Earnings Transcript for CKHUY - Q2 Fiscal Year 2024

Operator: Welcome to attended live webcast of CK Hutchison 2024 Interim Results Presentation. Today, our speakers are Mr. Victor Li, our Chairman, who will join us later. Mr. Frank Sixt, our Group Co-Managing Director and Group Finance Director and Mr. Dominic Lai, Group Co-Managing Director of CK Hutchison and Chairman of A.S. Watson Group. [Operator Instructions]. Before I hand over to Frank, please also pay attention to our disclaimer, which you can find on Page 2 of the presentation. We can start now.

Frank Sixt: 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 3, to 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, it'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 HKD1 billion 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 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. right, were taxable and 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, right, the tax swing was almost HKD2 billion 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 HKD2.688 per share. If we go to the next slide, on Slide 4, as I mentioned, EBITDA is up by 5%. That's by HKD2.3 billion. EBIT is up by 5% as well, which is HKD1.4 billion and I've explained how you get from there down to the net earnings reduction of 9%. Operating free cash flow was HDK600 million lower, which is a relatively small amount for the size of the company than in the first half of 2023. That's -- 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 cash flow -- operating cash flow and free cash flow slides a little bit later on. So, going to Slide 5. 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, 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 flat, ports were well up, CKH Group Telecom was well up. Everything else was line ball except for finance and investments and others, right and that was basically driven by lower trading profits. So, we didn't have the same trading profits as we did in the first half of last year in treasury. And of course, we include in finance and investment and in others, our share of HUTCHMED. And of course, HUTCHMED last year had a very large net incoming from upfront payments, 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, right. Again there, you'll see that the contribution profile has increased reports, 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, 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 HKD1.9 billion. Retail's operating free cash flow profile was down by about HKD1 billion. That's a slight reduction in cash and 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, right, 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. And -- 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 HKD1.8 billion. And then lastly, Finance & Investments, which I've already referred to. Operating free cash flow was down HKD1.4 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 payment -- upfront payments that I just referred to earlier on. Now if we go one slide further and drill down a little bit more on to Slide 7. Our free cash flow was actually up year-on-year at HKD8.9 billion, so that's up 17%. If we go through the pieces of the puzzle on the left, right, 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 and taxes, we've already talked about taxes the actual first half cash flow impact was about $0.5 billion for taxes and interest in cash terms in the first half were up by HKD883 million. So that's the increase that you're looking at on the right-hand side of -- roughly HKD1.4 billion. Having said that, operating free cash flow includes the interest income and that was up by about HKD0.5 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 HKD5.3 billion and a year-on-year swing, right, a positive HKD1.7 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 Cellnex 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 a favorable variance. When you look at telecom licenses, which are not included in the operating free cash flow calculation, there was a significant swing there, again, HKD949 million. So basically, spent nothing on telecoms licenses in the first half of this year and we spent roughly HKD1 billion 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 HKD2.002 billion which is a year-on-year swing of about HKD550 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. And the reason for that is that we sold a fair number of shares, actually, Cellnex shares during the first half. That accounted for about HKD3 billion worth of the cash flow inflow. And when you -- 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 net debt doesn't come down? If we move to the -- we are on the next slide, our financial profile. So average maturity is still sitting at 5 years. So really quite unchanged. I think the important thing to observe about that is that the -- 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 score with one more debt issue or we may not, but all in all, I think that we've -- 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 -- that doesn't -- of free cash flow that doesn't improve net debt, which is the proceeds on the Cellnex shares. But we also redeemed EUR0.5 billion 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 HKD143.1 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 Cellnex 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 -- welcome. 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 it at 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 and there's an expected 25 basis point decrease in U.S. rates in September around 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 that -- with that, I'm going to pass over to my colleague, Dominic, to explain what happened in Ports. Very good story.

