CK Hutchison Holdings Ltd (OTCPK:CKHUY) Q2 2022 Earnings Conference Call August 4, 2022 5:00 AM ET
Company Participants
Canning Fok – Group Co-MD & Executive Director
Frank Sixt – Group Finance Director, Deputy MD & Executive Director
Dominic Lai – Deputy MD & Executive Director
Victor Li – Chairman & Group Co-MD
Conference Call Participants
Operator
Ladies and gentlemen, thank you very much for attending the live webcast of CK Hutchison’s 2022 Interim Results Presentation. Today, our speakers are Mr. Victor Li, our Chairman and Group Co-Managing Director; Mr. Canning Fok, Group Co-Managing Director; Mr. Frank Sixt, Group Finance Director and Deputy Managing Director; Mr. Dominic Lai, Deputy Managing Director of CK Hutchison and Group Managing Director of A.S. Watson Group; and Ms. Malina Ngai, CEO of Asia and Europe of A.S. Watson and Group COO of A.S. Watson Group. [Operator Instructions].
Before I hand over to Mr. Fok, please also pay attention to our disclaimer, which you can find on Page 2 of the presentation. We can start now.
Canning Fok
Okay. This is Canning Fok. Okay, let me start with the results. Let’s turn to Page 3. It is about our interim results. Our net earnings, in summary, our net earnings for the first half of the year is HKD19.1 billion. And then our earnings per share is $4.98, which represents a 5% increase from 2021. And then the net debt is at $168.4 billion, which represents 20.5% gearing ratio.
But however, one of the major cash has not come in yet. It will come in with what we estimate to be sometimes this month so that if that cash comes in and that gearing will be reduced to 17.5%. And then important, the dividend per share is $0.84 and represented a 5% increase to be the same as the increase in earnings per share in the [indiscernible].
So with this, we can turn to Page 4, and then we will give you the operational performance of the company, which is quite — in our opinion, is quite resilient given this quite a challenging 6 months. Revenue up 8% to $222.6 billion. If you just — because of the currency, actually go against us. So — but if you look at the global currency, actually represent a 13% increase in local currencies.
And EBITDA, $58.2 billion, plus 5%; and then operating cash flow, $16 billion. And the EBITDA has grown 5%, and then the operational cash flow for last year — last first half was $17.7 billion. And EBIT is $34.5 billion, plus 5%. And also if you take a [indiscernible] local currency it’s 9%. So it has quite a good result, in my opinion, for the first 6 months.
And if you go to Page 4, I would like to take you up and down how this increased EBITDA comes from. And if you look at the left-hand side and then the [indiscernible] part is showing you left hand side, the [indiscernible] shadow is showing you where does this come from and then the below shadow is showing you at what business does this come from.
And we can be very clear that it come so 49% come from Europe and U.K. and within the 49% and 20% — 21% is from the U.K. Then our cost mix biggest one is Asia, Australia and North America, which is 29%. And Hong Kong is 23%. And China is 6%.
If you look the business, you saw that the port actually came up 16% this time. It was infrastructure and telecom at 28%. One thing that I want to put you to notice is the finance by the orange color, which is 17%. Plus this year, we classify into finance cost of contribution, still [indiscernible] first half of this year.
So if you look in detail where it comes from, so we get — we start the chart of the post-IFRS 16 and then going to the pre-IFRS in which there’s $58 billion, then end up in the pre-IFRS 16 EBITDA and then go back to the post-IFRS. So it will give you a full reconciliation.
You can see that we take away the one-off last year was $6.2 billion, which comes from the tower sale less than what we pay off of our investment in Italy. So it would give us a net positive. So we get take off the current. Underlying EBITDA was $49 billion. You saw that this year, the partners did very well, $1.5 billion more than last year and then basically come from good performance in North America, that is Mexico and also good performance in Europe. Doesn’t really come from TEU but come from storage income. And then, of course, and then very good performance from investments this year.
And then the Retail part, we saw that negative $231 million. I think we will go to [indiscernible] basically comes from a reduction of EBITDA from Mainland China because of the lockdown situation in China, but it is overcome by the European then, of course, of foreign exchanges.
There’s a lot of [indiscernible] as well. And Infrastructure, they have announced yesterday $846 million positive. That has come from quite average — come from everything. So it’s quite a good improvement in the Infrastructure side.
And then you got this negative from the telecom side, from the European telecom, which we group plus Hong Kong. And actually, the other quite stable and then Hong Kong is very small. And then actually basically all comes from Italy, $2.3 billion.
But however, you’ve got to take away $500 million from the tower deal because we can make it . So there is about $1.7 billion which we will go into detail [indiscernible] . And then this time there to start. It also comes to a shortfall in Europe, 2021 improvement. This is the result of the merger, and then we are going to details when we come to the HAT area.
And of course, on the finance side, we saw that $4.9 billion then would be a shaded area is $4.7 billion the company improvement [indiscernible] over last year. So that has been very nice return for us. Foreign currency impact and $2.5 billion, and [indiscernible] $53 billion as current impact in the first half, the first half of 2022.
And then, of course, you’ve got the one-off gain, and this majorly comes from the merger, increasing that area. Merger [indiscernible] of course, some cost something happened Sri Lanka, and they chose to write down a significant amount in Sri Lanka to come up with [indiscernible] $5.1 billion and then the total EBITDA is $53 billion. And then at that [indiscernible], I always explain stuff, [indiscernible] . So this is roughly a summary Page 5.
Now we go to Page 6, which is the operating cash flow. I will ask our group CFO, Frank Sixt to take us through all the cash flows and that situation. Okay.
