Shui On Land Ltd
HKEX:272
Earnings Call Analysis
Q2-2023 Analysis
Shui On Land Ltd
In a tale of resilience and potential, Shui On Land's interim results reveal a company poised for opportunity despite the global challenges. The first half of 2023 wasn't smooth sailing with geopolitical tensions, economic uncertainties, inflation, and a strained property sector casting long shadows over the global stage. Yet, amid this climate, Shui On Land not only managed to maintain their operational fortitude but also to chart a course for future growth.
While the broader economic turmoil led to consumer caution and impacted the property market, Shui On Land capitalized on government policies aimed at urban regeneration, finding an avenue for opportunity. This proactive approach, combined with steadfast occupancy rates and a stable balance sheet, allowed the company to increase profits by 17% to CNY 913 million and, more impressively, boost profit attributable to shareholders by 37% to RMB 618 million. The hallmark of their success amid adversity was property sales, soaring by 90% to RMB 4.6 billion, significantly contributed by Panlong Tiandi in Shanghai. With the interim dividend set at HKD 0.032 per share, the company's commitment to shareholder return remains unshaken.
A glance at the bigger picture, including JV and associate investments, underscores the full scale of Shui On Land's achievements, with total sales hitting the RMB 34 billion mark. Despite a slight uptick in the net gearing ratio to 50%, their capital management remains prudent. Anchoring this outlook is the robust valuation of their investment properties, mostly stable with minor fluctuations, which comprise approximately 61% of their asset base and underpin the strength of the company's balance sheet.
Shui On Land isn't just navigating the currents of market demands; they're also steering towards sustainability. The issuance of the largest ever private green-mortgage-backed onshore CMBS (Commercial Mortgage-Backed Securities) at RMB 4.4 billion with a AAA rating and attractive coupon rate of 3.9% shows a commitment to innovative and cost-effective financing. The involvement in green initiatives and their integrated urban development projects reflect the company's strategic vision to align with the government's urban rejuvenation policies and the shift towards sustainable practices.
There's more to Shui On Land than just robust sales; their strategic focus on the luxury residential sector in top-tier cities has paid off. Notably, their high-end products such as La Riva Phase III in Wuhan Tiandi witnessed remarkable success, achieving the highest pre-sale price ever in Wuhan. With the sales of high-end residential markets in Shanghai and Wuhan growing by 20% and 47% respectively, they plan to amplify their luxury brand strategy and further their stronghold in these key markets. The pipeline remains rich with about 211,900 square meters slated for launch in the second half of the year, fortifying their long-term revenue streams.
The company's fertile landbank continues to yield potential with the total saleable amount estimated at around CNY 72 billion as of June 30. This asset positions Shui On Land to pursue its asset-light strategy and focus on high-quality sales as it navigates through a market seeking better living standards and quality life.
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Good evening, ladies and gentlemen. Welcome to Shui On Land's 2023 Interim Results Analyst Briefing. Thank you very much for joining us online this evening. We are pleased to have 5 members of the senior management team with us today. Mr. Vincent Lo, our Chairman; Ms. Stephanie Lo, Executive Director of Shui On land and Vice Chairman of Shui On Xintiandi; Mr. Douglas Sung, Chief Financial Officer and Chief Investment Officer of Shui On Land; Ms. Jessica Wang, Chief Executive Officer of Shui On Land; and Mr. Allan Zhang, Chief Executive Officer of Shui On Xintiandi. We will start with a presentation by the management, followed by Q&A. During the course of the webcast, you may submit your questions via the webcast portal, and they will be conveyed to our management during the Q&A session. Without further ado, may I invite Mr. Lo to start with some opening remarks. Mr. Lo, please.
