SHGKY (SHGKY) Q2 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, and welcome to Sun Hung Kai & Co. 2026 Interim Results Presentation. This presentation will be conducted in English. I am Christian Arnell from Christensen Advisory. The senior executives here with me on the call today are Mr. Tony Edwards, Deputy Chief Executive Officer; and Mr. Brendan McGraw, Group Chief Financial Officer. In today's call, we will talk you through the company's business performance in the first half of 2026, outlook and future plans. Following the call, we'll open the floor to questions. Before we start, I would like to take the opportunity to remind you that today's discussion will contain forward-looking statements, which are based on assumptions and factors that are beyond the control of the group and are not necessarily indicative or guarantees of the group's future performance. Now I'd like to pass the call to Tony to begin the presentation. Tony, please go ahead.

Thank you very much, and good afternoon, everyone, and thank you for joining us today. Let me begin with the key figures. Despite the challenging operating environment in the first half of 2026, the group continues to create value, staying focused on downside protection and risk-adjusted returns. Total income decreased 10.9% year-on-year to HKD 2.5 billion, while EBIT declined 9.3% to HKD 1.3 billion. Attributable profit was HKD 688 million, down 22.4% year-on-year, primarily driven by lower net investment income against the high baseline in the first half of 2025 from a major position's IPO valuation markup, partially offset by an improved contribution from our credit business. On the growth side, our Alternative Solutions business, SHK Capital Partners, continued to expand with total AUM rising 17.7% since the end of 2025 to USD 3.7 billion. Investment assets increased 7.4% since the end of 2025 to HKD 16.9 billion, while the consumer finance loan book grew steadily with gross loan balance up 4.6% since the end of 2025 to HKD 12.3 billion. The Board declared an interim dividend of HKD 0.13 per share, an increase of 8.3% year-on-year. Turning to our key messages. The group's profitability remained resilient and aligned with our alternative investment platform strategy, although reported profit was lower this period, reflecting the absence of a sizable liquidity event compared with the preceding period. Total AUM reached USD 3.7 billion with 17.7% growth in the first half, demonstrating the flywheel effect of our expansion in strategic partnerships, enabling Sun Hung Kai Capital Partners to build long-term recurring revenues and enduring relationships. Our proven track -- investment track record supported by a resilient balance sheet, continues to drive external capital growth, strategic partnership expansion, consumer finance scaling and asset growth in mortgage servicing. We maintained a low cost-to-income ratio and an EBIT margin of around 50%, reflecting disciplined and well-managed operating model. Importantly, our investments in technology infrastructure, AI implementation and top-tier talent are actively driving business traction. As the uncertain market environment is likely to persist, the secular investment case for alternatives remains compelling. Now I'll pass to Brendan to talk about the Investment Management business.

Thank you, Tony. In the first half of 2026, our Investment Management business delivered a profit before tax of HKD 403 million, contributed evenly across private equity, special situations and structured credit and hedge funds. Overall, our return on assets remained solid at 3.8% for the 6-month period. Total investment assets reached HKD 16.9 billion, an increase of 7.4%, with private equity, external funds and direct or co-investments representing approximately 57% of the portfolio. We also increased our exposure to special situations and structured credit, now accounting for 11.2% of assets, providing downside protection while preserving upside optionality. Investment income of private equity was propelled by liquidity events, including IPO and M&A, portfolio markups from new financing rounds and technology investments and ongoing distributions. The decrease in direct and co-investment returns was largely a high base effect because the first half of 2025 included a one-off IPO gain. Our fund of -- hedge funds strategy delivered strong returns outperforming market benchmarks. Gains from special situations and structured credit were driven by value appreciation in a U.S. payments co-investment and some special situation funds alongside steady income from the private credit portfolio, such as the Wentworth Private Credit platform that we invested in last year. The public portfolio recorded a small loss amid broader market volatility and sector rotation in the second quarter. Our portfolio remains well diversified, both by geography and sector. We monitor it using a total portfolio approach. Geographically, Asia, North America, Europe and Australia accounted for approximately 33%, 34%, 15% and 8% of investments, respectively. By sector, exposure is well balanced across financials, TMT, diversified, consumer, real estate, supporting resilience across market cycles. Private equity remained the largest contributor to investment income in the first half of 2026, generating HKD 128 million of profit before tax. Total assets increased 2.9% from the end of 2025 to HKD 9.7 billion, while return on assets was 2.1% for the 6-month period. Net IRR since inception was 15.8% and DPI improved to 0.87x, reflecting ongoing realizations and liquidity events. The successful public listing of HKD 1.7 billion of the private equity portfolio provides us with strong liquidity flexibility. I will now hand back to Tony to discuss alternative solutions.

