The principal activities of the Group continue to be the development of and investment in properties for sale and rent, hotel operation, telecommunications, transportation, infrastructure and logistics.
The Group's profit attributable to shareholders for the year ended 30-06-2019 amounted to HKD 45.08 billion, a decrease of 10.1% compared with previous corresponding period. Basic earnings per share was HKD 15.5017. A final dividend of HKD 3.7 per share was declared. Turnover amounted to HKD 85.30 billion, a decrease of 0.4% over the same period last year, gross profit margin up 3.7% to 52.6%. (Announcement Date: 12 Sep 2019)
Business Review - For the year ended June 30, 2019
Property Sales and Rental Income
Revenue from property sales for the year under review as recorded in the financial statements, including revenue from joint-venture projects, amounted to HK$41,313 million. Effective from 1 July 2018, the Group has adopted the new accounting standard HKFRS 15 for recognition of property sales. Profit generated from property sales was HK$18,697 million, as compared to HK$16,261 million last year. The Group achieved contracted sales of about HK$65,000 million in attributable terms for the year.
During the year, the Group’s gross rental income, including contributions from joint-venture projects, rose 6% year-on-year to HK$25,077 million, and net rental income increased by 6% year-on-year to HK$19,678 million. The growth is attributed to positive rental reversions both in Hong Kong and on the mainland, together with contributions from new properties on the mainland.
Since June this year, however, the business operating environment in Hong Kong has been significantly deteriorating, mainly due to continuous social incidents.
Property Business – Hong Kong
During the year, the Group continued to replenish its land bank through different means, adding seven projects with an aggregate gross floor area of 3.1 million square feet in attributable terms to the Group’s development land bank in Hong Kong. Among the additions, two residential sites, one in Kai Tak and another at Pak Shek Kok in Tai Po, were acquired via government tenders, with the retail portion of these two sites to be retained for rental purpose. The remaining new sites for residential use largely came from land use conversions from agricultural land.
In addition, the Group reached a lease modification agreement with the government during the year for the redevelopment of an industrial building in Tsuen Wan into a residential project, which will offer a gross floor area of 168,000 square feet.
As at the end of June 2019, the Group’s land bank in Hong Kong amounted to about 58.0 million square feet of attributable gross floor area, including 25.1 million square feet of properties under development for different usages covering residential, office and retail. An overwhelming majority of the remaining portion was comprised of completed properties for investment. As always, the Group will continue to use diversified channels to replenish its land bank, including active land use conversions of its agricultural land.
Hong Kong’s primary residential market remained relatively resilient in recent months amid social incidents, although the secondary market became quiet following a rebound in the first few months of 2019. For the year under review, the Group achieved contracted sales of about HK$59,700 million in attributable terms in Hong Kong. Major contributors included Cullinan West II in West Kowloon, St Martin in Pak Shek Kok, Ultima in Ho Man Tin, PARK YOHO Milano and Grand YOHO in Yuen Long. Apart from residential projects, the Group’s office development W LUXE in Shek Mun was launched late last year with all standard units sold out.
Leveraging its strength in the selection of sites, project planning and quality assurance, the Group is able to deliver premium properties that meet the needs of homebuyers. The Group also continues to provide quality after-sales services that are in line with the aspirations of end users, including a first-three-year warranty for new residential units in Hong Kong.
Six projects in Hong Kong with about 3.3 million square feet of attributable gross floor area were completed for handover during the year, of which about 3.2 million square feet were residential developments. The remainder was retail properties for rental purpose.
Driven mainly by positive rental reversions from its diversified property portfolio in Hong Kong, the Group’s recurring rental income rose 6% during the year to HK$19,698 million. The overall occupancy registered at about 94%.
Retail sales of the Group’s tenants in its 12-million-square-foot diversified quality portfolio continued to achieve growth during the year. This was mainly attributed to the Group’s customer-centric marketing strategy, proactive tenant and trade repositioning, as well as ongoing asset enhancements. Along with positive rental reversions, occupancy remained relatively steady during the year. Nevertheless, weakening consumer sentiment and declining tourist spending have posed challenges in the retail market for the recent months.
Representing one of the few flagship malls in the district, V Walk below the Group’s CullinanWest residential development at MTR Nam Cheong Station has created a new experience for shoppers in the vicinity since its opening in July 2019. This 300,000-square-foot mall comprising a curated array of local favourites has been almost fully leased. Harbour North, the 145,000-square-foot retail component of the Victoria Harbour development at North Point, is targeted to gradually open by the end of the year, featuring a diverse collection of lifestyle retail and popular eateries.