Good evening. Thank you for joining our analyst briefing for the interim results of Shui On Land. The first half of this year has been extremely difficult despite the lifting of the COVID restrictions, partly basically due to the geopolitical tensions, the Russia-Ukraine war, and it's not easy to see an end to it. And then, of course, the Taiwan's trade tension. Inflation has come down a little, but it's still high compared to the last decades. And then, of course, high interest rate. But what's most challenging is actually the poor economic outlook, which is affecting consumer spending and buying interest. And particularly, I think, for the property sector, a lot of defaults on the loan, bonds and then people are concerned what is going to be happening and then also the liquidity crisis, it's very challenging in financing or refinancing of our projects. Of course, the Politburo has come up with policies to try and support and stabilize the market and to enhance buying interest. But it's not really seeing very positive result at this moment. But the government has now come up with policies on urban regeneration, particularly on urban village reconstruction, which I believe will offer a lot of opportunities for Shui On Land. Despite all these difficult operating environment, we have seen an increase in our profit. Our occupancy rate has remained steady, and then our balance sheet remained very, very stable. I'll hand over to my colleagues to give you more details.
Thank you, Chairman. With that, let me walk you all through our business review and our outlook for the first half of this year. We had a resilient performance amidst a very challenging market environment, but we are pleased to report solid results despite some of the challenges that the Chairman addressed just now. The group revenue increased 46% to RMB 6.4 billion in the first half compared to the first half of 2022. Profit for the period increased by 17% year-on-year to CNY 913 million, while profit attributable to shareholders also rose 37% year-on-year to RMB 618 million. In terms of property sales and rental income, they have both shown growth. Property sales in the first half increased by 90% to RMB 4.6 billion, mainly contributed by Panlong Tiandi in Shanghai. And the opening of Shanghai Panlong Tiandi in April and the reopening of Xintiandi Style II also generated additional rental revenue for the group. And the total rental and related income was RMB 1.5 billion, representing a growth of 3% year-on-year. We have always maintained prudent capital management and a stable balance sheet. Our net gearing ratio increased slightly to 50% as of the 30th of June. Our cash and bank deposits totaled RMB 12.23 billion. We are committed to maintaining a very prudent approach in managing our balance sheet with maintaining good liquidity as a very top priority. We also had a very successful issuance of the largest ever private green-mortgage-backed onshore CMBS in April. This asset was backed by the hub in Hongqiao CBD in Shanghai. It's the first CMBS in China supported by a TOD transit-oriented development and commercial complex, and it's listed on the Shanghai Stock Exchange with an issue size of RMB 4.4 billion with a credit rating of AAA and a coupon rate of 3.9%. In terms of interim dividend, having considered the group's financial performance during the period, the Board has resolved to recommend the payment of the 2023 interim dividend of HKD 0.032 per share. So in terms of the market environment, the Chairman mentioned just now, China property -- industry continues to face numerous challenges this year. While business activities in China have resumed following the lifting of the COVID-19 restrictions, consumers remain extremely cautious, resulting in a weaker-than-expected recovery in the first half of this year. And at the same time, liquidity remains very tight for most property developers. But we have seen very divergent sales performances though. It's a very K-shaped market in that solid demand in top-tier cities and quality products remain high, in high demand. And thanks to our focus on top-tier cities and our focus on high-quality developments, our recognized property sales for the first half amounted to RMB 34.7 billion. And notably, in May, our residential project, Wuhan Tiandi La Riva, the third phase was sold fully online on the day of its launch, achieving the highest record in the presale price in Wuhan across the city. So despite weaker-than-expected recovery of consumer spending, our commercial portfolio has consistently delivered very resilient recurring rental income for us. And the retail portfolio occupancy averaged 91% as of 30th of June with rental reversions remaining positive. Following the relaxation of a lot of the pandemic-related restrictions, sales and shopper traffic in our portfolio for the first half have recovered to 109% and 120% of the levels seen in the same period in 2021, not 2022. And despite the pressure from the economic slowdown and the oversupply of offices in Shanghai, our office portfolio saw relatively stable performance, which bears testimony to our high service quality in the prime locations of