Harold Woo – SVP, Investor Relation
Lim Ming Yan – President and CEO
Arthur Lang – CFO
Wen Khai Meng – CEO, CapitaLand Singapore
Jason Leow – CEO, CapitaLand China
Lim Beng Chee – CEO of CapitaMalls Asia
Lee Lee Chee Koon – CEO of the Ascott Limited
Sean Gardner – Morgan Stanley
David Lum – Daiwa
Yvonne Voon – Credit Suisse
Tata Goeyardi – Religare
Vikrant Pandey – UOB Kay Hian
Wong Yew Kiang – CLSA
Regina Lim – Standard Chartered
CapitaLand Ltd. (OTCPK:CLLDF) Q2 2014 Earnings Conference Call August 4, 2014 10:00 PM ET
Good morning, ladies and gentlemen. A very warm welcome to CapitaLand First Half 2014 Financial Results Briefing. It's very nice to see so many of you here this morning. And this is the first set of results and we've improved performance under our new One CapitaLand model.
So without taking the thunder from my President and Group CEO, it is my pleasure to invite Mr. Lim Ming Yan to kick off this presentation. Ming Yan, please.
Lim Ming Yan
Hi. Good morning, ladies and gentlemen. Very happy to see so many of you here. I know there are many other companies announcing results this morning, so the fact means that you can be here means that CapitaLand is still important to many of you. Thank you very much.
I will move on to cover some of the key financial highlights and business highlights and talk a little bit about some of the changes in terms of management, and then Arthur will go on with the financial and capital management, and followed by the conclusion.
A very quick one, total PATMI for second quarter of 2014 is up 15% and operating PATMI is up 31% on a year-on-year basis. And if we look at the first half 2014 results, total PATMI is up 9% for the first half and total operating PATMI is up 30% on a year-on-year basis.
The strong -- this comes from the strong operating performances by our SBUs. First, I think the significant improvement in operating PATMI was due to first lower finance costs, higher development profits from our China residential, and higher contributions from our shopping mall business. And with us taking over the remaining minority stake in CMA that we do not already own, we have used a certain amount of cash, but our net debt to equity is about 0.58 times, due to also a reduction the cash used in the taking private of CMA and also a reduction in the minority interest. So -- but despite that, I think we still have a very healthy cash balance of SGD2.5b and SGD1.2b of undrawn facilities by our corporate treasury as at the first half of 2014.
Some of the key coverage ratios, ISR and ICR, has improved, despite the fact that we are now -- we have a slightly higher net debt to equity. Okay.
We continue to maintain a very well-balanced and diversified portfolio in our two core markets of Singapore and China. I will not go through the details yet, you can refer to the slides later on as well.
And if we take a re-look at our effective stake in the various -- our portfolio, you can see that 75% of our stake now are in what we call investment properties with steady recurring income and 25% in our residential trading business. So it's a balanced portfolio, which will help to mitigate any potential slowdown that we are seeing in particularly Singapore residential market and also perhaps a slowing down in the China residential market.
So with this, I just want to give you a very quick summary before I go into the details of the various businesses. One is that post CMA transactions, we now have a very steady and resilient income stream, making up about 75% of our total assets. And we look further to actually harness the synergies among our different business types. The capital recycling remains intact. We have to choose the right time at a right value to continue to do that. And of course we will continue to build people. I think that is the fundamentals of CapitaLand, ability to grow our business. And we are on track to deliver the ROE target of 8% to 12% in the next three to five years.
So with this, I will move on to the business highlights of CapitaLand Singapore. A large part of this is on residential business which has, in the first half of 2014, we saw 195 units at a sales value of about SGD340m.
And if you look at our portfolio, I think most of the projects that we have launched, we have achieved fairly respectable and decent sell-through rate. And looking at our potential to grow up project pipeline, we have a healthy pipeline of 1,400 units. This is on a 100% basis.
You can see the number of units -- number of projects here. We have continuously been able to move some of the sales, particularly I think in the first -- second quarter of this year. We were able to move significant sales in Sky Habitat. We're relaunched and resales -- repackaged our strategy.
In the office market, it has been fairly resilient. I think we are, on renewal, continue to see strong support for the officer rent.
And CapitaGreen, we have achieved a 23% commitment, and the building is due for TOP [ph] at the end of the year. We are still looking forward to about 50% -- still very much our target to achieve at least 50% commitment at the end of the year.
Okay. For China, we -- in the first half we sold 2,200 units, with a sales value of about RMB2.7b. The sell-through rate is about 85% of our launched units. Five thousand units were
handed over. We recognized about RMB5.3b of revenue in the first half of -- we have value of RMB5.3b, because some of these are not subsidiaries so they may not be consolidated in our revenue line. Okay.
For the second half, we expect, among our launch unit, 1,990 units to be completed in the second quarter, and of which about 68% of this already sold. Okay. And getting ready for future launches in the second half will be about 7,500 units.
Okay, moving on to the second part of the portfolio which is the Raffles City portfolio. As you can see, I think this chart is not new, you can see that about 25% Of the GFA are completed, whereas the remaining 75% are still under construction. Out of which, Raffles City Hangzhou, Shenzhen and Raffles City Changning, these are the three projects that will be completed in 2016. Okay.
In terms of the different asset types within the Raffles City portfolio, we can see that they're actually quite well-balanced, with retail making up 34%, office 21%, serviced residence or hotel about 13%, and the rest of the component are component of the bigger developments which are potential for Strata or trading sales. Okay.
If we look at the four Raffles City that are operating, this is the operating numbers. The NPI, we see healthy NPI growth for Raffles City Shanghai, Beijing, Chengdu, as well as Raffles City Ningbo. So, a very strong sort of a flow through and we continue to see improvements in the performance.
Okay. These are the occupancy numbers. I think we can see that both retail, office, as well as our serviced apartment are seeing good traction in the market that we are located.
