Earnings Transcript for CKHUF - Q2 Fiscal Year 2021

Operator: Thank you very much for attending the live webcast of CK Hutchison 2021 Interim Results Presentation. Today, our speakers are Mr. Victor Li, our Chairman and Group Co-Managing Director; Mr. Kin Ning Fok, Group Co-Managing Director; Mr. Frank Sixt, Group Finance Director and Deputy Managing Director; Mr. Dominic Lai, Deputy Managing Director and Group Managing Director of A.S. Watson Group; and Malina Ngai, CEO of Asia and Europe of A.S. Watson and Group COO of A.S. Watson Group. During the presentation, please feel free to raise your question in the chat box which is at the lower right-hand side of your screen. The Q&A session will follow the presentation. Before I hand over to Kin Ning, please also pay attention to our disclaimer which you can find on page 2 of the presentation. We can start now, Kin Ning.

Kin Ning Fok: Okay. Thank you, Kap. So, good afternoon, everybody, and good morning to those in Europe. And good morning to Frank. He's in Europe. So, I think at the first half of the year for CHECK Hutchison is quite pleasing. If you turn to page 4, revenue went up by 12% at HKD212.4 billion and EBITDA went up by 18%, HKD55.6 billion and EBIT went up by 23%, HKD32.8 billion. Of course, we got some -- it’s about time we get some help from foreign exchange. If you take out the foreign exchange, revenue went up by 4% and EBITDA by 10% and EBIT by 15%. And our net earnings for the six months Net earnings for the six month period is HKD18.4 billion, recorded a 40% increase. And if you just take away the foreign exchange, and that is 32% increase. And of course, earnings per share, HKD4.75, a 41% increase. So I'm very pleased to say that the board resolved to pay an increased dividend which is HKD0.80 per share, representing a 30% increase from the same period last year. And of course, we -- one of the more pleasing result is that in the first half, we are able to complete and build up on tower transactions. And then when we see if the cash is in our pocket, and then our debt ratio now is 19.9, which is the lowest for a long time. We are already happy that it go down into teens figure. And if you go to page 5, we talked about the EBITDA, and EBITDA that went up by 80% at HKD55.6 billion. And then if you talk about local currency, and it’s 10% in a -- take away the foreign exchange gain. And if you look at the figure, the circles, in the far left, you saw that the circle have two -- two rings, and actually, the outer ring is the -- where does the profit come from because we have the tower transactions. So 70% come from -- still come from UK and Europe and then -- but then, if you take away this one-off and it is 59% on Europe and 6% from Mainland China and the 5% from Hong Kong, China. And then, 20% from Asia, Australia, and Canada. And then of course, because we will Husky, our oil company, Cenovus now changed the -- as a head office is no longer on our core business is classified and obviously -- that always become bigger at 8%. So, if you -- and then you go to the right-hand side, in the middle of the page, right hand -- moving to the right-hand side, you saw the waterfall chart. And you go from last year to this year to HKD46.9 billion to HKD55.5 billion. how you make above, of course, last year we have a one-off from the merger of the TPG, if you take that away, and then, it become HKD41 billion that blue color for -- and then if you look at that part it went up by HKD1.1 billion. Actually in the quarter I will go for that in a detail. But it went up everywhere. So parts has a excellent time in the first half and retail is one -- went up by HKD1.6 billion, actually is also went up everywhere, except that PARKnSHOP in normal time doesn't do as good as COVID time, because people go out more often than stay home. So otherwise you spend up everywhere against last year. And then infrastructure, EBITDA I actually went down by HKD566 million. The reason being that a lot of the projects is under reset and -- so in the new reset. But however if you take -- they just announced that they actually take their -- net profit after tax actually went up in the first six months. Okay. And on the -- and then on the three group, actually three group has a very, I won’t say stable, but have -- every way it’s more or less the same than last year in terms of business with Italy fell behind because this year it’s the first half that we see -- we witnessed a change in one of our MVNO. That is the earlier and then they -- because they have built a network and then they start using the network we saw that the income, the income unless I will go into more detail in the telecom sections. And also on heat [ph] it is more or less the same with Indonesia. It’s under pricing fee as it fear COVID-19 situation. So that there is a shortfall in the revenue. However, even in Vietnam and Sri Lanka, these two small operation is doing quite well. They all improved and shows positives figures and so that is one of the small figure. And then, of course, the finance and the investment represented the major increase represent that return from a major loss from Husky last year into a profit, no loss in the Cenovus situation with some profit, so this is why you saw there are two -- almost positive. And so, the foreign exchange, you know, as I say, you know, comprise of HKD3.9 billion. So, this year we have -- you know, we’ve got the strengthening of our European currencies. You know, everywhere, the currency went up against US dollar. So, it's quite happy. And, of course, you know -- and then gave up to the HKD49 billion. And then this year, we recorded a major gain from this finalization of the of the power transaction in Italy. And so, what we did is that we took profit and then we actually did not recognize all the profit. We actually make up prohibitions against the goodwill of Italy, so that we only recognize HKD6.2 billion finally. So, that is how the EBITDA waterfall chart reference. And so, before I go further, we have to go for the page 6 on the operating cash flow. I will ask Frank to go through the detail.

