Swire Pacific Limited (OTCPK:SWRAY) 2022 Interim Results Conference Call August 11, 2022 5:45 AM ET
Company Participants
Guy Bradley – Executive Chairman of the Board
Karen So – Managing Director of Swire Coca-Cola
Martin Murray – Finance Director & Executive Director
Conference Call Participants
Karl Choi – Bank of America
George Choi – Citigroup
Unidentified Company Representative
Good afternoon, ladies and gentlemen. Welcome to the Swire Pacific 2022 Interim Results Analyst Briefing. May I introduce our speakers today; Mr. Guy Bradley, Chairman of Swire Pacific; Mr. Martin Murray, Finance Director of Swire Pacific; and Ms. Karen So, Managing Director of Swire Coca-Cola.
Today’s briefing will be conducted in English. [Operator Instructions] Following the presentation by our management, there will be a Q&A session. But before I hand over to Guy, we would like to introduce a short video, showcasing Swire Pacific’s highlights for the first half of the year. I hope you enjoy the video.
[Presentation]
Have you all enjoyed the video? May I now invite Guy, Martin and Karen to take us through a detailed look of our results, please?
Guy Bradley
Good evening, and thank you for joining us. Let me start with the financial highlights. Well, we had a very resilient first half performance, I would say, under some very challenging conditions. But our focus is very clear. We’re focused on the Greater China and Southeast Asia geography where the company seeks to focus and grow its three core divisions and make new investments in the growth areas that we’ve discussed like health care.
Some highlights of the first six months. I’d just like to single out, on the property side, we managed to get the Taikoo Li Xi’an deal done and over the line, which should be very exciting as a new Taikoo Li. On the beverage side, we’ll come on to this in more detail. But we were able to acquire the franchise territories in Vietnam and Cambodia for a sum of just over US$1 billion, and we’re very excited about that opportunity.
And on the aviation side, we started to see in the second quarter some increased capacity and improved performance. And at the airline level, you saw Cathay Pacific becoming cash positive. So some early signals in Q2 there of the positive nature, which was very pleasing.
That resilience that I talked about translated into improved performance in terms of both underlying profit and recurring underlying profit versus the prior year. And the resilience was shown across our three core divisions. But you can see on the right-hand side of the chart that the big impacts and the big improvement there has clearly been in the aviation numbers.
So we remain in a strong financial position, and we’ve increased dividends by 15%. We’ve also announced today a share buyback program, and Martin will now go into much more detail on the financial numbers, probably including the buyback.
Martin, thank you.
Martin Murray
Thank you. So this first slide, the recurring underlying profit of HKD1.2 billion. And then we adjust for nonrecurring items to get to the underlying profit, HKD1.7 billion and then the statutory profit that principally adjusts for the net valuation of investment properties and the deferred tax relating to those.
In terms of our revenue, our revenue is down 5%, that mainly a reduction in property trading and also the reduction of charter hire from the closure of our Marine division. The cash generation from operations is down 42%, partly because the operating profit was down slightly once we adjusted for the value — the revaluation of the property. Our accounts receivable are up and also the reduction in proceeds from property trading impacted that line, too.
This shows here our return on equity. So clearly, the left-hand side shows the difficulty the group’s faced since the outbreak of the pandemic. And clearly, the returns aren’t yet where we want them to be. And on the right-hand side, it shows you the makeup of that. So with the recurring profit, again, good results, stable results from Swire Properties, up in Swire Coca-Cola, the impact that COVID’s had on the aviation business. And then the other big piece is the translation differences of HKD3.2 billion and the dividends that we pay out to get the movement in our equity.
Here, we just again show the recurring underlying profit. As the Chairman said, in the property side, very solid performance on that piece. We really look at the quarters here. So Property and Beverages really were impacted in the second quarter because of the size of their book portfolio in Mainland China and particularly the impact of the lockdowns in there.
In terms of aviation, stronger results from Cathay Pacific, 34% improvement in their losses, 70% on the airline level. So they’ve been very impacted by what’s happening in their associates on that front, too. The good news on Cathay Pacific, very much related to the first quarter and particularly in the quarantine procedures that were implemented at the very start of the year. And with the adjustments to quarantine, it’s good to see Cathay Pacific back being cash positive since May and the second half outlook looking much stronger.
