Thank you for coming to the Cheung Kong Property analyst briefing. My name is Gerald. I would just like to introduce Mr. Edmond Ip on my right and Mr. Simon Man. Mr. Victor Li will be joining us shortly. We are going to have the presentation right now, led by Mr. Edmond Ip.
Now, I will just do three pages, and then I will leave the rest to Gerald. If you turn to page three. Turnover increased by 45%, from HKD 19 billion to HKD 27 billion, from 2015 to 2016. And the profit before investment property revaluation up 51%. And the investment property valuation, obviously, the market has been fairly steady of late, so compared to last year, it is actually down 80%. As to profit attributable to shareholders, it is up 25%. The numbers are rather remarkable, isn't it? I tell you, we are not magicians. Clearly, we are not comparing like to like. 2015, because the merger happened in early June, so in terms of the figures, last year it was sort of one month of Hutchison Property and six months of used-to-be Cheung Kong Property. For 2016, is of course 6 + 6 .
To the extent that while we quote the numbers, they are not exactly directly comparable. Earnings per share. This year is HKD 2.23 per share, and net book value per share is HKD 69.07. But I should emphasize again that HKD 69 is just book value. As you know, our investment property valuation has always been rather conservative, and I think Gerald mentioned that many times in the past. And also our development properties stay at book. So HKD 69 is purely book value. So the current market price is still a major discount from the real value of our portfolio. Dividend, we approved HKD 0.38 a share compared to HKD 0.35 last year. This is up 8%. If you work out the payout ratio, it is about 17%, but this really does not make a lot of sense because Do not put book at 17% as any indication because this is just half a year.
By year-end, we will have a different payout ratio altogether, I think. Turn to the next page. Geographic split on the turnover figure. Hong Kong accounted for 51% this year against mainland of 48%. And profit contribution in Hong Kong, 67%, compared to mainland, 33%. So the profit margin in Hong Kong, obviously a bit higher than our mainland portfolio. By segment, property sales, 77% this year of turnover, with the rest being mostly the rental property of 13% and the hotel 9%. Profit contribution. Again, property sales is by far the largest, 62%. Rental property 31%, and hotels is 6%. That is good.
Sorry—
That's okay.
The [CKH] meeting is running a little bit later, so I'm trying to be in both places at both times.
So I've just completed my three pages, Gerald, your turn.
Thank you, Edmond. Page six. Our property sales division continued to benefit from the strong momentum on the mainland. The sale of non-core assets such as Heung Yip Road in Hong Kong was treated as part of regular property sales as it was classified as current stock of property in the balance sheet. It was there because Heung Yip Road was a presale before completion. As you can see, a full six months contribution from all investment property and hotel assets has also further strengthened the group's recurrent income base. Let's take a closer look at each of the division. Again, it is only meaningful to compare the profit margins between 2016 and 2015, and not the absolute numbers. Page seven. Overall, first half pre-tax margin was at a healthy 32.2%. Hong Kong was at 40%.
Commercial assets, sale of non-core commercial assets enjoying 59% pre-tax and before overhead margins. Residential assets recorded a 34% margin if we exclude La Lumiere, which only had a margin in the teens. Overall margin on the mainland was at a solid 27.2%. If we exclude overhead expenses and only look at direct costs, all the margins you see here will at least be 3% higher. Turning over to the next page. In the first half, the top Hong Kong profit contributors would be Heung Yip Road, HKD 1.83 billion. Stars by the Harbour, HKD 800+ million. La Lumiere, HKD 162 million. We also have the Laguna Mall, which we also sold, contributing HKD 860 million. Top three from the mainland, Millennium Waterfront, HKD 1.2 billion, Laguna Verona, HKD 612 million, Emerald City, HKD 487 million. Recognized Hong Kong units sold, unit count, 314 resi in Hong Kong and on the mainland, 3,848.
Contribution in the second half will mainly come from the projects listed below the table. To the next page nine. In this table, you can see that the contracted sales figures that have not been recognized, contracted but not yet recognized. In terms of what may be included in the second half results, I would say most of what you see for Hong Kong, more than half of the mainland number, less than half of the U.K. number, and none of the Singapore number. For your information, 2016 first half contracted sales, so sales activity in the first half of 2016. In Hong Kong, HKD 4.9 billion or 361 units. On the mainland, HKD 21.5 billion or 6,137 units. In Singapore, HKD 497 million, 93 units, and the U.K., HKD 167 million or six units. Altogether, HKD 27.1 billion or 6,597 units sold in the first half of 2016.