Frank Sixt: Yeah. So, at the operating level, our cash flow management continued to be pretty solid during the year. Obviously, operating free cash flow which is here presented as the EBITDA by subsidiaries, the dividends received from our associates less CapEx, less investments, at HKD17.7 billion is lower than in 2020’s first half. But that is entirely due to increases in spending. Bear in mind that these numbers are presented on underlying operations, so they're not taking account of the cash inflows from, for example, the towers transaction or anything else. That's a one-off. And so the spending increase really is -- it has been driven by the sensible need to deploy capital with that in a little bit more detail in the subsequent slides. So I don't take anything adverse from that. And indeed, I look at it the other way which is that you'd have healthy increases in the EBITDA from subsidiaries, but as well as in the dividends that we've received from our associates. The circles on the right, I've just split that out by contribution by division, pretty self-explanatory, right. The retail contribution, if you look at it year-on-year, if you look at last year's slide presentation obviously is significantly up in kind of free cash flow terms as well. And that is of course because the early stages of the pandemic hit the mainland very hard, with a major part of retails businesses in the first half last year. And they've had substantial recovery as we've gone through the first half of this year. Moving to the next slide. This just splits it by division, right, in exactly the same way. So you have far right the totals, you have exactly the same numbers as you saw on the previous page but the important ones being the 32,890 of really cash available from ordinary operations, right, and the 15.2 of spending and another 4.7 of discretionary spending on licenses. As you go through it, it's pretty obvious just from the pictures, right, that everybody is living well within their means, right? The real investment increases that are coming from the telecoms businesses, right, and HAT has been a bit of a consumer this year, right, as it has rolled out network and so on, pretty difficult operating environments in Indonesia. But all in all, right, everybody is living within their means. And actually if you parse the financial statements, you’ll find that everybody is pretty well living within their CapEx envelope -- their depreciation envelope as well with the exception of CKH Group Telecom and Hutchison Asia Telecom where we are investing above our current depreciation rates. And then finally, moving from operating cash flow to real free cash flow, right, in doing that you have to take away interest paid, you have to take away working capital, you have to take away things that we decided to do. So we decided to voluntarily prepay some license fees that would have been due in subsequent years in order to save effectively interest costs associated with those balances and we bought some new telecoms licenses. So, that gets you down to an underlying free cash flow of HKD1.4 billion, but then, of course, you add onto that, the cash from the tower proceeds, which is HKD38.425 billion. So, the cash generation in the first half, obviously, very healthy. And what's quite interesting, if you look at the waterfall, right, on the right-hand side, you quickly find that working capital management was very good. And again, I've single out the retail group here for having done a superb job in the first half of continuing to manage working capital tightly. And that's not easy, as businesses are opening and closing and partially opening and partially closing all around the world, that which Dominic will now be talking a lot more about. But working capital changes year-on-year have actually been positive. And all of the stuff, which is driving, right, the negative bars, right, is, by and large, discretionary stuff, it's the prepayment that we made on the license, it's how much more CapEx we decided to invest and we'll get to that, but that's primarily in the telecoms businesses. And indeed how much we decided to buy in terms of new licenses supporting our telecoms businesses. So, overall, I think a very healthy cash management profile, which leads me to the next page, right? And that is reflected in a pretty healthy debt maturity profile HKD190 billion of cash and cash equivalents against the total outstanding principal debt of HKD351.1 billion. That as Kin Ning mentioned, takes our net debt to net total capital ratio down to 19.9%, which is certainly a recent memory low and a very good thing, I think, in -- still, to some extent uncertain times. A good, I think, maturity profile. We have an average maturity of 4.9 years. Our cost of debt has continued to decline. So it averages right at 1.6%, right. Our return on treasury assets is low because most of those have been kept in liquid deposits. So 40 basis points return. So there is a spread between our cost of debt and our liquidity. But it's still a very manageable number overall. And the only other thing that I would say is that, we have changed the mix of our debt, right, after swaps, so that we are much less in floating rates and much more in fixed rates for that 4.9 years duration than we were at the end of last year. So I think I'll stop there and, Kin Ning, send it back to you to talk about Ports.

Kin Ning Fok: Well, as I said before, Ports goes up everywhere. So, if you look at the TEUs, and then they went up by 11% and we’ve looked at the EBITDA, it went up by 26%, even if take away the foreign currency gain, it went up by 20% -- 21%. So, it's quite a happy first half, And following the good business from the last half in this, the second half of 2020. So it -- if you look at the waterfall chart on the right-hand column, top column, and then you see that if you go from last year’s EBITDA and to this year. So you can see that everywhere is blue color except the main end one. Why it is a red color, because we actually -- we have less ownership in Shanghai part. So that we have 20% less. And so that it become -- so we have less earning, we own less. We showed 20% last year. And another worth mentioning is Asia and Australia has really good improvement. Why do I mention that? Because that this year, we lost the demand part, so that one part less, they are still doing good. So we are quite happy with that. And then the least -- the last thing I would like to mention in the part business is that they -- we strike a partnership offer. We made a partnership with Costco because they are one of our biggest customer and then we invested in the company. And then that give us a very, very good return. And that is reflected in the corporate costs and other. So it’s a good first half. And so I will turn over the page to page 11, and then I will ask Dominic, he is -- he’s our Head Office Director, but he is in charge of our [indiscernible]. So I would like him to report on his work.