Here, we show the adjustments in terms of the nonrecurring items. So again, lower gains from the disposal of Taikoo Shing car parks. In terms of impairments, we have an impairment in the absence of the impairments of Cathay Pacific. We took an impairment on the bakery. We’ve got a remeasurement gain on the disposal of SPO when we completed that transaction and, again, some ad hoc gains on disposals.
In terms of the improvement in the underlying profit, the actual — the nonrecurring items year-on-year weighed themselves out. So really, the movement in underlying profit is the same movement as the recurring profit. So again, as we said, the impact, particularly in the second quarter in Properties and Beverages, the first quarter in Aviation, but a stronger first half. And then again at the end, the year-on-year, the nonrecurring items are pretty much the same.
In terms of the balance sheet, very strong net debt levels of HKD43 billion, which means we’ve got a very low gearing at 13.6%. Our interest cover is 6.6%, average cost of debt is 3% in this environment where we’ve got 72% of our interest rate is on a fixed basis.
And in terms of liquidity, strong liquidity. Swire Properties had built up a lot of liquidity in the sale of Cityplaza back in 2021. So with that investments, that’s come down slightly. But as you can see, we’ve got strong undrawn facilities and a good maturity profile in terms of our debt profile.
With that, I pass it back to the Chairman.
Guy Bradley
Thanks, Martin. Moving on to the business review, I will take the first one, which is the property business. As you heard in the previous session, and apologies if there’s a little bit of an overlap here, but the property business had a very solid performance, driven in particular by the Chinese Mainland performing strongly in the first quarter.
Some highlights, again, in the chart, 269 Queen’s Road East was successfully acquired about two months ago. It’s an important part of our push to use our very strong residential brand a bit more. And so we’re very pleased to have won that under a government land sale. We finalized the acquisition of the Zung Fu Industrial Building, which is part of our stated strategy of reinvesting in our two main clusters, this one being Taikoo Place. And that continues to be a great story for the Swire Properties brand.
And again, I mentioned Xi’an, which is just going to be tremendously exciting being able to put a retail-led mixed-use development alongside a UNESCO site of that sort of status. So we’re really, really pleased about that.
Finally, on the hotel front, some good news. We’ve got two wonderful brands in the hotel sector, the House Collective and East. We’re very happy to announce in the first half that on the House Collective side, we’ve been able to secure hotel management agreements in Shenzhen and in Tokyo. Tokyo being the first agreement for a house hotel outside of China. So some excellent work being done on that side. This is a repeat of the basically underlying profit figure, which was fairly flat. The only difference being a slightly reduced level of divestments year-on-year, explaining the larger drop in the underlying profit versus recurring. So I won’t dwell on that.
That strong performance from the Chinese Mainland in the first quarter translated into figures that I’ve got here. Notably, now you can see that the Chinese Mainland in terms of gross rental income accounts for 39% of our total, and that’s a first half figure, making it the second-largest rental contributor after Hong Kong office. So you’re starting to see some really significant growth and numbers and I think success, driven by the Taikoo Li and Taikoo Hui brands in China.
Some pictures here to show that we’re scaling up the Chinese Mainland development. We’ve got a policy of not just adding to our existing assets, which in the case of Xi’an, but also reinforcing existing assets. And here, you can see several examples of that. The INDIGO Phase 2 in the bottom left is a 4 million square feet addition, primarily office, which will really set up that part of Beijing as a decentralized office location of some strength, and that’s about an HKD8 billion attributable investment on Swire Properties’ behalf.
Xi’an, we’ve talked about some — there’s a really exciting location across the road from HKRI Taikoo Hui in Shanghai called Jing’an, and that’s the picture in the top right-hand box where we get to work with the district government and to revitalize those heritage-protected buildings built in the old Shanghai style. And what we’ll be doing in there will be a real combination of retail, cultural and arts and some very exciting uses. So that’s a fantastic deal.
And then finally, one that we’ve mentioned for a year now, we’ve added to Sanlitun, putting another sort of 250,000 square feet of retail in the busiest corner of that development and had a really good opening last year of Taikoo Li Qiantan down in Shanghai. So lots going on in the Chinese Mainland.
