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Earnings Transcript for CKHUY - Q4 Fiscal Year 2020

Hans Leung: Good afternoon, ladies and gentlemen. Welcome to the live webcast of CK Hutchison 2020 Annual Results Presentation. Today, our speakers are Mr. Victor Li, our Chairman and Group Co-Managing Director; Mr. Canning 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. [Operator Instructions] 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.
Canning Fok: Okay. Good afternoon, and let's turn to Page 4 of our presentation. So that this gives you a summary of our 2020 results. Revenue -- now, 2020 is a year plagued by COVID-19 and also the more significant is oil price drop that affects Husky Oil in a material way. And so this -- all these result has been taken into account of all this problem, and you will see that revenue, the total group dropped 8% and EBITDA dropped 13% and EBIT should drop 24%. And our earnings, minus 27%. And net earning per share at $7.56, minus 27% and correspondingly, [EPS] is minus 27%. But however, because of -- we have -- the operation has been operated very tight and then we have some mega transaction come through, and then the debt ratio has dropped from 25% last year to 22%. So that we can see that this is a very excellent result because what happened at the oil front is so difficult, and the figure come through negative against us. It is so bad, but thanks to the VHA deal that we merged with TPG and thanks for the tower deal. And then we actually generate enough profit to overcome the mega losses incurred by Husky Oil. And also during this year, we also fixed Husky which we will go into more detail by merging with Cenovus as the end result is a much better animal. And if you look at the -- today, when we merged with -- we were about $3, and then now Cenovus is over $10. And then if you go back to what we own in Husky, the [equipment] is about $8.50. So the result of the merger gives us a lot of hope and then we are [Indiscernible] If you go to Page 5, okay, give you the EBITDA because Husky Oil order country and percentage changes. If you see that instead of 1 circle, we now have 2 circles. One is the outer one is the actual [auditors] because Husky suddenly become negative. So that every other thing become bigger. And then the inner one -- the outer one is the actual one then the inner one is the were set right count and if you look at the graph, the chart on the right-hand side you saw that -- you saw the waterfall of how the EBITDA dropped. So we go from 2019 underlying EBITDA and then the part basically dropped $2.5 billion. Actually, it's mostly came from last year as first half and the second half is structured much less, and it went to the fourth quarter. Actually, it is quite a good performance. And the same thing is on the retail and then the retail is also suffered by the first half when the whole business dropped 50%. But then the second half was doing quite good. Actually, second half was better than last year. This is why. So the retail -- so as a whole year, it only dropped $1.8 billion. It's mostly come from first half. And then the interest structure doesn't really affect the -- by the COVID-19 so it's doing -- it shows a green color. And Husky is the big casualty and which we will describe to you later. And then the telephone group is basically -- although it showed the HKD 3.3 billion negative is actually is doing quite good. Actually, if you look at the underlying performance, it's similar to last year. So what happened is that this -- there was a nonrecurring item or onetime item happened last year, which is a $1 billion happen in Italy when we shift some compensation from some vendor and then about $1.2 billion in -- from the 3 U.K., where we got some compensation -- some benefit from the VAT. And then there was $1 billion from the corporate side, where there some adjustment came through. Actually from the operations [Indiscernible] you will see later is quite stable. And the same thing happened to Asia, and then it is quite a stable operation and now. So on the head office front, I would -- basically the interest, I will let Frank talk more to it, okay? So this year, you will see that most of the -- majority of the income come from Europe and Hong Kong become more enough because of the Husky Oil doesn't contribute anything. So the next page, Page 6. Frank, on the cash flow side. Can you take over?