Dominic Lai: Okay. Well, thank you Kin Ning. Retail. On the retail division has staged a robust recovery The retail division has staged robust recovery year-on-year and reported a solid first half with the active management of the pandemic impact continuing. Total sales for the first half was HKD82.6 billion, a 12% increase in the reported currency or 5% in local currency. The core health and beauty business reported 8% sales increase in local currency with strong growth of 17% also in local currency in the second quarter. With over 16,200 stores, that division remains the world's largest international health and beauty retailer, operating in 27 markets with a strong loyalty member base reaching 140 million and member sales participation high at 66%. That means 66% of total sales came from loyalty members indicating the strong stickiness of our loyalty programs. Exclusive sales which include our own brands and exclusive on eight brands, the sales participation increased 2 percentage point to reach 36%, creating strong differentiation for the retail business. Next, on our O+O business model, i.e., offline plus online, it is working out nicely to help build market position and brand uniqueness. For your information, our CRM data shows that the customers who shop with us both offline and online buys three times more than the customers who shop with us only in our physical stores. So, this is observation from the business case for our O+O strategy. On store numbers in the middle chart, we continue to open new stores during the pandemic and 317 net new stores have been added year-on-year, bringing the total store numbers to 16,206 as end of June and around 80% of new stores opened are in China and Asia. Average payback period for the new health and beauty stores which represent the great majority remains healthy at 12 months. So, we have a short payback. And the split of these 16,000-odd stores is 50/50 between Europe and Asia. On EBITDA, EBITDA is reported at HKD6.725 billion, represent an increase of 45% in reported currency or 35% increase in local currencies. And the EBITDA split is 54% in Europe and 46% in Asia. The EBITDA growth chart on the top right shows a very healthy EBITDA worth of 35% from HKD4.63 billion in the first half of last year to HKD6.73 billion this year. And this number also includes a favorable foreign exchange translation gain of HKD481 million. If you look across the bar chart, all divisions saw positive growth except other retail, like what Kai Ming says, predominantly representing the PARKnSHOP supermarket business in Hong Kong, which had an exceptionally strong first half last year due to panic buying, which does not recur this year. For the core health and beauty business which account for 94% of the total division’s EBITDA, the year-on-year growth rate is a strong 52% in local currencies. Now, let me go through it one by one. First, for Health and Beauty China, the first half sales achieved a growth of 21% versus China's retail market sales growth of 11%. So, we are doing better than market. In the meantime, online sales continue its growth momentum at 80%, 8-0, versus the market growth of 23%. So, this increase in sales has resulted on year-on-year EBITDA increase as shown of HKD494 million, a strong 53% growth in local currency. Next, for Health and Beauty Asia, despite the resurgence of the pandemic in recent months in some countries, this division also reported an EBITDA increase of HKD170 million, a growth of 19% in local currency with Malaysia, Thailand, and the Philippines as the key contributors amid movement restrictions, demonstrating resilience of the Asia businesses. For Health and Beauty Western Europe, this division’s major operations are considered essential retail by the government, which allow stores to remain open during the lockdown periods. This has enabled the Western Europe division to deliver a very strong EBITDA increase of HKD1.04 billion, representing a very high growth rate of 82% in local currency, primarily from the Benelux countries and Germany. For Health and Beauty Eastern Europe, it also reported a HKD276 million EBITDA increase, reporting a growth of 39%. The predominant contributor to this EBITDA increase is largely in Poland [ph] which also enjoyed the essential retail status and have its stores remain open during lockdowns. So, with all these good contributing results, the total Health and Beauty business reported a strong EBITDA increase of almost HKD2 billion if you add all the increases together, representing a year-on-year growth of 52% in local currencies, as I mentioned earlier. Now, we turn to the EBITDA margin chart on the bottom right. With the increase in EBITDA, the EBITDA margins also increased correspondingly. For Health and Beauty China, the EBITDA margin increased 2 percentage points For Health and Beauty China, the EBITDA margin increased 2 percentage points year-on-year from 11% last year to this year’s 13%. For Asia, the EBITDA margin also increased from 7% in the first half last year to 8% this year. And for Western Europe, from 4% to 7% saw a quite a respectable increase. And for Eastern Europe, from 10% to 12%. So, as a result, the overall EBITDA margin for the core Health and Beauty business has increased 2 percentage points year-on-year from 7% last year to 9% this year. So, in summary, the robust year-on-year recovery of the Retail division, under the pandemic, has attributed to the successful digitization to drive further digital transformation and accelerating the innovation of its physical store portfolio and online channels, to offer a seamless O+O experience to the customers, resulting in food increases in sales and margin, and this crucial O+O strategy is working out well and will continue. So from here, I’ll pass it back to Frank to talk about infrastructure.

