CK Hutchison Holdings Limited

Welcome to attend the live webcast of CK Hutchison 2024 interim results presentation. Today our speakers are Mr Victor Lee, our chairman who will join us later, Mr Francis, our group co-managing director and group finance director, and Mr Dominic Lai, group co-managing director of CK Hutchison and chairman of AS Watson Group. During the presentation, please feel free to put down your question in the chat box. The Q&A session will follow the presentation. Before I hand over to Frank, please also pay attention to our disclaimer, which you can find on page two of the presentation. We can start now.

Good. Well, thank you, and welcome, everybody. This is the first time that Dominic and I are doing this on our own, but it's not our first rodeo, so hopefully things will go reasonably well. I'll start by taking you straight to slide number three, the financial highlights, obviously. Revenue for the half compared to the first half of last year was quite strong, actually. And one theme that you'll notice is there's relatively little forex volatility in comparing the first half of 2023 to the first half of 2024. Our earnings were lower by 9%. That's a $1 billion Hong Kong dollar difference. And to jump ahead a little bit, when we get to the next slide, you'll see that both EBITDA and EBIT were actually up 5%, so that needs to be explained. And the explanation is quite simply in an unusual swing in the amount of taxes that we accounted for in 2024, or more correctly, that we didn't account for in 2023. There's two elements to it. One is a cash tax element, which is because some of the Treasury profits that made up the earnings in the first half of 2023 were not taxable, whereas more or less everything that made up the earnings in 2024 were taxable in a number of relatively higher tax jurisdictions, so a higher effective tax rate on a cash tax basis. And then there was another anomaly in that we had set up a deferred tax asset in the first half last year, whereas this year we have a more normalized deferred tax liability profile going into our earnings. And so when you put all of that together, the tax swing was almost $2 billion in Hong Kong dollars in and of itself, and that accounts for the discrepancy in the profile between net earnings and EBITDA and EBIT. EPS, obviously down by the same 9%, and the dividend per share driven by maintaining the same payout ratio as we did for the first half of 2023, so adjusting really just in accordance with the earnings decline to 0.688 HKD per share. If we go to the next slide, on slide four, as I mentioned, EBITDA is up by 5%. That's by 2.3 billion Hong Kong dollars. EBIT is up by 5% as well, which is 1.4 billion Hong Kong dollars. And I've explained how you get from there down to the net earnings reduction of 9%. Operating free cash flow was $600 million lower, which is a relatively small amount for this size of company than in the first half of 2023. That basically we'll get to it on a detailed slide, but it's slightly higher, EBITDA capex slightly lower, but investments higher, including most importantly the investments in Phoenix Energy by CKI that came into the first half. Our net debt ratio is flat when compared to the first half of last year, but it is actually up year on year, and I will explain that as well when we get to the operating cash flow and free cash flow slides a little bit later on. So going to slide five, first of all, looking at EBITDA, there's some significant changes in the geographic breakdown this year, notably a reduction in the contributions from Hong Kong and the mainland, which will come as no surprise, I think, to anyone. and when we look at the mix between the businesses right our ports business and our telecoms businesses were up our infrastructure and finance and investment businesses and retail businesses were flat or marginally down so if you go to the slide on the right you'll see that pretty well everything right was Hutchison Holdings Limited trading profits as we did in the first half of last year in treasury and of course we include in finance and investment and others our share of Hachmed and of course Hachmed last year had a very large net incoming up from licensing payments received when they did a transaction with Takeda to basically appoint Takeda to sell and manage some of their oncology drugs in the rest of the world outside of Hong Kong and the mainland. So that's pretty well the explanation for EBITDA. If we then drill down one level further on slide 6 to operating free cash flow, Again, there you'll see that the contribution profile has increased for ports, increased for telecoms, and reduced for the other operations. If you go to the diagram on the right, which basically splits that operating free cash flow performance out by division, All right, ports, first of all, in terms of the incoming side, so that's the EBITDA ports direct subsidiaries, right, and the dividends which it receives from associates and joint ventures was about 18% higher. And its capex was about 50% of what it was last year, so significantly lower. And you put all of that together, operating free cash flow contribution was up by almost 1.9 billion Hong Kong dollars. Retail's operating free cash flow profile was down by about a billion dollars. That's a slight reduction in cash in, married up with a slightly higher spending profile, and Dominic will spend a lot of time explaining what's going on with the retail division a little bit later on. Infra, from an operating free cash flow point of view, was slightly down year on year, even though earnings were up, which we'll get to on the infrastructure slides. CKH Group Telecom was significantly up, and that's basically because the cash coming in, was up 17%. CapEx was lower, but having said all of that, it's still, as you can see from the shape of the bars, by far our most capital-intensive sector. But nevertheless, the improvement in operating free cash flow from CKH Group Telecom was HK$1.8 billion. And then lastly, finance and investments, which I've already referred to. Operating free cash flow was down $1.4 billion compared to the first half of last year. And that was essentially due to the shortfall in trading profits, half on half, and the Takeda upfront payments that I just referred to earlier on. Now, if we go one slide further and drill down a little bit more onto slide seven, our free cash flow. was actually up year-on-year at $8.9 billion, so that's up 17%. If we go through the pieces of the puzzle on the left, we'll go through the absolute amounts on the left-hand side, and then we'll go through the corresponding half-on-half, first half 23 to first half 24 comparisons on the right-hand side bar chart at the same time. So if we look at interest in taxes, we've already talked about taxes. The actual first half cash flow impact was about a half a billion dollars for taxes, and interest in cash terms in the first half were up by HK$883 million. So that's the increase that you're looking at on the right-hand side of roughly HK$1.4 billion. Having said that, operating free cash flow includes the interest income, and that was up by about a half a billion. So net-net, the changes in the rates environment really cost us relatively little in terms of the net interest burden as a whole. If we then look at the second item, which is working capital changes at a negative 5.3 billion and a year-on-year swing of a positive 1.7 billion, The reason for the positive is entirely because in the first half of 2023, we made a very large VAT payment relating to the Celnex Tower transactions of the year before that. That was about $4 billion. So that's the reason why the year-on-year looks favorable. Actually, if you look past that, at the working capital changes in the businesses and in the operations, I think it's fair to say it was a little bit more stressful for retail. It was a little bit more stressful for infrastructure. But all in all, when you're making the comparison, because of that big one-off in the first half of 2023, we have favorable variances. When you look at telecom licenses, which are not included in the operating free cash flow calculation, There was a significant swing there again, $949 million, so basically spent nothing on telecoms licenses in the first half of this year, and we spent roughly a billion dollars in telecoms licenses in the first half of last year, so that's the swing there. And then when we look at others, there's a positive variance again. So others were a positive inflow of 2.2 billion, which is a year-on-year swing of about 550 million. Now, I have to caveat that number because you'll get to the next page and you'll see that, strangely enough, net debt doesn't get reduced by what you would expect it to be reduced by just looking at the free cash flow profile. The reason for that is that we sold a fair number of shares, actually Solmex shares, during the first half. That accounted for about HK$3 billion worth of the cash flow inflow. And that obviously comes into free cash flow because you're selling securities and you're getting cash. When you look at net debt, the net number includes cash and marketable securities. So actually, the net debt doesn't change even though the free cash flow impact is shares have been converted into cash, so you've got the cash. So that's probably the only... sort of real mystery when you look at this presentation is why it is that debt doesn't come down. We are on the next slide, our financial profile. So average maturity is still sitting at five years, so really quite unchanged. I think the important thing to observe about that is that if you look at the debt maturity profile, most of what we've got coming up in 2025 is in bank debt. And so the refinancing burden for 2025 is not particularly onerous. The refinancing burden for the rest of 2024 is almost taken care of. We may be in capital markets for one more debt issue or we may not. But all in all, I think that we're in pretty good shape in terms of average maturity. If you look at the net debt improvement, I think I just really explained that in part. One of the reasons is the bit of free cash flow that doesn't improve net debt, which is the proceeds on the sell-next shares. but we also redeemed half a billion euro perpetual which was becoming quite expensive going forward and so obviously that drove up net debt as well. So those two items together are basically why we've gone from 16.1% at the end of last year to 17% as we sit here today. The liquidity component of the net debt calculation remains very, very solid. That's $143.1 billion. And on the cash portion that's managed by the Treasury operations, we're making about a 5% all-in return. And only 3% of this portfolio is in equities now, largely, of course, because of the sale of the Solnex shares. So we're 92% in cash and 5% in U.S. Treasuries. So the liquidity profile remains very, very strong. Our average cost of debt is 3.6%. So that's up a little bit. But having said that, I think that because we're 69% in fixed rates and 31% in floating rates after swap, and you take a five-year maturity, we've had quite a bit of attenuation, if you will, of the impact of rising rates overall in the company. And if indeed the market prognosticators are correct, then there's a an expected 25 basis point decrease in U.S. rates in September and 100 basis points by the end of the year. If that was correct, then obviously we would be in a very good position to take advantage of that in terms of our overall cost of capital. And with that, I'm going to pass over to my colleague, Donik, to explain what happened in ports. Very good story.