our property. The occupancy rate across the entire portfolio remains stable at an average of 88%. And also if Shanghai, in particular, Shanghai achieved an average occupancy of 92%. We also have a very long track record in urban regeneration projects in China, and this year, Panlong Tiandi, which opened in April is one of the most successful examples of the urban village development in Shanghai. And as some of you have noted, this is a new channel for urban regeneration going forward in the large megacities in China. So we can share a little bit more about that later. So in the short term, I think our focus is very clear. We will maintain a very prudent but proactive capital management to maintain strong liquidity and explore additional onshore financing channels. But in the longer term, we continue to be looking at expansion in Shanghai and other first-tier cities in the GBA. The urban regeneration in these large megacities is going to be ever more important. And so these, I think, will generate new channels for landbank in the future. In terms of sustainable development, let me give you a brief update on the first half. So our 1.5-degree science-based targets were approved officially by SBTi. And in terms of our Green Pledge, we've made very good progress. Our Green Pledge coverage is 96% across our F&B tenants, 85% on our retail tenants and 74% of all of our office tenants. In terms of board diversity, we have modified our Board diversity policy, and we have also announced a new appointment of another female iNED to our Board. We've also updated our Climate Change Policy stating that the group has established a 2050 net-zero emissions target going forward. And happy to announce that Shui On Plaza has received the ULI Asia Pacific Awards for Excellence, Shui On Plaza in Shanghai. So we've made very good progress so far. With that, I'll hand it over to Douglas.
Let me just give the audience a quick summary of our first half results. On the next page, you see the key indicators. We're happy to say that all have shown very positive growth year-on-year compared to first half 2022. As you can see revenue, profit, profit attributable to shareholders, all have seen a pretty strong growth compared to the same period last year. In particular, our two main business units, property development, property sales and also our rental business have done reasonably well and also showing positive growth. So this is a very quick snapshot on the next page. You can see the two main businesses, property sales and rental income have shown pretty good performance in the first half. On the property sales, you can see that the total sales is RMB 4.6 billion, of which Panlong Tiandi accounted for the majority of the sales in the first half because we handed over quite a lot of the units to buyers in the first half. The audience should know that in the last few years, we have been pursuing an asset-light strategy, where we have a lot of our new investments under JV and associate investments. And if we account for all the sales, including JVs and associates, you can see in the lower table there, the total sales figure would have been RMB 34 billion. And this very high figure is partly because of the handing over of units in our Rui Hong Xin Cheng, Rainbow City Lot 7, our joint venture with COFCO, which most of the units were handed over in the first half. So that accounted for about CNY 17 billion of property sales in the first half. So even though on a consolidated figure, our property sales number is not particularly high. If we account for all the investments that the company has made, we actually have delivered quite a lot of sales in the first half of the year. On rental, you can see that on a consolidated basis, it's a 3% increase year-on-year. On the next page, you can see the income statement. I will just go through a few key figures. We talked about revenue already at CNY 6.4 billion, up 46% year-on-year. If you look at gross profit, it's CNY 2.95 billion, up 5%. Gross profit margin is 46% compared to the same period last year of 64%. The difference is the contribution of revenue in first half '22 would have relatively low residential sales, profit booking, revenue booking. So rental accounted for a much larger proportion of revenue. And in the first half of this year, where property sales have increased quite a lot, as you can see, up 90% year-on-year. So the gross margin in sales is always lower than rental. So that accounts for the difference. 