Frank Sixt: Thanks, Dominic. I'm not going to dwell too much on slide 12, obviously, CKI announced their results yesterday and will have done a very good job of explaining the puts and the takes. But obviously the major, sort of, anomaly in the first half was the deferred tax charges and deferred tax credits. And so -- which related to the changes in UK tax rates, which will be introduced in 2022, I believe, and involve a substantial increase. But nevertheless, even including that, showed a 5% increase in earnings, which is very healthy. And obviously if you exclude the effect of deferred tax charges And credits, a double digit, right, level increase in earnings. And that’s quite satisfying when you consider that the company has already taking in the impact of resets that took place in 2019 -- I’d say in 2020 and in the second quarter of this year, and I think it's about five of the assets. The chart on the lower right-hand side shows you where reset effects, right, will come into play, right. And some of those have already been absorbed, obviously, in the results announced with the first half. So, I think, overall, you know, very steady as she goes and very happy results from CK infrastructure, right. And, of course, a debt ratio and a credit rating that are completely supportive of CKHH’s own, right, debt ratios and credit ratings. So, I'll stop there and pass it on to Kin Ning to talk about telecom.

Kin Ning Fok: Thank you, Frank. And so, on the telecom. Hello? Can you hear me? Okay. So, all in all, the telecom side has a solid first half, and revenue went up by 7%. And then although the subscriber, you know, active subscriber went down by 2% to 38 million, but then the AMPU is doing quite well. Not only even fully went up by 1%. And regards, you know, data usage is quite a lot, so plus 30%, that gave this solid foundation to the business and the EBITDA for the year -- for the first half is HKD14.7 billion. And so if you look where does it come from, so I would like to refer to the left-hand side -- the right-hand side of the page then you got the 2020 EBITDA. And then you take off, in order to make the two half year comparable you take off the tower contributions, the tower expenses so that will make the 2020 figure comparable to the 2021 figures. And this showed that UK has a small increase and then Sweden have a small increase. And then Denmark, Austria and Ireland, they all have a small decrease. I would say that it is according to margin. I explained a little bit higher here and there and you will see in the next page. And then the thing that we showed, bigger figure is Italy. Basically, if you look at Italy for the last few years, the strategy was to take the income from the wholesale business and then especially with earlier and then let them take away our low ARPU customers because that you earn more money from the wholesale business than keeping those subscriber. So as a result, we saw that -- we saw in the last few years was very solid our strategy. Our strategy worked very well. The gross margin for all those year while the market is so competitive we have been able to stay while the market is so competitive, we have been able to stable and increase a little bit. And this year, it is the first year we saw that and earlier has built the network and then the channel takes a portion of the thesis back to that. So, that work especially into cities and we saw that the first time that we saw that the wholesale income earlier has reduced. However, we are quite ready because that -- our second brand has actually take off from the second half of last year and to this year and have a quite a substantial base now. And so that actually if you’ve seen in that second quarter result our base performance is actually quite pleasing. You know not only is stable. It was a little bit and then so that but then the first half results shows that -- the financial effects off less and less wholesale income and then offsetted by our cost savings. And also we won some settlement with another competitor. So, our EBIT dropped by HKD564 million. And of course, if we go to the far right and then we have a foreign exchange gain in this division because the European currency has performed quite flatly. And so -- and then the EBITDA percentage change, this shows the picture, and the margin is quite healthy Italy is still 45% while Sweden and Denmark at 32% and Austria, 43%. So with that, you can move to page 14. And this page 14 shows the detailed calculation. This is a simple represented of what we have just described. So, with this, I turn to page 15. Frank, can you…

