Edited Transcript of 272.HK earnings conference call or presentation 30-Mar-20 10:00am GMT

And then end of last year, we’ve issued our first green bond, and I think that’s a very encouraging sign.

So on the next page, you can see the details of the Panlong Project. It’s in Qingpu, which is on the Western part of Shanghai, and it’s part of the Hongqiao CBD. Our site has metro line 17, and the Panlong station is within our site. It’s just 2 stops from the Hongqiao Railway Station. The site area is 90,000 square meters and the buildable floor area is 176,000 square meters, and we hold 80% of this site. And we purchased the land at very attractive land cost. It’s a CNY 22,000 per square meter.

And the next site is Hong Shou Fang in Putuo District. It’s nearby Nanjing West Road, and it’s on Changshou Road, which is a very prosperous commercial street of Putuo District. And it’s also directly linked to the mass transit station, metro line 17 as of 7 and 13. It will be a Grade A office building with a Tiandi style retail. It’s a clear site, so we can start work immediately. And also, the land cost is also attractive at CNY 29,500 per square meter.

On this page, you can see all the projects that we have in Shanghai. We have total asset value end of last year of CNY 76 billion, and ownership for Shui On Land is 58%. And for residential, we have a total of 568,000 square meters for development, and the estimated saleable resources will be CNY 57 billion and attributable to Shui On Land is CNY 37.5 billion.

On this page, you can see all the ratios are going up; for our Shanghai projects. So I won’t go into detail here. And then just the next page is the dividend per share, which I’ve mentioned already.

So on the market and outlook, I think 2020 will be a very challenging year because of this COVID-19 global outbreak and then also the China and U.S. relations. Despite the fact that the Phase 1 trade deal has been signed, I believe the trade tension will continue. And the COVID-19, I think, will impact the world very negatively because we’re now seeing a global pandemic.

And in the West, I think this is just starting. They are not really in a very good position to handle it like China. So we’re happy to see that the COVID-19 is basically contained in China. But as far as the market is concerned, I think we will have to monitor because it will take time to recover. But unfortunately, the COVID-19 will likely have a negative impact on our performance in 2020 because we are making rental concessions and subsidies to our commercial tenants, and then we are seeing delays in our construction schedules and our anticipated presale timing.

And then we are monitoring very closely our 2 sites in Wuhan, how that will recover. But on the whole, we are still confident about the Wuhan market.

We will continue to maintain a very prudent positioning against this backdrop because I believe we’re looking at a global recession, and it’s hard to say how and when it will stop. So we will continue to maintain a cautious and disciplined approach in making new investments. We have a healthy gearing at 52%, and we will try to maintain that at no more than 60%. And then we have about CNY 12 billion in cash, and I think that will put us in a very strong position to face up to this current downturn.

Maybe I’ll stop there and let Douglas take you through the financial highlights.

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He Hau Sung, Shui On Land Limited – MD, CFO & Executive Director [5]

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Thank you, Mr. Chairman. I’ll walk you through the financial highlights for 2019. So next page, the key point. A lot of them have already been covered by Mr. Lo, so I’ll just pertain to the P&L, next page.

So you can see revenue for — in 2019 is CNY 10.4 billion, represents 58% year-on-year decline. It was a pretty good decline mainly because some of you may recall, in 2018, we recognized the revenue and profit from the transaction we did with COFCO group where we sold 50% interest into residential site in Rui Hong Xin Cheng project in Shanghai. So the revenue from that transaction alone is about CNY 15 billion in 2018. So it’s not really exactly apple-to-apple comparison because we have a very large exceptional transaction in 2018.

So if we take out this exceptional transaction, the residential sales in 2019 was about CNY 5.9 billion compared to about CNY 7 billion in 2018. So the decline, actually, was not as significant as the headline, and we had lower residential sales revenue because the actual amount of property we completed and handed over to buyers last year was less. So that was one of the main factor.