Dominic Lai: Okay. Well, thank you, Frank. So, let's go in the individual business in more detail. First, if you turn to Slide number 9, ports and related services. The Ports division actually has a solid first half, primarily driven by a strong domestic consumption. This inventory replenishment caused by anticipated rising consumer demand and sea 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, shown 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 HKD7.938 billion. Now let's move to the EBITDA order fall chart below, which shows the year-on-year EBITDA change of each subdivision. First, starting from an EBITDA base of HKD6.509 billion in the first half of last year, we see across-the-board EBITDA increases. First, for HPH Trust, which represents mainly our Kwai Tsing port in Hong Kong and Yantian Port in Shenzhen, the EBITDA increased HKD20 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% -- HKD38 million or 12%. For Europe, which consists mainly our U.K., Barcelona, Spain and Rotterdam, Netherlands ports, the EBITDA grew 15% or HKD245 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 HKD1.1 billion. At the same time, the corporate and other port-related services also has a modest EBITDA growth of 8% or HKD52 million. So therefore, in total, we see a very healthy EBITDA growth of 22%, bringing the first half underlying EBITDA to HKD7.97 billion. We had a small, relatively small foreign exchange translation impact at HKD32 million. So, the reported EBITDA for the first half is HKD7.938 billion, as indicated on the slide. As for the outlook, we expect demand to remain positive, but to slow down a bit in Q4, shippers made front-loading orders in advantage 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 ports from the current 293 to 295. Now let's move to another business, retail, on Slide 10. The retail division has a rather challenging first half. The major challenge lies in the non-ASEAN Asian region, predominantly in Hong Kong and China. The other operations actually have performed pretty well with double-digit increases in both EBITDA and EBIT, which I'll show you in a minute. First, on store number, the division continues to carry out our store expansion program, whereby we have opened 346 new stores while closing 289 nonperforming stores. So as a result, our store number stood at 16,548 at the end of June, representing a 2% store number growth over last year. The portfolio spread on the stores is 50-50 between Asia and Europe. Now on EBITDA. EBITDA for the first half is HKD7.089 billion, flat, versus same period of last year in reported currency or a small 2% increase in local currency. The EBITDA split is 28% from Asia and 72% from Europe. Now let's move again to the EBITDA waterfall chart below, which shows the year-on-year EBITDA change of each subdivision. First, on Health and Beauty, China, this subdivision is under tremendous pressure as a result of a soft economy and subdued consumer spending. Against a backdrop of comparable sales decline of 19%, 19, EBITDA decreased by 65% or HKD489 million to a reported EBITDA of HKD 250 million, EBIT as breakeven. So, this is Health and Beauty China, very challenging. Next, for Health and Beauty, Asia. EBITDA increased 11%, primarily driven by steady sales growth from major markets in the ASEAN region, namely Philippines, Thailand and Malaysia. The next column is Western Europe for Health & Beauty, Western Europe, with strong growth in comparable store sales, primarily in the U.K., Germany and the Benelux country, EBITDA grew HKD538 million or 17%. For Health and Beauty, Eastern Europe, we saw good trading performance in Rossman, Poland as well as the Drogas business in Latvia, which together more than offset the drop in Ukraine, resulting in a net EBITDA increase of HKD156 million or 14%. So, in summary and for our Health and Beauty business, which accounts for 88% of the Retail division's revenue in this first half, the total EBITDA has reported a decent 6% growth in local currencies over the same period of last year. Lastly, when you see the slide, for other retail, which mainly comprises our supermarket and electrical retail business in Hong Kong as well as our manufacturing division, the combined EBITDA registered a decrease of HKD273 million. The decrease is predominantly in the Hong Kong supermarket business whereby many Hong Kong consumers do their grocery shopping across the border in Shenzhen over the weekends, especially when they travel there for leisure. So, all in all, the underlying EBITDA for the first half of this year for the retail division is HKD7.171 billion, 2% increase. And with HKD82 million adverse foreign exchange translation impact, the reported EBITDA for the Retail division for the first half is registered at HKD7.089 billion. Looking in the second half of this year, businesses in Europe and the ASEAN Asian countries should be able to maintain the momentum in achieving solid results. At the same time, various initiatives are being taken and implemented to improve the performance of the Hong Kong and China operations. Meanwhile, we will continue to expand our store network with a short CapEx payback period, which currently stands favorably at 11 months. And lastly, we continue to strengthen our engagement with our substantial loyalty member base of 164 million members. Now I would pass back to Frank to talk about our Infrastructure business.