Moving on to page 10, the rental division. Excellent performance from our leasing divisions. Pre-tax margins at 91.6% as our contribution portion from Hong Kong offices has gone up. Top contributors, Cheung Kong Centre, HKD 713 million, The Center, HKD 435 million, 1881 Heritage, HKD 408 million, and Whampoa Garden, HKD 367 million. Hutchison Logistics Center, HKD 315 million. From the mainland, Shanghai Westgate, HKD 202 million. Page 11. The bulk of our IP exposure is in offices, mainly in Central, and mass consumer retail malls located within or next to large-scale resi developments. So in my view, we really have one of the most resilient IP portfolios in Hong Kong. Net increase in fair value mainly comes from The Center as passing rent has been on the rise. Important point to note is that the same cap rates have been used. So office for offices, roughly 5%, retail, roughly 5.25%, industrial, 5.5%.
Based on the respective changes in rental level, valuation of individual assets will of course be adjusted accordingly. Page 13, moving on to the hotel division, hotel and service suite division. Hotel operating profit yield, which is after FF&E depreciation, is 14.4%. EBIT yield would be about 2%-3% less. Pre-tax margin at 27.6% seems weak compared to 2015, but the operation in the Bahamas has been the poor performer in the first half. If we exclude it and just focus on Hong Kong and China, the profit margin actually increases to 31.34%. So I think that is more reflective of our situation in Hong Kong and on the mainland. Still finding the bottom, but a bit more stable now. Page 14, as you can see from the bottom table, Hong Kong actually did well compared to the first half last year.
China room rates had to be reduced to boost occupancy, and the Bahamas was really the drag. Compared to second half 2015, room rates in Hong Kong generally was down another. Because second half is usually better than the first half, was down another 10%-15%, but there may be some seasonality involved. Project and property management. 22 million square meters of floor area under management by the group now. Solid contribution as always by this division. Please read note two at your leisure. Page 16. A total of HKD 423 million of cash distribution received from the three REITs. Another significant source of recurring income for our group. A gearing profile. Debt HKD 57.2 billion, cash HKD 50.3 billion, net debt HKD 6.9 billion. So the net debt- to- equity has come down to 2.6%. Net total capital 2.5%.
In terms of our maturity profile, the next focus in terms of liability management is really to optimize the maturity profile of our debt. Maybe tapping the capital market opportunistically if terms are attractive. All three rating agencies have recently upgraded the credit outlook of the company to positive. Last page here, the land bank summary of 13.1 million square meters across the regions where we have operations. Although we have not been too active or too successful on the replenishment front, we still have a decent land bank to work with, especially on the mainland. That, this concludes the presentation part. I think we are now ready to open the floor for questions.
A lot of information. Questions? Please. Lady in front.
Hi. Sarah Cooper, Merrill Lynch. I am curious, in your outlook statement, you say that, "The group will also pursue other global investments to extend our reach in new business areas, and negotiations on certain potential investments in different business nature are underway." Could you elaborate?
Not yet. I think, because property is cyclical by design, and I think whatever new business we are looking at will have characteristics whereby we can always get back the cash to move into property. It should smooth the cycles. Not that we are deviating from the fact that property is going to be our main and most important business.
I remember we had a discussion when you bought Northumbrian Water, and we talked about a clear investment path that investors can choose between one entity and the other. Is this the entity that you need that smoothing in?
I do not quite get your question, sorry.
You would not look to do something different in a different entity? Is Cheung Kong going to become more of a conglomerate again?
No. No. I think the fact is, we still have property as our main business. If we go into new businesses, new business is complementary in nature, not replacing. It is complementary in nature. But we do not have immediate things that I can share with you.
I think it is a good thing to have some more recurring income. If whatever we invest in can provide us with some additional sort of steady income outside of property, let us say for the time being. I think the valuation of the shares might go up, as a matter of fact. We will see.
Well, if you look at the return profile for some of the recently transacted land sites. Based on what you guys have written, it does not look like it is going to make much money or a lot of money. So there is a—
We are quite disciplined. I think that the word is we are very disciplined in acquisition, and that has always been the case for CK Group.