Okay. Moving on to our shopping mall business. These are the two main markets, Singapore and China. In Singapore, the total tenancy has gone up, 0.3%. But on a per square meter, because we have now increased -- we have increased some of the leasable space, then the new tenants moving into on a per square meter, this has come off about 2.7%. Later on if you need a bit more information, I'll give you more color on this.
On China, we still see very strong flow tenant sales growth of 13.2%. And then for tenant sales on a per square meter, it's also up 9.4%. Okay.
This gives you a snapshot again, the similar picture that you will see in terms of NPIU, as well as shopper traffic and tenant sales on a per square meter basis. Again if you look at this, in India, I think the occupancy has gone up and there are new tenants coming in, and the sales on a per square meter for some of these tenants are quite different from some of the existing tenants that we're in. So that's why you see, on a per square meter basis, this number has come off.
So, same-mall NPI growth has been healthy. Okay.
And moving on to the NPI breakdown by country, you can see that we see some of the contributions start to flow through, particularly in Singapore, we see Westgate and -- Westgate Mall and Bedok Mall flowing through. And in China, some of the malls are also flowing through. And generally there's an NPI increase.
Okay. Again a breakdown by the vintage of the different shopping malls. You can see that those that are open in 2005 for example are still -- we still see improvement of 8.4%. Those in 2006 is about 10.7%. So we still see fairly healthy growth in some of the earlier -- the more mature shopping malls.
On the whole, I will say that we are riding with the trend of increased retail consumptions that we are seeing in China.
Okay. This is -- these are some pictures of the new mall that we opened in India, in Bangalore, India. Another picture of Minzhong Leyuan in Wuhan. So this mall has already opened and you can see some of the brands that are present in this particular mall. Well-received by the local community in Wuhan.
In Tokyo, Olinas Mall. I think there were some AEI done on Basement 1 to rejuvenate the basement. And this particular case, a new sort of food court has been introduced, again well-received by the tenants. And overall NPIU has improved in fact for this particular case, Olinas Mall, from 6.2% to 6.7%. Okay.
Two malls that we are still working on to open this year, one will be the Tianfu Mall in Chengdu and the other one is a shopping mall in Hyderabad. So these two malls will be on track to open by the end of the year.
Okay. A picture to give you a sense that about 76% of our shopping malls are now already operating. And in China, about 75% of effective NAV are also operating.
Okay, with this I move to -- move on to Ascott. We see generally on the whole, on the total basis, you can see that the RevPAR has grown about 6%. Okay. And in the case of Ascott, similarly, we have a breakdown here to show about 68% of the assets are completed and operating and another 32% are still under development. So it gives you a sense of the recent -- the performance of the Ascott portfolio.
And if we look at management company within Ascott, we can see that currently the operating units, we have 24,000 operating units. These contribute about SGD126m to our fee income. And we have another close to 12,000 that will be coming on stream over the next few years. And this particular pipeline will provide an uplift of about another SGD45m or so when it is operational, SGD45m of fee income.
And what is really for us to note is that, at this point in time, with SGD126m, we have a small margin there, but that is good enough for us to -- in fact the system has already been built, and when the rest of the properties start operating, most of these 45 will flow through to the bottom line.
Okay. A few things that we also have done for our Ascott business. One is of course we have continued to grow in a few other new geography. In this particular case, it makes a lot more sense for us to grow it in the form of a franchise instead of our own management contract. So, a few sort of franchise arrangement has been done in Vientiane, Laos and in Bali. And we also have our first Ascott branded property in Japan in the location of Marunouchi, which is a very prime CBD location.
And in China, we continue to grow our business there, with first strategic alliance with Vanke. And we start off that with two properties in Beijing. And then of course we are also working with many other Chinese developers and quite a number of management contract has been added. Okay.
Ascott continues to recycle our stabilized asset, so three of them, two in China and one in Malaysia has been divested to Ascott REIT, and this has been approved by the AGM just a few days ago. Okay.
Just a quick highlight on one more business which is Vietnam. I think the Vietnam market has been doing well. We have, as at end of June, sold 500 over units at a value of about SGD65m. So we have also launched for Vista Verde. This is a development that we have started with -- a residential project that we have started development. So in this particular case we launched 200 units in the soft launch and we have already sold 180 units. So we are very happy with the results. And I think Vietnam will continue to do well for us in the coming year. And going forward we expect this particular market to be fairly strong, given that there is also significant urbanization trend that's happening in Vietnam.
Okay. With this, I just want to touch on -- I'm very pleased to announce that Kok Siong, I think some of you may have seen the announcement this morning, will be appointed as our Chief Corporate Development Officer. So he will focus, he will be part of the senior management team, focusing on developing the corporate systems, some of the processes, and helping to string together some of our -- the organization through the use of technology. And I think going forward, technology will be an important part of how we can operate and how we can build our competitive advantage. So this is something that Kok Siong will be working on.
And I'm also pleased that Swee Chuan will be now appointed our Group Financial Controller. So we -- you can see that some of the younger members of the team are really taking on greater responsibilities. Of course there are also a few other colleagues who have taken on greater responsibilities like Edwin [ph] who has taken on as the Chief Business Technology. We have also another colleague in Guangzhou who will be taking on greater responsibility as the deputy regional GM.
So all in, I would say that we're announcing many of our younger colleagues taking on with the responsibility. And this is really part of our process of continuing to build people.
So with this, I will just hand this over to Arthur. Thank you.
Good morning everyone. Thank you, Ming Yan.
I think Ming Yan gave everyone a summary of our financial performance for the second quarter and the first half of this year. Maybe let me elaborate more on some of these -- the trends that we are seeing in our financials or the trends that we have seen in the first half.