But rental income, you can see, we’ve developed I think — seeing quick growth, 12% year-on-year to CNY 2.2 billion. And then hotel, construction and other is about CNY 900 million or so. So we did have profit sales.

Gross profit is about CNY 5.3 billion. Gross profit margin is 51%. Other income is mainly interest income and some dividend income in our joint venture projects. And then taking our operating expenses, operating profit is about CNY 4.87 billion, which is about 25% year-on-year decline. Again, the decline mainly because of the higher base in 2018 because of the transaction with COFCO.

So the investment property revaluation was pretty stable last year. We only recognized an increase in fair value of about CNY 256 million. So that is about 0.6% of the total valuation of our investment property portfolio. So most of the properties are only sold less than 1% revaluation in 2019.

Other gains and losses, CNY 150 million, is basically pretty much all related to hedging costs where we hedged our foreign currency borrowings against our R&D. And then the reversal of the impairment loss, again, this is — this figure was actually recognized in first half 2019. And some of you may remember, it’s related to the transaction we did with Country Garden about 3 years ago where we sold the Foshan Lot 4 site to them. But the final payment was contingent on completion of relocation. And in 2018, there was some uncertainty about the final relocation time. So we made a provision against that lot payment that the relocation was done and payment was paid in first half of 2019.

The overall finance costs is down 5%. Obviously, the RMB was relatively weak in the second half of last year because of trade war with U.S. where we see a slight increase in the net exchange loss. But if we just look at interest payment, we actually — it was actually down 10%. So we have been able to manage our interest costs recently well.

Next page. So if we took our tax profit for the year, CNY 2.5 billion. And then taking up minority interest attributable to shareholders is CNY 1.93 billion, up about 1%. And as the Chairman mentioned, the Board recommends final dividend of HKD 0.084, which is same as 2018. And then full year dividend was recommended at HKD 0.12.

The recognized property sales picked up, for your reference, both of them came from Lakeville Phase 4, which was completed and we handed over most of the units in 2019 and then in Foshan. And you can see the comparison of 2018 and that one-off transaction I mentioned in 2018, which we sold 50% interest in Lot 1 and Lot 7 in Rui Hong Xin Cheng Rainbow City with a revenue of about CNY 15 billion in 2018.

Next page. Locked-in sales basically contracted sales, we have not yet handed over or haven’t recognized the revenue. So it’s about almost CNY 12 billion, CNY 11.8 billion at the end of last year. It came mostly from Rainbow City Lot 1, which we presold towards the end of 2019; also from Wuhan Lot B10, which we presold both in 2018 and 2019. And then the rest is coming from Chongqing, Foshan and some of our other projects.

Our financial position, you can see that cash on hand is about CNY 12 billion and then total debt increased about 10% to about CNY 37.7 billion. So net debt has increased last year. The increase is mainly because we actually spent quite a bit of new investment in 2019. The Chairman mentioned that in the second half of last year, we acquired 2 sites in Shanghai. And then in first half of last year, we completed our purchase of Brookfield’s share in the China Xintiandi subsidiary, and we also completed a lot of Manulife and China Life, completed the purchase of Corporate Avenue 5, the office building in Shanghai. So these 4 transactions together cover more than CNY 10 billion of impacting CapEx last year. So it was quite a big year for us, particularly investing in Shanghai, which is one of our key strategies. It increased our market leadership position and increased our presence in the Shanghai market. So that’s why we have an increase in borrowing and an increase in gearing.

And this is just practically showing you our changes over the years. Even though we have seen a balance in our net gearing, we believe at around 52% is still a pretty healthy level and a sustainable level.

Okay. And then in February this year, we took advantage of the market window and successfully completed liability management on our debt in 2021. So we commenced an exchange and tender offer to 2 senior notes maturing next year. And in conjunction, we also issued a new 5-year U.S. dollar bond to finance Panlong that Xintiandi tendering process. So we completed this exercise in March 2. And overall, we basically exchanged or tendered 39% of the 2 U.S. dollar notes due next year. Particularly for the February 2021, we either tendered or exchanged about 48% of the outstanding total. So the total amount is about $391 million, which basically, we have either redeemed or we have exchanged for the new 5-year note. And the final issuance size of the new notes is $490 million, 5 years at 5.5%. So I think we were fortunate to complete this right before the market window in March.