And lots going on in Hong Kong. We continue to mention Zung Fu, which is the continuation of the wonderful story going on down in Taikoo Place of decentralizing and creating a global business district on the office side. But we continue to reinvest in our other main office cluster in Pacific Place. And you can see in the second picture there, there’s a new Grade A office tower there, which will add to the portfolio in Pacific Place with a very new and technology-friendly building.
Not to mention Hong Kong, the residential trading side of the business continues to go from strength to strength. And we now have three residential trading developments in Hong Kong: Wong Chuk Hang stage 4, where we have a 25% stake; the Chai Wan residential development; I mentioned 269 Queen’s Road East. And maybe further down the track, we’ll probably end up with a project down on Quarry Bay and Pan Hoi Street. So there’s quite a lot going on, on the residential side, which we’re very excited about.
Just quickly touching on Southeast Asia. Savyavasa in Jakarta started the sales down there. That will be a wonderful product. There’s about 400 units in a very affluent part of South Jakarta. It’s well located. So we’re watching those sales very carefully. And we’ve had two minority investments in Ho Chi Minh, which the sales of which have gone really well.
I’ll now pass over to Karen, who will give you a little bit more detail on the excitement going on in the beverage business.
Karen So
Thank you, Guy. So I will brief you about the result in Beverages division. So 2022 is the year of exciting expansion for Swire Coca-Cola. Recently, we’ve announced the plan to expand our franchise territory in Vietnam and Cambodia. This is our first investment in Southeast Asia with the robust urbanization, young population demographic, high GDP growth pre-COVID time and also the relatively lower per capita consumption dominated by sparkling drink. This presents to Swire Coca-Cola a phenomenon tremendous growth opportunity in Southeast Asia.
Upon the completion of this acquisition, we’re going to increase 15% of our franchise population to 876 million people in our Swire franchise territory. And this also presents significant opportunity for synergies with our legacy market through commercial capability, supply chain, procurement and digitization.
Over to the Chinese Mainland side, we’ve also announced the acquisition of our steel manufacturing facility. Upon completion of the acquisition, we’re going to have acquired six manufacturing sites, a total of 21 steel aseptic production line into our management. And this allows us to rationalize our production facilities. And we’re able to produce our still beverages much more closer to our market with a lot of saving in logistic, head office costs and also synergy of our existing manufacturing facilities.
The first half of 2022 give us a mixed result, mainly impacted by the COVID control in Chinese Mainland and also our input cost pressure.
Over to the U.S. side, the U.S. has continued to deliver very, very strong revenue growth and also profit growth. The U.S. profit increased by 34% and revenue increased by 14%, reflecting our price increases and also strengthening of our execution capability.
Chinese Mainland in the first half of the year was impacted by COVID-related travel and social restriction. At the same time, our input costs also increased. As a result, profit decreased by 41%. Despite the challenging environment, our team continued to focus on executing our long-term strategy. We’re particularly focusing on revenue growth initiative, which has allowed us to continue to deliver strong revenue growth per case in both of our Chinese Mainland market and U.S. market.
Diversity of our franchise market gives us protection. As you can see here, despite our Chinese Mainland results being impacted by COVID restriction, our U.S. market to continue to deliver strong profit growth. And we have a good portfolio of our product from sparkling, juice, energy drink, water, tea and other still beverages. Chinese Mainland contributed 53% of our total revenue and followed by U.S.A. contributing 40%.
As you can see from the table on the bottom right-hand corner, our revenue growth has a slight increase of 0.5%. However, EBITDA margin was slightly squeezed due to our cost increase from raw material.
On the revenue delivery, the Chinese Mainland revenue was adversely affected by COVID, as I mentioned just now. However, with our continuous focus in executing our long-term strategy, which has served us very well after the COVID restrictions being eased. And we have seen significant improvement in the end of the first quarter and also beginning of the second half of the year. So we are confident that with the external environment continue to improve, our business is going to have a strong improvement in the second half of the year.
So with that, I’m going to hand over to Guy to continue on aviation.