I think on this slide, you look at our revenue, EBIT, PATMI and the breakdown of our PATMI, I would say broadly, if you look at our business, right, I would say that in the first half we have seen the following -- or rather the second quarter, we have seen the following. One, I would say if you look at our residential projects in our subsidiaries, which then is reflected in our revenue line, there has been lower recognition. It's due to various factors including, you know, depending on which country lower sales, but also due to the fact that the prior period we had more income recognition because of the projects for Singapore, because of the progressive recognition of the projects.
But I stress again, the revenue is down is because these projects that had the drop in sales, or lower income recognition related to projects that were in the subsidiaries which we consolidate in the revenue line.
Now if you go down to EBIT which is up 4% quarter on quarter, or rather the second quarter of 2013 versus 2014, you see an increase. And this is largely due to a few things. One is basically our residential projects in China that are in our associates and JVs. So these are the ones we do not consolidate, is not reflected in the revenue line but is reflected in the EBIT line. Right? Hence, you see an increase. This EBIT is also where you see our increase in our fair value gains, our revaluations, and we have an increase as I will cover later in and go into some detail.
Now if you look at our PATMI line, total PATMI increase of 32%, the one that I've circled. So, 4% up EBIT, 32%. The reason why -- some of the key reasons why the PATMI has gone up more than the increase in EBIT is because of our improvement in our costs. I think, remember, a few halves ago when we had discussion, primarily the cost reduction is largely due to the reduction in the finance cost. I think last year at this time we undertook a few debt management initiatives to reduce our cost structure, and I think this year we are starting to see the fruits of that. So you see the PATMI has actually gone up quite a bit by 32%.
Now what is really worth noting is the improvement in operating PATMI, which is an increase of 105. I forgot to mention this has taken -- this is continuing operations, so we took out the numbers that related to Australand, because Australand in second quarter 2013 last year you'll see in the PATMI number, and then the second quarter 2014 you don't see in the PATMI number. So we took out for better comparison on an apples to apples basis, we took out the effects of Australand, which as you all know were sold down in the first quarter of this year.
So the -- so if you look at operating profits, coming back to 105%, this significant increase I think is due to various things. One is due to the improvement in the malls business, and we have seen improvement in the operating PATMI of the malls business. It also does -- I mentioned earlier about some of the sales or the handover of the residential projects in China in our JVs and associates, so of course that's reflected in our PATMI. There's also an improvement in the fair value gains across the board, whether it's our office in Singapore, the Raffles City in China, the malls business, as well as the Ascott properties in various parts of the world.
And then finally, between EBIT and PATMI, or rather in operating PATMI, is the significant improvement of finance costs. I think for the first half -- or this is a second quarter number, if you look at the first half number, we've I think reduced the cost by about SGD60m [ph]. So you will see that's the leverage effect or the operating leverage, if you will, you know, climbing [ph] down to our operating site.
Now portfolio gains have come down, largely because in the last year there were some large portfolio gains that were recognized. And then our revals were up 35%, which I will cover in greater detail.
So this is a snapshot of our second quarter numbers. This trend that you're seeing on the first half is fairly similar to what I've described in the second quarter. Okay? There are some little differences here and there which are covered in the SGX announcement.
Okay. So this is -- you're familiar with this waterfall chart. This shows you the split of our PATMI for the first half of 2014. So, starting from the operating profit, this yellow or brown portion relates to Australand which we have highlighted. Of course we are going to recognize that. But we've taken that out to show you the blue portion is basically from our continuing operations.
And then on top of that, you layer on a portfolio of I think total SGD13.8 million. There were some gains, there were some losses because of the divestments we made. And then reval gains of SGD306.2 million, of which about SGD25 million is highlighted in green. The reason why this is highlighted in green is because of a new accounting policy which we adopted this year, which is FRS 110. Okay? If we had the same discussion without the adoption of FRS 110, this green number SGD25 million would have been under portfolio gains, because this relates to some of the divestments of the service residences that Ascott made throughout [ph], which Ming Yan spoke about earlier, right, because of FRS 110, the arrangement now is such that we revalue the properties up to the amount where it is sold at. So this effectively is realized reval already but is recognized as revaluation. Okay?
Then we have write-backs of impairments amounting to SGD9.3 million. This gives you a total PATMI of SGD621 million. If you look at just the continuing operations, it's SGD586 million.
Let me now go into the first half revals and run through some -- give you some details. I think this is the first time we are showing the revals on a PATMI basis, but I thought it was helpful given that in the past CMA had also I think provided some information.
So, starting from the top, CapitaLand Singapore is about SGD63 million. It largely relates to the office portfolio, which is, well, everything is under -- all the office portfolio is under CCT. And I think the -- on the properties, I think except for one or two properties which is under CLS, most of which are under CCT. This also includes CapitaGreen which we took a more conservative approach on valuation, and we are watching on the leasing progress of the building which I think we are very strongly encouraged by the leasing progress. Well, we did take a more conservative approach on valuation for CapitaGreen.
CapitaLand China, it largely relates to the Raffles City China portfolio. As Ming Yan mentioned, there are four operating and they are coming up very nicely if you look at the NPI growth. And then there are four under development. The revaluations relate more to the once that have turned operational.
CMA, SGD154 million revals. That largely comes from I would say three buckets -- or rather two buckets. The first bucket is the China malls, particularly Minhang and Hong Kong. I think you have seen that there is significant NPI growth on these two malls of about 30-plus percent, and we took less than 50% of the NPI growth and reflected that in revaluations. So, fairly conservative approach to valuation. And I think the other bucket primarily comes from the CMT portfolio which is the Singapore malls, as well Ion.
So I would say total -- and then after that, Ascott is about SGD40 million. This largely relates to the revaluations of the properties in Japan and in New York.
I would say the approach that we have taken in revaluations have been in conservative. The first principle for us is always to reval based on operational improvements, which is NPI growth that we are seeing. And even if it's NPI growth, we do not, for most other properties, do not take the full amount of revals, and we have actually taken a very conservative approach.
So all in all you'll see that the first half 2014 is about SGD300 million over of revals that we have taken.