46% gross profit margin is in line with our historical average somewhere around 40 -- mid-40% to upper 40% range. The rest of the income and expenses are all pretty straightforward. I'll talk about the fair value of our investment properties later on. Other gains and losses include some small impairment losses, some change in fair value of some of our forward contracts, et cetera. The JV and associate income increased quite a bit from a year before, and that's mainly because of the handing over of the Rainbow City lot 7, which I mentioned earlier. Finance expense in total is just over CNY 1 billion, down 9% compared to a year ago. On the next page, you can see the remaining of the income statement. So profit after tax is CNY 913 million, up 17%, and excluding minority interest, profit attributable to shareholders was CNY 618 million, up 37% year-on-year. So next page is our balance sheet and some of our liquidity positions. You can see it's still very, very stable. Total assets haven't changed that much. It's about CNY 103 billion and total cash on hand is just over RMB 12 billion. Our net debt increased slightly. As a result, our net gearing increased to 50% compared to 45% a year ago -- sorry, 45% at the end of 2022. On the next page, just for your reference, you can see, I mentioned that Total Assets have been quite stable and currently, approximately 61% of our total asset is our investment properties, both on a consolidated basis and also JV and associate projects. So this is the largest component of our asset base and the high value of our IP portfolio clearly brings a lot of stability to our overall foundation of our balance sheet. On the next page, you can see the valuation of our IP. I won't go through all the projects one by one. You can see quite clearly that the valuation movement is quite minor on most of these properties, less than 1% up or down. So overall, our -- on our SXTD portfolio on a consolidated basis, the total carrying value is about RMB 53 billion, and our share of that value is about CNY 42.5 billion. And if we include some of the JV projects and some investment properties under construction, the total -- grand total value of the portfolio is CNY 97 billion, almost CNY 100 billion, and our share of that value is CNY 63.5 billion. So this accounts for about 61% of the total asset base of SOL. Next page is gearing. Net debt, again, for your reference. We are still staying at a very healthy and low level of debt, gearing at about 50%. On our overall financing on the next page. You can see that we are increasing our onshore financing as a new additional funding base. So, the four in the last column, the CNY 4.28 billion represents the Shanghai The Hub CMBS, which we did earlier this year. For this half, second half 2023, obviously, the main repayment would be the USD 500 million bond in November. And then the rest would be just various bank loans of onshore and offshore. Next page is the breakdown of the U.S. dollar bond, the Senior Notes, the maturity profile for your reference. And then finally, we have talked about this CMBS project that we did, earlier this year. This is the largest green financing, CMBS onshore in China. Net asset gross proceeds of about CNY 4.4 billion and at a very attractive cost, the coupon is 3.9%. So it helps lower our overall financing costs in the first half of this year. We are pursuing similar initiatives and some under discussion right now. So hopefully, we will have more to announce in the coming weeks or months. With that, I'll hand over to Jessica to talk about the property sales business.
Thanks, Douglas. Next, with regards to the Property, Sales & Development, I would like to begin with update on our property sales performance. In the first half of this year, our contracted sales amounted to CNY 4.56 billion. It comprised of residential property sales of CNY 4.19 billion and the commercial property sales of CNY 368 million. By the end of June, our total subscribed sales of CNY 606 million was recorded, which will be converted to contract sales in the coming months. And in addition, the total locked-in sales amount is CNY 7.43 billion, and these sales will be recognized in the group's financial results in the second half and beyond, once related properties delivered to the customer and buyers. As earlier mentioned, the property sales market in the first half is still facing pressure due to the challenging operating environment, ongoing correction in the industry and weak consumer confidence. However, our quality products in the city core area continued to perform well and show great resilience. It is worth highlighting that La Riva Phase III, as mentioned by Stephanie, which is the latest phase of the residential in our Wuhan Tiandi and was launched in May and have received very positive feedback from buyers. Total 120 units was fully sold on the day of its launch, making the highest pre-sale price ever in Wuhan with an average selling price CNY 63,800 per square meter. It contributed CNY 2.6 billion in contract sales in the first half. Next. In addition to property sales performance in the first half and highlight on our Wuhan Tiandi project, here, I'd like to share more on market observation and our property development, including residential business challenge going forward in current down market. Despite the challenge and weak national market, it's observed that the K-shape character continues with divergent sales performance among cities and projects. And the property sales in top-tier cities performed better than that of lower-tier cities. Furthermore, the high-end sector keeps outperformed as well. If you look at Shanghai and Wuhan, primary high-end residential markets, as highlighted on this slide, we can find that high-end markets in these 2 cities are very strong with 20% and 47% year-on-year growth respectively