Guy Bradley
Thank you. As an overview on the financial figures, which touched a little bit on some numbers Martin gave you, you can see on the right-hand side the Cathay Pacific group improved its losses by 34% at the group level. And at the airline level, losses improved by 70%. So that really reflects what was going on in the second quarter here for Cathay Pacific. The bigger number here is not an improvement, and that’s the 90% worsening of the situation from Cathay’s associates.
If we look at this chart, I think you may have seen this one before, it really just serves to demonstrate exactly what happened due to the pandemic, and you can just see the complete drop-off of passenger volumes back in February and March and April 2020, and it’s been pretty much like that ever since. So we’re really hopeful that those trends are going to start to pick up again and those figures will help to improve towards the end of the year. So in terms of outlook, we’re confident that Cathay Pacific and its subsidiaries will see a stronger second half than the first half performance. But as I’ve just noted, the results of the associates will remain challenging. But as you heard, the Cathay Pacific Chair say yesterday, it is vital that the quarantine restrictions on Cathay’s crew as well as the passengers are removed in order for Cathay Pacific to ramp up its capacity to levels that we’re going to need to serve the demand.
Meanwhile, though, the team at Cathay are doing everything they can to prepare for that recovery. Aircraft are being brought back from overseas. Cathay is recruiting more than 4,000 frontline employees to meet the operational needs over the next 18 to 24 months. And several thousand staff will need to be added into the Cathay subs that do a lot of the servicing of the business.
Just looking at HAECO, the profit figure there has worsened versus prior year, and that’s mainly because of the absence of subsidies from the U.S. government. However, if we disregard that, the profit increased slightly, reflecting a small recovery in demand for the engine overhaul business and more airframe based maintenance. Unfortunately, line maintenance in Hong Kong remains weak, as you would expect, with very little aircraft up in the air and needing maintaining.
On the health care side, we’ve begun our program of investing the $20 billion target. But health care investments were adversely affected by COVID in the first half. That notwithstanding, we were very excited. We have a small minority investment in a hospital in Shenzhen called the Shenzhen New Frontier United Family Hospital, and we managed to get that open in May ’22. So that’s now up and running, and it’s pretty much state-of-the-art.
Just touching on an important subject of ESG and sustainability, I just want to give you some progress points here. On the property side, we continue to do a great job in green finance, and we’ve secured three more sustainability-linked loan facilities totaling HKD3.5 billion.
Beverages, meanwhile, they’ve now got to an exciting level of 25% of their power needs being sourced from renewable energy sources in the Chinese Mainland. And Swire Properties are doing the same thing. It’s certainly what we’re all going to be needing to do if we’re to achieve some of the rather strict SBTi targets that we’ve committed to. So this is really good news, and Beverages have done a great job doing that.
On the D&I side, I’m also very pleased to report that we’ve now, at the Swire Pacific Board level, increased the percentage of women on the Board to 27% with the appointment of two female independent nonexecutive directors in the first half. I think this is a very good trend, and 27% by peer group standards, I think, is a very good number.
Just finishing up on outlook. I think we’re probably all aware that the short-term challenges of the pandemic remain, but we are very optimistic about our medium- and long-term prospects in the businesses and markets that we’re operating in.
The two brands in Swire Properties, Taikoo Hui and Taikoo Li are very well established and very much sought after in the Chinese Mainland. And down in Hong Kong, Taikoo Place continues to strengthen its position as a global business district. Swire Coca-Cola’s expansion into Southeast Asia bodes well for future growth, as you’ve heard.
And I would say, lastly, on the aviation side that any further adjustments to COVID-19-related travel and quarantine restrictions should only be beneficial.
So with that, I’ll stop, and we’ll be very happy to take questions. Thank you.
Question-and-Answer Session
A – Unidentified Company Representative
Thank you, Guy, Martin and Karen. We will now proceed to the Q&A session. [Operator Instructions] So that gentleman on the third row, please.
Karl Choi
I’m Karl Choi from Bank of America. A couple of questions. First of all, thank you for the share buyback program. Is there any target between the A shares and B shares? Or is it going to be opportunistic? Obviously, the B shares are cheaper, but liquidity wise, it’s not as strong. Second is for the Beverage division, the pricing has been quite strong for some time now. Can you talk more about what you’ve been doing of late even in the first half despite COVID? And what’s this prospect in the second half with the U.S. slowing down?