Frank Sixt: The first sort of easy snapshot of what the cash flow profile of the group was like. So operating cash flow is just a very quick proxy. It's EBITDA from our subsidiaries plus distributions from our associates less CapEx and investments. And so obviously, on that measure, we had a meaningful decline from 2019, right? And you see that in the bars, basically, the result for this year at $39.8 billion is the -- what you get by subtracting $69.6 billion -- sorry, $29.7 billion from $69.6 billion on the columns on the right. And the distribution of that obviously speaks pretty well for itself. Interestingly, though, this rough measure tells a lot less of the story this year. So if we go very quickly to the next slide, the -- there's really no important number on Slide 7. There's really no important message just to convey here, except that, essentially, everybody is living within their means. And in fact, everybody is living within CapEx and investment envelopes that are less than depreciation except, right, in the telecoms group and in HAT, where we are still in a meaningful investment phase. But obviously, the message is even on the operating free cash flow measure, right, we're very well covered in terms of our spending profile. The next page, Page 8, is actually quite a little bit more interesting this year because it looks at the whole free cash flow picture. And when you do that, you obviously have to take into account of what's happening to interest expenses and financing costs. You have to take account of what's happening in taxes. And you have to take account of what's happening in working capital. So it's a slightly complex chart. But to simplify it, if you go to the right-hand side, right, last year's free cash flow, underlying free cash flow after tax, after working capital movements, after financing cost, et cetera was $21.7 billion. Now we've just gone through the reduction in EBITDA that we suffered, right, during the year of $10.9 billion, but we recovered significantly more than that, right, in terms of the, believe it or not, overall level of dividends that we received from our associates excluding Husky Energy, of course. But interest and financing costs and taxes paid were down very significantly. So in the aggregate, by HKD 6.1 billion. And working capital was managed very, very tightly all around from the group. I have to, in particular, single out the retail division, right, for their excellent job in managing working capital over the course of the year. So the swing from year-to-year is $9 billion. So the free cash flow underlying profile for 2020 is $27.9 billion, right, which is fully $6 billion-plus better. And obviously, I think a very encouraging picture in terms of the group's financial profile. If we go to the next page, right? This is this is Page 9. The group's financial profile, not surprisingly, after everything that I've just said, right, is still very strong. Net debt, as we said, has reduced, has reduced substantially in absolute dollars and has continued actually to -- we've been continuing to reduce gross debt right in the first 2 months of this year. Our net debt ratio is at 22.2%. One of the things that works against us there is the movement in sterling and euros, right, over year-on-year, which increases net debt. And as a result, negatively affects the ratio. So you could argue that on a like-for-like basis that the ratio is a little bit better than that. Our ratings stayed stable. Our weighted average maturity at 4.7 years is very manageable. We are still further down in terms of the average cost of debt capital at 1.7%. We're now, after swaps, 31% in floating rates and 69% in fixed rates. That's again less floating than last year. We were 33% last year and 67% fixed. So we've been taking some advantage of moving out along the curve a bit, right, as we medium- longer-term rates, obviously, have been at historic lows. I don't really have anything to say in terms of our debt maturity profile, except, as I mentioned, we reduced gross debt already in Q1 led by EUR 1.6 billion, roughly USD 2 billion. And CKI, of course, will report that they redeemed the perpetual of $1.2 billion right, in full, right, in February, I believe so. I think that's all I have to say about the overall financial profile. And the next section is ports. So Canning?
Canning Fok: Okay. Yes. The ports this year is a difficult year in the first half because of the China shutdown and then towards the middle of the year is the European shutdown. But then it really recovered well towards the end of the year. So that is the whole story. So that we still -- our asset is USD 11 billion and then 283 berths and 52 ports in 26 countries. And last year, we handled 83.7 million TEU, which is 3% below 2019. And then the EBITDA is $10 billion -- almost $11 billion and 19% of 2019. And if you look at, basically, if you will look at the waterfall chart from 2019 to 2020, you will see that actually, if you look at the first red is the main line and so basically it's all come from because in the first half we reduced Shanghai by 20%, so that the reduction mainly comes from the reductions of interest. It's not really from the operation. And then if you saw a bigger figure, $1.3 billion from Asia, Australia and all those. One of the major big is about $600 million and then come from the close of the [Dan] mine and then we provide, if you take the opportunity to provide some of the middle -- small Middle East port. And so that there is about $600 million. And then another $200 million from -- if you compare to last year, demand because we finished the concession in September. So that if you take that away, the other is a small drop. So that actually it was better in the second half already. And then the corporate is at 400 -- almost $500 million, it's basically the dividend from OOCL, which we had last year, we don't have this year. So the ports this year have a difficult time, but they hold, they fought pretty well. And then about the September -- August, September onwards, actually, the throughput start coming back. And then we still see a strong throughput growth until now this year. If you go to Page 11 somebody move the page in the screen. And so that shows you the monthly throughput. And if you look at that, the trust is all -- the green is about 2019. And you can see that all for the main trust Mainland, Europe and Asia, Australia, if you show -- it shows that in Asia and then after June, they are all doing quite well. And then in Mainland, it is the same thing. In Europe, actually, it is getting better and better in the summer. And then it's getting better in the last 2 months and the same as in the other Asian and Australian ports. So that the story is that -- is coming back, the stories. And then we see strong performance in January and February and also March up to today, right? Page 12, let's go to the famous retail. I think we got Dominic here. He is not only a head office [Director], but he also is the CEO of Watson. So I will invite him to talk Page 12.