Frank Sixt: Yeah. Just an update on the tower sales. So just to recap, in 2020 we completed the sales in Austria, Denmark and Ireland which brought in proceeds of €2.2 billion and gains on the disposals of €1.7 billion in the first half of this year. We completed Sweden and we completed Italy for total proceeds of €4.1 billion and total gains included in the numbers that we're looking at today of €2.6 billion. So that leaves the UK to be done. It is in the CMA regulatory process. As everybody knows, it has gone into Phase 2. And for those who don't know the competition process in the UK, it's really very different from the competition process in Europe. If we put in a nutshell, in Europe, if you go into Phase 2, you essentially have to convince the same team who put you into Phase 2 that they were wrong, right, in their conclusions on Phase 1 but you're always dealing with the same team and you're dealing with the same decision makers. But in the UK, in Phase 2, a panel is in independent, right, experts that are brought in. And both the CMA and Cellnex will make their case, right, to that panel. And we think that in that context, right, the position that Cellnex is in is very solid. So, we're -- we remain kind of confident that approval will be forthcoming. I suppose the only thing that it does is leave some question as to whether approval comes before the end of this year or whether it slips into the first half of next year. Given the structures on the regulatory process in the UK, it can't go past the first half of next year. But, of course, given all of the ructions and so on that the pandemic has caused, it may be a little slower than it might otherwise be. So, we will see what the timing is. I continue to believe that the outcome will be good and under our contracts, right, assuming that the regulatory approvals are obtained, which they were in all the other countries where we needed to obtain them including Italy. We would be getting proceeds of €3.6 billion, €3.7 billion and looking at a gain of €2.6 billion to go into the numbers either for the second half or for the first half of 2022. One of the things that you start to see in the telecoms reported figures is that we are normalizing, right, when we do period comparisons. So, I wouldn't compare to the prior year’s quarter for the impact, right, on EBITDA, right, of the tower sales because, obviously, they are paying money to Cellnex. And it’s important to understand how much that is. And, of course, they were not paying money to Cellnex in the first half of last year. And that will continue to be the case as we look forward. So, we look at the “normalized numbers” to get a fair period-on-period comparison for the telecom operations. The impact in the first half of 2021 was really very small, it was about €50 million across all of the countries that had been completed in December 2020, and, of course, Italy completed on the 30th of June. So, it had no impact, but will have in the second half. No change at all to the original announcement in terms of the use of proceeds, but obviously we have applied some of these funds already to reduce gross debt and net debt. So, with that, I would turn it back to Kin Ning talk about HAT.

Kin Ning Fok: So, HAT has a difficult environment. We are basically HAT is in Indonesia, Sri Lanka and Vietnam, as they have moves up you as well, no -- is -- in the first half of 2021, this replaces -- will be keep quite high by COVID-19. And so -- so that we have about 61 -- 4 million active mobile subscriber and then in the first half, we show a reduction in the EBITDA from HKD872 million to HKD800 million. Basically, if you look at Vietnam and then Sri Lanka actually is quite well. And then they actually do a little bit better than last year, similar period. Than last year’s similar period. And Indonesia actually the performance is quite well, in spite of the fact that revenue and margin went down. Actually, we did very good controlling cost and then we make it back by tighter operations and orders so that it shows a HKD100 million difference between this year and last year a similar period. So I will say that these saves would result in a difficult situation, I think everybody want to know about our discussions within those -- on emerging. I must say that we have a deadline here in middle of August and I am cautiously optimistic. And so there, I hope that we can have an announcement at that time. Okay. So we now go to sustainability. Frank, can you do this?

Frank Sixt: Yes. This is an area which has been over the last several years gaining focus and prominence across the group. And I want to say very satisfactory. If you go to page 18, right, we’ve released our 2020 Sustainability Report. I really do hope that you have had the chance to read it and that you will read it because I think it's very revealing about just how much is going on all fronts across all of the divisions and geographies in this group in various coherent directions but in terms of sustainability. And just to put a rough number on that, if you -- if you exclude -- because it's very difficult to allocate what we're spending in 5G development. But we’ve spent about $1.8 billion in the last three years across the board on sustainability initiatives around the group, and that's a number that we're going to be tracking going forward because it is very important. So, if you look at what ports are doing, right, they're deploying smart port technology, all sorts of electrification which is reducing their carbon footprint quite rapidly and quite successfully. Self-driving trucks are now part of the state-of-the-art net port development, right, approach, trialing hydrogen-powered, right, port equipment. And indeed in the UK where the port has been designated as a free port, it's also part of the green agenda, the government's green agenda, and with a view to becoming a, in effect, showcase for hydrogen-powered, right, ports operations which would be extremely environmentally friendly and, right, set a standard, right, for port operations going forward. In retail, right, you see just a plethora of efforts and commitments in the areas of, in particular, the circular economy, getting stuff on the shelves, right, that doesn't just consume resources but that consumes resources that can be brought back into the world's resource base, which is a goal and objective that is probably right up there with decarbonization and the initiatives relative to climate change that you're seeing across the board. Infrastructure. The CKI Group is really leading edge in terms of what they're doing, particularly in terms of the hydrogen economy. So, trialing delivery through natural gas pipelines of hydrogen off-takes and trialing hydrogen-based energies in homes substitute for natural gas, trialing as I understand it, a hydrogen powered train. About 50% of the trains in the UK are electrified. And so, there's scope potentially for hydrogen powered rail. It’s really quite remarkable. And then in terms of the EV universe planning ahead in the electricity distribution businesses for when and where, it will be necessary to provide additional grid capacity to support charging points and so on. So, really across the board with CKI is going and sustainability is. I think when you read the report, you’ll find very, very impressive. And then of course in telecoms, we are part of the CBP. We publish every year. We have targets in terms of our own emissions and decarbonization targets but we're also involved in a lot of projects looking at how 5G technology can support smart technologies, smart city technologies and so on that will have meaningful environmental impacts. So for the group as a whole, we've adopted for 2021 and 2022. Of course, we've endorsed the UN Sustainable Development Standards but we've also adopted out of those four key actions for this year. One is to continue to up our game on climate change, so make progress in terms of understanding our scope 3 emissions, as they're called, but also make sure the progress in terms of target setting division by division and over time. The second is seizing the opportunity of sustainability. That's really what I've been talking about in terms of investing in new technology that either works towards decarbonization or new technology that supports, right, the [ph] circular economy, right, creating great places to work that's very important. The, you know, the work environment has been really highlighted during the pandemic. How you deal with your people is the starting point, I think, you know, what kind of company you are. And one of the things that's happening there is that the workplace metrics are starting to be woven into short term and long term incentive calculation metrics, right, for managers. So, we're really taking seriously, right, the, you know, the need to make sure we're achieving the right things, right, you know, in terms of diversity and inclusion and the way that we handle our workplaces. And then lastly, of course, as we did from the beginning of the pandemic and we will continue to do just a whole plethora of things to support employees, support communities, support stakeholders, right, through the pandemic and that's happening in all of our divisions and will continue in 20 -- the rest of 2021 and into 2022. So as I say, we encourage you to read our sustainability report, and, you know, keep an eye on this area because I think it's an area that is necessary both from a capital markets point of view and a customer-facing point of view. But it is also, right, an area that is rich in opportunity potentially, right, for our group, for the future, right, across all of our lines of business. So, I'll stop there. And I think that takes us to Q&A.