So debt profile as of end of last year, if we look out 1 year, so basically 2020, the total repayment outstanding is RMB 5.8 billion. But since then, as of March 15, we have repaid another CNY 760 million. So outstanding this year will be somewhere around RMB 5 billion. As I mentioned, we have cash on hand of about CNY 12 billion. So our repayment pressure for this year is basically light. And I also mentioned that we have already started to manage our maturity in 2021 as well. So we are pretty comfortable about our cash flow and our balance sheet condition.

And this is just for your reference, various maturity for senior notes.

Okay. And lastly, on our balance sheet, we have about CNY 108 billion of total assets, of which more than 50% is commercial investment property related. 40% — about 42% is completed IP generating recurring income. So we believe that this will be able to provide more solid and stable foundation from the company for the future years.

So I’ll stop here, and I’ll turn over to Stephanie to talk about investment property portfolio.

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B. Y. Lo, Shui On Land Limited – Executive Director [6]

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Thanks, Douglas. Let me run everyone through our investment property portfolio. Our consolidated rental income for 2019 stood at RMB 2.25 billion, and this reflects a year-on-year growth of 12% versus approximately RMB 2 billion of rental income in 2018. And if we include rental income from our JV portfolio that we manage as well, the rental income growth achieved is 17% year-on-year. And the growth is largely driven this year by the reopening of Xintiandi Plaza in Shanghai as well as the opening of HORIZON North mall in Wuhan.

And there are a couple of numbers here I’d like to highlight for you. The properties such as THE HUB that saw a 14% increase in rental income, down to Wuhan Tiandi that saw 29% growth as well as Foshan Lingnan Tiandi that saw 20% growth, these are all very healthy growth rate figures that we’ve been very pleased about, largely driven by an increase in occupancy as well as new openings.

But there are 2 numbers that I particularly like to highlight, which are the drops in rental and related income. Firstly, at Shanghai Xintiandi, the first line. We see a 19% decrease in rental income here. This is due to the fact that the South Block, the mall in that block in Xintiandi is undergoing a large AEI. And we started this in the beginning of 2019, and that represents about 15,000 square meters of leasable GFA, which is 28% of the total leasable GFA in Xintiandi. So therefore, there’s 19% drop last year. But we plan on reopening that mall at the — around the end of this year, all factors accounted for. And we hope that this new rental income will hit our books by 2021.

I also would like to highlight a drop in Shanghai Rui Hong Xin Cheng as a JV property. There was a drop in the occupancy down to 78% as well as a drop in our rental income by 3%, and the reason being that in Palette, which is a residential shopping mall under one of our residential sites. In the basement, E-mart’s lease, which was approximately 10,000 square meters, came to end. And essentially, we did a large-scale AEI after they left and after the lease was finished. And so this is what’s causing the drop in rental income.

And similar to the South Block, we hope that it will finish at the end of this year and complete and reopen. And therefore, we will have additional rental income for 2021.

The next page, you can see that on the left-hand chart, you can see that our CAGR for our rental income portfolio has a double-digit growth of 13%. And from a contribution point of view, Shanghai contributes about 70% of our rental income. Other cities, such as Wuhan, contribute 13%, 10% from Foshan and the remainder from Chongqing and Nanjing. And we saw a 14% increase from the Shanghai portfolio in rental income, and the other cities had a 28% increase last year, primarily driven by Wuhan and Foshan projects.