Dominic Lai: Okay. Well, thank you, Canning. And I'm sure all of you will be interested and anxious to know what the retail division have -- was doing last year and also into the first 2 months of this year. But before commenting on the slides that follow, I would like to pass on the following messages so that to put things into the right perspective. 2020 was a testing year for all retailers in the world and A.S. Watson has proven to be resilient versus competition, with total sales dropping only 5.7% versus 2019. The first half of the year was very challenging with massive store closures, especially in China. But then we have a very robust recovery in the second half, both in terms of sales and profit. To illustrate, EBITDA in the second half increased significantly by 111% when compared to the first half. And like what Canning said, 12% increase over the same period second half of 2019. This was helped by large -- by the large loyalty member base and an acceleration in our digital transformation. At the same time, the O+O strategy, i.e., offline plus online, has enabled us to significantly increase our digital sales by leveraging our physical store network. So the physical stores actually helped the e-commerce side. So as a result, the e-commerce sales increased over 90% in 2020. And to update you on the last -- in the first 2 months of this year, EBITDA and EBIT has already returned to the 2019 level. So now let's go to the slide. So this gives you an overall perspective of how the retail division was doing last year. Some corporate information on the left. The retail division is the world's largest international health and beauty retailer, operating in 27 markets with 139 loyalty members worldwide. One of the largest loyalty programs in the world. And more importantly, 65% of our total sales actually came from this member base. Our exclusive sales participation reached 35% of total sales creating a lot of uniqueness and differentiation. The business strategy for the past few years has been focusing on O+O, off-line plus online. It's a new terminology that I want to elaborate. In fact, it leverages on our extensive network and also our CRM member base. The reason for this O+O strategy is quite obvious. Because our data analysis shows that an average O+O customer, i.e., a customer who buys both off-line and online, spend 3x as much as they spend by customers who only shop in physical stores. So there's huge sales upside potential for us going forward. And if you want to understand more under this very important O+O strategy, Malina Ngai, the Chief Operating Officer of Retail, would be very happy to elaborate for you in the Q&A session. On store numbers, the division has 16,167 stores at year-end, an increase of 2%. 50% of the stores are in Asia and 50% in Europe. In terms of EBITDA, despite the tough trading environment marked by store closures and reduced footfall, EBITDA only dropped 15% or 16% in local currency to $14.4 billion. Moreover, if you exclude a onetime dilution gain of $633 million recognized in 2019 as a result of a merger between the partnership of China and Yonghui of China, the EBITDA decrease is even lower at 11%. So the underlying EBITDA decrease is only 11%. But reportedly, 16% in local currency. In terms of the split, 48% of the EBITDA is in Asia and 52% in Europe. On EBITDA growth, the waterfall chart on the right shows decreases in all divisions, except other retail, the green block, which shows a $1.1 billion increase. This represents a strong performance of PARKnSHOP, the supermarket chain; as well as Fortress, the electrical retail chain in Hong Kong and strong performance in the Watsons water and beverage division. On the other hand, the health and beauty business had a total EBITDA decrease of 20%, around $3.1 billion, attributed by a decrease of $1.77 billion in health and beauty China, followed by $628 million decrease in health and beauty Asia, $553 million in Western Europe and $190 million in Eastern Europe. Noteworthy is that the EBITDA decreases in health and beauty mainly took place in the first half of the year, as Canning mentioned, as also the Chairman mentioned when it dropped 44%. But since then, we saw a very strong recovery in the second half when we witnessed even a small positive growth of 0.3%. So net-net, the total EBITDA for the year is $14.4 billion, which includes an FX translation gain of $161 million. For EBITDA margin percentage, it's worth mentioning in the lower right-hand table as a result of decreases in EBITDA dollar, the EBITDA margin percentage of the various health and beauty divisions were also adversely affected. Health and beauty China saw a 4 percentage points drop from 18% to 14% whereas the other divisions dropped 1 percentage point. The wider margin percentage decrease in China is due to the significant drop in EBITDA, as aforementioned, as well as a shift in category mix. What I mean by category mix is that under the epidemic, we saw less consumption of the higher-margin skin care and cosmetic products, while consumption of the lower margin personal and body care products were still in demand. So we believe this is reversible post COVID, and we are seeing it happening in recent months. Next slide, Slide 13. And in fact, the next 2 slides shows the quarterly sales changes and their respective health and beauty divisions during the year. The blocks in the middle illustrate the quarterly EBITDA change year-on-year, and the charts underneath simply illustrated temporary store closure profile. First, for the health and beauty China chart on the left, we can see the biggest sales decrease was in Q1 when the sales dropped 78% in February with over 2,500 temporary store closures. With the closed stores gradually be opened in subsequent months, we can see from the graph that the negative sales growth improved. Also worth mentioning is that the sales reduction is smaller than the stores traffic reduction, which is illustrated by the red dotted line underneath the sales change graph. This was the result of increases in customer conversion rates and higher average transaction -- transaction value so that the sales decrease is lower than the traffic decrease. Overall, the total sales decrease for the year is 19%, with first half decrease of 26%, improving to 11% in the second half. So we have a tough first half but recovered nicely in the second half. Correspondingly, as shown in the red box in the middle, the EBITDA dropped 62% in the first half and narrowed to only 13% in the second half with total EBITDA decrease of 39% for the year. Nonetheless, the silver lining is that there's a rapid proliferation of