.
Final question on the selling part. We see with dispose of the Shanghai office tower. We also, Prosperity REIT disposed of a tiny shopping mall in Hong Kong. If we have a view that the land market is very expensive or the property price may not be as high as what you believe will be in the future, it should be more on the selling mode, then you will continue to deliver good return to the shareholders by selling things. But actually on the Hong Kong part, you have slowed down property sales. In terms of the contracted sales, you have slowed down a little bit. Will we see that if there is no change in your view, should selling be or should the company spend more efforts in selling things?
Especially when there are so many willing buyers out there to pay for low-yield assets.
You are trying to simplify Cheung Kong into an on-off switch. I won't do that. I think what happens is, we will continue to rationalize our portfolio, and we will look at the margin and the timing. What we are saying is actually a luxury for Cheung Kong, in the sense that we have got choices. Those choices allow us to have choices that other simple developers would not have. That is why we are happy because we have those choices. If I don't have the choices, I will be scratching my head now. Most people don't have other sister companies who can give them opportunities all around the world, and a London or Singapore portfolio that continue to give recurring income.
Or a service apartment and hotel portfolio that will continue to have upsides because the cost is so low, and it is not in our revaluation profits, and it is still on the books at some of them possibly 10% of today's market value. The valuation today would be 10 times what is on our book cost, and that is not even showing our profits. Approximately we are now about, if you calculate the number of rooms, I think we are anywhere between one-fifth to one-quarter of all of Hong Kong's rooms in the hotel industry. I do not have the exact number of other people's rooms, but approximately one-quarter to one-fifth. Some of them have costs, correct me if I am wrong, below HKD 1,000. Yeah, per square foot.
Because we depreciate.
Because we keep depreciating them. You know the accounting rules on the offices.
Every year you have to do revaluation. But on hotels, rather than revaluation, we actually keep depreciating them as a equipment for business. So a lot of properties are held, some of them below HKD 1,000 per square foot. So I think when I say that it is below 10%, it is already extremely conservative. Some of them may be 5% to today's market value.
Just about HKD 1,000.
About HKD 1,000. Other questions? If not, thank you. Thank you.
This concludes our analyst presentation. Thank you for coming.