Operator: Thank you very much. We will now begin the Q&A session. Once again, please feel free to raise your question in the chat box which is at the lower right-hand side of your screen. [Operator Instructions]

Kin Ning Fok: The first question is, is there more specific information about the breakdown of proceeds from tower sales to market share buyback, debt reduction, others, if any?

Victor Li: Well, we've started the share buyback plan and we've started paying down the debt. But remember, the biggest part of the cash proceeds just from the completion of the Italian tower sale, which only took place at the end of June. So, we don't exactly have a lot of time to use those yet. So, I think all of them we will be active pursuing.

Kin Ning Fok: Thank you, Chairman. The next question is what is the hierarchy of the company's capital allocation?

Victor Li: Well, it's a couple of things, the top priorities. I think the -- if we engage in earnings and cash flow-accretive telecom deals, hopefully engaging in in-market consolidation, that would be -- that would be very good for the group. The second one would be retail stores because they have a pretty good payback period. And continuing new investment in recurrent income in CKI, be it utility or steady income project that would also be a -- be a priority. But the two new areas would be debt repayment and share buyback. So, those two are, together with the earlier three, the five priorities, will be our focus.

Operator: Thank you, Chairman. The following question is, what is a comfortable gearing method increase return to shareholders?

Frank Sixt: Well, the world is -- pandemic and political issues are continuing and uncertainty seems to be a word in the next coming one year. And I think the only guide that I have is that we have to maintain our gearing ratios to make sure that we can maintain our credit rating. And we intend to stay in A Class of our credit rating.

Operator: Okay. Thank you Chairman. This next question is about telecom. What should we expect to see commencement of the revenue source of 5G?

Kin Ning Fok: Yeah. Okay. So, you know, we are now building up 5G infrastructure everywhere, UK, Italy, Hong Kong, Sweden, Denmark, and Austria. So, we are building all these stuff, and actually, you know, the one that we -- I think that we saw is they provide exceptional speed and then I think what we have -- we see that as a one of the best weapon to provide consumer of what we call the wireless, fixed wireless asset and it is, for just anything to -- a device to produce WiFi fixed wireless asset and it is, you know, for just a thing to -- a device to produce Wi-Fi at home at a speed even faster than fixed wireless asset. I use it myself. So, that we are selling this fixed wireless asset and started selling it, and the result is very pleasing. So, that the income for building, but we are also able to derive revenue from this new infrastructure.

Hans Leung: Thank you, Kin Ning. The next question is on the health. Do you expect A.S. Watson will maintain double-digit year-on-year growth rate in EBITDA and EBIT in the second half? Kin Ning?

Hans Leung: Well, in the last year, though with quarantine, the recovery of the retail business was pretty good. And then we have a very good second half 2020 against 2019. And then this year, I think we will continue to have good business. And of course, you know, we hope that the COVID-19 in Asia and the recent outbreak in the Mainland will be over pretty soon. And then we still have strong belief that we can maintain a growth against this year. So, I think I would like to be a little bit more conservative, but this business has been going strong since the beginning this year.

Hans Leung: Yeah. Thank you, Kin Ning. A follow-up -- the following question is on sustainability. With the process, look at the recently is on sustainability. With the process, look at the reasons we issued sustainability report. Will sustainability be a key focus of the group in this area going forward?