Now this slide, I had to call up some of my IR colleagues this morning to help me put this together, but I thought it was important. If you look at our various SBUs, from an EBIT perspective, because you see some downs and ups, and I thought it was probably quite important to maybe show you the slide to help you understand the drivers of the business that we have seen in the first half.
So if you look at CapitaLand Singapore, I mentioned earlier its -- the decrease in EBIT is due to two reasons. Or the 10% decrease is due to two reasons. One is the lower income recognition from the residential projects. However, this is mitigated by the increase in the valuation of the office portfolio.
From CapitaLand China, you'll see that it's higher handovers, although you'll see that in the SGX announcement that revenues for CLC had come down, but the EBIT has actually come up, is because of the residential projects, particularly one or two that have been recognized, or more handovers have happened for the associates and JVs, as well as there were some cost accruals that we reversed in the first half.
CMA, I talked about this. Again you see this drop of 6%. But the operational EBIT of CMA has actually improved. So the operational gains from the malls business has actually improved. The reason why it's come down is because of lower fair value gains primarily. Right?
And in here as well, as you know, is Bedok Residences which CMA takes 50%. Now Bedok, for this first half, we did not recognize as much as last year first half. So it's really an income recognition, progressive recognition that we had.
And then for Ascott, mentioned higher fair value gains, contribution from some of the new acquisitions, properties that we have acquired out of China, Japan and Europe.
And Vietnam, right, small contributor but major improvement, major success in the team -- for the team, increase in Vietnam sales. And over the first half we've exited out of our investment in Loma [ph] in India, as well as Raffles City Bahrain where we actually could write back SGD9 million -- or a net SGD4 million, SGD5 million [ph] gain after incorporating expenses and all that.
So this gives you a 2% improvement of EBIT from continuing operations, a slight decrease from a total EBIT perspective because total EBIT you include Australand, right, in 2013, the full-year contribution. And PATMI you'll see an increase of 17% on continuing -- and the PATMI uplift is, I talked about all the operational improvements that we've had in the prior slide, followed by the improvement in finance costs that we have seen.
Now on to our balance sheet and liquidity position. I would say -- maybe highlight a few things. One is our cash balance. I'm speaking to both bankers and equity investors here, so I also don't know how to say, I'll just say it factually.
Our cash has moved from SGD6.3 billion to SGD2.5 billion. I think from a credit provider perspective, you'll be wondering, is the balance sheet strong? From an equity investment perspective you're -- all of you are saying, okay, great, less negative carry. We think this SGD2.5 billion is a good balance between both capital providers. I think you will see that our balance sheet and liquidity position still remain very strong. And I think this allows us to also reduce or minimize, not eliminate, but minimize our negative carry, which helps our ROE in the end.
So you look, we've got SGD2.5 billion of cash on a Group-wide basis. Net debt/equity has moved up, 0.58. We are still comfortable with this. And it's largely -- well, it's due, primarily due to the CMA privatization where we took on -- or rather net debt increased by about SGD3.1 billion, SGD3.2 billion.
Now the calculation of net debt to equity, if I could just maybe spend one minute on this, as you know, is debt minus cash, divided by shareholders equity plus minority interest. Net debt, I think all of us know, 3.2 -- it goes up by SGD3.2 billion, right? On the equity side, because we were taking out the minority -- minority interest which is about SGD3.2 billion, the denominator just drops by SGD3.2 billion. The equity, you know, because it's shareholder equity plus MI, so the SGD3.2 billion is taken out, and on top of that, it was a goodwill of about SGD600 million that reduced equity even further. So the denominator actually comes down quite substantially, hence, the overall ratio you see actually comes up.
So this is in some ways largely a -- it's some ways is an accounting -- or rather the way of calculating it. Economically it doesn't change basically our economics of the transaction.
Net debt to EBITDA 5, from 3.7.
Now our interest coverage ratios, there has been an improvement. Okay? And you'll see it's very strong, coverage ratios which are very encouraging, we feel very comfortable on.
Fixed rate debt has moved up slightly. Average maturities have come down because of the goodwill that we had taken, the SGD600 million goodwill which hits the equity or the NTA. Okay? So NTA has come down to SGD3.59.
Now having said all that, we've got SGD2.5 billion. I think you all know our strategy is always you wear a belt and you also wear your suspenders, right? So on top of that, we have another SGD1.2 billion of committed facilities that are at the CapitaLand treasury level which have not been drawn this. And this SGD1.2 billion are from banks, many of whom are represented here, the top-tier banks. For confidential reasons, I don't want to mention who they are, but they are the who's who in the banking world. So we are very encouraged by the show of support from our bankers.
And on top of that, this does not include some of the committed facilities that are undrawn at the CMA level, when, you know, and it continues whether or not CMA was listed.
So this is our debt maturity profile, right? You'll see that from a cash balance and available lines of total SGD3.7 billion, I think you look at our debt maturity profiles, I think we're in comfortable position. And I'm not too worried about where we are now in terms of debt.
However, we are of course focused on our 2015 and 2016 debt maturity towers [ph]. If I could peel the onion a bit more for you, right? This 2015 SGD2.2 billion of debt, I would say, out of that SGD2.2 billion, SGD1.5 billion we have very specific plans on what we're going to do, with either refinancing or paying it down. And refinancing we can draw on some of the lines, or there are various ways to tap the capital. I would also say, out of this SGD2.2 billion that you see out on 2015, about SGD800 million relate to Bedok Residences and Mall, as well as Sky Habitat, of whom I think all of you know, well, for Bedok, we sold almost all, right, all the residential units. The mall is operational, is 100% occupancy. And the Sky Habitat sales are definitively moving in the right track. The team did a good job in the first half of this year. So we're not concerned about the refinancing that's coming up relating to these two debt in 2015.