Frank Sixt: Okay. Well, of course, CKI announced its results yesterday. So, this is all pretty well-known stuff. I'll go fairly quickly. Just to say, it's very satisfactory to see that CKI's reported earnings were up by 2%. And of course, that was reflected in dividend growth to $0.72 a share announced yesterday. The balance sheet remains very strong with a 9.8% net debt ratio, it's up a little bit, but nothing in any sense alarming. And when you look through that and look at CKI's effective share, of the underlying net debt of the associated companies in the group and joint ventures in the group, the see-through rate, excluding the complexity of power assets holdings is about 49%. So again, for the types of businesses that CKI is in, that's, by any definition, a very conservative underlying balance sheet. So, as we kind of look forward, we're very, very pleased that there have been two acquisitions completed in the first half, another one that was announced just yesterday, two of them in particular, are in renewables, which is a good direction of travel in terms of the group's overall ESG profile among other things. And the Phoenix Energy acquisition, right, in Ireland is, again, I mean, it's very much an ESG positive essentially because most people in Ireland still heat their homes using oil. And so, the driver of natural gas distribution to substitute for oil is actually a positive in the overall scheme of things. So, in terms of outlook, obviously, we expect a pretty steady looking second half. We'll start to get, hopefully, some contributions from the new acquisitions. And the company is in an excellent position to continue to look at new acquisitions. Moving on to Slide 12 and our telecoms business. This is looking first just at the three Group in Europe, really a good direction of travel and very good to see with revenue up by HKD1.2 billion, which is 3%, right, and EBITDA, up by HKD800 million, which is 8%. And it's nice real stuff. Basically, what happened was that margin improved by 3% by HKD836 million. Inflationary cost pressures, right, subtracted about HKD15 million, but OpEx was reduced, right? So, you get that HKD800 million roughly EBITDA improvement coming through which is really very good to see. If you look to the chart on the bottom right, you see right away that it's distributed all across the board. With the bulk of the improvement coming in the U.K., but significant improvements coming out of Sweden, Denmark, Austria and Ireland. And despite the fact that it's a registered customer, it's -- sorry, active customer numbers were down slightly during the year, Italy still reported an EBITDA increase in the year, as you can see of HKD15 million. What's happening here is that the margin profile of all of the businesses is improving significantly. So, from the full year of 2023, where Italy had a 34% margin in the first half of 2024, it had an EBITDA margin of closer to 37%. So, a good improvement there for the group as a whole. Margin has continued to lift since the first half of last year were up overall by 2 percentage points to an average 32% EBITDA margin. What that's doing for us is a couple of really good things if we go to Slide 13, the only thing that I would draw your attention to here, is in the box towards the bottom, if you look at comparable D&A less CapEx, we've crossed a milestone, which is that for the three Group Europe as a whole, we spend less in CapEx than our depreciation. So, CapEx is in the envelope of depreciation, which is somewhere where we've been trying to get it to for a very, very long time. And of course, the three Group as a whole has been EBITDA minus, CapEx positive for quite a long time. But again, the favorable EBITDA performance against a relatively flat CapEx performance basically means that for this year, it was significantly more positive. A lot of that actually being driven right out of the profile in Italy. So, I think that's pretty well all that I have to say about telecoms for now. There will be a CK Hutchison Group Telecom call later on, that anybody who is more interested in the details in this area can feel free to join. And I'll go straight to Slide 14. This touches briefly on our other operations. I think Cenovus, is, I would describe, as far as we can see, is firing on all cylinders at this hour, they increased the base dividend, of course, in the first half, which was very welcome. But more importantly, in July, they met and exceeded their target net debt threshold, which basically puts them into a regimen where they will be distributing excess free cash flow, right, by way of shareholder returns, either in the form of buybacks or increase dividends, right, from this point going forward, which is good news for shareholders like us from a cash flow point of view.

Victor Li: And also, Cenovus is now producing over 800,000 barrels a day which puts us as one of the major oil companies in Canada and North America.

Frank Sixt: Yes. Exactly. And from a balance sheet point of view, obviously, with very, very low net debt, they're in upgrade territory with S&P and they're in positive outlook territory with Moody's. So really very good there. In the Indosat Ooredoo Hutchison telecom operation in Indonesia, again, a very, very good story with EBITDA growing by 18% and earnings growing by 43%. And -- the post-merger performance of this company has been as good as I think I've ever seen out of a merger combination. So, we're very pleased to see that. The network has grown to 240,000 base stations. So, it's a very, very large operation. And again, this company also has a very healthy balance sheet. So net debt to EBITDA is less than 0.4 times. So that's quite attractive. Looking at TPG. They've had growth in mobile service revenue and growth in their subscriber base. They have faced some headwinds obviously, from the way that the NBN is being dealt with in Australia. So, all in all, I mean, I think they announced -- they make their own announcements, so I would refer you to their own earnings announcements when they're made. The one thing that I would point out here, is that, if they get the required regulatory approval, the network sharing agreement with Optus, is a very, very important milestone for the company because it will mean that from a mobile point of view, for the first time in either Vodafone's or Hutchison's or TPG's history, they will be absolutely no coverage disadvantage, right, relative to any of the other operators anywhere in Australia. So that's a big deal to look at. Lastly, on HUTCHMED. Obviously, the results were below last year's but that's only because last year included the very significant upfront proceeds from the Takeda transaction that I mentioned earlier on. What's really encouraging here is the sales of oncology drugs. And as you can see, oncology products revenue grew by 59%, compared to the first half of last year. That's almost USD50 million of incremental revenue. So, this company is starting to be a revenue and cash flow driven biopharma, which is a very good stage of development to get to.

