Half Year 2018 Hysan Development Co Ltd Earnings Presentation

THOMSON REUTERS STREETEVENTS PRELIMINARY TRANSCRIPT 14.HK - Half Year 2018 Hysan Development Co Ltd Earnings Presentation

EVENT DATE/TIME: AUGUST 07, 2018 / 9:00AM GMT

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CORPORATE PARTICIPANTS Irene Yun-Lien Lee Kon Wai Lui Hysan Development Company Limited - COO Shu Yan Hao Hysan Development Company Limited - CFO

CONFERENCE CALL PARTICIPANTS Justin Kwok Goldman Sachs Group Inc., Research Division - Executive Director Yam Fan Tso BofA Merrill Lynch, Research Division - Junior Analyst

PRESENTATION Operator Thank you for coming to Hysan Development's 2018 Interim Results Announcement Session. And let me introduce our panel for this afternoon: our Chairman, Ms. Irene Lee; our Chief Operating Officer Mr. Ricky Lui; and our Chief Financial Officer, Mr. Roger Hao. And we will start today's session with a presentation from Irene, Roger and Ricky, and we'll follow that with time to take some questions from the floor. As we have a live webcast today, we'll also be taking questions online. And before all that, though, I will invite Irene to start. Irene?

Irene Yun-Lien Lee Thank you. I can't believe it's been 6 months. So we are here to present our 2018 first half results.

Let's launch into a few figures, which I know you will be most interested in. Our turnover and recurring underlying profit increased by 6.8% and 4.3%, respectively, year-on-year. There was also increased reported profit, which reflected changes in fair value of investment properties. The occupancy for the retail portfolio was 96%, whereas office was 95%.

Let's take a look at the bigger picture. Hong Kong's economy grew by 4.7% in the first quarter of 2018, and retail sales happily also grew by 13.4% in the first half of the year when compared with the respective periods in 2017. This is due mainly to strong consumer spending, backed by good labor market and the bullish residential property market. Also year-on-year, growth of visitors numbers was about 10% in first half with an even higher percentage increased from mainland visitors. So the picture looks rosy, but it is worth remembering we will always have a note of caution that the ongoing concerns about international trade policies and other macroeconomic issues may yet affect growth.

As for Hysan, we continue to curate unique content for the Lee Gardens community, a community that is inclusive, full of contrast and diversity. We believe we are truly the heartbeat of Hong Kong. So why are we the Heartbeat of Hong Kong? This is a little bit of a different analyst briefing, we'll do a little bit of history first.

Lee and I have purchased Lee Gardens exactly 95 years ago. It used to be a hill that runs from the shoreline in the somewhat north-south direction. And the '20s and '30s, it became an amusement park that helped entertain many local residents. Lee Theatre was also completed in the '20s, which served as a premier performing stage for Hong Kong public. Throughout the years, we also built the Lee Gardens Hotel, which is the island's first quality hotel catered for mass tourism, as well as a number of iconic commercial buildings.

We have always held our mindset of developing the Lee Gardens area based on sustainability, which means all stakeholders can enjoy the area and development, not just for now, but for generations to come. After all, we've been here for many generations.

We want this area to be unique, full of things you will enjoy at Hong Kong, shops covering the entire price range from traditional businesses to designer labors, delicious cuisines from all over the world, wide avenues full of trees, we're very proud of that, and all mixed with treasured order

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Lee Gardens, Causeway Bay and, indeed, Hong Kong are ever-changing. We are curating the content just like we are providing the heartbeat for the city and district to energize and grow. Having explained why we are the heartbeat, let me just quickly show you how we do it, how we contribute to the pulsating heart of Hong Kong. It goes down to vision, courage and persistence.

For those of you who might have read our annual report, you might remember the part. Why we're calling it the vision? We use this melting pot as an analogy in our annual report last year, and I think it is appropriate to show it again. You see the 3 -- what do you call those? Oblong -- the 3 circles around my pot, what are they? They are -- we have blessed with a credible location for commercial buildings and shops, the company have a mindset for constructing and managing top-quality buildings, and lastly, we have a very unique neighborhood. However, what are we facing now? And then now we look at the fire, which is boiling the pot. We are facing a generational shift. The demands from the mature users are very different from Gens Z, Y and Z. Technological advancement, of course, because that's where everyone seems to focus on, it's the technology side. Yes, that is important, too. We have e-commerce, we have online, offline, we have mobile technology, social media. They are all shaping and influencing the how, what and where.