Frank Sixt
Thanks, Canning. So the next few slides and we focus on operating free cash flow moving through the free cash flow and then the overall financial KPIs in the group. So we always start with operating free cash flow, which is basically EBITDA, right, but excluding one-offs. And what we’re calling these days EBITDA after leases or before IFRS 16.
So as you can see, that was $16 billion compared to $17.7 billion in the first half of 2021. The one-offs that are excluded, right, were $5.1 billion in 2022, $6.3 billion in 2021. So this is — these are the net comparisons of pre-IFRS 16 outcomes.
The main reason for the difference actually is the merger in Indonesia, where 3 in Indonesia was a subsidiary before the merger. And of course, we now hold a 40-some-odd percent interest in effect in an associated company.
So what you have is you have essentially EBITDA going out of the consolidation and investment being reflected in the increased investment below. So there’s a bit of a shift in categories, but nothing alarming in terms of the actual underlying cash flow profile.
In fact, the overall impact of the Indonesian transaction is very helpfully positive from a financial point of view. And I think Canning will be taking you through that later.
So if you look over to the right-hand side, the thing that I suppose leaps out again is the very, very small contribution to operating free cash flow from telecom. And again, that’s largely due to the deconsolidation of the free cash flow contribution, operating free cash flow contribution from 3 in Indonesia.
And of course, that’s yet — we’ve not received dividends from Indosat or Indo Hutchison. But that is something that we think will probably happen in the reasonably near future, given the very good operating performance of the merged company.
Now if we move on to Slide 7. You’re looking at the same operating free cash flow definition, but you’re looking at it by division. And overall, I mean, I think the picture is really quite good.
Ports is substantially up in terms of its operating free cash flow year-on-year with a significant reduction, among other things, in capital spending in the first half, much of which may be made up in the second half. And I’m sure Canning will be talking about that, but close to 20% increase in operating free cash flow as against the first half of last year.
Retail, we’ll be discussing in detail. That’s marginally down from the first half of last year, but again, certainly nothing that rings any alarm bells. Infrastructure contributions very, very solid across the board from all of the infrastructure investments under CKI and our co-owned infrastructure investments. Very good news on the Infrastructure front. CKH Group Telecom, marginally down. The — some of the EBITDA decline is very much offset by reductions in capital spending compared to the first half of last year, which is a good trend.
And then, of course, HAT, the effect of the deconsolidation, right? And when you add it all up, right, we get to our $17.7 billion for 2021 and $15.9 billion — $16 billion for 2022. And if you took out the deconsolidation effect, right, effectively, we would have been up 9% rather than down marginally. So again, at the operating free cash flow level, pretty solid performance and no real concerns emerging.
If we go to Slide 8, we now take it from operating free cash flow. And we take a look at interest, working capital changes, investments in telecom licenses and others, which is things like capitalized customer acquisition costs and cash that we just put — that went with the merger in Indonesia, for example. So you end up with a free cash flow, a real all-in free cash flow of just over HKD6 billion, HKD6.1 billion.
And then that’s a very actually healthy improvement on the profile in the first half of last year. So pretty good tight cash management overall. And the right-hand side of the page reconciles that.
You basically start with the reported first half 2021 free cash flow of HKD39.9 billion. Of that, HKD38.4 billion was the cash proceeds from tower asset disposals in the first half of last year under our agreement with Cellnex. So really, the underlying free cash flow generated by the businesses was HKD1.446 billion in the first half of 2021.
And then you waterfall that through to the HKD6.1 billion total for the first half of 2022, you first have to take out the — and again, this is the deconsolidation effect of Indonesia, HKD3.6 billion. But then you add back good increases in dividends from associates and joint ventures, pretty well across the board. And that’s a picture which we expect is going to be improving even further right in the second half with the likelihood of dividends from both IOH and from Cenovus.
Interest and taxes paid were lower. That’s largely because of lower overall debt level. What we’ve been doing is gradually paying down gross debt, leaving net debt more or less unchanged. We’ll talk a bit more about that on a later slide.
Working capital changes, so working capital at HKD1.9 billion better in 2022 than 2021 from a cash management point of view. So that’s very satisfactory. CapEx reduced by $3.7 billion compared to the first half of last year, offset somewhat by the, again, Indonesia merger effect of investments in associates and joint ventures and telecom licenses, which we acquired in 2021, which in the first half, which we did, of course, to acquire significant telecom licenses this year, right, and miscellaneous other movements, which takes you to a free cash flow performance of $6.1 billion. So a very good improvement for the first half.
If we move to the next slide, which is Slide 9. And this is really just the, I suppose, financial KPIs generally for the business. If you start on the far left, our cash was at just under HKD120 billion — cash and cash equivalents rather. And we’ve had some meaningful pickups on the cash management balances out of that, which is about 70-some-odd million of that pie.
We’ve had a pickup generally of about 40 basis points on our return. So the spread against our average cost of debt, which is in the lower right-hand side at 1.8, is up a little bit. But it’s partially offset by the returns that we’re getting on our cash and cash equivalent assets, which is good.
We have lengthened our maturity profile from 4.8 years to 5.2 years, and that’s reflected in the maturity profile as it is shown. Debt has been reduced, of course, to HKD285.5 billion, and we also reduced — we paid back — sorry, we redeemed a perpetual U.S. dollar bond of $1 billion principal during the half.
Now that’s — you’ll notice that the net debt has stayed roughly the same. The gross debt significantly reduced. Net debt to net total capital ratio has ticked up to 20.5%.