Dominic Lai: Starting to contribute to our bottom line.

Frank Sixt: Exactly. And very briefly on the next slide, in terms of sustainability highlights, I won't dwell on it because they're self-explanatory. Just to say that we had a rather mysterious 1 notch downgrade from MSCI, in July, that just, recently, which had to do with some very odd things that they picked up in U.K. newspaper reporting. So, we're talking to them about that. As far as everything else goes the ratings remain steady and good. Our group commitments, Scope 1 and 2 emissions have been announced and are on track. We think we've reduced about 10% in both Scope 1 and Scope 2 emissions from the 2020 baseline that we set. We are very busy anticipating and dealing with the developing regulatory environment and governmental environment here, particularly the CSRD requirements in Europe. We've got to make sure, a, that we understand them and, b, that we're equipped to comply with them in a timely manner. And the only other development of note is that we issued out of a HKD2 billion bond issue that we did in April, HKD1 billion of that was a green bond that included eligible projects in renewables and clean transportation and energy efficiency, circular economy, et cetera, under our sustainable finance framework, which is, of course, audited for purposes of the green bond status. And on the right-hand side, I guess the thing that I would point to, again, is obviously the increase in renewable and other clean energy generation that's coming from CKI's acquisitions, which has the added benefit of improving the group's overall ESG profile. And then some very, very interesting stuff, which we may talk about a bit more in the CKH Group Telecoms meetings or briefings, and that's in energy efficient. Ireland has basically achieved a 50% power reduction just by changing the way that their networks are managed. And the U.K., this is a really interesting update, reduced cooling requirements by 12.5% -- sorry, cooling cost by 12.5%, just using AI-enabled technology to optimize the way that they use cooling in the data centers and so on. So, I will stop there and that takes us to Q&A.

Operator: [Operator Instructions]. The first question is as follow

Victor Li: We remain very open-minded about conducting share buyback, and we believe the current share price is attractive on a fundamental basis. The only reason we decided not to execute buybacks in the first half of 2024 is to preserve a conservative financial profile in these uncertain times. Thank you.

Operator: Thank you, Chairman. The second question is about Port division. Can you elaborate on the strong performance of ports, and so similar growth be expected in the second half?

Victor Li: Dominic?

Dominic Lai: Okay. Thank you, Chairman. Well, what we see is that the improving trend in the second half of last year actually has continued into this year. Major ports such as Mexico, Pakistan, U.K., Yantian and Panama, were all growing at double-digit rates. We were also able to secure new services visiting our port. Storage income, which account for around 9% of the ports revenue was also benefited for some port congestions and increased by 4% in the first half of this year. At the same time, there's also a trend that shippers are front-loading some of the cargoes to avoid congestions in some ports caused by the Red Sea situation. And we expect the Red Sea disruptions and port congestions to continue into the second half. Overall, volume growth is expected to remain strong in Q3, but there may be some softness in Q4 due to the fund loading by shippers that I just mentioned. Thank you.

Operator: Thank you. The next question is as follows. Are you confident that CMA will approve the proposal for U.K. Vodafone merger -- of U.K. merger? Approve Vodafone U.K. expanding mobile network sharing with Virgin, with VM O2 and agreeing to divest spectrum?