Martin Murray
Yes. Thank you. In terms of the share buyback, it is across both the A and B shares. And as you mentioned, the B shares trade at slightly bigger discount, but has less liquidity. So I mean they both went up about the same percentage, and that’s what we hope to see in terms of the whole buyback program.
Karen So
Thank you for the question. For Swire Coca-Cola, our — we have been always focusing in margin management and margin improvement plan. And we have margin improvement plan specifically for each of our region. So underpinning those plans, particularly we have put a strong focus in revenue increase initiative through our packaging, pricing and portfolio management in order to drive a higher margin and also our improvement in our route-to-market execution and utilization of our digitization, all of this act together to help us to improve the margin of our product. And we’re going to continue this strategy over the — for the long term. So we are — what we are seeing for the second half or for the future, we will make our strong focus continue to improve our margin.
Unidentified Company Representative
Thank you, Martin and Karen. Any more questions from the floor, please? That gentleman on the third row, please, yes.
Unidentified Analyst
Jeffrey [ph] from Morgan Stanley. I have a question on the dividend. It’s good to see that your interim dividend is up 15% while your underlying profit is up almost 40%. So just wanted to see how should we think about the full year dividend.
Martin Murray
Yes. Well, again, I think the outlook is positive compared to the first half for all three businesses. I think with the adjustments to quarantine and the opportunities that we have are quite bullish in terms of the second half performance, particularly compared to the first. We have mentioned in the past that we’re trying to target — we want to get back to a dividend of about 3, which I think it should be. We’ve got a strong balance sheet to do all our investments, to do the share buyback and to have growth in our dividend policy, which we want to get back to having sustainable growth in it.
Unidentified Company Representative
Thank you, Martin. Any more questions? Yes.
Unidentified Analyst
Simon [ph] from Goldman Sachs. I have two questions. One, going to the beverage business. I wanted to get a sense about the earning contributions from your recent acquisitions. And if you can also share the margins and your expectation of the earnings. And going forward, given now you’re starting the branching out to ASEAN markets, maybe — would there be any other opportunity for further acquisitions on the beverage business? That’s the first one. And then the second one, I appreciate that you gave us ROE calculations on the group level. So seeing that is still quite depressed, I remember a couple of years back, you’ve been talking about some sort of your ROE targets, normalizing ROE targets, whether you have any insight or how you’re thinking of medium-term target on ROE.
Karen So
So I will take that first question. Thank you for the question. So first of all, we are very excited about the acquisition of the bottling business in Vietnam and Cambodia. As I mentioned just now, this market presents to us a tremendous growth opportunity due to the high GDP growth of this country, young population and relatively lower per capita consumption. And this market is very dominated on sparkling drinks. So we are expecting a good return from — of the profit contribution from this market.
Martin Murray
Yes. In terms of our ROE, you can see since the last three years, it’s been really impacted by the pandemic, particularly through the aviation side. I’d say I’m very bullish in terms of all three divisions in terms of growth, and we want to get back to the pre-pandemic levels and beyond.
Unidentified Company Representative
Thank you, Karen and Martin. Do we have any more questions from the floor, please? Perhaps we could take one more last question, since we’ve got three questions already. Yes, that man on the fourth row, please.
George Choi
George Choi from Citigroup. Another question on the beverages and the recent acquisition. Obviously, in the announcement back in July, profit figures from the target companies were disclosed there, but the only numbers from the 2020, 2021 being COVID affected years, which you happen to have perhaps like 2019 profit figures so that we can get us a better sense on the valuation implied by the consideration?
Karen So
Sorry, can I clarify? Your question is about 2019…
George Choi
Profits from the — for the target companies that you’re acquiring.
Karen So
So the price multiple that we pay for this market, what we see is commensurate with the revenue and the profit growth prospect of this market. So this is what we can share with that.
Unidentified Company Representative
Thank you, Karen. And do we have one last question from the floor? Okay. Thank you, everyone. That concludes our analyst briefing. Thank you very much for joining us today. Hope you have a good day.
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