Hans Leung: I think we’ve covered already quite a lot. I mean, Frank have mentioned a lot and also in the chairman’s statement where I’ve said a lot about our focus in the sustainability area. But one thing I maybe want to highlight is that for a lot of other companies, sustainability may be a compliance issue, whereas for Hutch and CK Hutch and also the subsidiary, it's a new business opportunity. And we've always been doing that. So, if you look at -- for example, I use something close to home, Hong Kong Electric. I mean, the change on coal to gas and, hopefully, later on to renewable energies and the transmission of it is our active business. We are no longer only in the business of generating electricity. We’re in the business of generating cleaner air. So, it's a new opportunity. It's a new product. So, that's Hong Kong electric. If you look at CKI, we've been in solar. We've been in wind turbines, and we're looking at wind turbines that potentially can compete with gas. We are in the business of generation of hydrogen, looking at it as a -- I mean, hydrogen is like a battery, storing the power from be it nuclear or wind or solar that is not being used at the time of generation. And if you look at electrical vehicles, mostly we look at the cars. I look at all the chargers that are necessary to charge up all the vehicles. And if you have to charge all the vehicles, you have to build a whole new distribution network with transformers and everything to charge so many vehicles. That's wonderful business with CKI and Hutch. So, we're not looking at it only as compliance. We're looking at it as a good business.

Victor Li: The next two questions are about health. What is the progress of the O+O strategy and what is the sales participation of the O+O shoppers in China and ASW as a whole.

Hans Leung: Can I refer the question to Dominic then?

Dominic Lai: Okay. Well, thank you, Victor. In fact, the O+O strategy has been working out very well because so just to remind everybody, our O+O strategy is not O+O. In fact, within that physical network that we have built together with a technology on the online capabilities, we have incremental business when a customer shop with us both offline and online. So on our offline site, we promote the online products category and vice versa on the online. We introduce, for example, coupons that they can use in physical store. So, we are talking about incremental. This is a retail model for the future for A.S. Watson. So right now I think the O+O sales participation is around say 18% for the group and for health availability is 21%. So we are growing because I imagine that we have identified there’s three times more spending for O+O customers than the physical store customers. So the room for growth is tremendous. So, this is something that we are working on and is working out very well with feedback from the customers, with feedback and now CRM…

Frank Sixt: We're only around 9% of our base are doing O+O. And then, the growth this year was about 30-plus percent. So, that I think one of our strategy is to work on our CRM so to make sure -- try to increase in participant -- increase the participant of our CRM base to do not only shopping in our shops, but also shop throughout our online channels. I think this will -- is a way that can increase our sales revenue quite drastically. We are looking forward…

Victor Li: This is a model that the customer want; we are not imposing on them. That's why we have this 34% growth Kin Ning mentioned. So, the O+O model is working out fine with good increase in growth. And also, Ken Ning mentioned that the member, for example, in our entire portfolio, A.S. Watson, we have nine --only 9% of our customer base is O+O. So, there's huge potential to convert them to do O+O.

Frank Sixt: Malina, what is our latest number on the total of customers on CRM?

Malina Ngai: At the moment, it’s 140 million, which is 4 million more than last year same time. So, this is a clear indicator of the good progress of our O+O strategy because the more members we recruit, the more opportunities we can get.

Kin Ning Fok: If I may also mention about China, I think the question also covered China. In terms of China, O+O sales participation reached 40%. So the opportunities is -- again, as Ken Ming said, we are going to recruit more of the members. The current base is only 12% base of the 63 million members that we have in China, they’re shopping. So, we continue to confirm more of them and there’s huge opportunities that are ahead of us.

Hans Leung: Thank you. Yeah. The question about retail is, what is the payback period of opening new stores in China and are you still considering opening new stores in China? Kin Ning, do you want to pick up that question?

Kin Ning Fok: Okay. Actually it's more for Dominic but let Dominic, correct me if he can.

Dominic Lai: Okay.

Kin Ning Fok: I think our job, you know, is to opening stores. So, we are opening store and then the payback. Now, from head office I only look at the return point of view, so it has been because of the COVID-19 has been a slower payback, but still is 17 months payback which is a time on our capital and watch. So, do more, Dominic.

Dominic Lai: Yeah. Well, in fact, it’s very rewarding, you know, even the -- under the pandemic, the payback period is only 17 months. For the health and beauty as a whole is 12 months. So, we got some quick payback in, for example, in Asia and, say, Eastern Europe. And so, you know, this is a good investment if you look at the return on capital.

Kin Ning Fok: But it’s not only China we’re achieving similar results in Southeast Asian countries also.

Frank Sixt: Yeah. So, I don’t want this -- I mean, China is a wonderful market, but it’s not China only.

Kin Ning Fok: Actually, other countries, the payback is that only 12 months. Okay. Other companies is better.

Frank Sixt: Yeah. So Dominic, can you comment?

Dominic Lai: Yeah. The payback definitely on Health and Beauty 12 months, China, 17 months, and Asia is 9 months, Eastern Europe was nine months and then Western Europe is less than a year. So all these paybacks show that we select the sites correctly and then the O+O model also helps the footfall of customers coming to our physical stores and our conversion rate on online.

Victor Li: Thank you. Other questions?

Hans Leung: Thank you. The next question is on infrastructure. What are the opportunities to acquire new assets from CKI?

Victor Li: Sorry. I couldn’t hear that last sentence.

Hans Leung: Yeah. What are the opportunities to acquire new assets by CKI?