Now there are a couple of major reasons for that. One is, of course, total capital includes the — a perpetual that we redeemed. So obviously, total capital has been coming down, and net debt has been staying stable. So that’s part of the reason for the increase. The other reason is that in shareholders’ funds, there’s an adverse driver of about just over HKD10 billion in unrealized foreign exchange losses — of foreign exchange translation losses, which moved through reserves. So you put those 2 together, and you end up with 20.5% net debt to net total capital ratio, but again, partly due to our and partly due to adverse foreign exchange movements overall on the balance sheet, although the foreign exchange movements on debt itself were actually favorable.
So again, I think as Canning mentioned, we do expect to receive some very significant proceeds about €3.7 billion in — all from Cellnex at some point during the course of this month. And that would take the net debt to net total capital ratio down right away to about 17.5%.
So I think that’s pretty well all that I have to say on the financial profile of the slides. So Canning, I think it’s back to you to talk about ports.
Canning Fok
Now ports this year is a very good story. On the far left-hand side, we just remind you that we have 293 berths, 52 ports in 26 countries. And now — and this year, we [indiscernible] have 42.4 million TEUs, which slightly decreased 1% decrease over last year. The major reason is that because of the congestions and others and then the work’s actually slower than last year.
However, if you look at EBITDA square, we’ve been up by 18%. So it is — I think the question you asked, why is this happening? So I said basically there’s only 2 reasons. One is when the port is congested and then the container stayed in the port much longer. As a result, actually, our storage actually went up by .
So actually [indiscernible] almost up to 11%, 12% of our revenue come from storage and also, of course, the business in Mexico is very good, and it went up by 30%. So that is very good earnings for that division. So that will show and if you look at the EBITDA growth chart, we got first half to .
The is almost the same. Hong Kong is down, [indiscernible] is up, so almost the same. And the remaining China, basically because of the shutdown in Shanghai, then was made up by some government subsidiaries and some better performance from other port in China so that the movement is more significant.
And then on Europe, actually for Europe, the container movement is okay [indiscernible] almost the same, increased a little bit. But however, the major income still come from — come from the storage income. So it [indiscernible] EBITDA of the business.
And then, of course, I said it before, the — Mexico is improving, Asia, Australia and Others. And then this $480 million is mainly due to the Mexico, very good performance by this division. And of course, one of the very good thing happening to us in our investment in OCL. Not only that it gave us good income, but also good EBITDA and also good increase in their price, so that just on the equity part income, it gave us almost .
So that the underlying EBITDA [indiscernible] , but that because of the exchange, a strong U.S. dollar and then we have to get [indiscernible]. So there we were in the story and then the EBITDA [indiscernible]. So this year, we expect that the port will have a very good year in 2022.
So next, we can go to the Retail part. And then we have the main Board director, also [indiscernible] CEO of the Retail part, Dominic, can you take Slide 11?
Dominic Lai
Okay. Slide 11. On Retail, of course, the first half of this year has been a period for China. The rest of the business are doing quite well, and I will elaborate more. So I’ll talk to this slide in more detail.
From the left side, with an asset base of $27.5 billion and over 16,200 stores, the Retail division remains the world’s largest international health and beauty retailer, operating in 28 markets under 12 retail banners and with a very strong loyalty member base of 142 million, one of the largest in the world. What’s more important is that 65% of the division’s total sales come from these 142 million members, illustrating the power and attractiveness of our loyalty programs.
On exclusive sales participation, which include our own brands and private label as well as exclusive product from has reached 36% with China being the highest at almost 50%, creating strong differentiation and uniqueness for the business in the eyes of the customers. In the meantime, our off-line plus online strategy continues, and this O+O strategy has proven to be very effective in increasing the customer lifetime value as well as sales growth. For your information, O+O sales has registered a very nice 28% year-on-year increase for the first half of this year.
On store number, it appears on surface that it is flattish year-on-year at 16,244 stores. However, this number doesn’t adequately illustrate the store optimization program that we have gone through, during which we continue to open new stores in good and strategic locations.
In fact, we opened total new stores in the first half of 833 year-on-year, not first half, but year-on-year. At the same time, we also closed those nonperforming stores upon lease expiry or exercising the big . So total year-on-year closure amounts to 795 stores with a net increase of 38.
As a result, by doing this program, we are continuously optimizing the overall quality of our physical store portfolio, which is crucial in carrying out our O+O strategy. An average payback period for the new stores opened remain healthy at less than 13 months, so payback less than 13 months. The split of these 16,244 stores is about 50-50 between Europe and Asia.
Now on EBITDA. On EBITDA, EBITDA is reported at $6.03 billion, representing a decrease of 10% in reported currency and 3% decrease in local currency. The decrease is predominantly due to Health and Beauty China, which I will talk about in a minute. The EBITDA split is 62% in Europe and 38% in Asia, more or less the same as last year.
The waterfall EBITDA change chart on the top right shows the year-on-year EBITDA change of each division in Hong Kong dollars. First, for Health and Beauty China, here, we see a sharp decrease of HKD929 million or 60% from last year, and this clearly needs explanation.
So in China, if you look back, the COVID situation in China was relatively stable in January and February this year. However, the situation rapidly deteriorated in March, resulting in the largest and most severe outbreak.
Many cities across China were partially or fully locked down for weeks or even months. At its peak, almost 600 of our stores were temporarily closed as well as some of our warehouses. As a result, this led to a 30% footfall decline.
And in terms of sales, total sales for the first 6 months of the year, including online sales, has dropped a hefty 17% year-on-year, thus resulting a 60% decrease in EBITDA. So 30% drop in footfall, 17% drop in sales and 60% drop in EBITDA. Looking ahead, the second half performance in China should improve with the easing of the movement restrictions. So this is China.