Frank Sixt: It's never wise to be overconfident about regulatory approvals. But we certainly believe that in creating the third mobile network operator that we're creating, which will have the scale to compete with the other 2 big networks in the country, it should strengthen competition in the U.K. mobile sector, and that should be something that will be apparent to regulators if we are successful in presenting the case. Obviously, we are continuing to engage with the CMA through the Phase 2 process. And we are hopeful that the CMA will recognize the transformative effect of the planned merger. I would also add that under the leadership of Melanie Dawes at Ofcom, which is the industry regulator. Ofcom is engaged in making sure that there's a good, clear and transparent understanding what it is that this merger is expected to agree -- achieve. So that, I think, is a helpful direction of travel. I should also point out that Vodafone made an agreement with VM O2, which is conditional on the completion of the merger as well as the CMA approval of the merger. But this agreement is very important because it includes a sale of spectrum to VM O2, which as we all know, is somewhat spectrum-constrained compared to all the other operators in the U.K. It extends the network expansion benefits from our HKD11 billion investment plan committed in MergeCo to VM O2's customers. So that means that the overall mobile experience will be better for over 50 million customers in the U.K., not just MergeCo's customers. And of course, it improves the balance of spectrum holdings between all the U.K. mobile operators. So, it should, as a result, significantly enhance the competitive environment in both the retail and very importantly, in the wholesale mobile markets in the U.K.

Operator: Thank you. The next question is about secondary listing. Chairman, I got a [indiscernible] similar question in incoming e-mail in Chinese. And I will repeat the question first in English and then in Cantonese. Will CKH and other member companies of CKH consider a secondary listing in London like CKI? [Foreign Language].

Victor Li: [Foreign Language]. In English, I haven't even thought about it. Absolutely, no plans for the time being. Let us finish our job with CKI's second listing first.

Operator: Thank you, Chairman. The next question. Congratulations on CKI acquiring free projects this year. Will CKI continue to look for acquisition opportunities coming up?

Victor Li: We're very happy with CKI's recent acquisitions. They are all of good double-digit returns. Probably even higher than projects acquired in earlier years. The CKI has now grown in scale rapidly. It has become a major infrastructure player on the global stage. It is now probably, I can say, one of the largest global infrastructure companies in the world, in scale. Thank you. Maybe some numbers. As at the end of June, CKI had cash on hand of about HKD9 billion. Net debt to net capital ratio was 9.8% and look through debt at an industrial low of about 48%. S&P credit rating is A/stable. So CKI's strong financials allow CKI to continue to explore new acquisitions. In addition, it has got strong strategic partners, CK Assets and Power Assets. both of which also have solid financials for new investments. Thank you.

Operator: Thank you, Chairman. The next question, what is the financial performance of A.S. Watson?

Dominic Lai: Okay. A.S. Watson's financial performance around the world is good except what I just mentioned, except for the non-ASEAN Asian markets, i.e., Hong Kong, Taiwan and Mainland China. On Mainland China, while the economy is a bit soft, as I said, consumer spending is subdued. But however, I dare not -- and I repeat, I simply dare not still be bearish of the long-term China retail market because if you look at the economic statistics, China's GDP compound annual growth rate over the past 10 years is over 8%. So.

Victor Li: What Dominic said just now is absolutely correct. While today, business in China is tough today, we dare not bet against the long-term growth in the China retail market. [Foreign Language].

Operator: Next question. Your infrastructure and utility division has been performing well and you have made a few more investments recently. Will you be interested in infrastructure projects in Hong Kong?

Victor Li: Indeed, this division has been very resilient in the past few years and has contributed well to the group. While we continue to search for attractive opportunities globally, we also have a keen eye on projects locally. We're pleased to enjoy double-digit IRRs in many of our overseas infrastructure businesses. And many have what I call good structural liquidity. This means that if a great opportunity comes our way in Hong Kong, we have the ability to raise capital internationally for deployment in Hong Kong. [Foreign Language].

Operator: Thank you, Chairman. The next question, what is the outlook of the group's health and beauty sales in Europe and Asia in the second half?

Dominic Lai: Okay. Well, let me first comment on Asia. Comparable store sales growth in Asia, including ASEAN and non-ASEAN market was nearly 0.3%, primarily due to strong growth in the ASEAN markets of 7.3%, partly offset by negative growth in the non-ASEAN market of 5.9%. So positive 7.3% and then negative 5.9% in non-ASEAN market. So, for example, in the three major markets, in the ASEAN region, Malaysia, Thailand and the Philippines, they continue to be robust with double-digit year-on-year EBIT growth in local currencies and also gaining market share at the same time. So, these positive sales trends are expected to continue in the second half with ASEAN markets continuing to offset any softness in non-ASEAN markets. Thank you. In Europe, of course, we talked about Europe. Comparable sales growth in Europe remained high at 6.6% in the first half, which is pretty decent and healthy sales growth was supported by both volume and price growth. So, it's not just by price, but both by volume and price. So, for example, in the Netherlands, [indiscernible] remains the market leader and is able to even capture more volume from supermarkets. In the U.K., Health and Beauty market, Superdrug, our main brand was able to increase its market share. So lastly, also visit a company, Rossman. They are expanding its store network in Poland, which will underpin solid growth in the second half. So, all in all, we are confident that Health and Beauty as a whole, will maintain solid earnings growth in the second half. Thank you.