Demographic changes, now this is a very important point. Hong Kong is not 1 type of Hong Kong people. We are old Hong Kong, people who have been here for generations, like our family. We have migrants who come to Hong Kong for family, for work, for many reasons, and these people also are Hong Kong people now, we call them new Hong Kong. New Hong Kong are the people who have been here for decades. Their children go to school here, and they hold Hong Kong IDs. So they are part of our fabric. And, of course, there are tourist.

Now this is the fire, the fuel, that drives us to better service in order to respond to the changing landscape. So we need to reimagine our retail and we need to reposition our office, because all of that is being influenced and disrupted by these new forces. But we need to also have content, ever-changing content, that wraps around our hardware. So content is the softness of the software that we can provide, and that finds us into a very unique environment.

Let me give you an example and explain what we mean by courage. I want to give you an example of LG3, Lee Garden Three, our new building. Here, we challenge ourselves to build and manage a predominantly office building that aims to attract the most demanding type of tenants who need the higher standards in a commercial setting. You may know who I'm talking about, we actually attracted one of those, many of those. It is the first Hysan commercial building with a focus on attracting financial institutions. But in the overall portfolio, we still have a very well-balanced portfolio of under 25% exposure to financial institutions. LG3 is also a place where we are promoting top-quality co-working space. We have identified that as a big disruptor in the office sector, and we have committed ourselves to making sure we have that as part of our portfolio. The building -- so this is also fully equipped to match the needs of the new generation of office users. We highlight lifestyle and wellness. You will see that we actually have no high grants in that building. It is lifestyle, health and wellness and lots of interesting food and beverage.

And we also have the first running track in Hong Kong on Level 15, I got it right now, this time, right? Now Lee Garden Three only forms 1 part of a much larger portfolio. We always curate not for the shop that is vacant or the building that is being filled, we actually curate for the whole portfolio. And we will use the opening of Lee Garden Three to further energize and draw attention to the rest of our portfolio. You will see that although we had a soft launch in April, we are constantly promoting different aspects of the building as we open different offerings, tenants, F&B, et cetera. We are determined to give the whole Lee Gardens area added dimensions, which is a very long-term project. We think long. That's why we need a lot of persistence to make things work. Our long history here and our sustainable mindset are perfect ingredients take on the long-term project like this. I always say, real estate is a long game. And for us, because we are really a landlord, we see ourselves being here for a very long time. And we do things, we curate, we build for the long run. We are not a develop and sell company.

So what we are doing is providing the hardware and the content for our stakeholders. So what's sort of hard work? Quality buildings and related facilities throughout the portfolio, what sort of content? Unmatched experience and events, strong tenant and third-party partnerships, digital transformation and many other things.

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Stakeholders. Who are our stakeholders? The growing community and Lee Gardens, including our tenants, our neighbors, shoppers and, of course, members of our very popular loyalty programs. How do we curate a matched experience? Experience is on everyone's lips. We need to provide experience to draw crowds. It's not as easy as that, and it is expensive, particularly it is not targeted.

So just some of the unmatched experience that we contact about. The café and HSBC Rugby Sevens Carnival, which is the only street carnival that is officially part of the program, and we attracted over 50,000 people. Lee Gardens (inaudible) art, I mean that's one of Mark's pride and joy.

Unidentified Company Representative It is.

Irene Yun-Lien Lee We've actually wrapped that into this year's rugby program, which spanned 3 weeks. And essentially, quite self-attracted 25,000 people. I wonder whether any of you think you're our (foreign language) It's very popular. We also have something called Absolutely Fabulous Children’s Theatre, that attracts hundreds of children and families. Every once -- 1 week and every month, and that becomes a habit building event as well. It has taken -- I think we've had 4 events mark, it's gone from not knowing what's happening to now you need to queue and you need to win the lottery to get in.