In 2016 -- I would say out of this SGD2.2 billion as well, because of FRS 110, I think about SGD400 million of this SGD2.2 billion also lies in our VITs [ph], right, which we consolidate, CCT and ART. So again, you know, this number looks a bit high, but purely because of, if I could really peel out the various components, I think we feel very comfortable with the debt maturity towers [ph].
2016 is the same issue. I think about SGD1.3 billion of this SGD3.6 billion relate to our properties like Westgate which you all know we are going to sell -- or we have sold, is in the process of completion, for the office tower, and we're keeping the mall, and CapitaGreen which I think the leasing progress has been strong. So I would say we feel comfortable in terms of our debt maturity profiles given the reasons that are stated.
So, looking forward, I think in conclusion, as Ming Yan started out this presentation, one CapitaLand now, we're effectively a company that's about three-quarters of our assets are in investment properties, 25% residential properties, I think that gives us a very strong base to grow the business in our core markets, and also weather any potential headwinds that we are seeing. I mean clearly we are not sticking our heads in the ground. We know there are headwinds, we are facing them, we'll continue face, and sometimes the headwinds might be stronger.
We continue -- but I think that is helping us is basically right now we are one CapitaLand, we have the competitive strengths that we can harness to work together and actually put a very nice product together, whether it's an integrated development product or a mixture of different sectors.
We -- because we hold direct sticks now in five REITs, and we have our funds business, we'll continue to recycle capital, and that allows us to not only manage our balance sheet but also to grow the business and increase AUM. And with Kok Siong and the various new appointments, I think we continue to enhance and strengthen the management bench strength.
If you look also forward for the second half, of course there are headwinds. We are -- we can talk more about that later in Q&A. But there are also some positive surprises which we hope we can turn that into reality the next time we meet.
With that, we -- I think we end, and if I could invite my colleagues up on stage for the Q&A. Thank you.
Thank you, Arthur, for your presentation. We'll now begin the most interesting part of the morning session which is the question-and-answer session.
For those who are watching us via the live webcast, you can also send in your questions through our email on the webcast, and I will mention it to the panel.
So, before we begin the session, let me just perhaps introduce my colleagues. To Ming Yan's left is Mr. Wen Khai Meng who's the CEO of CapitaLand Singapore. And to his left is Mr. Jason Leow who's the CEO of CapitaLand China. To Arthur's right is Mr. Lim Beng Chee, CEO of CapitaMalls Asia. And to his right is Mr. Lee Lee Chee Koon, CEO of the Ascott Limited.
Right. I think we are ready to begin. Can we have the first question please? Yes, please raise your hand. The roving mic will come to you. Thank you.
Sean Gardner – Morgan Stanley
For the benefit of the webcast audience [ph], if you'd like to identify yourself and the organization that you represent? Thank you.
Sean Gardner – Morgan Stanley
Thanks. Sean Gardner from Morgan Stanley.
Beng Chee, can you update us firstly on the Tianfu pre-commitment levels that you're seeing? And then secondly, how far through the rent renewal process are you for the Minhang and Hong Kong [ph] malls? And what sort of upside have you got left to come through from that?
Lim Beng Chee
[Indiscernible]. Tianfu we are about 40% [indiscernible] and 40% committed. I think in the next one month [ph] we'll probably go up to about 60%, 70% [indiscernible] extremely good rating. So we should be on target open by yearend.
And then Minhang, Hong Kong, if you look at 2011, we opened -- so this year actually -- this year and next year actually is major renewals. In fact actually next year there'll be more coming. So I think we are in the process of about 30%, 40% done for this year. So we can see actually the momentum is actually quite high and the sales growth is actually pretty strong.
David Lum – Daiwa
Hi, good morning. David Lum from Daiwa.
Can you elaborate on your statement around the residential market headwinds you're facing in Singapore and China?
Lim Ming Yan
So maybe I think on the Singapore market, I think Khai Meng will give you some color, and on China, I think Jason will give you some colors. Maybe we start with Singapore.
Wen Khai Meng
For the Singapore residential market, I think everyone in the room are quite familiar with, so I don't think I should repeat. Like you know, our exposure, we have about 1,400 unsold units. This includes JV projects as well as projects that have not been launched. So our effective stake is about 1,000. This amounts to about SGD3 billion, which is just below 8% of CapitaLand's group total asset size. So our exposure is not very big.
In terms of projects that had been launched, we are pleased to say that, I think we have said it in the last result announcement as well, that [indiscernible] we are able to achieve self-financing in terms of financing the construction as well as servicing the loans.
For the project not been launched, Marine Blue is ready for launch soon. We -- as to the exact timing of the launch, of course very much depend on market condition.
Just about China, I think for the Chinese market, I think the government has [indiscernible] since year 2009, so I think the end of this year we are finally seeing a lot of [indiscernible]. The [indiscernible] nationwide index [indiscernible] April, May, June, July [indiscernible] nationwide pricing. But [indiscernible] cities, you at least [ph] see different kind of decline. I think the case of Hangzhou and [indiscernible] you can see a lot of news reports about the volume also coming down by 50%.
So the government is actually aware of the inventory build-up. Recently, out of the 46 cities that imposed the [indiscernible] restriction, more than half of them have actually [indiscernible] either officially unofficially. So we are seeing a bit of relaxation of the [indiscernible] restriction.
In addition to that, I think that some city levels, they have also removed the price cap, for some of the [indiscernible] that you can sell. Like in the case of Shanghai, Beijing, I think previously they were very concerned about price escalating [indiscernible] how much you can sell [indiscernible].
In the case of Guangzhou, in the past they have also put in place [indiscernible] many units we can sell in a given month. They have also since removed the quota. So we are seeing a bit of a relaxation in the government policy.
I think more important to us is really our portfolio, how will it affect us and what are we doing [indiscernible]. I think the first half of this year we are focused very much on the handing over of the 5,000 units in the second quarter. In a very challenging market, I think the customers will be concerned with the drop in prices and whether your product that you deliver to them are actually up to the standards that they want. So we are focused very much on retention on the delivery, 5,500 units in the second quarter.