online sales, which increased 123% year-on-year. The increase in online sales was held by the milestone initiative, which I mentioned last year during the internal results, whereby our 28,000 plus store staff remained connected with our loyalty members through the WeChat enterprise app to retain sales. So even during the close downs, during the pandemic, our customers are still engaged with our 28,000-odd store staff or sales agents and beauty advisers. So O+O participation has reached at 35%, China got the highest O+O sales participation within the retail group. Now next for health and beauty Asia. We see a sharp decrease of around 30% in Q2 as a result of store closures in a number of countries in April. Overall, the sales decrease for the year is 16%, with first half decrease of 17%, improving to 14% in the second half. So on EBITDA, I must point out that Hong Kong had a major adverse impact on the division's EBITDA, with a sharp decrease of [indiscernible] tourist arrivals due to the border closures, our Hong Kong Watson stores located in tourist areas were severely impacted. But on a more positive note, excluding these tourist stores, the rest of the portfolio is healthy and profitable. And the tourist stores are being turning around with encouraging initial results that we see recently. Overall, the Asia division managed to narrow its year-on-year EBITDA decline from 39% in the first half to only 3% in the second half. So on a country basis, Malaysia, Thailand were doing better and leading the recovery with 2020 full year sales, matching that of 2019. So Malaysia, Thailand, these contributed to maintain the sales versus 2019. Philippines still suffer from a prolonged period of quarantine in key cities. And lastly, for the health and beauty Asia division, the online sales growth is 101%. So next slide, Slide 14. Similar chart for Western Europe and Eastern Europe, okay? Now first, on Western Europe. Well, Western Europe is like a tale of 2 cities. In the Netherlands and Germany, all of our health and beauty stores remain open during the lock down because they are deemed essential retail. Both countries, Netherlands and Germany saw positive sales and positive EBITDA growth during the year because the stores are located in suburban areas and close to supermarkets where the footfalls were not much affected by COVID. Whereas in U.K., although our health and beauty stores also remain open, but they are more located in the high suites and shopping malls where footfall drops was both apparent. So as a result, both sales and EBITDA in U.K. declined significantly versus 2019. However, we are confident that when the lockdown measures start to ease, which is now with the vaccination program, the U.K. business are poised for a robust recovery this year, and we are very confident of that. So on the luxury business, while the health and beauty stores were being open, the perfumery, the luxury business, although located in the same countries, for example, the Netherlands, the product is open but the [Indiscernible] luxury business has to be closed because they are deemed nonessential. So net-net, with all these counterbalancing factors, the total sales for the year in Western Europe only dropped 3% overall, 5% in the first half and recovered strongly to only 1% in the second half. So likewise, for EBITDA, we see a very strong recovery in the second half by turning around a year-on-year reduction of 39% in the first half to a growth of 14% in the second half. So as a result, total EBITDA decrease for the year is only 9%. And online sales for this division has recorded a healthy 70% growth year-on-year. So last, we turn to the Eastern Europe chart. So overall, the total sales of Eastern Europe remained flat at the same level as 2019. With 2% drop in the first half and compensated by 2% growth in the second half. So 2% drop first half, 2% increase in second half. And the sales and EBITDA profile of Eastern Europe actually is dominated by Poland, where they had a 24% EBITDA drop in the first half, but a robust recovery to positive EBITDA growth of 3% in the second half. So total EBITDA decrease for this division is limited to only 9%. So online sales growth for the division is also very good at 108%. So in summary, we have looked at various divisions, Asia, China, Western Europe, Eastern Europe. But overall, the retail division has shown a high degree of resilience, attributed to its well balanced and well-diversified portfolio and the online capability actually have benefited and quickly improved during the pandemic year in support of our successful O+O strategy. So this is a very quick summary of retail happening last year. And I now pass back to Canning on the infrastructure.
Frank Sixt: Yes. I don't think we need to dwell on it. I'm sure CKI will have reported in detail what the drivers were, right, of its earnings reduction in 2020. A couple of anomalies. One is some meaningful COVID events effects, somewhere in the area of HKD 600 million from assets like PARKnFLY in Canada, where obviously nobody was flying and therefore, nobody was parking. In addition, there was a very major accounting volatility relating to deferred taxes, right, which resulted in a charge of HKD 1.4 billion because of a 2% increase in the tax rate in the U.K. that was announced during the course of 2020. That's quite problematic, right, because it's not a real cash volatility or even a real cash flow risk. Most of the regulated assets have, in effect, a pass-through of the actual cash tax burden that is paid out in any given year by the regulated utilities. So this anomaly, of course, grows larger with the increase in 2021 with the proposed increase in tax rates that we're expecting somewhere in the U.K., which would go up by 6%, and it's something that we'll be looking very closely at because it's becoming a very distorting earnings volatility with no real meaning in cash terms. Other than that, there are some headwinds in the business in terms of regulatory resets. We all know that. Regulatory resets are tending in one direction, which is not that surprising, given how far long-term interest rates have dropped all around the world. The timetable on the lower right sort of sets out what is to be reset during which periods, and it will be what it will be. Needless to say, in value terms, at the same low interest rate environment that's driving the regulatory reset environment is probably also supportive of the valuation environment for infrastructure assets. So we'll have to see where all those puts and takes take you. If I can move on. Canning, do you want to talk about Husky? Or do you want me to do that?