Dozens of pop-up stores during the year, bringing in new retail ideas and plenty of restaurant specials to attract people to come and experience and shop. Finally, in November, we have our very, very spectacular night parade, which is a collaboration with Standard Chartered Bank and Youth Arts Foundation. Thousands and thousand people lined in the streets to see the puppets. These are two-storey high puppets, and it's a wonderful family location. And this is part of the open air, which is wonderful in our neighborhood.

We also have strong partnership with tenants and third parties. We need to -- this is a year where we focus, just like a bank having account managers for their clients, we actually focused on our tenant's business. We want to understand the business the way we understand our own. So we know how to drive the business and we make every effort to make the business performed, because they perform, we perform.

We had to Go Green Causeway Bay, we still have this, isn't it Mark?

Unidentified Company Representative Yes.

Irene Yun-Lien Lee That growth in dozens of restaurants to promote healthy eating through some very, very attractive offers. Every Monday, we have a Green Monday, where you buy 1, you get 1 free. That's a pretty good deal.

On the fashion side, we have a launch for Louis Vuitton. We have an amazing IT's new store in LG3, which is quite undefeated. I saw that, and I send that image to my staff, and I said, "Wow, is the happiest day of my life." The (inaudible) Hysan Avenue to Leighton Road. So they will be launching these specials on a very regular basis. And queues are always good. People always think they are missing up when they see a queue, so they queue, too.

And Nike also had a Yoga Day on our site. So we utilize our outdoor spaces for our tenants, and they really appreciate that. We, of course, value our loyal customers as we are big believers in long-term relationships. We have 2 big loyalty programs, 1 is our VIP Club Avenue, by invitation only. High spenders, high end. And we need to make them feel very, very special. We treat them the same way a private banker treats its private clients.

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And we have expanded our lounge service, our VIP lounge service, this is in Lee Garden One building from the basement area, which is designed like a study with ward, we leverage, it's very beautiful, to a slightly more airy, light first-floor. So we can actually have them enjoy this privilege. And, of course, we need to provide very exclusive events and offers for them so that they feel special and they feel looked after, because they spend a lot in our area.

And then how our general vendors, we have Lee Gardens Plus. We have very attractive limited time offers for tenants, and they are going to be a very major platform for us to drive traffic and spending. We now have from a standing start of about 50,000 members, and we intend to drive this further. And this will also be a very, very good data-gathering source for us to know exactly what our spenders likes and dislikes, what they buy, who they are. And this will be very important for us.

So this leads us to talk about the growth of e-commerce, dominance of mobile technology and prevalence of social media, means we cannot be complacent when it comes to providing cutting-edge technology to our customers.

Coming very soon will be our area wide WiFi. It's high-speed WiFi. Will be the only area -- we're the only company that can actually even do that. It is in and out of more WiFi. And we have our (inaudible) if it doesn't work, you ring him up. This will link all our buildings on the streets and in the mall and in the shops, so you will have uninterrupted service. And this is where we will widen the funnel and we will be able to gather information from our traffic.

We will also rollout our eCoupons for paperless shopping experience. We'll have better interactive signage.

So all of this is really designed to have better ways to gather data. So that means we are able to provide more improved shopping experience, so there are more visitors, too. And we'll focus on big data analytics, as well as better use of IoT and artificial intelligence and machine learning.

We need to collect, retain, analyze and predict the data, so that we can understand our customer behavior. Because everyone wants personalized, everyone wants you to target them specifically. So unless we know that, we cannot be targeted. And, of course, if I'm targeted, we will be able to target every dollar we spend to recruit them, to make them spend more. We will be able to see the ROI on every single dollar spent, and this is what we need to do. And, of course, we will be vigilant on data privacy and we have implemented all range of safeguards.

Apart from customers, there are many other stakeholders we care about. The people that make the community. And to celebrate the 95th anniversary of Lee Gardens, we have rolled out many social media campaign with 95 stories from Causeway Bay people. Mark has even included dogs. So we have 95 personalized stories about people who have lived here, the 80-year-old lady who has been selling, knitting yarn. So the whole range are very human. It's a very touching human, warm approach, because we generally care about the people. Because we are from this area. We want to know who they are, what they do and why they do things. We are neighbors, and we want them to feel part of this community.