Next, the next part is for Health and Beauty Asia. With the gradual relaxation of the pandemic restrictions in various countries, EBITDA increased 33% or $374 million, notably in Malaysia and Philippines. So Health and Beauty Asia is doing quite well.
For Health and Beauty Western Europe, where trading conditions have more or less returned to normal, the EBITDA increased HKD437 million or 17%, mostly in U.K. So Western Europe is doing fine.
For Eastern Europe, we have seen very good trading performance in Rossmann entities in Poland, Czech Republic and Hungary. However, this good performance has been partially offset by the negative variance in Ukraine due to the Russian-Ukraine war. So net-net, the EBITDA in Eastern Europe has only increased 4% or HKD38 million year-on-year.
So if you look at it in summary, for our Health and Beauty business, which accounts for over 97% of the Retail division’s EBITDA, this chart demonstrates the significant EBITDA decrease in Health and Beauty China has almost been compensated by increases in other regions, resulting in only 1% drop in EBITDA in local currency for the group.
So lastly, for the Other Retail, we see a bar of HKD151 million drop. In fact, our PARKnSHOP supermarket business in Hong Kong and [indiscernible] are doing well. However, the EBITDA increase were offset by negative variance in our water and beverage business in China, which was similarly affected by the lockdown and movement restrictions.
Also included in this HKD151 million number are the noncash onetime asset write-off in Ukraine and closure costs in Russia. At the same time, with a relatively strong Hong Kong dollar, we have to report a HKD464 million FX translation loss resulting in a total EBITDA of HKD6.03 billion for the 6-month period, a 10% drop from same period last year as I mentioned.
So lastly, on EBITDA margin percentage at the bottom of the slide, with the exception of Health and Beauty China, where the EBITDA margin percentage has been eroded to 6% for reasons that I mentioned, all the other divisions have been able to either maintain or even increase their EBITDA margin percentage.
So this is the overall summary on Retail, and I will now pass to Frank to talk about Infrastructure.
Frank Sixt
Yes. So on Page 12, of course, CKI reported their results yesterday, and it was really, I think, quite well received. They reported earnings HKD4.4 billion for the first half, which was up by 46% from the first half of 2021. Now of course, they will have gone through this in their results presentation, but the first half of 2021 was distorted by some very, very large U.K. deferred tax revaluations due to the proposed increase in U.K. tax rates that’s coming down the pipe or may not be. So we’ll see what happens with that once the conservative leadership race ends and we have a new prime minister.
Leaving that aside, there was quite a distortion year-on-year. And from our point of view, I think what we see is we see CKI and its underlying infrastructure investments doing exactly what they need to do, which is being very resilient and generating very good cash returns regardless of the fair or foul winds that may be blowing in the overall economy.
So when you parse down into the results and you look at the EBITDA, which was flat at about HKD14.8 billion, HKD14.9 billion. That was actually up 6% in local currencies. The difference being, of course, fluctuations mainly in sterling, but also in the pound and the Australian dollar.
And what was really quite rewarding about it was the contributions were up almost across the board, very, very few units that had any level of decline at all. And those declines were insignificant relating to the first half of 2021.
So that’s really a very good sign that this business does what it’s supposed to do despite overall economic headwinds. So obviously, stable earnings and stable dividend, a dividend increase yesterday announced.
And in terms of regulatory resets, the U.K. process is well underway for the 2023 reset and is basically unfolding in line with expectations. And everything else is set fair until timelines that are noted in the bars on the right, at the lower right.
So I’ll stop there and hand it back to Canning to talk about the Telecom division.
Canning Fok
The Telecom division in the first half of this year, we actually have mixed results, which I will go and explain. If you talk about the revenue, actually, in the local currency, it’s $39 billion. It’s minus 9 on currency but because a lot of the reduction come from foreign exchange actually on the local currency, it’s small or less, only minus 1% different — less than last year to show that the revenue side [indiscernible] on this — on the subscriber side, actually, they are doing quite well.
And then on the net ARPU, they are doing — also doing quite well. And then one thing that — the profile of our business is different because we have now — because in the 4G business and before, we are always shown on spectrum. We are not — we have less spectrum than our competitors, so that we are competing in a . But in a 5G scenario, we have actually hired a lot of spectrum [indiscernible] so that, in fact, in Italy or in Austria, in Ireland, we all partner and also U.K., some external tests. Now we are all the project fastest network in those countries, which is quite a good thing happening to us.
In terms of EBITDA, actually, it’s HKD11 billion and recorded a 21% drop. Okay. And so let’s look at the waterfall chart, starting with 2021 EBITDA. And then because that we show our tower this year if we can utilize it, this HKD14.7 billion, we will deploy HKD14.2 billion because almost HKD600 million we have to pay more to the tower company.
So we are comparing this HKD14 billion, and then where does the reduction come from. If you look at it, almost all the other countries, it’s almost better or a little bit more or less the same, okay? And except for Italy. We recorded a 23% drop in the EBITDA.
This is basically coming from both strong gross margin, and then there are some — a little bit increase in operating expense. The reason of dropped gross margin, actually some very good things happening in Italy.
We have — last year, we reported that there was a drop in the wholesale revenue. And then — and of course, the strategy previously before is to let other — let take our customer at low price, and then we receive better revenue from the wholesale price.
But as the network build out and then this strategy, we have to reverse. So okay, and then order we have seen that because as the network build out and the wholesale revenue dropped, and then we are working very hard on our base so that our base revenue, A, is to stabilize and B, to increase the cut off the sharp fall.