Upgrading work has consistently been undertaken in terms of mall specifications and tenant mix to enhance the value of properties. Scheduled to be completed towards the end of the year, the second phase of reconfiguration at New Town Plaza III in Sha Tin is set to inspire customers with a brand-new facelift and broader tenant mix. The newly renovated Park Central in Tseung Kwan O is expected to draw more traffic with a new footbridge connecting the neighbourhood. To enrich customer service in a digital era, The Point by SHKP, the second phase of the SHKP Malls App which integrates the loyalty programmes of its 15 major malls, was launched in March 2019, elevating customers’ shopping experience. In addition, the Group will enhance The Point by SHKP by devoting more resources into marketing campaigns to drive traffic and tenant sales.
Benefitting from the growing spending of young families and the millennial generation, YOHO Mall in Yuen Long and Metroplaza in Kwai Fong recorded increased sales and achieved healthy rental growth. The Group’s other major malls, including IFC Mall in Central, The Sun Arcade in Tsim Sha Tsui, and East Point City in Tseung Kwan O, also performed well during the year.
Uncertainties in Hong Kong’s external and internal environment have posed challenges to the office market for the past few months. By differentiating itself through superior building quality and distinctive management services, the Group’s 10-million-square-foot diversified office portfolio continued to experience positive rental reversions with overall occupancy standing above 95% during the year.
Leveraging premium building quality with comprehensive amenities at unique locations, IFC in Central and ICC in West Kowloon remained highly sought-after in the premium office leasing market. Offering one of the best office addresses in Hong Kong, IFC was virtually fully leased with satisfactory spot rents. Bolstered by improved cross border connectivity, ICC continued to attract leading financial institutions to move in and existing tenants have been looking for expansion. During the year, ICC was almost fully let and recorded healthy rental reversions. The Group’s quality office space in Wan Chai also performed well.
The Millennium City cluster in Kowloon East continued to achieve overall positive rental reversion, underpinned by effective tenant mix reshuffles and solid demand from a wide range of tenants for large-floor-plate office space. In the pipeline, two Grade-A office towers comprising about 650,000 square feet of the joint-venture project at 98 How Ming Street in Kwun Tong, together with a 500,000-square-foot mall at its retail podium, will be completed in the financial year 2022/23. This addition will further scale up the Group’s presence in premium office leasing in Kowloon East, one of the largest commercial districts in Hong Kong.
Property Business – Mainland
During the year under review, the Group acquired another site with a gross floor area of 2.8 million square feet in the Nansha Free Trade Zone in Guangzhou. Together with the adjacent site, which the Group acquired in May 2018, the two sites will be jointly developed in phases into a 3.3-million-square-foot integrated complex. Located at one of the strategic spots for technology research and development in the Greater Bay Area, the integrated development will have direct access to the Qingsheng Station of the High Speed Rail and the Guangzhou Metro Line, and is set to become a new landmark for transit-oriented developments.
As at 30 June 2019, the Group’s attributable land bank on the mainland stood at 65.4 million square feet. Of this, about 50.6 million square feet were properties under development, 56% of which will be developed into quality residences for sale. The remaining 14.8 million square feet are mostly completed properties for investment purposes. To meet rising demands, the Group will continue to develop integrated projects and premium residences in major cities on the mainland.
Subsequent to the end of the year under review, the Group in August acquired two riverside sites in Hangzhou via government tenders with a respective 45% and 50% stake in the eastern and western sites. Ideally located at the intersection of the Qiantang River and the Beijing-Hangzhou Grand Canal, the two sites will be jointly developed into a landmark integrated project with high-end offices, retail spaces, residences and hotels, providing a total above-ground gross floor area of about nine million square feet.
The mainland residential market has been recovering since the fourth quarter of 2018 amid increased market activities. Despite signs of softening of late, city-specific housing policies have effectively stabilized the market and are expected to bring about a positive impact on the long-term development of the mainland residential market.
The Group achieved attributable contracted sales of about RMB4,600 million on the mainland during the year. Major contributions came from the wholly-owned Park Royale in Guangzhou as well as several other joint-venture projects, including Oriental Bund in Foshan, the first batch of Phase 1 at TODTOWN in Shanghai and Forest Hills in Guangzhou.
During the year, a total gross floor area of about 3.0 million square feet was completed on the mainland, about 30% of which were properties for rental purpose. The premium building quality of Two ITC in Shanghai and Nanjing One IFC was highly acclaimed by tenants.
For the year under review, gross rental income from the mainland, including contributions from joint-venture projects, rose 10% year-on-year to RMB4,069 million, mainly driven by positive rental reversions and contributions from new rental properties.