Hysan95 is and will become a platform to share our cherished history, our everyday lives and our thoughts for the future. We hope that you can follow our social media to help us celebrate ours and Hong Kong's history.

Talking about neighbors, we are thrilled to have been a founding member of Lee Gardens Association. The Association has blossomed in the last 2 years and now has 13 members, many of whom are old traditional stores that have been here for a long time, as well as quite a few new stores that recently moved in. So these are our tenants, not only our tenants, these are people who want to join our programs. They understand that when we events, when we have the night parade, when we have (inaudible) actually they are part of our membership. They actually have visibility and participation in what we do today, so they can leverage on a much bigger platform.

Apart from setting up events to boost foot traffic or helping to bring more creative ideas to the area's landlords, to shop owners, the Association have been actively helping members promotions through videos and social media. And not a very exciting example. If you walk around our (inaudible), you will see some buildings completely painted. Is that still on (inaudible) We still have. So we actually have invited graffiti artists, we actually invited people to decorate our buildings. Now you need to have this collaboration, things association with your neighbors so that they allow you to actually do things to their walls, to do things on the streets. So this is part of expanding the inclusiveness.

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To recap, lastly, we believe Hong Kong is ever-changing. Located in the middle of Hong Kong island's commercial area, we are smacked in the middle of everything, and we are curating the content for our area with vision, courage and persistence.

So this is our high-level helicopter view. Now I will let Roger go through some figures for you.

Shu Yan Hao - Hysan Development Company Limited - CFO Yes. Good afternoon. And I would just spend a few minutes very quickly, go over high-level numbers and then I will invite Ricky to share with you some more detail operating highlights on each individual business unit. Again, for the company, overall, I'm sure you guys already looked at it, our top line grew 6.8% year-on-year, and now on the recurring underlying is 4.3% year-on-year. And on the reported profit, that reflects devaluation change. As you can see, this first 6 months of the year, we had a HKD 1.7 billion evaluation gain in corporate, in our reported profits. That primarily reflect devaluation change that we see from, first of all, the recovering retail markets, as well as the continued possible rental reversion on office.

As you can see again from this slide, last year, for the same period, that is the rental change on the mainstream retail part getting reflected in devaluation of our portfolio in the first half of the year. So basically, last year, first half, is a valuation drop, versus this year is evaluation gain, partly from the recovery of retail and the continued positive momentum on the office rental. So we can talk more -- by the way, recovery are maintained the same time between these 2 period.

And then, Mark, please, the next slide. That's a very simple slide, and Ricky is going to share more detail highlights for you. As you can see, the 2018 first half results, one of the area I want to highlight to you is the percentage mix contributed by each portfolio, with Lee Garden Three coming into the P&L, you will see that the office as a percentage of total contributions, it rise from 37.5% first half last year to now 42.9%. Remember, at the same time, the greater contribution shrink a little bit to (inaudible) half of it.

And then finally, before we move on to the detail one, again, a bit of the financial strength. On gearing, we maintain our low gearing of 5.6%. We have a very stable debt profile, fixed-rate continue to be along the 3 quarter of our debt portfolio. And average maturity have shortened a little bit to 4 years, and with average cost of finance about 3.5%. And we continue to maintain our investment grade credit rating, that is AAA for Moody's and BBB+ for Standard & Poor's.

So that's a quick recap. And that is, again, our selective (inaudible) in the cap rate. As you can see, there's no change of them, and for the Lee Garden Three cap rate, in particular, basically, it's very aligned with those of the other great buildings.

And this again, which give you 5-year trend. As you can see from basically all metrics, we continue to make a stable, but progressive improvement and increase in our portfolio. And that's it for my part. Thank you very much. And next, maybe I'll invite Ricky to share with you some of the operating highlights.

Kon Wai Lui - Hysan Development Company Limited - COO Thank you, Roger. Good afternoon. Let me do some highlights on the operations side. Retail sales of Hong Kong (inaudible) 13.4%, and you can see that (inaudible) are still the driver, they're 3.5% growth. But good for this half year is that there are the major categories like consumer durable goods, food, alcoholic drinks and tobacco, clothing, footwear and (inaudible) products all have very healthy growth, like almost like 7.5% to 13.7%, which reflecting the general bounce back of the retail sales for the first 6 months.

