The Wharf (Holdings) Limited (4) Earnings Call Transcript

Good afternoon, everyone. A very warm welcome to Wharf Holdings Interim Results Briefing. I am Angela from the IR team. You can download the PowerPoint presentation using the QR code displayed on this LED backdrop. Today, our management team includes Mr. Stephen Ng, Chairman and Managing Director; and Mr. Kevin Hui, Director and Company Secretary. Before the PowerPoint presentation and Q&A section with the analysts, may I first share a few things about our backdrop. As some of you may know, we used to feature a different backdrop for each results presentation. This time, we are showcasing The Monet, our new luxury residential property on The Peak in Kowloon. And there is also a special message in the backdrop. This 140 year anniversary backdrop marks an important milestone in the Group's history. Founded in 1886, Wharf Holding today stands as the seventh company with the longest history in Hong Kong. So in celebration of this milestone, the Board has reserved to declare a special dividend of HKD 0.20 per share. Together with the interim dividend of HKD 0.20, total distribution doubled to HKD 0.40 per share. So let's go back to the PowerPoint presentation. The headline is operating and underlying profit increased by 6%, excluding the investments. Since the last quarter of 2025, the Group has been unwinding part of the equity portfolio, which result in lower Investment Income during the reporting period. Excluding the Investment Income, group revenue increased by 2%, while operating profit and underlying net profit both increased by 6% despite a challenging operating environment. Mainland IP delivered stable results, while the shortfall in Mainland DP sales was covered by stronger contributions from Hong Kong properties. In addition, our Logistics business remains resilient despite the ongoing global disruptions. So over the years, we remain focused in premium properties across Hong Kong and Chinese Mainland, which are the major contributors to our total assets, revenue and group revenue -- I mean, underlying net profit. Our earnings are underpinned by a substantial recurring income base from Investment Properties, Hotels and Logistics, while our Hong Kong residential development pipeline provides growth opportunities. And here shows more details on the financial performance, reflecting lower dividend income after unwinding part of the equity portfolio, underlying net profit decreased by 17%. During the reporting period, Hong Kong DP contribution overtook Mainland DP, driven by higher sales recognition, while Mainland DP continued to be affected by a weak market condition and net provision. Mainland IP remained the largest and stable contributor, accounting for 67% of underlying net profit. Our listed equity investment amount to HKD 30 billion after partial disposal. The portfolio continued to preserve capital and generate dividend income. After recognizing a prudent investment property revaluation deficit of HKD 2 billion, group profit amount to HKD 48 million. So including the special dividend, the total dividend distributions doubled to HKD 0.40 per share. The strong balance sheet remains one of our key strengths, and we have achieved net cash position since the end of 2025. Excluding the debt from Modern Terminals, net cash increased to HKD 8.6 billion, mainly resulted from the disposal of HKD 3.2 billion equity investment with HKD 0.4 billion of surplus. Average interest rate was 3.1%. In the following slides, we will walk through the performances of our business segments. In Hong Kong, overall residential market saw meaningful gains in price and volume, supported by solid local demand and continued talent and capital flow. Attributable Hong Kong DP revenue increased remarkably to HKD 1.3 billion and operating profit to HKD 166 million, primarily from the sale recognition of House 1 at 1 Plantation Road, which is our