I think the market does appreciate that. I have one last question, which I am asking every company. When you look at these new acquisitions, will you evaluate the returns that you can make from those, versus your shares, buying your shares?
That is always an option.
We do buy our shares, too. We have done so.
That is always an option. Okay. Another question? Saw some hands. Yeah.
Thank you management for the presentation. I have two questions. First is on the dividend policy. We know that this is an interim. We should not expect this is a payout that we should apply for the full year. What should we think about it? Should we tie it or expectation- tie it against the rental income? Or any basis that we should think about for full year?
Well, like I just said, the 17% in the interim. The final would probably be somewhat different. The important thing is we've increased the absolute amount, too. You notice that we've increased 8%. By the time the final comes around, Chairman's decision, I'll tell you what the payout ratio is going to be. Too early for me to say.
We're not going to make a projection. I think what we mentioned earlier, in our restructuring process, we'll definitely adhere to that.
Okay. My second question is relating to Cheung Kong versus peers. We understand that, I mean, a property company value or how market perceive it's in the perspective of leverage as it makes and dividend policy. How management view Cheung Kong, compared to peers?
In terms of, put it this way, we have choices. We like to maintain a very disciplined policy on new purchases. This we have not deviated from day one of Cheung Kong. From time to time, we can buy a lot in one year. From time to time, we can stop buying for extended period. That policy has served us well, and we are not going to deviate from that. From time to time, going back to your earlier question, whatever alternate business we invest in is meant to complement, not to replace.
Okay.
Well, it is actually interesting that you mentioned asset mix. If you look at the market, Hong Kong, one of the few markets, well, Britain is different now, but one of the few markets that real estate companies always trade at a discount. Developers tends to be at the steepest discount. Then you have landlords, less discount, REITs, even closer to the NAV. Cash, I guess there is no discount on cash. What is the optimal asset mix? Where should we put our money into to invest now that we have a pretty sizable war chest? Which leads to, or is connected with Sarah's question as well. This is something we have to think about, in the long run or in the medium term.
In a way, in the last couple of years, when we have a less gearing, actually closer to no gearing, if that is the theory, the discount on CK Property should be getting smaller and smaller, theoretically.
Do not be a cash company. They will go crazy.
No, we're not saying that. That's not what we're saying. Careful. Okay.
But it looks like in the overall low interest rate environment, the market participants, the investors seem to appreciate companies with a higher recurring income base. It looks like it is, you may not agree, but that's subject to your interpretation, but it looks like companies like CKI today are trading at very good valuation because of the high recurring income base.
We still look at our base as a cash base, as war chest.
Another follow-up question on your new business potential. Have you changed or have you changed your geographical focus in sourcing this kind of potential new project after Brexit? This is the first question. I think the second is, which countries are you seeing more opportunities to generate your, I think, expected, maybe double digit, that kind of ROI, that kind of returns?
Okay. Let's not get too focused on new projects. We haven't decided yet. But on property, we've always looked outside Hong Kong, and we've delivered good profit from outside Hong Kong. I think in the next couple of years coming up, U.K., even with the lower currency, even with that, we're looking at major contributions coming from London. And we've two projects, very large projects that is in good areas in London, and we expect the sales and the profit margins on an after-tax basis is comparable or even better than Hong Kong. So, we're never restricted to just Hong Kong and China. Having said that, Hong Kong and China continues to be our most familiar area. So that's property. On new businesses, I can't really tell you too much now because we haven't decided.
Once we've decided, I think we'll make it known to the market very quickly. But as I go back, it's going to be complementary to our property portfolio. It's not going to be restricted to To answer your question, it's not going to be restricted to U.K. or any other country. Other questions?
I came late, so you might have answered this. I was at the CKH briefing. The question is related to your strategy of waiting in Hong Kong to buy land for the last couple of years because the return has been lower. And the only way it changes is if land cost goes down and ASP goes up. What has happened, however, in the last 6 - 12 months is that prices have, in the last two months, started going up, and land cost is going up even higher in the last few transactions. So it sounds like what you were expecting isn't really happening for you to jump in and buy land. So are you just going to wait till that opportunity comes? Or you are going to reduce the return expectation?