in the first half. Most of the other top-tier cities present similar characters based on our research, and this reflects the solid market fundamentals and the customer demands for better living standards and the quality life in this market. In view of such market condition, we will continue to solidify our brand strategy of being the best-in-class for residential business to capture the structural growth opportunities and to further enhance our leading position in the luxury sector, especially in Shanghai and Wuhan. On the right -- sorry, just go back -- on the right-hand side of this slide, we here have listed out some major residential pipeline projects in Shanghai and Wuhan. In our home market, Shanghai, the Lakeville Phase VI commenced its construction work in March this year and is planned to sell in Q4 next year. Yangpu Binjiang heritage preservation and a development project that involves the development of a high-end low-density residential community have entered construction stage and the pre-sale for this project is targeted to start around the middle of next year. In addition, we also have a potential project Zhaojialou, which the company has announced in April and would further update should there be any major progress in future. In Wuhan, Changjiang Tiandi is another mega master planned community with Phase 1 residential under construction and the first sales launch is to start in the second half of this year. All these major projects will continue to provide the company with high-quality sales resources in the near future and generate sustainable cash flow and a stable sales revenue. Next. By taking into account the pace of market recovery, the group has planned for more launches in the second half of this year, there are approximately 211,900 square meter for residential GFA available for sale and a pre-sale in the second half. A big portion is from Wuhan. Next. This slide has summarized our existing residential development landbank and the saleable resources in the future. The total saleable amount is around CNY 72 billion as of June 30 this year with attributable value at CNY 38.2 billion. CNY 24.2 billion saleable resources are in Shanghai, while the rest CNY 47.8 billion are in Wuhan and Chongqing. The total saleable residential GFA is more than 1 million square meter, of which 105,000 (sic) [105,500] square meter are in Shanghai. Next. Besides the residential development landbank, we also have a considerable commercial development portfolio in Shanghai and other high-growth cities which will drive for further AUM rental growth and capital recycling in the future. This slide shows the list of commercial properties under development and in the pipeline for future development. The total size of our commercial property portfolio was 2,699,000 square meter, of which 59% were for office and 41% were for retail. We believe this balanced mix of office and the retail portfolio would enable the company to further enrich our product offerings with various of our community under development and enhance our asset management business. Next. Lastly, I would like to share a bit more on our business development focus with ongoing market correction. Recently, we are excited to see the increasing importance and the policy supports on urban renewal since early this year and in July, both the central government and the Shanghai city government have announced the various policy to promote the urban village redevelopment in super-large and mega cities, including Shanghai. It's worth noting that the government also encourages the participation of private investment and a plan to raise funds with more financial support through various channels for those development in order to activate domestic demands and facilitate high-quality development. With our strong brand and a track record in urban regeneration developments, especially in Shanghai, we believe that the company is well positioned for this trend and those opportunities that would arise. So in addition, the recent success of Panlong Tiandi and the urban village renovation, development project would further enhance our competitive advantage and brand in that way. Panlong Tiandi is one of the first urban village redevelopment project completed and unveiled in Shanghai, which has become a destination in a city since its opening in April. Through our holistic capability as an urban solution provider, SOL has transformed the open urban village, the old urban village into a culture landmark combining culture and lifestyle in Western Shanghai and the great Yangtze River Delta, the project and the redevelopment has received a great recognization from the government and the public. Allan would share more on the commercial operations later. With our favorable position there, SOL would further explore and seize the emerging urban renewal opportunities in Shanghai and the top-tier cities. In particular, urban village development to drive growth of the company while maintaining prudent financial position, we would implement this strategy for the right investment opportunities in a very selective way. That's all my part for today, and now I hand over to Allan, please.