ultra-luxury project on The Peak and Victoria Voyage, our 30% owned JV project in Kai Tak. Contracted sales increased to HKD 1.1 billion. At period-end, our Hong Kong residential land bank amounted to 2.7 million square feet with net book value of HKD 56.6 billion. Notably, this includes our valuable Peak Portfolio in Hong Kong and Kowloon. The Monet, our Peak project in Kowloon comprising over 400,000 square feet GFA is undergoing preparation for sale launch. Other key projects under development include Mansfield Road project on the Peak and Kowloon Bay redevelopment project. Moving on to Mainland Development Properties. Following our significant reduction in exposure since 2019 and the continued weakness in the market, Mainland DP revenue declined to HKD 238 million and operating loss was reported. At period end, unsold stock was 0.7 million square meters and net book value amounted to HKD 15 billion. Our remaining stock is largely concentrated in office and the demand continue to be subdued. Net order book amounts to RMB 428 million, including the sales of Chengdu IFS apartment units, which are being progressively released for sale. And for the Mainland Investment Properties, Mainland retail market remained soft in the first half. However, the group's retail revenue remains resilient, supported by the performance of our flagship IFS Malls. On the office side, vacancy remains elevated under prolonged oversupply. With a stronger Renminbi providing some support to our reported Hong Kong Dollar results, our Mainland IP revenue and operating profit both increased by 1% to HKD 2.3 billion and HKD 1.5 billion, respectively. The Group continued to optimize tenant mix to drive more performances at the IFS. At Chengdu IFS, an arcade area is being converted and is expected to be complete later this year, introducing a refreshed lineup of brands. Excluding the area under conversion, occupancy stood at 97%. And at Changsha IFS, mall occupancy was 98%. Recent highlights include the expansion of HERMÈS and BRUNELLO CUCINELLI into duplex flagship. And POP MART is also set to open a regional duplex flagship later this year. Moving on to Hotels. Wharf Hotels currently operate 16 hotels under Niccolo, Marco Polo and Maqo brands, mainly in Hong Kong and Chinese Mainland. Park Hyatt Changsha is the group's only hotel with outsourced management. Segment revenue increased by 4% and operating loss narrowed. Turning to our Logistics Infrastructure. In Hong Kong, Modern Terminals' throughput declined under persistent pressure from overcapacity in South China and regional competition. Modern Terminals' revenue remained stable, but operating profit decreased. Against this challenging backdrop, the Group proactively secured new businesses, and they are scheduled to commence in the second half. Looking ahead, let's turn to the general market outlook in Hong Kong and Chinese Mainland. While Hong Kong continues to benefit from talent and capital inflows, recovery in the Mainland remains relatively uneven with ongoing challenges in the property sector. At the same time, geopolitical tensions and external uncertainties continue to weigh on the economic outlook. Against this backdrop, we remain focused on maintaining a strong balance sheet and disciplined approach to navigate market volatility. In the last part of the presentation, we will go through our efforts and performance in sustainability. Our sustainability efforts earned a strong ESG ratings and Green Building Certifications, including LEED Platinum. Last year, the Group's near-term science-based targets were validated by SBTi, which marked an important milestone for our sustainability journey. As of June this year, sustainable financing made up over half of our financing. More details about our sustainability efforts could be found in the PowerPoint presentation. So that concludes my presentation. We will proceed to the Q&A section with the analysts.