And indeed, this is happening, especially we see that in the second quarter of this year, the increase in base revenue. And this actually almost is more than enough to compensate the drop in the wholesale revenue.
And also, at the same time, we work with some — a lot of this wholesaler MVNOs so that we can give them some more business, and then they give us some more income. So I think this is happening.
And then on the expense side, and then, of course, this year, there are more spectrum cost, renewal cost, which is the cost of — not our actual cost, but the cost of the spectrum and also some of the expanded — some of the income that we have last year from some settlement, legal settlement that will be nonrecurring. So actually, the increase in cost is quite minimal. So this accounts for the HKD1.7 billion downfall.
And looking forward, I can see that the margin side and continues to improve. So that I think that we are on what we call a smile, and we are on a turning corner. And I’m very positive going forward.
And Sweden is doing very good and including — and I can only report good things about our Swedish team. They are doing well. Denmark is that — is almost there. And then the lockdown have some effect because they traded on [indiscernible]. And then, of course, the lockdown have some effect on them, but this changed very fast. So I think in the second half, they will catch up with this small decrease.
Austria continues to be very solid company. And Ireland — and again, is a solid company. I think they come out from lockdown. So then on the second half, they should be able to make up. And of course, the currency have a huge effect on us, almost $1 billion. So this account for how we do EBITDA margin 31%, 34%, 35% is a little bit reduced because of the — affected by the tower deal, but we get a lot of money.
And then if you move to Page 14, it is basically a summary of what I said. I think that if you look at Italy, and then $1.5 billion gross margin versus $1.58. I think this one is already beginning to stabilize in the second half — in the first half. And I would hope that this gap will be reduced in the second half and [indiscernible] the base income. Base income continues to improve and then the wholesale income will stabilize.
And then, of course, we are a very [indiscernible] offer is controlling operating expense. And one thing that we noticed is that we are in the process of moving our 5G network. You see that they are increasing in the depletion. If you look at the total [indiscernible] $9.5 billion in the first half this year versus $9.1 billion last year. So as a result, they explained as we build out the increase of depreciation spend immediately, but the income come a little bit later. So this is something to note but not a cause for concern.
And then also, if you look at the CapEx, as I said last year, it has been reduced from last year. If you look at the far right and the CapEx is $8.2 billion — $8.7 billion versus $11 billion last year and show that.
So things are actually doing what we want. And of course, it should be on the network, the depreciation come first and then income come a little bit later. And we are often — we are not often — we are ready to build up our revenue base to show that we will earn money from this 5G investment.
With this, I will return — next page is Indonesia. Is it Page 16? No, if you go to Page 15 first. I think this is about our tower deal. I think I’ll let expert talk about it. Frank can you [indiscernible]?
Frank Sixt
Thank you. Thank you for the flattery. There’s only one milestone left to be complete, which is the closing of the U.K. tower assets deal. Just as a reminder, that deal itself represents proceeds in euros of about , which €1.4 billion paid by way of Cellnex shares, which should be around 5% of Cellnex’s issued share capital based on the current price environment and the balance coming in, in cash.
Now we’ve said before that we expected this to complete during the course of this month. There are essentially no conditions outstanding or agreements outstanding between Cellnex and CKH Networks and CKH Group Telecom. So everything has been invested between the principals.
What is yet to be completed is the final stages of the CMA approval of the remedy taker arrangements between Cellnex and its remedy taker. The stage that we’re at is where formal documents are submitted to the CMA, the Competition & Markets Authority.
There are 4 documents of the transaction as of last night, 3 of them had been submitted and were under review by the CMA and the monitoring trustee. One more document to come, which we expect will be in the next few days. Once the CMA has signed off, all of the conditions in closing are set. So we will move pretty expeditiously towards closing.
So just to recap, that will mean that we will have brought in total proceeds of about €10 billion, a small minority interest in that of about €500 million to our partner in Scandinavia, split €8.6 billion in cash, €1.4 billion in shares.
And we estimate right now that the disposal gain on the U.K. transaction will be in the area of €2.1 billion, and it is an estimate at this point. So we’ll be running that to ground hopefully in the second half results, but that would take the total gains that we’ve reported on the transaction to €6.4 billion.
So on that, I think I’ll pass back to Canning to talk about our merger in Indonesia.
Canning Fok
Well, this is the result of the work over, I would say, almost 3 years’ work, and then it is one of the not an easy thing to do. We talked with almost everybody in the market. And then the end result, we are able to come to a conclusion of all we do allow our partner to do this joint venture.
And then as I said before, in-market consolidation is the most accretive business one can do. And then if you look at it before and after on the active customer base, before it’s 44 million, after is 96 million, 52 million more than us — than before.
And EBITDA before was HKD810 million. Now it’s HKD2.458 billion. Earnings before was losing money. Now it’s HKD770 million. So that actually — now the 2 companies getting together, one management team and merging and then 2 sets of income and then really is very, very accretive. And there’s a lot of synergy, too.
And then the management team there is doing so well. And then they told us that the first is synergy. If you look at the target actually for the whole year, I think in the first half, they have finished the whole year synergy, but they will not stop there, I’m sure. In the second half, they will bring improving amount of synergy to the party so to the company so that it is a very, very good situation.
So what are the benefits to us? We clearly stated on the right-hand side, A, it’s a very highly accretive transaction just for the transition itself will bring us net of 5.1 billion profit, net of the write-off income, which is about 1 billion. Okay.
And then, of course, before we were losing money. Now we are making money, much better growth, a 200% growth, 1,000% EBITDA and then from loss to net earnings. So it is one of the very good things happening.