Thank you, Jessica. And good evening, everyone. In this section, I will briefly introduce the performance of the commercial property sector. So with the completion and opening of the latest 2 projects, the Panlong Tiandi and the Hong Shou Fang. Our portfolio in Shanghai actually increased quite a lot. And the total valuation of our commercial assets in Shanghai actually already reached CNY 83 billion. And later on, I'm going to focus more about the Shui On Xintiandi owned and managed portfolio. So because of the strategic and essential location and also the good quality of the portfolio. And our performance actually record a very stable performance in the first half of this year. The total revenue reached for CNY 1.45 billion. And I'm not going to go into the detail about the profit. And on this slide, I would like to also mention that the net gearing ratio actually was maintained at a very low level, which is 17.3%. Next slide is a bit more introduction about our performance by business segment. So overall, our revenue actually increased by 2% in the first half of this year. And the biggest component that came from their, property investment -- property. And due to the lifting of the COVID restriction and also the reopening of our Xintiandi Style II. The overall revenue from this sector basically was maintained at a very stable level. The biggest increase came from our real estate asset management and due to the scale of -- our AUM grew from CNY 26.5 billion to CNY 30.3 billion. Our revenue from this sector basically increased by 10%. Well, next slide is a bit more introduction about our rental income by asset type. I think as Jessica already mentioned before, the company has been trying to maintain a very balanced office and retail portfolio. So for the retail sector, we have successfully maintained a quite high average occupancy rate, which is 91% and also due to the very proactive leasing management and also promotion activities, our tenant sales and shopper traffic actually recovered to 109% and 120% respectively, comparing to 2021. And our office portfolio actually maintained at the average occupancy rate of 88%. Among all of the office portfolio, our office properties in Shanghai maintained an occupancy rate of 92%. Next slide, it's the introduction about the rest 2 business segments, which is the property management and also the real estate asset management. So due to the increase of the scale, our property management, actually now in this sector, we manage a portfolio of overall more than 9.1 million square meters. And also the biggest increase comes from the assets management. So as you can see from this slide, we have one new project added into this segment, which is the Shanghai Panlong Tiandi. So the total scale of -- the total valuation of the assets under management reached CNY 30.3 billion. The newly added project is Panlong Tiandi. I think Stephanie and Jessica already mentioned about this project before. Actually, this project was prepared mainly in the COVID impact period. Unlike the traditional shopping, position of property, this project at the very beginning, we kind of target this project at the growing demand from the urban citizens, they are looking for a very self-aware and also a place for relaxation and escape from the city center. So a lot of these type of customers, they're looking for a very healthy and also very experience-driven demand. So we kind of target this market segment and tried our best to added a lot of culture and art related content and also a lot of outdoor and wellness content into this sector. We are very happy to see that in the first week after the opening, we kind of received more than 1 million visitors to this project and a lot of media coverage. So later on, we are trying to review the opening and trying to further improve the service and the quality of the content in this project. And hopefully, in next half of this year, we will have better performances. So in the last slide, it's a bit about the short-term challenges. So we are further focused on the 3 different priorities. The first priority is where we will continue to adopt a very flexible leasing strategies and also keep providing proactive and good quality services to our tenant in order to further increase our occupancy rate. At the same time, we were trying to look at the opportunity side to go with our Greater Tiandi strategy to further improve our positioning. So hopefully, in the long run, we will keep improving the performance of our portfolio to drive the organic growth of our commercial properties. And the second business strategy is to further sharpen and strengthening our competitive advantage, especially in the community product sector and also the culture and the experience content in all of our community products. Well, the last one is the Urban Retreat product line. After the successful opening of our Panlong Tiandi, we have been focused on reviewing the opening and also the product and content and the services, so we are kind of further improved the attractiveness of this product line and use the findings in the reviewing in our future pipelines for the urban retreats. So this is all from my part.