So on the next page, I’d like to just share briefly with you some of our thinking behind our leasing strategy and some of the progress that we’ve made. We plan to have a first in Shanghai and first in each city, flagship leasing policy. This is a conscious effort to try and drive traffic and drive sales. We’ve always branded Xintiandi as a social and cultural destination, and this is very much in line with our strategy there. So last year alone, we brought in 57 first-in-China brands and 78 first in each city tenants, including Shake Shack from New York, STUDIOUS from Tokyo, Maison Kitsuné from Paris, Miller Harris from London, CHA CHA THE from Taiwan as well as Tao Tao Ju from Guangzhou. And Paul Pairet, a 3-star Michelin chef, opened a new French bistro at Xintiandi as well. And there are a lot of new flagship concepts from very mature brands that opened a new flagship concept at our properties, such as Tom Ford Cosmetics, Jo Malone with their first streetscape and garden concept; and Xintiandi Venchi, the chocolate brand; PS. Cafe from Singapore and the list goes on. So we are very pleased with this progress so far, and we have seen it drive substantial sales and traffic to our sites.

In the next page, as an extension to and a very important aspect of creating a cultural and social destination, we have launched over 1,100 events organized for our retail portfolio and has seen a shopper traffic increase of 18% year-on-year last year. Retail sales were up 16%. And our iTiandi, which is our loyalty program, saw our membership base increased 46%. And a lot of these events include Xintiandi performing arts festival, Shanghai Design Week, Shanghai Fashion Week, Lumieres Shanghai, a lot of these IPs are recurring within our portfolio and actually help to brand and drive a lot of the traffic within our sites.

And in the next page, I’d just like to share a little bit more with you, given the context of what’s going on around the world right now about our retail strategy this year. COVID-19 naturally has hit not just ourselves but across the platform, retail sales across the country. And so there are a couple of things that we’ve been maintaining and trying to capture in terms of opportunities within the market. So for instance, because of COVID-19, we weren’t able to hold Shanghai Fashion Week as originally planned, and the on-site fashion week was canceled. But as a result, we’ve partnered with Shanghai Fashion Week as well as Tmall to launch the first global Shanghai Fashion Week online. And therefore, it’s actually ongoing right now. The shows were live broadcast on our platform as well as Tmall. And after the show, we had a live broadcast center within Social House at Xintiandi where the KOLs as well as the designers themselves can come and do their live broadcast and actually introduce their products and their brands. And afterwards, people can actually directly purchase the products from Tmall or from our iTiandiGo app. And this is actually a new opportunity that we hope to capture and continue to collaborate on going forward.

And in terms of supporting our tenants, naturally through this crisis, the point is to help our tenants bridge these couple of months of very challenging times. And so as much as possible, apart from some rental concessions that we’ve already announced, we are also using and trying to leverage our community experience. For instance, for F&B tenants across our portfolio, we’ve tried to launch — take out through our iTiandi app where you can order takeout, and it will be delivered to our office and residential tenants. A lot of our retail tenants have also launched some of their products on our iTiandi app. And the first city to actually take on this challenge to launch this app was in Wuhan because they’ve actually been on lockdown for the longest period of time. And so we actually are still fully in belief of our social strategy. We believe people are still — need a social environment. And therefore, we will continue to actually upgrade our O2O strategy going forward and improve our online and off-line experience for both social and cultural destinations within our portfolio and further enhance our new retail strategy going forward.

Here is a simple description of our portfolio in Shanghai. As the Chairman and Douglas mentioned, we acquired a new piece of land in Shanghai called Hong Shou Fang, and this is primarily an office property within the inner ring of Shanghai. And so we are one of the leading landlords in Shanghai now with one of the largest commercial property portfolios. The property value comes to RMB 76 billion. And of the 1.68 million that buildable GFA, 52% is already complete with rental income, and it’s at a value of RMB 41 billion. And the remainder of the GFA is as landbank are under development.

And within our commercial portfolio in Shanghai, as Douglas mentioned earlier, we completed the transaction with Brookfield by acquiring their previous shares in the CXTD portfolio. We also reacquired Corporate Avenue 5 through the SCOV investment platform. And with the new land acquisition Hong Shou Fang at the end of last year, our effective interest in our commercial portfolio in Shanghai rose to 58% at the end of last year versus 48% in 2018. And the value attributable to the company increased to RMB 44 billion accordingly, which represents an increase of 30%.