For our retail portfolio, we have (inaudible) for 2% to HKD 962 million. Occupancy stayed at 96%, good side is the turn over rent improved to 100% to HKD 54 million, which reflect the sales of tenants. Overall, neutral rental revision for all the renewals, rental bills and new let-ins. For the retail sales, we have 35% -- actually 36% growth year-on-year, outperform the over Hong Kong retail sales, which is 13% for the first 6 months. For the total foot traffic, it's 10% growth, with mainland visitors accounted for 20%. About the trend mix enhancement, which reflect our commitment to meet and exceed our ever-changing customer needs and expectation, Lee Garden Three has a soft opening in April 2018. It is a more than lifestyle extension of our retail offerings. The major category, like the home furnishing and appliances, you can see the names like Kitchen Aid, (inaudible)

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Tavolo Kids Living, BoConcept, Sub-Zero and Wolf, they are (inaudible) good name with quality product that things (inaudible) to high-quality lifestyle stuff.

Fashion and accesories, the photos that aren't just showed about the (inaudible) undefeated and (inaudible) is about IT, and IT is going to give a 2 more surprise by introducing 2 more brands in the next few months. Food and beverage, Starbucks flagship, (inaudible) which I would like to highlight that this is a new concept by (inaudible) concept, which we think will draw a lot of the young crowd, young bankers and a very different crowd of customer, particularly for the late (inaudible) business.

Personal care and beauty and (inaudible) is another brand under the (inaudible) Evita. So other than this, you should expect we should have more and more to come within the next few months. And the grand opening of LG3 will be the last quarter of this year.

(inaudible) putting the focus in LG3, we are not lazy to -- for the rest of the portfolio. So for the rest of the portfolio, this is not more only about lifestyle, we say lifestyle and brands, and that's the things that should all be important element of our tenant's mix. For example, luxury, (inaudible) and (inaudible) by Valmont will all come to us. And then food and beverage, 10 Shanghai, (inaudible) Specialty Coffee, Hai-di-lao, they have all been opened and have a very good response from the customers. We also change Hysan Place (inaudible) from one (inaudible) to a feel good down the brand names that (inaudible) Champion. They are more popular for the Gen X, Y, Z. For kids, the (inaudible) which is a very good and originate from Londor are very good Kids concept will open by November or December this year. Other than newcomers, we also have the existing tenants who show their competence and they buy into our community concept. For example, Bulgaria, (inaudible) Roger Vivier, Towngas, Adidas, Jack Wills, Lemon, they either expand the (inaudible) within our portfolio or having kind of major renovation to stay longer and trying to get more business in our communities.

Marketing, digital Hysan (inaudible) related to our (inaudible) program. The loyalty program showed good progress. VIP Club Avenue membership grow 40% with the sales growth of 30%. Energy Plus, which is going into a full loyalty program within this year, have doubled in membership number and their sales. Not the sale, but (inaudible) redemption of other food offering from us.

For business technology, area-wide WiFi, our loyalty applications that we're engineering, data analytics and AI, all under constructions. Our famous leisure promotion still got very good response this year, and we (inaudible) shopaholic shopper promotion that cover the whole portfolio on top of already festive promotion, Chinese New Year, Valentine's Day and Mother's day.

Marketing, I think were named (inaudible) -- when Irene talked about the community concept, but you can see from the heading that we go from different angles to build the marketing within our community. We go for tenants collaboration, we have all the names LG, Cardia, Bulgari, PRG, they all have events with us. And then we also got our (inaudible) third-party like the Rugby Sevens, Lamborghini Weekend Drive, HSBC, Hang Seng Bank, China Merchants Bank, they all have credit card promotion with us. Of course, as a community, wellness this is so important for work-life balance now. So the Go Green campaign, Nike Yoga and then the (inaudible) good event as mentioned (inaudible), the Children Theaters, the (inaudible) they are all (inaudible) and really make our place a destination or build happy for the customer that why not go to Lee Gardens area, there must be something happening here.

Social media, you see we have 75% growth in (inaudible) and then Hysan95 have (inaudible) group follower and (inaudible) expecting that Hysan95 program to bring more excitement by the end of this year.