Canning Fok: Why don't you do it?
Frank Sixt: Thank you. Okay. So Slide 16, I'm not going to dwell on the Husky debacle. I mean what happens when all of the commodity price supporting your production goes through the floor and goes way below your cash breakeven level, let alone your earnings breakeven level and you combine that with effectively a collapse in the markets for refined products largely due to the collapse in demand for jet fuel. And you have an unprecedented Armageddon, and you get the kind of net loss profile, which is shown on this slide, which wax CKHH, whichever line you choose to look at, was an unprecedented loss. Now interestingly, it is a noncash loss in the sense that Husky only paid us a relatively small dividend. So in terms of this impact on our cash and our financial profile relatively low, but it is indicative of a pretty significant value loss in Husky, and you can't ignore that. Of course, we were fortunate and that we were able to agree and then in early January, complete a merger with Cenovus Energy. That merger, we've already talked about a little bit, but it creates not only one of the largest number 3 producer in Canada, but also one of the lowest-cost producers and one of the most integrated producers in North America, which is a superb place to be. What that translates into is a WTI breakeven, which is very significantly below where Husky is WTI breakeven might ever have been considered to be. And as a result of that, in the current commodity price environment, which let us hope that it persists during the course of the year, we are probably experiencing netbacks that are more than double than what they would otherwise have been so in last year's price environment. So the good news there is that in terms of value creation, Cenovus is a company that does not need to incur exploration expenses in order to support its production profile and its reserve profile and a reasonable level of growth in its production. That being the case, most of the kind of cash flow that's being generated in this environment can go to debt reduction as can the realization of synergies, which have been targeted at a run rate in cash terms of CAD 1.2 billion a year as an exit rate coming out of this year. So you can see that, that potentially adds to the value of the equity position that we have very materially. Just to go over that very quickly. We actually hold a number of warrants in addition to our shares. So on a fully diluted basis, our interest is 16.79%. The warrants are at $6.50 strike price, they have a 5-year term. So they are very valuable little pieces of paper right now. Canning mentioned that we've experienced a terrific recovery in value already. So for our 16.79%, that's a CAD 3.5 billion gain from the Husky low point, which was at around $3 a share. So it is -- as mergers go, so far, we're very happy because it's almost a 3x here. So I think I'll stop there and hand back to Canning for telecoms.
Canning Fok: Okay. So much for Husky. And I think the combined animal is a much better animal than Husky standalone. Similar production of oil quantities but at a much higher quality and much lower cost. So that I think we should be able to take advantage of this situation. Now let's go to Page 17 on telecommunications. So that the way -- so that this company had total revenue of $85 billion revenue, but then it dropped about 3% in local currency. And of course, during the COVID period, which is couple most of the time, a lot of the time in Europe in various times. And the gross add is -- has dropped. But however, the trend is also doing good. And then of course, the one thing that we miss out is a reduction in the roaming income, okay? So that our customer base is 38.5 million, so down 5% and our -- but then our ARPU is getting better because people stay home and I suppose they have nothing to do, and then they spend more time on the phone. And of course, you can see the usage is 35% more. And then during last year, we actually do a lot of things on 5G. And you just be [indiscernible] of the 5G capability, we start rolling out everywhere. And then as the Chairman pointed out in the press conference, actually, we just got hold of 2 10 megahertz of -- of 700 at a price which is almost 50% of what we paid for the last time around, which is very good. And in fact, I just want to say that it's the first time in our career, our U.K. spectrum position is more than competitive than the others. Our 5G, 3.5, 5 is much more than our competitor. And then the first time that we have 10 megahertz of lower spectrum at 700, which is very, very good to us. So if you look at the right-hand side, the middle of the slide, and then you see the waterfall chart. And I think, basically, it's just summarize what I said, take away the one-off or nonrecurring one, actually the business is similar to last year. So this group holding very well. And then actually, the slight red in U.K., you can just say that is because of the cost in holding the 5G spectrum. And we have to pay a spectrum fee, and this amount was more than what we did last year. And if you -- so EBITDA margin is more -- U.K. is always still in a work in progress but has improving. And then the margin other than U.K. is more almost dropped. It's quite good Italy, 46%; Sweden, 47%; Austria, 51%, even Ireland 43%. So the 2 need to improve Denmark and U.K. On Page 18, you saw the details. And I just want to draw you the line is EBITDA less CapEx, $11 billion for the 3 U.K. group, which is quite good. And then CapEx is a little bit higher at $20 billion. The depreciation just for equipment alone, you saw the $15 billion which is used in both CAC and spectrum. But if you just take those 2 out, it's about $12 billion, so that our CapEx is still higher at $20 billion and higher than the $12 billion were right in the spend. And this is a continuous work that we need to improve. But however, because this is to build out 5G and actually, we do have business trend so that when we do build, they should be able to sell it. So to generate income. Hopefully, that will be a key component for the business for the next 2 years. Okay. And then coming to 19. I think Frank spent a lot of time on this. Maybe I will let him describe it on Page 19.