Thank you, Brendan. Our Alternative Solutions business, SHK Capital Partners, delivered strong growth momentum during the period. Despite a challenging fundraising backdrop, our total AUM increased by 17.7% from the end of 2025 to USD 3.7 billion, while fee income rose 24.7% year-on-year to HKD 21 million. Pretax loss -- pretax loss narrowed significantly by 82% year-on-year to a nominal HKD 1 million. This improvement was primarily driven by accelerating AUM and fee income growth, partially offset by planned operating expenses. During the period, we leveraged strategic partnerships with leading global alternative and private market GPs, and this has allowed us to access privileged risk return through co-investments and tailored solutions for our institutional and family office clients. New developments include partnering with Janus Henderson to co-develop and distribute alternative investment solutions, partnering with Aquilius to unlock unique access to Asia Pacific secondaries, and expanding our alliance with Pinegrove Credit Partners, broadening Asian investor access to venture debt in a high-growth sector. Over the past few years, SHK Capital Partners has delivered strong and consistent growth with both AUM and fee income expanding at a high CAGR, demonstrating the scalability of our platform and solutions-driven business model. Our AUM growth was attributable to net capital inflows, satisfactory performance across various strategies and new strategic partnerships. Both the AUM and fee income growth reflects our success in accessing unique alternative opportunities with differentiated risk-adjusted returns, which further transforms into solutions for our clients and GP partners. With the completion of our investment in Aquilius in the second quarter and with most other alliances only commencing last year or this year, this collaborative model will continue to generate a flywheel effect that unlocks proprietary deal flow, expands the network effects and enables Sun Hung Kai Capital Partners to build long-term recurring revenue. Importantly, these expanding partnerships benefit not only SHK Capital Partners, but also the wider group, driving investment returns and creating compelling co-investment opportunities for our Investment Management segment. This next slide shows you how we activate our strategic partnerships to unlock the flywheel effects. At its heart, strategic partnerships and disciplined origination compound into investment returns and recurring income growth, a self-reinforcing flywheel that powers everything we do. On the supply side, we back the best GPs and funds with capital, better governance and distribution, helping strong managers build and scale, while we institutionalize and amplify what they do. These GPs and funds, in turn, produce differentiated privileged risk-adjusted returns, which we transform into solutions for our clients. On the demand side, the family offices and institutional investors who gain access to investment opportunities they could not reach on their own with better access, better alignment with SHK Capital and better outcomes. As capital inflows -- as capital flows through, we grow our LPs' AUM and franchise value and the whole wheel turns again, each rotation strengthening the next. Ultimately, this compounding cycle drives the platform monetization and relationship development in 2 forms: investment returns captured in the Investment Management segment, of which approximately HKD 681 million of gains have been associated with AUM from our partners within the alternative solutions platform since 2021 and recurring income captured in SHK Capital Partners. The more partnerships we add, the more powerful these flywheel effects become, and it is exactly what we are seeing in our AUM, fee income growth and investment returns. Now I'll hand back to Brendan to walk you through the credit business model.