We have also spent more time on pre-marketing. In fact we were supposed to launch two projects in the month of June. We have since moved it to July because we needed more time for the pre-marketing. So we have done some of these things to manage our portfolio.
And in the month of July we actually launched two new projects, one in Guangzhou --
Lim Ming Yan
-- Shanghai. But I think in the long term we remain confident in Singapore being a regional hub in this part of the world. So the growth, the kind of growth that we can expect from Singapore in the longer term, in the medium to longer term, will continue to be positive for us to continue to look for the right opportunities in Singapore.
And having said that, despite all the headwinds, I think projects, they are well-designed, well-built and well-located. And in this case, if you price it correctly, I think they are still doing well. I think an example will be the Sky Habitat that we have done. And also in the course of the last one-and-a-half years, despite all the many rounds of cooling measures, I think our projects have continued to sell. So this is something that I think we remain positive about Singapore in the longer term, although in the very short term we expect some of these headwinds to continue to be there.
I think on China, I think this -- I mean what Jason has given you is the picture that he's seeing on the ground. But the other thing I think we should also note is that there is still the urbanization trend that is still happening in China. It's still ongoing. China is still going through a phase of reform, where they are trying to move -- essentially shift from an investment and export-led economy to one where it is very much driven by consumption and also service.
So I think this is the kind of change that is happening in the market. And given urbanization and this change in the structure of the economy, I think we remain very positive about China that -- and if you look at it very carefully, Asia, China will still be the main engine of growth, and this is -- and China's growth, despite the talk about it slowing down from 7.5% to 7%, it's still a relatively high sort of growth rate, vis-à-vis many of the other areas that -- other regions that we see in the world. So I think we remain quite positive about both Singapore and China despite some of the short-term headwinds that we are seeing.
Yes, in the center.
Yvonne Voon – Credit Suisse
Hi guys. Yvonne from Credit Suisse. First and foremost, thank you very much for maintaining the visibility despite the privatization and increasing the disclosure on Ascott. It's quite noticeable.
I have a couple of questions, I hope you don't mind. The first one is, could you give us a sense of where gearing target would be right now on a more stabilized basis, and where we have seen average debt cost actually moving post the recent round of refinancing? Because that's actually boosted your bottom line quite a bit.
The second one is actually for Beng Chee. Can we just get a sense of the cap rates for CMA as well, this round for revaluation, have they been stable?
And the third question is actually for Chee Koon. I guess in terms of the -- Ming Yan mentioned earlier about how the revenues are, on the management fees, actually going to start to improve and that's when operating leverage would actually kick in. Can we get a sense of where the sort of margins would actually be stabilizing for this business?
And lastly, for Ming Yan, do we actually see -- is CapitaLand at the point of capital recycling now? Thank you. Other than Ascott. Thanks.
Lim Ming Yan
Ascott is still part of CapitaLand. You want to talk about the first -- maybe we start with the first --
The first question, on average -- gearing targets and average debt cost. I think the gearing targets, I think we -- when we look at gearing, it's not one specific ratio, right? Because as clearly evidenced in the net debt to equity, I mean that number is really, you know, it's just a combination of various factors.
I think overall what we always target ourselves is to always remain as a strong investment grade company. Now when I talk about strong investment grade, yes, there are certain ratios which S&P and Moody's will always give us, right? Say, okay, if you are beyond this number, you are a certain rating; if you are below this ratio, you are a certain rating. We will of course always -- we are not rated but we will always follow that to be a strong investment grade company.
But the second thing is the qualitative aspects of the company. And it's quite interesting, is the day we announced the takeover offer for CMA, while the whole market knew that we are taking on more debt, the debt spreads of some of our paper actually tightened. And I think it's because the investors understand the qualitative story of CapitaLand, of being one CapitaLand, right? And this qualitative story is basically -- in the past we have three layers, right? And cash that's generated let's say out of -- let's say CMT for example, Plaza Singapore, right, because of virtue of the fact they are REIT, most of the cash will be flushed up to the shareholder, CMA will take 27%, 28% of that. And then CMA, because it's a listed company, there's a certain dividend policy it has to follow. There's a fraction of that comes out to CapitaLand.
Today 90%, is by law that all the cash flows of CMT or most of it or any of the REITs we own have to be flushed up, and we will take the full 27% of that. So I think that's one powerful credit story.
Two is, you know, cash sits and resides, and rightly so, has to reside in different levels. Now, actually more and more entities or the four SBUs now are 100% owned, so cash is basically -- can be more -- or can be more efficiently deployed for strategic capital allocation. So I would say we will target to be a strong investment grade company. And these ratios are still in the strong investment grade category that we are targeting ourselves.
The second question is the average debt cost. Our average debt cost is, right now, if you take our kind of total finance costs, right, and then you just look at our total Group debt consolidated, our cost is right now about 3.4%. Right? This compares to last year at about 4.2%. So it has come down quite substantially. Now, is there more ways that we can reduce, I don't know, my treasury team is here, I think we can, and we continue to do so. Right?
The bankers are all laughing. Okay, yes, because of our supportive bankers, we continue to look to reduce interest costs.
The -- I would also say that we will continue to make sure we diversify our sources of capital. Yes, the bankers have been very, very supportive to us on the lending side, but we will continue to look at capital markets and various forms of financing to support our capital structure. Yeah.
I think the question, yeah, Beng Chee.
Lim Beng Chee
On the valuation. I think, if I may refer you to the supplementary slides, slide I think 73, there's actually a table summary for all the valuation cap rate [ph]. We can see that actually there's no -- maybe the next one. I have a different -- yeah, this one. Yeah.
So that if you compare this with the fourth Q 2013, actually there's no change in terms of the cap rate [ph], with the exception of Japan, I think you look at the cap rate [ph] now, in fact that is 5.5 to 6.9. Earlier was 8.0, mainly because we saw Itokaru Inewa [ph], first quarter cap rate [ph] initially [indiscernible].