Operator: Thank you, Dominic. The next question, how is the Red Sea disruption evolving? And was there any impact on HPH operations so far?

Dominic Lai: Okay. So of course, I don't have a crystal ball. But there may be a possible long-term resolution to the Red Sea crisis following what happened in Gaza cease fire proposal back in June. However, in the industry, shipping lines may need more time to rearrange schedules and networks and for operations to return to normal even after the Suez Canal resume transit. So, the Red Sea disruption will continue in our views into the second half of this year. On our ports, on our business, our Middle East ports are mainly scattered for local economy and thus not being affected much by the service fee sharply as a result of the Red Sea situation. On the contrary, our terminals in Barcelona, Spain, Sohar and Bahamas actually have gained ad hoc transshipment volume as a result of this service revolving.

Operator: Thank you, Dominic. The next question, what is the expected CapEx level of your Port operation this year?

Frank Sixt: Well, as you saw in the first half, obviously, Ports CapEx was less than -- it was about half of what it was in the first half of last year. So, it will definitely be lower in 2023. And the main reason for that is that we've completed of a major expansion project, which is the container terminal at [indiscernible] in Egypt. I think the division runs very, very tight spending controls on capital investments, on projects, on new investments. We are continuing to invest in the second half. So, the second half will be a bit more CapEx intensive than the first half was but that's because we're completing the second birth at Ensenada in Mexico. Mexico is, of course, all container terminal facilities are growing in terms of capacity because there's been so much increase in traffic in Mexico. Thailand has been doing very well for us. So, we're spending some money completing expansions there. Barcelona, we just mentioned, right? And of course, at Rotterdam, we are investing to bring the competitiveness of the port back up to scratch, particularly in terms of cost structure. So, all of the spending that we're doing in the second half is really stuff, which is essential to maintaining our competitive position overall within the global ports sector.

Operator: Thank you, Frank. The next question. Will there be any change of the company's strategy after the changes of the company's CEO positions earlier this year?

Victor Li: There should not be any significant change of the company's strategy. As say, all three of us are not new to the group. CKHH will continue to manage our assets and businesses so as to achieve growth in their underlying value, while preserving our solid financial position and maintaining our current investment-grade rating, we will also maintain our long-term objectives of exploring value-accretive transactions for our shareholders and deploying capital in a way to deliver good returns to shareholders. Thank you.

Operator: Thank you, Chairman. The next question. What's driving the improvement of U.K. earnings? And when do you expect it to be EBIT positive?

Frank Sixt: Okay. Well, basically, the growth is actually being driven by what we would call the noncore customer base. So not the three brands traditional customer base per se, but growth in things like Smart TV and things like our business operations and in a couple of other areas, things like bulk SMS and so on. So overall margin improvement, right, and that is more than offsetting the higher operating costs that you get from an enlarged network. And of course, the element of cost inflation that I mentioned earlier on, part of that is in the U.K. and in people costs. We're forecasting an EBIT improvement, as we consider -- as we continue to benefit from some accelerated depreciation that we took in 2023. I think the important thing to note though is that, it's the only one of our operations that remains in a meaningful cash flow negative position. And it still has a significant amount of unrecovered cash investment remaining on the table in the U.K. So, we have quite a ways to go. That, among other things, makes the merger that we are looking at in the U.K., so important. We needed to achieve the required scale which can support the kinds of levels of investment that are required to create a competitively balanced mobile network infrastructure picture for the U.K. as a whole, whether you're looking at 5G or you're looking beyond 5G.