Thank you, Tony. Our Consumer Finance business conducted by UA Finance delivered a strong performance, recording a pretax profit of HKD 565 million in the first half of 2026, up 50.7% year-over-year. Excluding the exchange loss of HKD 42 million relating to the liquidation of certain Chinese Mainland subsidiaries, the adjusted pretax contribution was HKD 607 million or a 43.8% year-on-year increase. The total gross loan balance of UAF increased by 4.6% from the end of 2025 to HKD 12.3 billion. Supported by disciplined underwriting and portfolio management, the return on loan of UAF reached 28.1% in the first half of 2026, while the loan charge-off ratio improved to 6.6%, down 30 basis points from the end of 2025. In the first half of 2026, UAF Hong Kong delivered satisfactory growth in both profitability and transaction volume, maintaining a disciplined credit underwriting policy and robust credit scoring system while bringing down the loan charge-off rate. Total gross loans of UAF Hong Kong increased 3.4% from the end of 2025 to HKD 10.1 billion. Our SIM Credit Card business has begun generating profit with growth in card receivables, interest and fee-based income. With rising revenue yields and acquisition among younger demographics, overall performance remains satisfactory. UAF China continued to focus on its secured loan business with tight cost control. Total gross loans in China increased by 9.7% from the end of 2025 to HKD 2.3 billion. Overall, total income of the consumer finance business increased by 6% year-over-year to HKD 1.7 billion in the first half of 2026. The cost-to-income ratio stood at 31% in the first half of '26, broadly stable versus 30.6% in the first half of 2025 and around 90 basis points lower than the 31.9% recorded in the first half of 2024. This demonstrates the continued strength of our consumer finance platform and the effectiveness of our prudent credit approach. In the first half of 2026, our mortgage loan business conducted by Sun Hung Kai Credit, recorded a pretax profit of HKD 26 million, up 140.7% year-over-year. Growth was primarily driven by a significant reduction in impairment charges with the net impairment losses ratio down by 160 basis points year-over-year, reflecting improved asset quality and prudent risk management. As such, the return on loans improved by 50 basis points year-over-year to 10.4% in the first half of 2026, demonstrating enhanced profitability and portfolio performance. The mortgage servicing business continued its momentum. Total mortgage loans serviced by Sun Hung Kai Credit reached HKD 1.5 billion at the end of the first half of 2026, up 40.7% from the end of 2025, while loan servicing income increased 81.3% year-over-year to HKD 3 million. This growth was driven by new mandates, underscoring the market's recognition and trust in Sun Hung Kai Credit amongst institutional investors and reflecting growing demand across developers. Expanding the mortgage servicing business advances our strategy to broaden the revenue base through capital-light recurring income while solidifying our position as an institutionalized mortgage solutions platform. Now let me go through our key financial performance in the first half of '26. Attributable profit was HKD 688 million, down 22.4% year-on-year. Total income reached HKD 2.5 billion, down 10.9% year-on-year. Both declines were mainly due to the absence of a sizable liquidity event compared to the preceding periods. Looking at the broader 2-year trend, performance has strengthened since the 2024 interim. Attributable profit has grown from HKD 75 million to HKD 688 million, while total income is up 29.4% from HKD 1.93 billion to HKD 2.5 billion, underscoring the group's improved earnings base over the period even against a strong 2025 comparative. The cost-to-income ratio of our fees and interest-based business stood at 31.8%. Interest cover remained strong at 3.9x. Net debt decreased by 5.1% year-over-year to HKD 6.2 billion, while shareholders' equity increased 3.4% year-over-year to HKD 22.8 billion. Consequently, our net gearing ratio reduced from 29.6% in the first half of '25 to 27.1% in the first half of '26, reinforcing the strength of our balance sheet. Charts highlight our long-standing commitment to disciplined asset growth and value creation, which has consistently translated into strong EBIT and attractive shareholder returns. Our capital has been deployed with a clear focus on quality and sustainability, underpinned by a long-term proven track record of stable capital return across market cycles. Operationally, our EBIT margin stood at 50%, demonstrating our continued focus on profitability. The Board declared an interim dividend of HKD 0.13 per share for the first half of '26, an increase of 8.3% year-on-year. The group also repurchased 2.8 million shares in the first half of 2026. Since 1997, we have returned a total of HKD 16.2 billion to shareholders through dividends and buybacks while maintaining a strong and flexible balance sheet. Together, these elements underscore our focus on disciplined capital management, sustainable earnings and long-term shareholder value. Now I'll pass you back to Tony to talk about the outlook.

Thank you, Brendan. Let me close with our outlook. We expect the macro backdrop to remain dynamic, shaped by geopolitical shifts, interest rate trends and ongoing AI disruption. Rather than trying to predict the cycle, we are positioning the group to stay resilient across market conditions guided by 4 pillars: Firstly, capital discipline. Disciplined capital allocation and proactive risk management remains central to maintaining resilience across -- through market cycles. That discipline is reinforced by cross-segment synergies. Deeper collaboration across our credit, investment management and alternative solutions businesses is where we believe much of our differentiated value can be created. We're extending that value further through strategic partnerships. New GP investments and co-developed solutions will unlock further flywheel and network effects across our ecosystem, supporting investment returns, recurring income and proprietary opportunities. And underpinning all of this is agile execution. Our nimble operating model and group-wide AI integration enable SHK to capitalize decisively on high conviction asymmetric market opportunities while progressively diversifying and expanding our revenue base. Together, these pillars are aimed at one clear outcome, sustainable earnings growth and long-term value creation for our shareholders. Thank you.

Thank you, Tony. That concludes management's prepared remarks, and we will now proceed to the Q&A session. [Operator Instructions] The first question comes from Kate Luang at UOB Hong Kong. Could you provide more color on our -- on the latest partnership with Clipway and Aquilius? What are the opportunities that we expect to see from these partnerships?