[Operator Instructions] So now may I invite Mr. Ng and Mr. Hui to come to the stage, please. Let's have the first question from Karl, Bank of America.

Two questions. First is on the Hong Kong DP. Just curious what you're seeing in the marketplace, especially in the Luxury segment after some of the recent enforced action by Beijing in terms of taxation. And has that sort of changed the sort of potential buyer interest? And what does that mean for the timing of launch for your Kowloon Tong project? And second is related to capital management after I think the shareholders were very happy with the hike in dividend payout for 1997 HK. And for 4.HK, the company's balance sheets are obviously very strong, and we do appreciate the special dividend in the first half. Just wondering now that you're closer to monetization for Hong Kong DP as well, is there any sort of intention to perhaps pay a special dividend to pay out some of the cash or step up some of the payout more tied to the IP earnings?

Okay. Good. Thank you. First question, we've seen no sign that buyers' interest in ultra-luxury properties in Hong Kong has changed. In fact, we've been in discussion with some buyers for some of our ultra-luxury properties on The Peak. And hopefully, we'll be close to some deals. They continue to be seriously interested in rare and valuable properties in Hong Kong. So that may be an interesting and favorable sign. Capital management, yes, we do have a net surplus cash. And as I think Angela referred to in her presentation, we're looking at reinvesting it. How and where? Our first preference is Hong Kong and our other preference is properties. That's what we've been doing for years and years. In fact, you may or may not have noticed that a couple of weeks ago, there was an urban renewal project in To Kwa Wan. We submitted one of the bids, 1 of the 7 bids or so on. We didn't win. So maybe that's why I didn't catch a lot of people's attention. But we are bidding for land in Hong Kong. And if there are other good opportunities in Hong Kong, we would continue to bid. I can't guarantee you when we'll win, but that would be a good indication of where we would like to see our resources, cash resources invested in the coming future. In the meantime, our Mainland DP business has been in the wind-down mode for some time, as you know. We don't have a lot of unsold stock left in the residential sector. And in the residential -- well I should say this, in the residential sector, which allow strata sale. We do have some residential stock, which is subject to on-block sale conditions. And that would become an institutional kind of sale rather than retail. As far as retail, residential, retail versus wholesale, as far as retail residential stock is concerned, we don't have a lot, and we don't see immediate opportunity to get back into that end of the market. So in the meantime, we look at Hong Kong properties. The Board decided today to -- as a token of appreciation and to celebrate our 140th anniversary to pay a special interim dividend. We have not changed our dividend policy. We have not reviewed our dividend policy. This company and The Wharf REIC are two different companies. We are brother companies. We have different DNAs. We have different Boards, and we make different decisions. I don't think it would be fair to apply one company's direction to the other or vice versa.

The next question from Cindy, Citi.

This is Cindy from Citi. So first question, back to your dividend rationale. So wanting to better understand, like, say, for this time, why did you choose to make a special dividend apart from the anniversary any other reasons? And when reviewing that, why didn't you choose to increase your dividend policy? Why would you opt to maintain the stable dividend policy forward, or under what condition would you start to review your dividend policy? This is the first question. The second question I want to touch a little bit on your Logistics business actually because I saw at your presentation just now, the mention of proactively securing new business to commence in the second half. Can you elaborate a little bit more on that? And also, has the shipping alliance restructuring impact stabilized for Hong Kong? And do you expect your operations to maybe bottoming out from second half this year or next year?

Thank you. The special interim dividend is precisely what it is, to celebrate the 140th anniversary, nothing more, nothing less. We didn't propose to the Board to review the dividend policy yet. And that is something we can look at in due course, although I don't want to lead you into or give you expectations because we haven't done that. We haven't thought about doing it. As far as the terminal -- Container Terminal business is concerned, most of the "touch wood" most of the reorganization among the shipping companies is hopefully completed, at least this round. Hong Kong as a whole actually benefited from disruption in the Middle East in the second quarter. And we also picked up some ad-hoc volume during the second quarter. However, that's ad-hoc. What we referred to as new business in the second half has actually started. It started a little earlier than we had expected. It started in June, but it will come in progressively rather than all in one go. So the decline in Hong Kong volume in the first half has turned into a slight increase in July. And that's beginning to narrow the year-to-date decline. It may not necessarily be very high-yield business, but at least we get the business back. We get the volume back. And with volume, we've got work to do, our staff and our contractors get busy, and that's the first step. So at this point in time, I think maybe it's still very difficult to predict whether by the end of the year, we'll be able to catch up to last year entirely because the new business is coming in progressively.

The next question from Mark, UBS.

This is Mark from UBS. I have two questions. I think the first question is also related to the special dividend. I think this year is to celebrate the 140th anniversary. But when I look back the historical report like 10 years ago and 20 years ago, we did not distribute any special dividend. May I know why we decided to issue the special dividend? And for the 1997, next year will be -- we marked the 10th anniversary. Should we expect a special dividend as well? Yes. And the second question is more related to Stephen yourself because you have served the company for really a long time. This year, you are already 74 next year, turning above 75.

Thank you for reminding me.

Just on from a succession perspective, do we have any succession plan for both companies, et cetera?

Okay. Thank you. No, we not when we were 130 and not when we were 120. I didn't check, but I guess you must be right, you must have checked. And I'm not sure what we'll do in -- when are 150, but I'll leave it to the then Chairman to think about it. I am 74, and I feel healthy. And I'd like to continue to work. Frankly, I don't know what I should be doing without coming to the office. I still work hard. I'm one of the first employees to come into the office in the morning. Whether or not the Board will allow me to do so is a different matter, of course. And at the moment, if I were to run over by a bus tomorrow, hopefully not, obviously, there will be ways. It's -- it will be inconvenient, but the company will manage. That was the only question. Well, again, it's not a 1997 meeting. So I can't speak on behalf of Wharf REIC.