Complementing the Group’s strong presence in Shanghai, the 7.6-million-square-foot ITC will become another iconic integrated complex in the city. The offices at One ITC and Two ITC boast a combined gross floor area of 490,000 square feet, with occupancy standing at over 90%. The sole tenant of Two ITC, Adidas, moved in as its regional headquarters during the first quarter of 2019. The first two phases of the development will provide around 380,000 square feet of retail space, of which the 340,000-square-foot grand luxury mall at One ITC is virtually fully leased and is expected to impress the market when it opens in the fourth quarter this year. The new mall will include a variety of international flagship stores and highly sought-after eateries to appeal to the millennials. Construction work of the remaining phase, which includes a world-class shopping mall and a 370-metre-tall skyscraper, is progressing smoothly. Upon its full completion by late 2023, ITC is expected to enliven Xujiahui and contribute to a significant increase in the Group’s rental income on the mainland.
Nanjing IFC, consisting of about 3.4 million square feet in Hexi CBD, Nanjing, is another of the Group’s integrated projects that is gradually coming on stream, attracting growing interest from major multinationals in the two-million-square-foot office space. Nanjing One IFC has recently been completed with some of the tenants already having moved in. Construction work of Nanjing Two IFC is expected to be completed in 2020. Pre-leasing discussions on the one-million-square-foot-plus luxury mall are currently underway with top-notch international brands as well as newcomers to Nanjing.
Among the Group’s well-established developments, Shanghai IFC in Pudong and Shanghai ICC in Puxi continued to achieve positive rental reversions. In particular, tenant sales at the Shanghai IFC Mall have been further boosted following renovations on the ground level, which houses a variety of prominent luxury retailers. The 225,000-square-foot New Town Plaza close to South Second Ring Road in Beijing recently opened. The reconfigured mall has recruited international brands making their debuts in the vicinity to attract young family shoppers. It will join hands with Beijing APM through an integrated loyalty programme to strengthen the Group’s presence in the capital city. The Group’s two joint-venture malls in Guangzhou, IGC and Parc Central, also performed well with latest overall occupancy reaching over 90%.
Hong Kong’s hospitality sector remained relatively stable prior to the rapid deterioration of its operating environment since the middle of this year. The Group’s hotel portfolio performed relatively steadily during the year under review.
To elevate the experience of guests and to build up its international image, the Group’s new upscale Hotel VIC on North Point waterfront has recently been rebranded as Hyatt Centric Victoria Harbour Hong Kong. The Group will continue to expand its hotel portfolio in Hong Kong, with ALVA Hotel by Royal in Sha Tin slated to open in late 2019 and a high-quality project on West Kowloon waterfront under construction.
On the mainland, The Ritz-Carlton Shanghai, Pudong maintained its prestigious position in Shanghai’s luxury hotel market with relatively stable room performance during the year, notwithstanding growing competition from new deluxe hotels in the city. Among the Group’s hotel projects under construction on the mainland, Four Seasons Hotel Suzhou and Andaz Nanjing are scheduled to open over the next few years.
Telecommunications and Information Technology
The mobile industry continues to be highly competitive, and the outlook is expected to remain challenging. SmarTone’s strategy is to distinguish itself from the market with superior service and a world-class network. During the year under review, SmarTone achieved a steady growth in customer numbers. The company’s average postpaid churn rate remained at an industry low and postpaid ARPU continued to be in an industry leading position. Amidst keen competition, the company’s core service business remained stable with the enterprise solutions business delivering robust growth. To position itself as a leader in the 5G era, SmarTone acquired 5G spectrum in the 26/28GHz band and conducted a live 5G trial in March 2019 to demonstrate 5G capabilities under real-life conditions. The Group remains confident of SmarTone’s prospects and will continue to hold the company as a long-term investment.
The data centre sector continues to see solid demand, although there is increased supply in the market as a result of the conversion of industrial buildings through the government’s data centre conversion scheme. During the year under review, SUNeVision delivered healthy growth, driven by its core business in data centre operations. Its world-class data centre facilities continued to be a preferred solution by leading enterprises from new-economy industries, such as cloud services, internet technology, online video streaming and e-commerce. A data centre site in Tseung Kwan O with a total gross floor area of over 1.2 million square feet was awarded to the company through government tender during the year. This new data centre is expected to create synergies with the adjacent MEGA Plus flagship facility and strengthen SUNeVision’s position in Hong Kong as customers’ preferred data centre services provider.