Okay. Well, thank you, Frank. So let's... Go into individual business in more detail. First, to turn to slide number nine, ports and related services. The ports division actually has a solid first half, primarily driven by a strong domestic consumption. B, inventory replenishment caused by anticipated rising consumer demand and C, supply chain relocations as trade tension and geopolitical risk escalated which in particular benefit ports in Asia and Latin America. If you look at the slide, channel throughput for the first half increased 7% year-on-year to 42.3 million TEUs with increases across the board in all subdivisions. Correspondently on EBITDA, EBITDA increased 22% in both reported and local currencies to $7.938 billion. Now let's move to the EBITDA order for chart below, which shows the year-on-year EBITDA change of each subdivision. First, starting from an EBITDA base of $6.509 billion in the first half of last year, we see across the board EBITDA increases. First, for HPX Trust, which represents mainly our Kwai Ching Port in Hong Kong and Yantan Port in Shenzhen, the EBITDA increased 20 million, or 3%. Next, for mainland China and other Hong Kong, which mainly represents our port in Shanghai and other port and logistics services in Hong Kong, the EBITDA increased 38 million or 12%. For Europe, which consists mainly our UK, Barcelona, Spain and Rotterdam Netherlands ports, the EBITDA grew 15% or 245 million, a good growth. Next, for Asia, Australia, and others, with others include Mexico, Pakistan, Middle East, Thailand, and Panama, the combined EBITDA has a robust growth of 34% or $1.1 billion. At the same time, the corporate and other port-related services also has a modest EBITDA growth of 8% or $52 million. So therefore, in total, we see a very healthy EBITDA growth of 22%, bringing the first half underlying EBITDA to HK$7.97 billion. We had a relatively small foreign exchange translation impact at HK$32 million, so the reported EBITDA for the first half is HK$7.938 billion, as indicated on the slide. As for the outlook, we expect demand to remain positive, but to slow down a bit in Q4, as shippers made front-loading orders in advance for holiday seasons. Overall, we expect moderate volume growth for this year, particularly in Asia, Europe and Latin America, due to economic recovery and supply chain relocations. And lastly, for your information, the expansion at the Ensenada Port in Mexico is expected to be completed by the end of this year, thus bringing the total number of boats from the current 293 to 295.