Frank Sixt: Yes. And I think the story on our tower sales is well known. So I just want to make clear that -- so that everybody understands what we received in 2020 and booked was proceeds of HKD 20.8 billion. And what we recorded is a gain of HKD 16.6 billion in the year. The remainder of the aggregate $10 billion of consideration comes in this year in 2021. That's already started with the completion of the sale in Sweden in January. But of course, the 2 biggest sales remain to be completed. That's the towers in Italy and the tower assets in the U.K., including the lion's share of the build-to-suit program, which falls in the U.K. That we anticipate will bring in additional proceeds of $73.1 billion and an additional gain in 2021 of $50.8 billion. So we don't, at this point, anticipate any major issues impacting closing either in the -- in Italy or in the U.K., and we are in the relatively routine regulatory processes in respect of both of those closings, as we speak, and we will update as developments occur. What do we do with the cash flow? Obviously, what we did with the cash was what you do in relatively dark and uncertain times. We first reduced gross debt. We -- I said in the original announcement last November that we would be considering market share buyback programs, and that remains the case when these proceeds come in, I think it's quite possible that we will be in execution mode. But again, as we said in the announcement, always subject to a full evaluation of the company's position and the market's position and the world as we see it at the time. So I think that pretty well summarizes the tower picture, and we'll take questions later if there are any.
Canning Fok: Okay. And then I just want to -- just to emphasize on this transaction is very convenient for us, both the VHA and this one because of the big loss we've incurred in Husky and this [one] actually help us to overcome the losses that we did suffer from the [indiscernible] loss that we suffered from Husky. And go to Page 20. HAT is nothing much to talk about. The Indonesian business, I think that the exciting thing is not the result. The exciting thing is that we are able to come to a preliminary agreement with Indosat so that we merge the 2 companies, and everything is in progress and then the 2 parties are working up nicely. Hopefully, we can have something to sign, and then there's a goodwill on 2 parties. And then if you look at the red color in Indonesia, it's basically, it's not from the operation. There was an exchange gain that they booked last year. And which is not occurring this year. Other than that, they have increased margin by 7%, but also because of they have a bigger network. So we also increased cost by 7%. So the operation is similar to the year before. And Vietnam, I think I want to mention a special mention because we are a small player in a difficult market. We have a small team, and I just want to mention that the new CEO, the female CEO that we have founded has been doing extremely well. And it's such a difficult situation with COVID-19 and she managed to breakeven. And I think we had also that we are not losing any EBITDA there. So -- all right. And so I just want to mention it, so that she can hear this. As you know that I'm not critical of her. All right. Next page, ESG. Frank, are you going to do it, this one?
Frank Sixt: Sure. Sure. Look, there's so much that we could say about the developments around ESG all around the CK Hutchison Group. I think I'll leave it for the most part to Q&A at this stage because it would extend the presentation time for longer than we should. Probably the most important thing is not walking the walk or talking the talk is what you actually achieve. And there's never been a challenge like COVID-19 and I'm actually very proud of the way our group made our way through it. If you look at our employees, we had case loads, hospital admissions, morbidity way below the national averages in all of the countries that we operate in. I can tell you that as of last night, we had 373 active cases, mainly in Europe. And sadly, we've lost 14 colleagues. But that is against the workforce of over 300,000, which is, I think, just an absolutely first rate testament to having handled the protection of our employees well. We did a lot, which you can see on the next slide, in terms of protecting our customers and the communities that we operate in. And I think that's the final slide, Slide 24. This is the stuff that ESG is really about. It's what you really do when the rubber hits the road. And I think we showed ourselves very, very proud in 2020. And with that, we can move to Q&A.
A - Hans Leung: [Operator Instructions] Okay. The first question is about the -- is a general question about the company. What is the priority of the company's capital allocation?
Victor Li: I think our priorities would be opening some new retail stores, stores that have a quick payback. And the other one would be we will engage in-market consolidation within the telecom market. And activities, which are earnings and cash flow accretive. So we will do those. Also, part of the capital will be allocated to some share buyback. So -- but this will -- the timing would have to depend on the closing of the tower deals. Since we're talking about tower deals, there some markets misunderstanding that some people thought that we will be taking the profit of the hotel deal in 2020. I'd say, we're taking a rather conservative view, and that is -- we took the profit on those portions that have been closed in 2020. And a big portion of them will be taken in 2021. I think I might as well use this opportunity to clarify that misunderstanding. Somehow it keeps creeping up in various reports -- hotel reports.