Lee Chee Koon:
I mean just -- maybe I'll just take a step back just to explain the three components of income drivers for Ascott. The first part will be through our holdings on [indiscernible] that gives a stabilized kind of income for Ascott.
The second part will be in terms of real estate. If you look at the history of Ascott, ever since the inception of the -- of Ott [ph], essentially we are so close to about SGD3 billion to SGD3.5 billion of assets into the REIT. We have been selling more to the REIT than we had been investing. And over the last two, three years, I mean our pace of investment has not been as fast as we'd like to because we are going to be able to find very good assets at good valuation that we want to capitalize on but still on the lookout.
The other issue is of course we have a big proportion of the asset which is under development. But as we get the assets operational, I think the flow-through will be quite significant.
And the last part is on the management fee. Currently the margin is about 30%. With the addition of SGD45 million, assuming 80% to 90% flow-through in terms of income, that will bring the margin up to about 50% at the EBITA margin level. Yeah, thanks.
And Yvonne, I think your final question is on capital recycling. I think our answer will be the capital recycling model is still very much intact for us, which we will use to continue to grow our business. But it is not capital recycling for the sake of recycling, right? We will always have to do it at the right value, right market conditions and all that. And again I'll stress, capital recycling can take many forms, which could be through our REITs, through our funds, through our JV partners, through even sales, residential sales, right? That's capital recycling as well.
So we will continue to do that. We have to grow the business as well as to manage our balance sheet. Yeah.
Any question from the media? Okay, Sean. Go ahead.
Sean Gardner – Morgan Stanley
Okay. Thanks. Arthur, can you just talk about the potential drag on your ROE from Danga Bay? How long is that going to be unproductive in terms of investments going in there? Maybe walk us through the next few years of capital required and returns.
I'll let Khai Meng give you a bit more update on Danga Bay, yeah.
Wen Khai Meng
The Danga Bay project, we are facing some delay because of some regulatory issue. I think you asked about potential drag. I think the land prices for this project is a progressive payment. So far we have paid the JV company, of which we are 51%, we have paid 10%. But this is on an escrow account. So if the project is not proceeded for whatever reason, potentially the money could come back to us.
So the expenses that we incur so far is minimal. We basically engage consultant to do the master plan, some traffic study, some prelim design. Those are out of pocket. Those are not a significant amount of money. Not significant, yeah.
The -- we have some regulatory issue with the planning authority as to the master plan, yeah. So the money they will pay -- actually it really depends on the outcome of the approval of the master plan.
Okay. Actually the term paper [ph] is we hope to get this resolved within months because this project, the agreement has been signed last year, so it had been some time. So I think in a few months' time there'll be clarity on this outcome.
Next. Yup. In front. Julia [ph]. Thanks.
[Indiscernible]. Could I check, I think you mentioned just now that even though there are headwinds in the residential markets in Singapore, you managed to move quite a lot of units at projects, Sky Habitat, but of course these are with significant discounts. So I was hoping you could talk a bit more about your pricing strategy going forward. Do you expect to offer further discounts, especially for projects like [indiscernible] which are really TOP [ph] but not yet fully sold all the units?
Then my second question would be for Ming Yan actually. So a few of your peers have gone to record to say that they want the government to relax cooling measures. So what's your view? Do you agree?
Wen Khai Meng
In terms of the pricing the residential units, of course you'll notice that recent launches or relaunches have been very attractively priced. So we price to clear [ph] the market. As to whether there'll be further discount, really depending on the market condition. But the good news is we are now still sitting on a cushion, that means our sell price for the projects versus our cost, there's still a buffer. So that would give us some pricing flexibility.
Lim Ming Yan
I think we all understand by the government imposed some of the cooling measures. So insofar as the measures are concerned, I think there are certain measures that -- I think Robbie Mandon [ph] has already mentioned that these are macro-potential policies that will likely to remain for a longer time. So there are also certain policies that the government has made clear that these are policies for the circumstances that we are in at this point in time. So at the right time they will -- the government will probably look into reviewing some of these policies.
So I mean from our own point of view, is that we certainly hope that it will be -- any review of the policy will be [indiscernible]. And I think if you listen to Minister Goh yesterday at the parliament, I think he's already made it clear that maybe now is not the right time yet. So, well, we just have to wait.
Yes. In front. Julia [ph]. Yeah.
Lim Ming Yan
Maybe I'll just add, I think while we wait for, I mean some of the policy we know that in the future there may be some changes and some review. But while that is the case, I think from the company's perspective, I think we have taken a very proactive approach to that, and I think we have started our own so-called action to look into how we can rebalance our portfolio, how we can de-risk our portfolio, and I think we have achieved that to a very good effect over the course of the last one-and-a-half years. So I think this is something that we are -- in fact put CapitaLand in a very strong position now to relook at some opportunities, whether it's in Singapore or in China.
Tata Goeyardi – Religare
Hi. Tata from Religare.
Just on Slide 19 on China residential. Just going through a little bit of specifics here. Raffles Collection, Lakeside in Wuhan and Summit Residences, they're going for completion in the second half. The percentage of take-up is actually quite low. Can you just give a comment, you know, the reasons, and is it price points or just general market slowdown? Thanks, Jason.
Summit Residences in Ningbo, I think that's the last phase of our Summit collection in Ningbo. We only have about 38 units, and these are lux units of about 250 square meter and above. We have sold about 20% of them, and now we are in the process of selling.
I think the good news is Ningbo has recently relaxed the HPR. For buyers of this kind of high-end product, I think most of them would have owned at least two homes. So we are seeing some interest now in the relaxation of HPR. So we hope to move the rest of the stock quickly.
I think on Lakeside, this is a project in Wuhan [indiscernible]. I think we decided that we will snowball this project, because Wuhan supply is actually quite big. And we have actually taken a write-down on this project previously, so we will continue to watch the market and launch it at the appropriate time.