If we bought, let's say, one or two years ago and trying to sell today or next year, I think the market should penalize us. The margin on some of the land acquisition in the last couple of years, two years to now, is actually at an unhealthy level. I think the risk-return ratio is not correct, and we shouldn't do that for our shareholders. And we're quite disciplined in what we think is a fair risk and return ratio, and we're going to stick to it. And as [Edmond] mentioned earlier, our shares has always been one of the options. Our shares are always one of the options. We've never said that we're not going to buy again or anything like that. But that's a discussion that I'm not entering into today. But that's always an option. The discount to NAV is something that has been discussed earlier.
That actually, when the gearing of the company is low, the discount is actually too much on CKP. Going back to our tradition is that we've always been very disciplined on our acquisition in early days in CKP. From time to time, we buy a lot. From time to time, we stay quiet. That has always been our tradition. We're not doing something that's new, if you look at our history. Okay?
I just have a follow-up on that. What it seems that the land cost keeps going up simply because there are more entrants to the market. For example, if you look at the percentage land bought by Chinese developers in the last two years have gone up versus five years ago, three years ago. There are smaller companies, without naming names, who have been coming too. It just sounds like it's going to be very difficult to find this historical return that you have been waiting for, and that's what gets you into more and more cash. Maybe you just mentioned that you can buy your stocks and so on. It becomes your land bank keeps depleting. You become a different company in the next three years. Are you prepared to completely transform this?
Whatever you say, it's not a reason to buy expensive land.
Fair enough.
That's not the reason. I think the reason we buy land is because we think that we can make money for shareholders. Full stop.
And—
Nothing more than that.
—At the lower cost of debt that today we are in, and we can sustain that, like your cost of debt is really low. Even at that lower cost of debt, you think that you're not making enough return to buy land. Is that fair?
Risk and return. I'm not going to elaborate further because we must have a judgment of market and politics around property and everything. We must have that judgment there, and I shouldn't go further than that. But we've been consistent in our approach. So far, I think we've been doing the right thing. If you look at, it doesn't have to take long, and already a lot of people recognize that we have been doing the right thing. I mean, the fact that we have a war chest doesn't mean I have to pick a war. As long as there's a price in the winning. It's the price, not the winning, that we're after. Sorry, that's all I have. Over there.
Thank you. Steven from Macquarie. Just a question on the recurring income to try to bulk up the recurring income. It is interesting to know that in the history of Cheung Kong, you guys are always a little bit ahead of your peers due to good vision and good planning. When the whole world is chasing yield, you have just told me that may be also something that you guys want to have more, right? Stable yield. But again, this type of asset has been getting more and more expensive, depressing the yield that you can obtain for new purchases. The obvious question is, should you be thinking the other way around? Especially some of the more trophy assets that you own in Hong Kong. If you are willing to dispose of them, you realize tremendous gain, much more attractive than six months ago or five years ago.
Would you ever entertain that path? I know this is a totally opposite question. That means that you would actually, how could you get more cash, right? Quite different from what a lot of investors want you to do, to spend those cash, right? But you have got a lot of good asset which can sell at very attractive price right now. Will you ever consider that?
You know it is my job to keep a poker face on that question, though, huh? I am the final trader in the company. Okay. I will give you the pipeline answer. The pipeline answer is, I will always look at deals. It is my job to look at deals, both purchase and sale. But we are very disciplined in our approach. And we say this all through the group, be it CKP, CKHH, or CKI. There is no deal that we must have. There is no property that we must own. Other than this building.
I was going to say. Cheung Kong Centre. Chairman's order.
Yeah. Other than this building, we still need an office ourselves. Okay. A building across the street. I think this discipline has served us well. We are not very emotional on individual property or anything. I think our shareholders want us to do so, too. We have not low ego, we have no ego.
Well, in terms of disposal of non-core commercial assets, I think we have done in the last 10 years more than many local developers. Our former self, even this year we have had in the first half, we have seen that there are decent results from such actions as well. I think that it is like Victor said, I think the key word is discipline and return- conscious.
I will give you some tips. If we get a good price for Victor, he can sell [The Center] out.
Still poker face.
You look at our margin. We are delivering healthy margin. Some of them I think larger than the market would expect. Timing. Property is all about timing.