For office, we have 32% growth in turnover, so it come to HKD 820 million, occupancy, 95%, but when we talk about the commitment, office can be up to 97%, 98%. Positive rental reversion, rent renewals and new letting across the portfolio.

For the LG3, it show the effect of having a good quality building in Causeway Bay when the central become decentralized- -- having decentralization of office occupiers. Causeway Bay will be next to destination for their employees, family and location, and when we have this kind of really good that can meet the (inaudible) extended, then you can see from the chart, 58% of LG3 is occupied by financial industries. And we the -- and we are very advance in trying to make our portfolio ready to accommodated the need of co-working, which become a very important facilities for more than office communities.

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Next slide, you can see Irene has mentioned, we still have a very balanced tenant mix. For the first 4 categories, bank and finance, professional consulting, insurance and semi-retails are all up to that not more than 50%, so have still have a very wide judgment, which we think will meet our portfolio (inaudible) need, very different from central or even (inaudible)

For residential portfolio, we have a little drop of 3% to HKD 130 million, this is mainly due to the renovation of some of the units, get the higher rental, but we are very careful in controlling the amount of new supply or vendor unit to meet the demand because the demand is not that superstrong for this kind of very expensive apartments in Hong Kong.

Tai Po, we have just got the GFA approval, and the actual site will start in 2 months time. So from the picture, you can see that view is wonderful or the neighbor is so green and low density. So this could turn into a very luxurious residential project.

Okay. That's all I want to highlight. Thank you very much.

QUESTIONS AND ANSWERS Operator (Operator Instructions) Now it's time for questions from the floor, and we appreciate if you can let us know who you are and which company you represent. Please use the microphone when asking questions as they go out live online. And I will now hand it back over to Irene, Ricky and Roger. And let's take a question.

Yam Fan Tso - BofA Merrill Lynch, Research Division - Junior Analyst Yam Tso from Merrill Lynch. I got a couple of questions. First on retail, you mentioned that mainland visitor was up 20% first half. And with the R&D starting to weaken, I think in the middle of June, have you seen any signs of retail slowdown, for example, for your tenant sales in July? And my second question is on office. There are some reports, Rick, saying one of your key tenants at Hysan Place is seeking even cheaper alternative in (inaudible) Can I confirm that there will be no impact on the Hysan Place office revenue until the end of the initial lease of the tenants and given the rents in Causeway Bay also where (inaudible) significantly what is your view going forward on the office rental growth there?

Irene Yun-Lien Lee Maybe I'll just answer the second question. The (inaudible) answer is we don't comment on individual tenants. But suffice it to say, the impact will be minimal as in we will not see a movement for the foreseeable future. I mean, there will be regular turnover on the tenants, but big tenants that you may be referring to, there will be no turnover there. And Roger, may be you can talk about the...

Shu Yan Hao - Hysan Development Company Limited - CFO Yes. Well, again in terms of tenant sales, I mean, after the recent renminbi performance, we still (inaudible)for our tenants just low books are for the month of July, and down today is August 7, and we are waiting for another week or 2 before we see the first report coming in. Again, with this as a backdrop, if you look at the seasonality of the tenant sales, normally, each year, around summer timeframe, and usually will be some sort of a reduction or momentum, or something like that, soften a bit. So the same we see in some of the key part of that segment as well. I guess, we are also very keen to see what will be the impact, if any, on that tenant sales. And again, there's always a cycle apart from these individual events. As a business, we always try to arrange our trade mix to be a balanced one and distributable for our target customer groups. And that's also one of the key reasons what we've been doing in the past 18 to 24 months about revising our tenant mix.

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Operator Another question from the floor? Not yet. Well, we can take a question.

Irene Yun-Lien Lee There is one.