And then, of course, the performance is very strong. And then we are able to — we are not only that we improve the branding on both side, but also that the network cost rate and rollout, we are now building on one of the network that will be comparable to the market leader Telkomsel.
So that — but not only they can do that, but also they can do it by their own money. They are self-financed. And so there’s no need to send them any money. And so for the first time, we don’t need to send any more money to Indonesia, which is very pleasing.
And then, of course, with the current profit, we have kind of looking for a dividend from that and let’s wait and see. So if that comes true, that will be the first time that we receive any dividend from Indonesia. So very good. Thank you very much.
And then Sri Lanka, still working well under these extraordinary circumstances. And Vietnam is also in a very stable manner, but this is very, very small compared to Indonesia.
Now we can move to sustainability. I think, Frank, he is very interested in it, and then I will let him take this one.
Frank Sixt
Yes. I think we are very pleased with the improvements overall in our sustainability activities, and in particular, our decarbonization activities and the way that we responded relative to our family of employees and our stakeholders and customers throughout the pandemic.
Really our focus on sustainability, I think, has yielded very tangible results on the ground since the major refocus in 2018, 2019 on the area. And we have seen, as a result, some ESG ratings improvements.
Finally, just in May, MSCI upgraded us from B to BBB, still work to be done there. But nevertheless, I mean, a recognition that all of the horrible things that they thought about us as an Asian-based conglomerate weren’t necessarily true.
Sustainalytics, of course, lifted us from high risk to medium risk. And we are now ranked ninth out of the 112 conglomerates that they rank globally, which is a good thing. However, we still have work to do there because it is, I think, from a sustainability point of view, better to understand each of our major business divisions on a standalone basis compared to their peers rather than to be stuck in the lump of a conglomerate rating mechanism, which is the case, both with Sustainalytics and MSCI.
But their ratings are what they are. You will have seen our 2021 Sustainability Report, which we released in May, which I think reflects both good progress but also got clearer targets and activities going forward. A lot of net-zero transition opportunities, a lot of definitions of short- and medium-term milestones for emission reductions.
We also issued our first Green Bond Impact Report relative to a bond that we issued in 2021, and we will have completely covered the proceeds from that bond by several times in that report. And we’ve been improving again on all metrics our ability to sort of track our investment and our performance across all of our divisions in sustainability.
So at the bottom, you get a flavor of some of the things that are going on in the divisions. In the Ports division, of course, the most important program is to move away from diesel and towards electric and to the greatest extent possible towards electric from clean energy sources.
A lot of automation improvements, productivity improvements and so on, which at the end of the day, reduce the carbon footprints right over the port operations themselves. And they have hired outside consultants to put together with them their realistic net-zero transition plan and their Scope 3 reporting and their climate risk assessments, which, of course, is important in terms of the risks represented potentially by climate change to the assets and businesses of the Ports Group.
Retail is — has done its Scope 1, 2 and 3 emission reduction targets and is at the point of looking for validation of those targets from a Science Based Target initiative, which we would expect we will have by the end of this year, has launched a major greener store framework globally, which I’m sure they can talk about in Q&A and a lot of initiatives in terms of product ranges moving towards more sustainable products.
And of course, a lot of stuff on the noncarbon side as well in terms of being one of the best places to work and one of the most supportive and diverse places to work in retail all around the world. CKI will have reported on this yesterday, but they’re engaged across the board in so many of their utilities, including pipelines, electricity distribution, et cetera, on the decarbonization projects. And of course, they’ve committed to phasing out coal-fired generation, both through Hong Kong and in Canada before 2035.
And then lastly, the telecoms group has done its Scope 1, 2 and 3 emissions reduction targets. And again, those are with the Science Based Target initiative people for review now, has upped the game in terms of renewable energy procurement and is implementing the task force on climate change financial disclosure recommendations, including scenario analysis, to identify climate-related risks and opportunities for the telecom business. So really, I think, an area in which we have continued to up our game. And we’re starting to, I think, be recognized and differentiated from the pack.
So with that, I’ll hand you back to Canning to go through the outlook slide on Page 20.
Canning Fok
So if you turn to Page 20, I will not go through each business because we have all talked about it. But just in summary, I think I just want to emphasize that we still continue to produce solid earnings. And then what we will emphasize is that in-market consolidation and network sharing that will produce a lot of upside for our business in the telecom side in addition to our operating focus.
And then a lot of people asked us about share buybacks. And I have talked with the Chairman, and he will answer you in the Q&A session that after the completion of the U.K. tower deal, and then we will continue to buy back. But you can ask the Chairman on that.
And then about the Retail F&B in China, I think the recovery will be slowly. But then what does that mean? That means that we will have to have a lot of time to get our operation ready for the next stage when everything starts — opens up, so that in the second half, I would expect it to be better than the first half, but we will not be back to normal so fast.
So — and then the most important last thing is that it is continuous of the nature of our business, we are conglomerate of different business. One business down, we pick up by the other business to continue — we can protect our earning and dividend and the example is the foreign [indiscernible] and then an oil company comes up, okay?
And then, of course, when China is having a slow down, but then Europe is picking up to come to help. When the traffic is down and [indiscernible] can come up. So then I think this diversity from business and also from geography is certainly a major plus for ourselves.
With this, I finish with this page. So then I pass it back to [indiscernible].
Question-and-Answer Session
Operator
[Operator Instructions]. The first question is quite a long one. The question is, for many companies, business has not been normal for the past couple of years with inflation in some countries, military conflicts, different degrees of pandemic restrictions as well as currency volatility. How has the group been affected by these issues?