There are 2 projects that I just like to simply introduce here. The first is what we mentioned last 6 months ago as Lot 123, 124. And because this is a partnership with CPIC, we’ve decided on a name for the project, which is Tai Ping Yang Xintiandi. And this is a project that we started construction at the end of last year, in October last year, and is 192,000 square meters of Grade A office within our Xintiandi community as well as 88,000 square meters of retail. And the office is due to complete in phases from 2022 to 2024, and the retail will open within 2023. And we own approximately 25% of this project together with CPIC and Lumière.

Next page. And the next project is Shanghai Rui Hong Tiandi-Hall of the Sun. This project is what we originally referred to as Lot 10. The land was fully relocated at the end of 2017, and we started construction in 2018. It’s 147,000 of new Grade A office, plus 183,000 of retail as a mall within our Tiandi commercial spine. And it’s due to complete within 2021 to 2022 in phases from both the office and retail. And this is a rather large supply within the entering of Shanghai. And the location is actually very good because it’s very close to Lujiazui. So we are very hopeful on the launch of this project, and we have a lot of new concepts, including a new food hall that takes up the top 3 floors of this retail complex that we are very excited to launch to the market.

Having said that, we are cautiously optimistic given the current retail climate in China, but we don’t foresee any delay in the launch at all.

So at this point, I’ll leave it to Jessica to introduce more on our property development.

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Jessica Y. Wang, Shui On Land Limited – MD of Shui On Management Limited & China Xintiandi Co. Ltd. [7]

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Okay. Thank you, Stephanie. And I would like to share with you all about the group overall sales in 2019.

In 2019, the group accumulated contracted property sales amounted to RMB 12 billion, decreased by 44% from 2018. The decline, as mentioned by Douglas, was mainly due to the reduced asset disposal and the residential launch planned in 2019. But our residential property sales was very strong. By the end of last year, the contracted sales and subscribed sales exceeded CNY 15 billion, of which the residential contracted sales reached CNY 12 billion, exceeded our 2019 sales target, which is CNY 10 billion.

Apart from that, the group has record a total of CNY 2,912 million of subscriber sales, which is expected to be turned into contract sales in the following months.

Next. Here, I would like to highlight Rui Hong Xin Cheng Lot 1. The project got great results from the market with a total sales of CNY 6.3 billion on the first day of launch, achieving the highest single-day sales record for Shanghai interim projects in 2019. From the analysis above, we can see that over 70% of buyer are under 40 years old and over 70% of the buyer are upgrade amount. More than 85% of the buyers living or working around, which indicating that the project is highly appealing to the local residents.

Next. Here, we can see the group has approximately 362,000 square meter of residential GFA across various projects, including Shanghai Rui Hong Xin Cheng Lot 1, Lakeville Phase 5, Wuhan Tiandi, Wuhan Optics Valley Innovation Tiandi and the Foshan Lingnan Tiandi as well. There will be available for sale of — up for sale in 2020. The actual timetable for the launch will depend on the market conditions as well as the development of the global COVID-19 outbreak.

Next. Here comes some detailed introduction for the projects. You can see this is the Taipingqiao Lakeville Phase 5, which has 78,000 square meters of saleable GFA. The project enjoys competitive advantages, which is adjacent to the central Greenland of Taipingqiao area, and it is also the last parcel of pure residential in Taipingqiao area. Lakeville Phase 5 is designed by RAMSA, the world-famous architecture design firm, who is the designer of the top luxury residential projects around the Central Park in New York. We are considering to launch the project in Q2 or Q3 this year. Until now, we have more than 215 groups of potential customers with strong intentions to buy units here. We firmly believe that with our good reputation, Lakeville will also get very good market response.