I think maybe, Tony, you could answer that one.

Thanks, Brendan. Yes, the -- both with Aquilius and Clipway, who are both secondaries managers, Clipway in Global, Aquilius more in Asia. Their job is really to provide liquidity to other LPs or investors that are looking to sell some of their private equity or real estate fund positions. And with that, it gives us significant insight into the market for secondaries and provides us with a lot of information in terms of the pricing of secondaries and also the valuations of the holdings within those secondaries funds. And that makes us a lot smarter when it comes to determining our own and other investment opportunities as we can bring all that information and insight together within our organization. And -- but those investment opportunities are also very scarce and unique. And those that have a significant discount have a significant edge, and that's really what our clients are also interested in access to those exclusive investments with an edge. That's what we call privileged risk return. Thank you.

We have a follow-up question from Kate. How do we see the Investment Management segment performing in the second half of the year? And what strategies and priorities do you have amid the current market volatility?

Okay. Maybe I'll take that one. Yes, I think the answer -- short answer to that is that we will maintain our strategy for investment management, which is really embedded in deep research, selective investments and not just chasing return, but looking for downside protection as well. So this is why we've been able to maintain a strong net IRR of 15.8%, and that's the same strategy that we will maintain in the second half of the year. Obviously, I don't have a crystal ball. I can't tell you exactly how that will turn out in terms of performance, but you can see yourself over the cycle that, that strategy does work.

Thank you, Brendan. The next question comes from [ Robert Lam at TPG Investment ]. The period's lower profit largely reflected the absence of a sizable liquidity event compared with last year. As the platform scales towards more recurring fee-based income, how quickly do you expect the earnings mix to become less dependent on episodic realizations? And what proportion of income do you ultimately see coming from recurring sources?

Okay. Maybe I'll take that one first, Tony, and then you can add on if there's anything to add there.

Yes.

I mean I think this has been obviously a very conscious effort by the company to change the earnings mix over the last few years where we've been seeking to have this fee and interest-based income more prominent even within our financial reporting and within how we structure our business. We do see that it is growing. It grew by almost 4% over the year. But obviously, it will take time to scale as the AUM builds within the platform. So I don't think it will change extremely quickly, but it will change over time, and that is the direction of travel for the group.

Yes. And if I could add to that question, though, it's -- the realizations might be cyclical, but the actual process is very systematic in the investment team. And that's borne out with our IRR that we published. So 15.8% over the last 15 or so years, which really -- which is a proof statement that the processes, the people, and the culture within the organization is -- has the capability to invest in a systematic way. And what we've done more recently is enhance that by actively investing and engaging with GPs to allow us to build on that access to better opportunities and share those opportunities with third parties and bring their capital to bear and allow us, therefore, to create better risk return for ourselves and our third-party capital. And that's really the flywheel effect or the network effect that we're trying to take advantage of. And I think you'll see that come through over the results over the next few years.

[Operator Instructions] The next question comes from Eudora from DealStreetAsia. Could you share more details into your new GP investment plans? Amid the current AI-centric market boom, what is your view on the 2026 vintage of primary fund investment opportunities?

Should I talk to that first, Brendan?

Yes, you go ahead.

I think on the -- we are continuing to look to expand our GP partnerships. We have a number of JV partners in the pipeline. We don't -- we have an opportunistic view on that as we're trying to find the right people in the right asset classes that we believe have the right qualities and the business is set up in a way that we'll be able to scale with our capital and with our assistance. And that assistance can be in various forms. We have been invested in that, specifically in the credit space. I think that's where we see the greatest opportunity over the course of the next few years, maybe in Europe, maybe elsewhere. And I think that's where our client capital is also looking to diversify into those sorts of opportunities where the outcomes are much more known rather than variable. And that's really what we're seeking is consistency and clarity and transparency in an investment world, which has become more volatile. So hence, we don't typically chase the latest investment theme, but create investment opportunities where we see that downside protection where we have limited downside and the asymmetric exposure where things go very well, we can participate in that growth as well.

Maybe I'll just add to that as well. What we tend to do when we're looking at GPs, we do look at the track record in quite a lot of depth, and we do re-up with good GPs that have given us good returns over multiple vintages. So that also provides some protection against just chasing the latest trend or the latest GP.

We have a follow-up question from you, Eudora. Are you concerned at all about the tech AI-focused funds launching this year becoming another high-priced vintage where exits in 5 to 6 years down the road could be challenging?