Yes. And I can confirm that Chairman is very hard working and very healthy. Please allow me to confirm. Yes. May we have the next question from Alpha, Goldman Sachs.

Two questions. The first one is you just mentioned you're more willing to deploy capital to Hong Kong DP, right? So I just wonder which districts will be more interested in replenish your land banking? And what's your appetite towards Northern Metropolis, which the government is very keen to develop? The second question is on China retail. So I just wonder what's your outlook towards China retail sales growth in second half? And we actually note that the turnover rent in first half is actually lower year-on-year. So I wonder what are the key reasons?

Thank you. When we look at Hong Kong and Hong Kong as a whole, and Northern Metropolis is very much part of Hong Kong, and we will be including that in our studies. But we have no specific guideline whether we're investing in the East or West or North or South because Hong Kong is a small -- relatively small market. It also depends on the opportunity that arises or opportunities that arise. If it's a good opportunity, whether it's North, South, East or West, we will take a very serious look. Two weeks ago, as I said, this was Kowloon East, I guess, maybe Kowloon Central. There's something else this week, and that's Hong Kong Island. So there's no specific guideline, and we don't restrict ourselves to any one part of Hong Kong. Retail in Mainland China, generally, the overall market in the first half was actually not as strong as a lot of people would have expected. And we don't see breaking out of it, the market breaking out of it in the second half yet. There's still a good deal of wait-and-see attitude. It may be because of the government subsidies last year. So once you've tasted government subsidy, you may have a tendency to wait for the next one. It's possible. I'm speculating. It's a little bit like clearance sale in Hong Kong or anywhere else. You wait for the clearance sale to get the best price. So -- but overall, the retail market in Mainland China, we think is -- we don't expect it to be breaking out of its mode in the first half.

[Operator Instructions] Jeff from DBS.

You mentioned that Wharf Holding submit a bid for the URA project in To Kwa Wan. Is this -- you submit a bid on your own or you collaborate with your sister company, or parent company Wheelock, in this tender? Also, if you look at the positioning of this project, it is slightly different from those projects, you are undertaking in Hong Kong, which is more high-end ultra luxury. In the future, when you decide to before they replenish the land bank, will you focus on high-end or you don't have any particular preference? What is the difference between Wheelock and Wharf Holding in terms of the land banking strategy? This is the first question. The second question is related -- also a follow-up question on the China retail. The retail sales or tenant sales in China for your Mall declined in the first half. If so, is this something to do with the arcade conversion at Chengdu IFS?

Okay. Good. Thank you. The bid last week or 2 weeks ago, recent bid. It was submitted by Wheelock Properties on behalf of Wharf, 100%, all right? And that is what we expect to be the model in the immediate future, all right? We don't have a separate team. There is already an organization within Wheelock Properties, and they know the market well. They know how it works. So we will continue to work with them as our partner in that regard. But the capital will come from Wharf, in these cases, 100%. Retail in Mainland China, in our case, this would partly address the question -- that the previous question as well. In our case, about a good part of Chengdu IFS was closed for conversion. So that affected the performance of retail at Chengdu IFS. And therefore, Chengdu IFS was -- or underperformed Changsha IFS. Changsha IFS grew well. Chengdu IFS, I think, slipped a little bit, partly because of the conversion. When the conversion is finished, hopefully, we'll be able to start to catch up. Another factor which affected the Mainland IP performance, albeit a small factor, is that because we have started to sell the apartments in CD IFS, Chengdu IFS. So the occupancy in the service apartments will start to -- well, actually, not will, has started to slip because we're getting vacant possession of the units for amalgamation for sale. We don't -- we haven't sold too many units so far, but the next lot we will put in the market within the next few weeks. So we'll start to see more sale in Chengdu IFS. And it's a good price. We'll be able to -- we're able to get RMB 60,000, RMB 70,000 per square meter, which is good for that product. The ticket is typically close to RMB 20 million units -- RMB 20 million per unit, a good price. So that will help Mainland business.

[Operator Instructions] Mark from UBS.