Can I just add one quick follow-up question. Do you look at the attractiveness on a very absolute basis? Meaning that, for example, in some of the REITs that you guys spin off, they do buy and sell, right? So they may have purchased something quite expensively, but they managed to sell another asset even at a more expensive price. Like you sell at 2% yield, but you buy at 2.5% yield. Do you consider that, which is basically cycling of a capital, and in the process you realize gain and shareholders value through that? Or do you just look at every single asset and say, "Hey, this is 2.5% yield, I would never consider buying this, even though I know I can sell some of my existing assets at 2%"?
I don't think shareholders want us to be short-term speculators. That's not our job. Our job must be you purchase something that we intend to own, and if we intend to own, that must have some value, we can improve on it. In the meantime, if there's opportunistic purchases from our portfolio, we will consider them separately. We are not speculators.
Sorry, another question from your potential new business, because we do see a lot of our clients have concern on that. I still recall last year when you were doing the group reorganization. One reason for doing the reorganization is to simplify the group structure. So taking all the aircraft, all the non-property business to CKH, and remaining CK Property for all the property business. So the potential involvement of so-called non-property business again, are you concerned it will complicate your group structure again, and hence basically it may increase your earnings, but on the other hand, widening your NAV discount?
We're not trying to complicate it anymore. We've worked so hard to simplify. I can't talk about our potential that has not happened yet. This is just something that on our mind, and we would like to share with our shareholders. We haven't selected the line yet. It's still a thinking process. But the idea, I'm starting to repeat myself, is to complement property, not to complicate the structure. To complement.
An example?
You got the answer. No. I think we'll be very open about it when we've decided. It would be unfair for us to talk about something we haven't decided yet.
Any target ratio? For example, if your property is still 100% now. So what is that kind of new business contribute on your target?
We haven't decided. I can't talk about things we haven't decided. You want us to talk about things earlier so that we let the market know what we're thinking. So we start with that, and then you want more details. Well, I'm not there yet.
Okay.
One observation I've seen is since the flotation. I don't know if I say it anyway. We think a pure property company will give us good valuation, but look at the discount on our asset. So maybe the market doesn't like a pure property company. I don't know. So it's an open question.
I think back to the earlier question, it's a good one. On discount on property companies. That's not a question for me to answer. It's for you guys to answer. If there's a heavy discount on property companies, then what's the logic on putting property on public companies? It's for you to answer. Not for me to answer.
Thank you. I would like to take a step back and ask management about your view on the market. I remember in the last analyst briefing, management did paint a very bearish tone towards the Hong Kong market. Especially Chairman, did mention some comments. Has that been changed going into second half? Especially when it seems like the market has stabilized a little bit. Overall, especially on the residential side, supply from the government there suggests that supply is still going to be increasing. Could you share your view on the market? That's the first question.
We're not changing our view. But then at one time, we're continuously selling our condominiums. On the other hand, I'm looking at new acquisitions. Forgive me if I can't paint you an optimistic nor bearish angle. It's my job. You can only read through our action rather than from my words.
My second question is, in the second half, when you launch, what will be your pricing strategy? Would you consider I remember you offered 123% mortgage for one of your project, but then take it back. But with these kind of financial plans going to be an option for your future launches, given that you have such a strong balance sheet?
Oh, there are many different types of options. Our sales department come up with new payment schemes and new payment methods and new ways of buying and selling every single day. I think the media has caught on to that mortgage percentage. I think the mission is achieved, is that the media has caught on to that percentage, and sales has been pretty good. As to the number of people picking it up, that percentage is not very high number. It's actually a very low number. But it served the purpose of helping sales in generating media attention. That, I think, is a more sales and marketing matter than a policy matter. Other question?
There is a question from online.
Okay.
During the restructuring, management talked about taking 12 - 18 months to find new businesses or the right acquisition. How long are we going to wait if we cannot find the right expansion idea or right acquisition? Will we be returning more capital to shareholders?
Who will consider that?
Yeah.
I don't think we have said that in our restructuring. I think all we can say is that consistently we will strive for good return to shareholders. Be that new projects, our own shares, or variations of both. Or new projects. Other questions? If not, thank you.
Thank you.
Thank you.
Well, this concludes our results presentation. Thank you very much for attending in person and those of you on the web.