Yes. Maybe I'll take that one. Yes, I mean, there's always that risk. There's always that challenge when looking at private equity and these types of investments. I think the honest answer to that is that you need to have very deep research. You have to have discipline in the investment strategy and make sure that you are investing in different sectors, different geographies, different GPs and to have a more of a portfolio approach, not just to focus on the latest theme or the latest trend.

Yes. If I could add to that because I think that's the key is not chasing the latest trend. Our heritage is as a credit investor. And so philosophically, price is really important to us. And that's really a big component in determining our investment appetite and the opportunity and also our risk control. So if you look at the recent investments in, say, Janus, for example, where we're very attracted to Janus Henderson's strategy of implementing an AI solution across its business. And we invested in Janus in the high single-digits multiples. based on an AI thesis rather than investing in a lot of AI names with a very extremely high and extended multiple. So we're a lot more comfortable philosophically using price and valuation to justify investment opportunities rather than expectations of what might happen in the future.

The next question comes from Alex Chan at Singtel. How is Beijing's tightening on cross-border capital flows impacting your credit business, specifically borrower repayment capacity, loan demand and collateral recovery? Given these headwinds, do you anticipate higher bad debt provisions and tighter lending standards in the second half of the year?

Okay. I'll take this one. Yes, we are aware of tightening on the cross-border capital flows. So far, the impact in -- for our business in Hong Kong has -- we haven't seen any large impact from this. In fact, I think if you look at the financials, you can see that our impairment has dropped by about 20% over the period. So we're not experiencing any repayment issues because of this particular issue. And whether we anticipate any headwinds or higher tightening of lending standards, we already have tight lending standards, and we will continue to apply that model, which I think is why we've been able to control the charge-off ratios in the past.

We have a follow-up question from Alex. As borrowing costs stay elevated and price competition in unsecured lending heats up, how do you plan to defend your net interest margins without taking on riskier subprime borrowers? Looking into the next 6 to 12 months, where do you see the ceiling for your loan book growth if risk-weighted assets must be kept in check?

Okay. Maybe I'll take that one as well. Yes. I mean, our -- obviously, our net interest margin has been maintained, as we mentioned in the presentation. I think the way in which we do that is not just by chasing after more clients. We also develop our products. So we've seen quite a good initiative within our UA Finance to develop new products, in particular, the credit card, which gives us new forms of income as well. So that helps us to maintain our net interest margin as well. I don't see any particular limit in terms of a hard limit for the size of our loan book. Obviously, we need to make sure that we keep it within levels that we are comfortable with from an overall balance sheet perspective, but we wouldn't be setting any set limits.

The next question is, you've spoken about the flywheel effect underpinning your platform. Could you give some concrete examples of how this dynamic translates into platform monetization and tangible revenue?

Okay. I think, Tony, you'll be well placed to that one.

Yes. No. Thanks, Brendan. If we use an example, I think -- well, if you look at the flywheel effect in general, it is looking at activating the GPs that create a privileged risk return, so investment opportunities with an edge that are exclusive that we can wrap into solutions for our family office and insurance clients who provide us more capital and that cycle allows us to activate more GP opportunities. That's the flywheel effect. And I think that we would -- there are many different ways where we can work together in partnership with GPs. A good example of that would have been recently with our credit platform and equity -- property equity platform or real estate equity platform in Australia called Wentworth. They -- and we were looking to invest in some hotels in Darling Harbour in a couple of hotels in Sydney, which we sourced from a Middle Eastern sovereign fund. And together, through our expertise and structuring and investment capabilities, purchased those hotels at a very good valuation, particularly relative to the opportunity as we see it in Sydney with the new airports opening. And that has allowed our clients also to participate in that hotel acquisition, and they've provided more capital to Wentworth to invest in future investment ideas. And that's the cycle, the flywheel effect that I'm talking about, and it's driven by essentially good investment ideas, good underwriting capabilities, access, expertise and ultimately, the proof statement of good investment risk returns. And I think as we're achieving that, that improves relationships with GPs that we activate with, and therefore, we get better opportunities and improves relationships with the LPs. And ultimately, those relationships will provide our success in the future.

[Operator Instructions] There appear to be no further questions. This now concludes the Q&A session. Thank you, everyone, for participating in today's earnings conference call. If you have any further questions, please feel free to reach out to the Christensen or Sun Hung Kai & Co. Investor Relations team. Thank you very much.

Thank you.

Thank you.