Hans Leung: The second question, the group's 2020 cash flow profile was very strong with underlying year-on-year growth of 29% in free cash flow. Any comment on the group's cash-generating capability in 2021 when [CapEx] starts to be normalized?
Dominic Lai: Well, we always take quite a conservative approach to CapEx spending and working capital. And I look forward to another year of strong cash flow. I mean, cash flow is a [Indiscernible]
Frank Sixt: Absolutely.
Hans Leung: Okay. The next question is, what is the company's target gearing ratio?
Dominic Lai: I don't think we have a target simple gearing ratio. I think we should -- our objective is to make sure that we have our credit rating. I think -- again, I use this opportunity to go back to the earlier question about cash flow. Sometimes in the new accounting rules now, cash flow in a way reflects the company's operation strength or health sometimes more so than the simple earnings. I use one example, one subsidiary of Hutch, CKI. This year, the cash flow is stronger than the previous year. But because of the impairment of deferred tax charges, earnings is down. But if you look closely at the regulated business, the rules of the regulation allow the operator to collect the increase -- the difference in the increase in tax in future years. So actually, there's no destruction of value when the tax rate goes up, but because we abide by accounting rule, we will have to take a hit now, but we have a higher reported profit in later years which is confusing to some people, but the accounting rule is that way. So sometimes I use the cash flow as a better indicator of the operations -- health and operating environment.
Hans Leung: Thank you. The next question is about our cost division. Do you expect the improvement in Ports [throughput] will be continued in 2021?
Dominic Lai: Well, maybe, Canning, you can answer that question. But all I know, is that the first 2 ones look extremely good.
Canning Fok: I think the outlook is, for us, is positive. And the ports are very busy in China, very busy from China go to Europe. So that the first two months we are happy.
Hans Leung: The next question is about the retail division. What is the progress of the O+O strategy?
Canning Fok: Well, the O+O is a success story. 2 things. One, it shows the return, and it shows the resilience of the group in a big crisis in 2020. It has achieved good results. And I want -- I mean, this is Dominic Lai’s I'm not going to discuss further. I should let him answer the question.
Dominic Lai: Okay. Well, in fact, the O+O is exactly what the customer wants because the customer is now moving, say, online, off-line, and then we can serve them equally well. And the numbers shows that they spend 3x more than a single channel customer. So why don't I pass this, maybe on this O+O, I will ask Melina to shed some light on this strategy. This is a very important strategy for the retail group.
Malina Ngai: Okay. Thank you, Dominic. Well, the progress of the O+O strategy has actually accelerated ahead of our expectation in 2020. And well, first and foremost, O+O is about getting our customer to shop with us both offline and online. So unlike some of the retailers we have, what's driving offline to online or vice versa, our O+O strategy is about not having any cannibalization. The customer who shops with us on both offline and online, they're spending currently at the analytics, shows us that it's going to be -- is 3x higher than the customers who shop with us only in the store. So meaning that if I used to spend $1,000 with A.S. Watson, $1,000 by shopping in the store. And once I get to shop online as well, then my spending every year becomes $3,000. So this is the 3x spending potential that we are seeing in our O+O strategy. So the progress of O+O happened in 2020. And first of all, more customers actually shopped with us on e-store because of necessity because of movement control. So we actually, in 2020, we managed to recruit millions more customers who shop with us online. And secondly, 139 million loyalty members because of the digital transformation, so we can digitally connect to them. So in 2020, we actually doubled the development of our digital assets, meaning content, to continue to engage them and get them to continue to shop with us. And in fact, actually, in several markets, we become top brands in our Instagram and Facebook as well. Our O+O strategy has helped us to also transform the way we sell, okay, this is important because traditionally, any retailers say they would be doing their business offline and then online separately. So for us, actually, in 2020, our store team in the store they are able to use WhatsApp, WeChat, telephone to help us to engage the customers and they convert sales also on the digital platform. So this is how the O+O strategy help us to drive more growth. And finally, because of our physical store penetration, so our O+O strategy help us to have that fulfillment flexibility. So even during COVID, when our online sales growth, just now already mentioned is 90%, so it's doubled, we're still able to deliver within 1 hour, within 2 hours or within the day doing COVID because we will to turn some of the physical store and to support the fulfillment. So in summary, the O+O strategy has accelerated a lot in 2020. And the physical store will continue to be a core touch point in this strategy. And in terms of store opening plan, we will continue to have store opening in Asia Europe, residentials, locations and shopping malls, provide the financial and modern expansion. So that's the O+O strategy.
Canning Fok: This is Canning. I just want to add 1 more point. If you look at Watsons China, approximately 80% of our revenue comes from our member, okay? If you look at O+O revenue is 35%, but it only come from 5% of our member. I just want you to think about this, and this gets me very excited. This is -- this tell you the size of the opportunity. So that I always say that when we fish -- we go to a fish port, people that we know, but not don't go to the ocean where so many.