Next. Here is Rui Hong Xin Cheng Lot 1. As I mentioned before, it is continuously in hot sales. Although the real estate market was affected by the COVID-19 in Q1, we still have 55 units who are subscribed and 99 units were completed.

Next. Apart from the projects I mentioned before, we are preparing for launch Foshan Lingnan Tiandi Lot 13a. Although Wuhan is still very hit by the COVID-19, we are still confident about the market in Wuhan because as we can see when Wuhan Tiandi Lot B10 was launched twice last year, and all units were sold out on the launch date. And also, Wuhan Optics Valley Innovation Tiandi will be launched in the second half of the year as well.

Next. As for the group residential salable resources, the total GFA stood at 1.37 million square meters as of the end of 2019, which is valued at CNY 77 billion. And the estimated attributable value to SOL is CNY 51 billion. As we can see from the table, the major saleable resources are in Shanghai with a total saleable GFA of 568,000 square meters. Other cities have 800,000 square meters of residential property for — available for sale in the future.

I believe with these residential projects, the group can maintain our good performance and generate more cash flow and profit in the coming years.

Next. While having plenty of residential properties available for sale, the group also has a sufficient resources in terms of commercial assets in Shanghai and other cities, which will fill the growth of rental and help with capital recovery — recycling. As of the end of last year, the group has had 3.26 million square meters of commercial landbank under construction already for future development, including around 2 million square meter of office and a 1.25 million square meter of retail.

And the next page, I will hand over to Stephanie to talk about ESG and sustainable development strategy.

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B. Y. Lo, Shui On Land Limited – Executive Director [8]

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Thanks, Jessica. Here, I’d just like to very simply introduce what we’ve been looking at and what we’ve achieved in the last year. So there are a couple of key milestones that we achieved last year. First is that we launched our first green bond within SOL. Douglas mentioned this, as the Chairman mentioned, so I won’t go into much detail here.

A lot of these funds will be used to fund sustainable projects such as 5 Corporate Avenue, which is the LEED-rated, 3-star-rated building in Shanghai as well as other projects in the future. And we’re really happy to announce that Shanghai Xintiandi received the first global WELL Community Certification in 2019 by the WELL Building Institute, and it covers Shui On Plaza, Xintiandi Plaza, the Langham Hotel, Xintiandi and Xintiandi Style together as well as Casa Lakeville. So this is quite a key milestone for us, and WELL certification is becoming much more mainstream now going forward, and it’s very focused on the healthy and green development of the community that’s less based on hardware but also combined with software and management as well.

And in terms of carbon emissions, we had 6 major guidelines and goals that was issued in 2017, one of which was the reduction in carbon emission. From 2011 figures to 2021, we had to reduce our carbon emissions by 1/3. And I’m very happy to announce that we are very close to that target, so we’re very confident that we’ll be able to meet this goal by next year, by 2021.

In the next page, you’ll see that we have 1.6 million square meters of leasable GFA that are Green Certified Commercial Billings. Of that 1.62 million, 80% is already completed and already in operations, and we continue to maintain a very high green building standard.

And going forward, because sustainability has always been a key strategy within our company, we continue to push ourselves to broaden our understanding of sustainability as well as better integrate sustainability within our business strategy, business model as well as operating standards. So first thing that we did was our Sustainable Development Committee is now reporting to the Board level, reports directly to our Board of Directors.

In 2020, which is this year, we’re launching a new 10-year sustainability development strategy. We can share more at the next announcement. It is what we call our 5C strategy that revolves around clean, which is more green and healthy building; culture, which is something that we’ve always been dear to our heart where we talk about more cultural heritage preservation as well as cultural exchange with our events and programs; community, which is how we conceive of and manage our live, work, play, learn projects, master-planned communities as well as how we actually give back in our social responsibility to these communities and the cities that we operate in; care is in relation to how we think about employee development as well as employee care; and corporate governance, I think, goes without saying, we want to hold ourselves to world-class management standards.

So I’ll stop here.