Victor Li: Well, we're looking at new assets all the time. But other than -- in terms of acquisitions. But in terms of the traditional infrastructure, we're looking also into building infrastructure. And one division that's been doing extremely well especially during this pandemic is all the water heaters in Ontario. And it's not the infrastructure that we traditionally see as roads or highways or electricity but it is as essential as other infrastructure in other people's home. And I think we’re the largest player in Ontario giving people hot water. Imagine in Ontario winter and you have hot water for your bath. I think that is a very good steady income. And now we're also moving into air conditioning. So we are again providing air conditioning to all these homes. Now, CKI is working together with CKA and CKHH in doing this. In the meantime, we're also expanding in areas of metering. So in Continental Europe, using our base in Germany, we’re spreading it into other countries. Now, none of these are major sort of acquisitions like big deals that were announced. But it’s like every week or every two weeks, we’re making new deals buying sort of a small neighborhood there and another neighborhood there on the market share. So, in all of these markets, we're growing market share without making big announcements, but cumulatively, they are quite respectable. So, infrastructure, that doesn't look like traditional infrastructure. It’s something that we like to work more on. I can go on and on garbage collection. Sorry. I shouldn’t use that word. Waste energy.

Hans Leung: Yeah. Thank you, Chairman. Okay. The next question is about positive vision. What is the outlook of focus growth in the second half of 2021?

Victor Li: Again, am I allowed to make profit projections?

Frank Sixt: We can talk about throughput I suppose, Chairman.

Victor Li: I think I can talk about the first half. I think the growth import is clear and strong. And in the first half 2021, it's very strong momentum. When you look at the Yantian, it’s -- if I’m correct, 21% year-on-year growth. Frank, correct me if I’m wrong with numbers. It’s 21% growth year-on-year in throughput. And even during this time in June, I think they have a scary experience with COVID-19, and given that, it’s still 21%. And I think I'm generally optimistic about second half. That's what I can say. The momentum seems to be continuing

Frank Sixt: Okay. Thank you, Chairman. Okay. Due to the time constraint, we are going to have the two last question. They are from -- for the -- they are all about Telecom division. The first one is, how will CKHH and Cellnex address their competition concerns of CMA?

Victor Li: Frank?

Frank Sixt: Chairman, I think I already addressed that but -- this CMA processes is a normal process. It's actually Cellnex’ process, right, because they are the guys who are acquiring and need to get approval in light of the impact on their position overall in the market. It's a new situation in the sense that -- in the UK at least, but nobody has owned as many towers as Cellnex owns today or indeed would own at completion of this. I think that they make states very [indiscernible] that is not an adverse impact on competition. But actually, it's probably pro-competitive in the sense that they are opening to the market assets that were off the market, right, when they -- when they were exclusively used by existing MNOs. But that's their case to make. And as I said before, the good news here is that the UK process is not like the European process. You are convincing, right, a new panel, right. The CMA staff make their case. Cellnex makes its case. We support that case in terms of facts relating to us that may be brought to bear. And I think overall, I'm quite optimistic that it's a process that we will get through. And so, we have gotten through it, right, in five other countries, including in Italy where the concentration is at least not dissimilar, right, to the concentration that Cellnex would have in the UK.

Victor Li: Thank you, Frank. The last question is about Indonesia. What is the current status on the merger with Indosat?

Hans Leung: Kin Ning? Frank?

Frank Sixt: I’ve reported earlier when Indonesian sessions show that we are positive about this merger. Is there anything that you want to add, Frank?

Victor Li: Just to say that, I mean, both -- all sides, actually, right, because it clearly involves Ooredoo. It involves Indosat, which is a separate public company, and ourselves. And all sides are working towards meeting that August 15 deadline. And I share Kin Ning’s optimism. But nothing is ever done until it's done. So, hopefully, we'll be in position to make a good announcement on the 15th of August.

Kin Ning Fok: But I think maybe to -- I can add my comment on this is the synergy is quite obvious. And I think there is good intent on both parties to conclude this. We’re now really on the nitty-gritty and the logistics of it. Now don't forget, I mean, Indonesia is now going through a really, really hard time during this pandemic. And our staff safety and everything, I think, we have to take a priority on this also. So, Frank, on one hand, we want a deal. On the other hand, we have to look at it from a human level.

Victor Li: And if it's -- we're talking about lives here. So, it’s very difficult operating now. People cannot travel. People cannot even move between neighborhoods. So to conclude a deal in these circumstances, I think it’s quite a challenge.

Kin Ning Fok: I just want to share the human side with our investors other than the numbers, which makes absolutely good sense, maybe a couple of days earlier, a couple days later. It’s not the end of the world.

Hans Leung: to make an announcement on the 15th I hope.

Kin Ning Fok: I hope so too.

Kin Ning Fok: Okay. Ladies and gentlemen, thank you very much for attending the presentation today. Due to the time constraint, we have to conclude our live webcast today. I already answered the remaining questions very soon. Thank you very much for joining.

Victor Li: No. I just want to say thank you to all the attendees and I really look forward to seeing all of you in person in the not too distant future because if I can see you, that means this pandemic is gone and business is good. And so, I really look forward to seeing all of you. Thank you.