Raffles Collection, I think again this is a high-end product. We'll continue to sell them. I think this -- the good thing is that exposure is not very big, again only 76 units. Yeah.
Hi. Lynette [ph] from the Business Times. As a follow to Melissa's [ph] question, I'd like to understand the timeline for the current residential projects that have not been launched yet. Would the current market situation actually delay the timeline? And what sort of pricing points, price points could we be expecting for Marine Blue and Con Hill? Thanks.
Wen Khai Meng
I think, since I've been quite guarded in my answer, maybe I invite my colleague Heng Fai [ph] who will be more open to -- I think he's more transparent than me.
Unverified Company Representative
I don't really think so.
We are ready to launch Marine Blue. So you've got to watch our next launch. We never reveal our prices, but it will be priced very competitively, as always.
As for Con Hill, I think we will be launched really soon. We will decide as the time goes by and see how the market reacts.
Lim Ming Yan
Vikrant Pandey – UOB Kay Hian
Hi. Vikran from UOB Kay Hian.
Given some of your competitors are considering overseas markets like I mean London and even U.S., do you see that as a developing trend or you would not really consider those markets at all? For residential development in particular.
Lim Ming Yan
No. I think CapitaLand, we will still for our development part of the business, we will still be very much focused on Asia. I mean of course within Asia our core market really is China and Singapore. And we have some presence in Malaysia, we have some presence in Vietnam. I think potential -- I mean through our serviced apartment business, we also have some presence in the other ASEAN countries.
I think these are areas where we can continue to look for opportunities. And there are enough opportunities in both China and Southeast Asia. Given where we are, given where CapitaLand is today, I think definitely we are in a much better position compared to many of our peers who do not really have a development platform in many of these countries, whereas we already have got established platforms in many of these countries, and we are in a position in fact to seize many of these opportunities. So this is where we want to focus.
But separately, I think if you look at some of the more developed market, I think through our serviced apartment arms, in fact there are opportunities emerging in Europe, in certain key gateway cities in Europe that I think we could take advantage of, so. But again this is something that is ongoing. I mean if there are right opportunities for us for the serviced apartment business, in the U.S. perhaps, but really it depends on getting the right deals and we will remain fairly disciplined in approaching some of these opportunities.
So the answer is, if you want us to -- if you talk about development opportunities in Europe, in U.S., then perhaps it will be a stretch for us to do it. Unlikely that we will do that at this point.
Hi. Mayu Kutani [ph] from Nikkei. Back to the China residential -- sorry. Back to the China residential market, on the Slide 20 you have 7,500 units launch-ready into the second half of this year, compared to the 2,000 in the first half. How many of these actually do you think you'll be comfortable of really launching, do you think? What's the outlook like in the real feeling of yours?
I think if you look at the portfolio, the Metropolis 1,200 units and La Botanica is about 2,000 units. Those are the two big projects.
I will say the Metropolis has been selling very well. In fact we have been phasing out the sale. We are now almost 100% sold. In fact we are waiting for the next launch sometime in August.
Xi'an itself is a joint venture with Henderson Land. This one is also very well-received product. So I think those two projects we are very confident of selling.
The rest are basically not very big in terms of numbers. But in terms of value, I would say those in the Shanghai area and the Shanghai area particularly like Lotus Mansion, the value will be a lot bigger.
We don't have the delay. In fact we are making preparation to launch in August. Yeah.
Wong Yew Kiang – CLSA
Hi. Yew Kiang from CLSA. Two questions.
One, on Singapore residential margins year on year how has it been?
Second, China residential margins?
And the last question is on Australand. Did you guys speak to phases before this?
Wen Khai Meng
Yeah. The Singapore residential project, the margin currently is about 10%.
For China, the portfolio is about 25%. Last year was 22%, yeah? Twenty-two percent.
Unverified Company Representative
Unverified Company Representative
I think Australand, we are bound by confidentiality discussions when we were going through the strategic review process. All I can say was -- is that Thailand this year was a very different Thailand last year.
Anyone else? Yeah.
Regina Lim – Standard Chartered
Hi. Regina from Standard Chartered.
I just wonder [indiscernible] looking like in the next 12 months, where do you see the opportunities? Are they in Singapore, are they in China, which sectors they are in?
Lim Ming Yan
I will say we see opportunities in both Singapore and China. I think when you look at when a market is under a bit more headwinds. There are probably less competition in the market. And I think therein I think, there'll be some opportunities for us to look at.
As I mentioned earlier, we have taken some certain proactive actions over the last one-and-a-half years. That puts us in a very strong position now to relook at some of the new opportunities in the market. So it can be in Singapore, it also can be in China. It can also be in some of the regional markets that we are in. So in fact, we see the opportunities there. So it's a question of getting the right deal at the right price, and having a good team of people on the ground who can execute the project.
So this is the approach that we will be taking. Of course it's difficult for me to give you more specific about which project we are looking at, and we still are looking at. But suffice to say that there are enough opportunities for us in this region.
And if we look at the Group as integrated group, there are also opportunities where we are differentiated from most of the other groups. As in many of the players in the industry, there are -- in the case of China, many of them are [indiscernible] in so-called mixed integrated developer, that is where I think CapitaLand can really differentiate ourselves in seizing some of these opportunities and optimizing the value.
And similarly, if you look at Singapore, it is also -- there are also opportunities of this nature. And we will be in a much better position to exploit some of these opportunities.
Any more burning questions?
Lim Ming Yan
I hope this is clear enough, and if there are any other issues, obviously Harold is always contactable, and we'll be happy to give you more colors on our performance and our results. Okay, thank you very much.
Okay. That draws this presentation to a close. Hope you'll join me to thank our panelists in the usual manner. Thank you.
There are some refreshments in the foyer, so please help yourself, and hopefully you get a chance to mingle with management. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!