Victor Li
That’s a big question. CKHH is a global company. Of course, we are affected by all of the above. But another way to look at it is what you have described is exactly where our strength lies.
These last few years have shown us that the advantage of having a diverse portfolio with a global presence, the geographic diversity of our assets allow us to deliver an overall steady underlying performance and continue to strengthen our balance sheet and remain on track to return to pre-COVID profitability levels.
Allow me to elaborate. While let’s say, a particular risk may be an issue for one industry at a particular location or market, another industry operating somewhere else in the world may be experiencing very positive circumstances. Every year, we see many such examples of resilience across our portfolio, which we get to think it’s normal. They balance out each other.
This is our intrinsic strength. And it’s the advantage on generating the balance and supporting our business. We have many pressures within the group. In Chinese, I call them [Foreign Language]. They will continue to produce shareholder value and especially during stressful times, these gems, I call them gems, shine through.
Maybe a few examples. Canning and Frank had mentioned them earlier. The last 6 months, we’ve seen a weakening pound and euro exchange rate. We have a number of businesses there, and they are affected by higher energy prices. However, on the other hand, the group also benefit from these high prices through our holdings in Cenovus.
Another thing to point out is that we have very limited exposure to the floating rate borrowing. I think — correct me if I’m wrong, Frank, but I think we have only 25% of our total borrowing that is exposed to floating rates.
Frank Sixt
That is correct.
Victor Li
Yes. They’re rather unaffected. A couple of years ago, our Retail Group was very much affected by lockdowns in Europe and was supported by the Mainland market. But the last 6 months, we’ve seen the reverse.
The lockdowns in Mainland China earlier this year was offset by the very good performance in other regions. We anticipate the Asian operations will continue to improve in the second half. I mean, this continues, the trade disruption because of conflicts in Ukraine and pandemic restrictions, offset by higher storage income, mainly in Europe and the very good results in Mexico.
EBITDA and EBIT increased in local currencies in ports and Cenovus helped us offset the higher depreciation of the increasing 5G networks in telecom. Our telecom merger in Indonesia is a big plus, which helped the noncash impairment in Sri Lanka. So this is the balance that we manage to strike in Hutch. A big question.
Operator
Mr. Chairman, I have received several questions for our telecom operation. May I put them together?
Victor Li
Yes. Maybe, Canning, you can help me have the answer on telecom.
Operator
The first question is, can you comment on the performance of three UK and [indiscernible] trade?
Canning Fok
Okay. And actually, 3 U.K. has quite a good performance since second half last year and then the first half of this year. And then actually, not only that the subscriber base grows, but the EBITDA actually grew by about 4% if you go back to the presentation.
But because we have been spending money to build out the network because the 3, we still have the smallest network than in U.K. And then on the 5G side, we have enough spectrum. We are trying our best to catch up so that — and then as we build out our 5G network to depreciation expense so that you saw that the EBIT actually dropped from U.K.
But actually this company is going in the right direction, and then I think it’s a matter of timing before they catch up with the depreciation in EBIT. And also, I will continue to be optimistic about the good performance in the EBITDA line.
And then going to Italy, as I mentioned before, it is a — we are in the middle of changing strategy from relying on wholesale in supporting the wholesale income and into supporting the revenue from the base. And then actually, this is happening.
If you see that the base — the customers’ revenue is actually doing — stabilized and actually going up in the second quarter of first half. And then we feel confident that this continues to — this will continue. And then the wholesale avenue will be because the remedy taker has built out their part of the network. And it went down and back the wholesale revenue, but I think it has come to a point of stabilizing now.
And also, we are working very hard with other MVNO so that we can increase their , so that we can have more revenue. And one thing that is very important that is we continue — we have the best network in Italy. And then we — not only 4G but also 5G.
And we will continue to work hard to monetize the 5G network. And also one of our strategies is through a network sharing. I think you have heard that in the market. We are working earlier so that we can do the Euro network share together. That will be helpful to the financial performance of the company. So thank you.
Operator
The next question is, any update on the progress of in-market consolidation in U.K., Sweden and Denmark?
Victor Li
Canning, please continue.
Canning Fok
Okay. I think as a strategy of CK Hutchison, in-market consolidation is something that we see as a huge opportunity to improve the financial performance of this company. And then we have been in touch actually with our competitor in all these 3 places.
And then so that I don’t want to comment on the progress of the talks, but I will say that as soon as we have something to announce, we will announce. And these deals, if it is successful, will be highly accretive with very huge value for this — for CK Hutchison. So that this is something that we are [indiscernible] actively .
Operator
The next telecom question is, how do you view the merger in Indonesia?
Victor Li
That must be Canning’s continuation.
Canning Fok
Thank you, Chairman. Actually, I have said it during the presentation. So 2 companies together is very good. A, all the subscriber base is better, profit is better, financial performance is better.
Actually, before we were losing money. Now we are making money. Before, we are putting cash in. Now, we don’t have — we don’t need to put any more cash in. And then the company has enough money to do their own network. I think we are doing a network that will be — we will be proud of Indonesia. And then fourthly, they are making good money. And then there’s — I don’t want to predict, but I can say that there will be — I’m looking forward to receive dividend from that. If that happens, it will be the first time we receive cash back from Indonesia. So I’m looking forward to that.
Operator
Next question is on capital allocation. What is the priority of the company’s capital allocation? Will CK Hutchison resume sale buyback in the second half of the year?
Victor Li
The top priorities, engaging and earning a cash flow-accretive telecom in-market consolidation. We said that many times. And we’ll prudently open new retail stores with quick payback. We’ll also look at new opportunities in infrastructure projects and the CKI. And after the completion of the tower sales, we will allocate some of the capital for debt repayment and share buyback.