Unidentified Analyst Alvin from CLSA. So 2 question. First, can you update on the Lee Garden Three occupancy for office and retail? And like how many market contribution for this year? I think it should be full contribution from (inaudible) but I wanted to get a clear idea about how many markets continue for this year. And second question is more detail on the balance sheet gain. So you mentioned the balance sheet gain may come from that your retail portfolio, but if you keep the cap rates unchanged and your neutral rental reversion in the first half, so I wonder where is the evaluation gain from the retail comes from? Is that market rental or things (inaudible)

Shu Yan Hao - Hysan Development Company Limited - CFO Okay, let me take this. For the Lee Garden Three, maybe I'll take a step back. Overall, as I explained before, 2018 is the first year with some rental (inaudible) stop in the sense. 2019, we will see the full year contribution. Okay, so for 2019, we maintain our protection of a turnover or revenue, about HKD 300 million to HKD 350 million, so we'll still be the same. So let's assume 2019 is 100%. So what we expect to see in 2018, and based on current estimate, is around 75% to 80% of our full year capacity is going to be reflected this year in 2018, first of all. Secondly, we see that the 2018 numbers (inaudible) between the first half and second half is roughly 40% versus 60%, so I guess, you probably can give some numbers for your model. And for LG3, another point I want to highlight, the expensive (inaudible) based on some of these estimate and some of the report I saw, because of this year, we are getting our tenant (inaudible) So some of these expenses we sort of like initial set of one off, in particular, the agency costs and some of these property management picture. So as you can see, again, in announcement, in the first half, our property ratio of the cost ratio for property expenses is around 11% to 12%. So for the whole year, that percentage is going to add up to about 14% to 15%. So that's expected. And just as a background, back in 2012, '13 (inaudible) that expense is actually hedged up to about 17%, given that the stop period. So we expect similar pattern in the first national expense we checked up this year. And then with the full year contribution coming starting from 2019, we expect the expense ratio will go back to the more normalized, like 10%, 11%. So that's what -- that's another point I want to highlight to you. In terms of devaluation gain, again, you point out spot on the quarter reversion is neutral. But evaluation is performed on the whole of the portfolio, not just those that we sort of transact or we price, basically. So every year is [1/3]. So I would say that the valuation change for the first half last year as well as first half this year reflect our given the every (inaudible) to change on the view from the value of the reversion we (inaudible) rental market. So basically, what translates into (inaudible) last year, there still some very, well, not very positive view on the rental recovery of the retail market, whereas this year from the interim data, they are quite new as compared to last year, quite positive reversion outlook. So I think that's kind of like consistent with the general market expectations.

Irene Yun-Lien Lee And I think our office performance was very good as well, and that contributed quite significant amount.

Operator Anyone else? Should we take a question from online? Now we have one from Justin Kwok from Goldman Sachs.

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Justin Kwok - Goldman Sachs Group Inc., Research Division - Executive Director It's actually a 3 parter, with co-working space being highlighted as one of the key initiatives for your office tenant reshuffling exercise, what's the percentage of space in your portfolio being leased to these operators? Second part is what's the target level of space to be allocated to these operators? And third, would you intend to JV with them or start your own co-working operator?

Irene Yun-Lien Lee Maybe I will have a stab atn this. Right now, approximately 6% of our office portfolio is co-working space, and we have gone from traditional service office, which were already in our portfolio to inviting 2 co-work operators, 1 is (inaudible) which is in LG3, and they had made LG3 their flagship. And in fact, we held a Board meeting this morning. We like to use our tenant space to test out their hardware and their software. And other one is the desk, which is a different price point, again, and we have placed them into our 1 Hysan Avenue and Leighton Centre. So we have actually expanded our co-work percentage quite significantly this year in recognition of a sector, which we believe is here to stay. Now as to expanding it, we will -- different area as in different location and different portfolio will have probably have a different percentage. If you look at the overall percentage, it's a big number right now, and it's growing. Are we going to match that? Probably not, because it really depends on the price point and on the needs of our tenants, as well as having the space. Having LG3 come online was actually a very, very fortunate thing, and we were able to release significant amount of spaces to them. As to how we want to look at this sector, we are looking at it. We are looking at a whole range of, as I said, from JV to owning to just having a tenant, we haven't landed on a solution because this is a fast-changing market, and I think the people, the players, who have jumped in to market, and they are many of them, are testing different models themselves. So I think it's (inaudible) the space. But we believe that it's an important sector, and it's very important office offering, because when a traditional tenant comes in, let's say, professional services or a bank, they actually are attracted to a building, which has co-work space because it allows them to flexibility up and flex down. These days, you do have space orders. If you use 2 floors, I can promise you, you will not be allowed, your space manager, your real estate people will not allow you to use, to move to a place, which is the same space nevermind figure. You will be asked to downsize from 2 floors to 1 floor and a half, because we need to -- everyone is thinking about cost and productivity, and reducing that fixed cost. So having a nearby credible co-work offering is terribly important advantage for a landlord.