Infrastructure and Other Businesses
The Group’s infrastructure and transport businesses continued to see satisfactory performance during the year under review. Wilson Group continued to deliver growth, while Route 3 (CPS) performed steadily. Business at the Hong Kong Business Aviation Centre has benefitted from an improvement in flight slot availability, but the slowdown in mainland-related business activities amidst Sino-US trade tensions has created challenges. Airport Freight Forwarding Centre Company Limited continued to see demand from the logistics industry. The performance of the River Trade Terminal remained steady through operational improvements and business diversification, although throughput dropped amidst challenges in global trade.
YATA expanded its Mong Kok store and has been focusing on extending the application of its new digital initiatives, including self-checkout and the new loyalty programme, in addition to enhancing the offerings and services of its stores.
Business Outlook - For the year ended June 30, 2019
In the coming year, the global economy is expected to be clouded by a number of challenges, including populism and trade protectionism. The downside risks, however, are likely to be mitigated by the low interest rate environment worldwide. Despite the continuous Sino-US trade conflicts, the mainland economy is expected to grow at a reasonable rate on the back of monetary and fiscal stimuli, lending support to the mainland property market.
Confronting unprecedented internal challenges which arise from the proposed amendment of the extradition bill and its subsequent issues, together with a slow global economy, the Hong Kong economy is also likely to remain weak in the short term. By continuing with its property development business, the Group is committed to contributing further to Hong Kong’s medium- and long-term economic growth given the ongoing development of the Greater Bay Area and the city’s status as an international finance and business centre. Despite weakening market sentiment, the Hong Kong residential market is likely to be supported by relatively low mortgage rates and continuous end-user demand.
The Group has presold about 70% of 3.1 million square feet of gross floor area planned for sale in Hong Kong, which is scheduled for completion in the coming financial year. As always, the Group will continue to put new projects on the market for sale, including the imminent launching of the first batch of units at Cullinan West III in West Kowloon. Over the next nine months, major residential developments offered for sale in Hong Kong will include Phase 1 of Central Peak in Mid-levels East, Phase 1 of a project near Hong Kong Wetland Park in Tin Shui Wai, Phase 1 of Hoi Wing Road project in Tuen Mun and a quality development in Sha Tin. The Group also plans to launch an industrial building in Tsuen Wan for sale. On the mainland, major residential developments to be put on the market include a brand new residence at the 90%-owned Suzhou ICC, a new phase at the wholly-owned Shanghai Arch and new batches at several joint-venture projects, including The Woodland in Zhongshan and Oriental Bund in Foshan.
The uncertainties of late have weighed on the overall leasing activities as well as the performance of the Group’s property investment portfolio, while there will be extra contributions to its recurring income from newly opened or future premises. In Hong Kong, following the opening of V Walk atop MTR Nam Cheong Station in July 2019, a new mall, Harbour North, and ALVA Hotel by Royal are planned to commence operations in the second half of this year. On the mainland, the reconfigured New Town Plaza in Beijing held its grand opening with positive response in July 2019, while Nanjing One IFC recently has been gradually handed over to tenants. In late 2019, Shanghai will welcome the opening of the shopping mall in One ITC. The gradual completion of the Group’s landmark projects in different cities over the next few years, including an office-cum-retail project at 98 How Ming Street in Kwun Tong, Hong Kong, Nanjing IFC in Nanjing, and the mega ITC in Shanghai, will significantly enlarge the Group’s property investment portfolio and underpin its recurrent income growth in the long term.
The Group is committed to focusing its business on Hong Kong and the mainland. Upholding the core belief of Building Homes with Heart and a customer-centric culture, the Group strives to create value for various stakeholders, including customers, shareholders and the community at large, while offering its staff opportunities to thrive. Caring for the society, the Group will contribute to addressing the housing problem in Hong Kong through developing more residential units, including making extra effort to expedite conversion of its agricultural land to residential development projects. With an unwavering faith in Hong Kong, the Group is confident of being able to weather the current tough and challenging environment and move forward, as it has come through the storms and grown with this city over the decades. Convinced of the Hong Kong government’s capabilities, the Group firmly believes that Hong Kong will return to normality and continue to be a safe, vibrant and attractive international city. Meanwhile, the Group will consciously learn from experience and drive continuous improvement of its products and services. Building on a solid foundation, the Group will manage to pursue sustainable business development while further contributing to the long-term growth of Hong Kong amidst this challenging time.
Looking forward, the Group’s results are likely to be uncertain in future years given the current unprecedented challenging situation in Hong Kong.
Source: Sun Hung Kai Ppt (00016) Annual Results Announcement