Regarding the share buyback, CK Hutchison intends to buy its own shares after the completion of the U.K. tower sale, which we expect it soon. And — but the pace of the actual buyback will depend on market conditions.
Operator
Mr. Chairman, there are several questions related to our retail operation. May I group them again together as…
Victor Li
Maybe the — Dominic, you can answer the questions on Retail.
Operator
The question is as follows. What was the reason for the EBITDA decline of Watson China? And should we expect Watson China to show better performance in the second half compared to first half — sorry, in the second half compared to 2021? Also, can you comment on the store opening policy in China?
Dominic Lai
Okay. Well, thank you, Chairman, for letting me try to answer these 3 questions. As I have explained in my earlier slide presentations, the COVID situation in China was relatively stable in January and February this year but deteriorated rapidly in March, resulting in the biggest and most severe outbreak in terms of geographical coverage and restrictive measures.
Too many cities were fully and partially locked down for weeks or even months. including the Tier 1 cities such as Shanghai, Shenzhen and Guangzhou. Those are the big footfall and sales generated for the group.
At its peak, around 14% of our China portfolio or 590 stores were temporarily closed. More importantly, consumer sentiment in the country was for sure affected because we see similar shopping mall traffic drop, both in impacted cities and in cities not impacted, i.e., whether it’s the city is impacted or not, we see similar footfall drop in the malls.
So it is, in our view, a sentiment thing as well. So overall, net-net, the overall footfall declined by 30%, resulting in 17% decrease in sales and 60 lower — 60% lower EBITDA in the first half. So this is the EBITDA decline part.
The way forward, if we look ahead, we expect the second half performance to improve with the easing of the movement restrictions. And we have already seen some improvement after we reopened Shanghai. But the condition, I must say, is too challenging as the recovery of consumer sentiment will take some time.
So at the same time, our Chinese colleagues are not sitting there doing nothing, but they continue to leverage their strength on O+O, own brand, exclusive as well as CRM to improve their overall profitability. So why the market was down and why the footfall is not there, they are working, and preparer for the market to be open.
So the last part or the last question is about the store opening policy. In fact, we have been focusing more on quality rather than quantity. While we are opening new stores in good and strategic locations for short payback period, we also are closing those nonperforming stores upon lease expiry or even exercising our .
So this store optimization program actually help us to continuously upgrading the overall quality of our physical portfolio, which is crucial in carrying out our oversold strategy. And then to shed some light, we have opened 67 new stores in the first half and have closed 191 stores in the first half, resulting in a net decrease of 124 stores. So this program continues to plans and improve the portfolio quality. So these are the answers to your 3 questions. Thank you.
Victor Li
On that question, the situation being tough in China is not a secret. It’s not only affecting us. It will be affecting also our competitors. But our competitors will also have additional problem of potential cash flow and morale issues, whereas the Watson’s Group in China would have the support of the whole Watson’s Group with international business and also all CKHH.
So in terms of our relative competitive position, when things get tough, it’s actually, to a certain extent, beneficial to our competitive advantage. So if I may add to that, Dominic.
Dominic Lai
Yes, yes. That’s a valid point.
Victor Li
We do expect better results in the second half.
Dominic Lai
Yes, we’ll top it up.
Operator
The next question is about our ports operation. Do you expect supply chain disruption will be relieved in the second half with throughput growth resumption?
Victor Li
I think supply chain disruptions will soften in the second half, and the container throughput is expected to have some modest growth in the second half.
Operator
This is a follow-up question on the — for the Ports division. What was the annual growth of storage income in the first half? And what was the overall sales represented by storage income?
Victor Li
Okay. Frank, again, please correct me if I’m wrong. But I think our storage income increased by over 50% in the first half against the same period last year.
Frank Sixt
That’s correct, Chairman.
Victor Li
Yes, and accounted for about 10% of our total revenue of the port business.
Frank Sixt
Indeed, certainly.
Victor Li
Yes. But the growth of the storage income in the second half should be modest due to the easing of supply chain disruptions.
Operator
Due to the time constraints, we will have the last 2 questions. The next question is, when does the lockup period of the company’s [indiscernible] Cenovus expire? How does CK Hutchison will its investment in Cenovus?
Victor Li
Okay. Remember, the investor in Cenovus includes CKHH and also personal investment by the family. If I remember correctly, the agreement should expire in early 2026, January 2026. But some of the terms are more relaxed from July 2022 onwards.
This would give us the flexibility to dispose some — of Cenovus shares. Now I want to be very clear on this. Currently, Cenovus is our valuable strategic investment, both by CKHH and personally. I think I’ve answered that question, yes.
Operator
Okay. The last question today is, can you elaborate on the investment opportunities to CKI brought by ESG?
Victor Li
Now this is my area. We have important participants in the infrastructure sector and in many parts of the world. And it is our business to help governments achieve their decarbonization goals and net-zero targets.
I don’t look at this as much as obligation as a new opportunity. And a few examples of such include providing leadership in the development of hydrogen economy and our gas networks, increasing renewable energy connections and digitizing our existing networks and also decarbonizing the power generation portfolio through phasing out carbon-fired generation. And the list goes on and on. There’s lots of opportunity within or next to the CKI portfolio. Thank you.
Operator
Okay. Thank you very much, Chairman. This concludes our live webcast today. Thank you very much for joining our presentation.
Victor Li
Thank you.
Dominic Lai
Thank you.
Canning Fok
Thank you for your support. Thank you.
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