Operator: Thank you, Frank. The next question is as follows

Dominic Lai: Okay. Well, let me give you some numbers. A.S. Watson, we opened 346 stores in the first half. As I mentioned and we closed some with net addition of 57, a mild 2% growth in total number of stores comparing to last year. In these new openings, 36% were in Europe and 23% were in ASEAN Asia, as I mentioned, which is doing quite well. While we pursue our sales growth in both online and off-line channel as a part of the O+O strategy, our growth store opening this year in the second half is expected to be higher than the first half with a total of around 1,100, -- 1,100 for this year, higher than what we did last year of 878 stores. 59% of the gross opening for this year will be in Europe and ASEAN Asia, where trading momentum continues strongly while 28% will be in China's lower-tier cities and for store locations with overall China store network size remained the same, similar to last year. Currently, we have around 3,700 stores in China. So, as we have just spoken, China due to soft consumer sentiment and with relatively large proportion of our sales coming from online. In fact, 50% -- over 50% of the sales is from online. So, our focus will be more on short payback and profitability on the physical stores opened instead of just chasing after the numbers. And we look at the payback, we look at which city that we want to grow. So right now, it's more in the lower tier cities for a better return and quicker payback. Thank you.

Operator: Thank you, Dominic. The next question is as follows

Frank Sixt: Okay. Yes. Thanks, Chairman. Well, look, it's EBITDA was stable against the same period last year. That was primarily driven by sound cost control measures. And some significant growth in what we call the beyond the core revenue stream. So, the nontraditional revenue streams, which include things like cybersecurity products, insurance products, energy products and that, all, but offset at a very moderate 1% decline in net customer service margin. That decline was due to churn and that is quite simply due to the continued aggressive pricing by our friends at Iliad in the lower value end of the Italian consumer market. In terms of the Vodafone Fastweb merger, all in all, our thinking is that it probably benefits the sector as a whole, the merged entity will probably adopt a more rational approach on pricing certainly than Fastweb was as a stand-alone MVNO. And so, with Wind Tre's customer base being more consumer focused, we would expect the impact of the merger would be slightly positive for Wind Tre in the midterm. And again, aided by continuing growth in those new beyond the core nontraditional telecom margin sources.

Operator: Thank you, Frank. We still have two more questions. The next one is about Telecom division. What is the CapEx outlook of the Telecom division in 2024?

Frank Sixt: So, CapEx will be pretty similar to what it was for 2023 as a whole, probably a little bit lower. I covered some of that in the slides on telecoms. And again, we can -- we'll be going into more detail on the CKH Group Telecoms announcement presentation later on today. Basically, we will continue to manage CapEx and cash flow to keep a strong financial profile. As I said, CKH Group Telecom is very solidly EBITDA minus CapEx positive and it's going to stay that way. But we're striking a bit of a balance in terms of spending, so that we've got the right levels of investment to keep growing new segments such as the ones that I talked about, but also obviously, fixed wireless assets, which in many ways is becoming more meaningful as a competitor to fixed line broadband offerings in a number of our markets.

Dominic Lai: Yes. FWA is looking very encouraging.

Frank Sixt: Yes.

Operator: Thank you. The last question is about ESG. what are your thoughts about future developments in sustainability disclosure? And how did you manage the impact to your business?

Frank Sixt: The whole area of sustainability in the ESG disclosure is continuing to receive an increasing level of attention from governments and from policymakers. So, we're expecting more governmental and regulatory requirements all around the world going forward. Now how do we deal with that? You've probably seen from our sustainability report, I mean, we engaged with a whole lot of different stakeholders in different businesses and all around the world. And so, what that does is, it gives us the ability to remain current as to what is best practices in all of the sustainability and ESG areas that are touched by our businesses and we try to incorporate those both into strategic planning and into our risk management activities across the board. We also use outside consultants to make sure that we have correctly understood, anticipated that we comply with emerging regulatory requirements. And I think I mentioned in the presentation, for example, with the new CSRD requirements coming up in the EU. Internally, we've spent some reasonable amount of money to upgrade and digitize our internal reporting capabilities and that's directed to ensuring that we really are measuring our performance and key metrics correctly. And reporting externally correctly and in a proper way so that we're not ever put in the position of being exposed to claims of greenwashing.

Dominic Lai: Also, CKHH, including CKI, very often, we are not looking at all these environmental initiatives not only as an obligation, but very often it's a business initiative. So sometimes we can develop good businesses out of these initiatives that is quite profitable also for shareholders. Thank you.

Operator: Thank you. As we have no further question at the moment. This concludes our webcast today.

Victor Li: Thank you.

Dominic Lai: Thank you.

Frank Sixt: Thank you.