Dominic Lai: Watsons O+O is a very exciting story. I think the potential is yet to be fully unleashed. Yes, a lot of growth.
Hans Leung: Okay. Thank you. Thank you, everyone. The next question is about infrastructure. What is the outlook of CKI in 2021?
Dominic Lai: Now there are things that I think the market knows already, and maybe I can add a few new things. What the market already knows is that there will be resets. And for the regulated business, the resets happen every 5 to 8 years. So it's always go, go, go until we have the year reset. And then goes down a bit, and then it goes up again. So this is normal for the business. So in 2021, there will be a couple of resets, which is part of the anticipated made plan for CKI. So that the market knows already. And the -- not already also know that we are always looking for new opportunities. The new one is a new farm in Canada and providing pretty good stable return. So those are the basic things. Now going forward, there are 2 things that maybe I can share. One is last -- night before last, the CMA has confirmed that the position on our appeal against the regulator. Now in U.K., the regulator is usually the person setting the rate. If you are unhappy with the initial judgment, you can appeal to the CMA. In that scenario, most of the water operators accepted the regulator's portfolio. We don't think it's there, and we appeal to the CMA. And all I can say is that the result of the CMA is a big improvement from the regulators' original reset. We don't think it is 100% what we want, but it's just acceptable. And it is an improvement from the regulator. Now the importance of that judgment is that not only does it set a rate for the water business, but it is a cornerstone for all other infrastructure resets in the U.K. in the coming months and years. So it will affect the rates for gas as well as electricity. So 2 days ago, the decision was as a time change. I don't know whether it's 1.5 days or 2 days. But the recent judgment is quite important news for CKI and for the U.K. utility business. The second one, second news, maybe I can share is a breaking news. Literally about an hour ago, 1 utility asset was sold in the U.K. at 73% premium to RAP, that's what we infer from the announcement. Now if you use that ratio, then the assets in CKI are worth a lot more than the share price would indicate. The -- most of the assets are acquired by CKI in much lower premium to RAP. And so this confirms that in this market, there's still a lot of -- I use the word [Indiscernible] treasures. That is within the Hutch Group IPO and some of the CKI assets. So some of the valuations are yet to be fully appreciated.
Hans Leung: Yes, thank you. The next question is -- we will take -- will CK Hutchison equity account for dividend accounts [Indiscernible]Cenovus?
Dominic Lai: So together with the personal or family ownership, CKHH has -- and family is the largest shareholder group in Cenovus and has influenced on the Board. And I think we should be equity accounting to say at the moment. Frank, right?
Frank Sixt: Yes. Yes, that's correct.
Hans Leung: Yes. Sorry, okay. Due to the time constraint, maybe we have the last 2 questions. What is the outlook of Three U.K. in 2021 is one of them.
Frank Sixt: That's definitely a question for Canning.
Canning Fok: Okay. I think that in the budget, they show that they will be much improved. And actually what we would like to do is to get the company back to where we were before when we talk about the merger with go to which is we made EBITDA of $700 million. After the merger fell through, I think my team somehow cut this and changed and then get into trouble with IT and all those still keep on having one concern after the other so that as a result, we have a brand-new management team since beginning of last year, and that has been very effective and a nice change. I'm not saying that the last team is no good. It's just that I think it's a nice fresh air into the and then you can see that has stopped in the second half is actually 25% better than last year, 2019. And then we will continue to see positive development in the U.K. And also one thing worth mentioning is that we always have a handicap on spectrum because we are the smallest network, we have the smallest spectrum in the overall 4G inflow but now with the 5G, where we have the most spectrum and then also with the success of the -- of getting the 700 spectrum is a very advantageous cost. This cost is almost 50% of the last time that we got the 800, so that we are very well equipped to go into the future as a major player. So U.K., I think the scenery is good for us.
Dominic Lai: I think -- I think we can say that we're the largest number of spectrum in U.K. and the recent option completes the portfolio and improving our in-building penetration. So we're quite happy with the recent purchase.
Hans Leung: Okay. The last question is still on Three U.K. 5G free U.K. has increased so much in 2020, and will 2021 be another heavy capacity year?
Dominic Lai: So we just said we're building 5G. Canning, maybe you can [indiscernible] I think it's almost all network.
Canning Fok: Yes. I think that it is part of the U.K. problem, which we are correcting and this core network, which try to finish. And finally, I think it's finished now because that doesn't run into any problems for the last 2 months. So that I think a lot of things we are being good right. And of course, with the new spectrum in the beginning of 5G and then but I told them that when they do 5G they [indiscernible] so let's see. And the figures will speak for itself, but in U.K. is strong.
Hans Leung: Okay. Thank you very much. This concludes our live webcast today. Thank you very much for joining our presentation.
Canning Fok: Thank you. Good health. See you. Bye-bye.