Unidentified Company Representative Any other question?

Unidentified Analyst Thank you management for the very good highlight on helicopter view of the company strategy. This is Hildy from Morgan Stanley. What I understand with the backdrop of all these changes on the technology and generation changes, how do you feel about the retail market outlook on your portfolio in the coming 1 year or maybe 3 years? How would you want to change and cater the shift in demand? That's one. And something housekeeping, what do you think about the rental reversion going forward in the coming half year and 1 year?

Irene Yun-Lien Lee I'll leave the rental reversion to Roger, and I'll try to give a view on where retailer is heading. From Rick's presentation, you will see that we are not just emphasizing lifestyle. We have used LG3 as an ignition key to actually emphasize and expand our lifestyle. It's really much more of (inaudible), just to say use LG3, which actually has no high brands in it. Only lifestyle. Only interesting F&B. That actually has ignited the rest of our portfolio, 1 plus 1 equals 3 kind of effect. So that highlighted the need for lifestyle. However, if you look at the rest of the presentation, you will see a lot of movement in our high brands, and the movement is actually people who want to go deeper and bigger. And now they may not go bigger in the sense of expanding the (inaudible) doubling the shop size, they are actually going bigger in terms of the (inaudible) Area of their offering. So I always think about the high brands as -- they are as (inaudible) as the landlords. They are being disintermediated as well. So they actually need to go into the online business. They need to actually be look at their own DNA, now some will always have a very specific DNA. But even with that, if you look at Dior, they've actually gone street wear. You can see the -- if you look at their store and landmark, it's beautifully wrapped into almost

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©2018 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. PRELIMINARY AUGUST 07, 2018 / 9:00AM, 14.HK - Half Year 2018 Hysan Development Co Ltd Earnings Presentation graffiti street wear, funky, young, approachable, but it doesn't mean that they are lowering their price point. It doesn't me that they are actually changing their brand. They actually are repositioning, I will call it a new classic. So think a lot of the high brands are also changing. So as a landlord, if we don't actually respond to that, we will be completely disintermediated. So we actually need to make sure that we have the energy and the vibrancy for them to feel they want to be part of us as well, because we actually are progressive landlords, we actually have a very interesting shops and flagship, and no one else in Hong Kong have shops like Undefeated, which is an IT offering, and they will have 2 more surprises coming. High brands actually quite like that, too. They want to be part of a vibrant neighborhood. We are not going to say no more high brands. I think there's definitely room for high brands. If you look at our top avenue, our VIP spenders, they are spending big on high brands, be it apparel, be it jewelry and watches. So there's definitely room for that. But I think it has to actually be repositioned somewhat. So you can see in the last 2 years or 3 years when times were more difficult, high brands actually repositioned and contracted. So brands who had, let's say, 15 stores on Hong Kong and (inaudible) Site, actually needed to come back to 10 stores. And we actually have this same for our tenant. We actually have to show them, you actually have to be in the location. Now that is not easy because we are competing with some very big landlords, some big landlords with a lot more leverage, they have lots of malls in China. So (inaudible) twisting it's a bit easier for them. So we have to really differentiate ourselves. So they have to want to be with us. Now those stores, we happily -- we have done very well, but those sorts of contracted now with the revival of retail sales, I can't see too many of them going from 10 back to 15, they won't. They have different ways of responding to the change in the market, and a lot of them going online as well. And so they actually need to look at their own productivity as well. So net-net, there will be a place for them, they will also reposition and we actually have to make our area a must be here kind of proposition for them.

Unidentified Company Representative Okay. It's been a long day for everyone. So thank you very much for coming. And we look forward to seeing you guys again next year.

Irene Yun-Lien Lee Thank you very much for coming.

Shu Yan Hao - Hysan Development Company Limited - CFO Thank you.

Kon Wai Lui - Hysan Development Company Limited - COO Thank you.

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