Executives: Canning Fok - Group Co-MD & Executive Director Frank Sixt - Group Finance Director, Deputy MD & Executive Director Dominic Lai - Deputy MD & Executive Director Tzar Kuoi Li - Chairman & Group Co-MD Malina Ngai - COO, A.S. Watson Retail Ltd. Analysts: Karl Choi - Bank of America Merrill Lynch Jonathan Galligan - CLSA Limited Angus Chan - UBS Investment

Bank
Operator:
Unidentified

Company Representative: Thanks for joining us this afternoon. Today's presentation will include 2 main topics followed by a Q&A session. Our speakers in the first session are Mr.

Canning Fok; Mr. Frank Sixt; and Mr. Dominic Lai. Mr. Victor Li will join us shortly.

We can start now.

Canning Fok: Hello. And okay. First of all, welcome, everybody. This year, we've tried to make it a little bit more interesting for the analyst rather than going through all the results like we do with the last 10 years.

And I think, we would like to make it more interesting, all right? So if you can -- I think it is self-explanatory that our business -- that is the part. This is a container. And then that is a tray, and then that is retail. And then that is the tower, and there's oil and gas. And in case you don't know, that's not a TV, it is a telephone.

Okay? And then -- wait. So that, actually, what we are trying to say is that we have a business that is very diversified and also not only in business but also in geography that give us a lot of resilience in case anything happen in terms of currency, in terms of whatever happen so that -- if you see the last slide, and then we would have straight to use some of the things that we have been doing, so because that the world is changing, and then we have been keeping pace of it to see how do we service our customer and increase in revenue. And we will talk more as the times go on. Next. Okay.

Today, we are going to do 4 pieces, all right? The first one, we will talk about the strategy of our group, how -- what have we been doing, how do we go forward. And then, of course, the most important is the first half result. And then thirdly, a lot of people has been asking about our retail business. Actually, we have been spending a lot of things since 2011 and doing a lot of interesting things to bring our business to today and going forward. So that we would like to -- we have a retail team.

It will give you a detailed rundown portfolio. They will give you a lot more insight about -- hopefully, when you left this meeting, you will understand us lot more than before you comes in. And, of course, I hope that we'll give you a lot of impetus for asking questions. And I hope that we have a good Q&A session so that we answer all of your questions, because that we are the management and you are the analyst and the bridge between ourself and the shareholder. Hopefully, after you answer all your questions, the share price will go up.

All right? Okay, next. So this is a lot of words. So I just want to say that what we have been doing is that we want to build our recurring revenue, build up our revenues, our earning per share, cash flow per share and DPS. We do it by organic growth; our CapEx to keep our business -- to improve our business; by merger in different businesses; and also by acquisitions, as you have seen, a lot of them happening in last two years; and of course, anything that we do. And of course, there's a lot of clever things.

I'm not going to steal Frank's words. A lot of clever things. I'm a very plain speaker. Frank is a very sophisticated speaker. A very clever thing that we you do is we increase revenue.

Of course, I never forget that cash, cash, cash. And our senior adviser and our chairman with this is all -- and our Chairman is coming now. And he's all concerned about cash, so we have a strong balance sheet. So I think I'm not going to bother this because I'm going to have a sophisticate speaker to talk about our strategy. He will put you in your language.

Frank Sixt: Canning has already pretty well said all of it. But these two objectives are coequal and very balanced, right, so we are always looking at how we can grow recurring EPS, cash flow per share, and therefore increased dividends per share. But we never compromise the company's financial strength and stability. If you look down the left-hand side, this is the stuff that many of you know, but it bears repeating, right, disciplined management of revenue growth, margins and costs. We're very numerate organization or a very ERP-based organization.

We use an Oracle system that runs across all of our group everywhere in the world with a consistent chart of accounts and, basically, delivers us our financial information by the seventh working day following the end of any period, which is, I think, still today pretty unique. When we look at capital investments, right, across the board, we have consensus views on what is the right return on total capital, what is the right rate of return on capital employed in different geographies, in different sectors. So it's very disciplined, and it's very numerate. As Canning said, I mean, we actively look for M&A opportunities and organic growth opportunities, but we stay focused in the sectors and geographies where we have strong management experience and resources. The last point, I can't overemphasize, right, which is the adoption of innovation and technology across all of our businesses is very much part of our core objectives.

And it's not something that we started doing yesterday. It's something that we started doing 10 years ago or perhaps even more. We recognized the threats when they arise. But we also see huge opportunities. Essentially, it is cheaper to own and operate new technology bases in most cases than it is to own old technology bases.

And of course, it's possible to open up not just cost-saving opportunities, opportunities to grow well internally, to grow with your staff, to encourage your staff, so internal looking stuff, as well as generating new revenue opportunities. Right-hand side has been my stock and trade for so many years now, maintain the rating. That's the acid test. Whatever we're doing on the left-hand side, is it maintaining the rating? If it's threatening the rating, we don't do it. Strong liquidity and flexibility at the end of the first half.

We $150.4 billion in cash. Our net debt was up a little bit at $185 billion, 24.95%. But part of the reason for that was that we redeemed -- retired $21 billion worth of perpetual capital securities, which basically came out of capital and, basically, went into straight debt. Saved us a lot of money for ordinary shareholders and so, again, hopefully, enhances the DPS possibility. Long and balanced maturity profile, I don't have to talk about it.

I mean, 44% of the debt that's due by this company is due after 2022. And then the last point is obvious but important. When I said we get our results within seven working days after the end of a period, we pretty well get our cash flow analysis on our working capital along with the same timelines. A few years ago, that was two weeks later. Today, it's a few days later, so quite important.

And on that, I'll give you back to Canning.

Canning Fok: Okay. Thank you. So the way he talk, right, very sophisticated, isn't it? Okay, now let's go to this -- at this year's result. Now revenue, 16%; EBITDA, 19%; and EBIT, 16%.

This year, we have the -- we have a tailwind with us. And we're benefited by currencies, so that we are very happy. This is a good year to stand here. And then, of course, we report our profit go to $18 billion, okay, and then earning per share for $4.67, 13% increase. And then I'm very pleased to say that it is first time in the last almost 20, 19 years that we have an increase in dividend, double digit.

Okay? A lot of people may say that it's still -- our payout ratio, it's still not improved. But however, let me say that this is first time that our board actually go for a double-digit dividend increase, and then this is only interim dividend. Okay? So that hopefully, you've -- I've -- we will continue to do well. And then a final dividend, maybe we can report a very exciting situation, but 11% is very exciting. Next page.

Okay, now this is -- we are talking about EBITDA and 19% increase, 11% in local currency. So that we have a tailwind with us, very happy. And the thing that -- we have really diversify. Hong Kong, where we started out only have 3% because, last year, we sold off our fixed line business. We are not believer of fixed line because we believe in 5G.

All right? So that -- if Hong Kong is only 3% and, of course, Europe and -- then is become 54%. And if you look at how it comprise of, 34% come from infrastructure, and 25% come from telecom. So it become a very major divisions. And of course, 14% retail has been creeping up nicely for us. Very little capital needed, but return is really high, and then profit -- and one thing, I would like you to know, our port is -- continues to be a workhorse, 11%.

Today, if you saw the share market drop by -- what was the end, 500 points?

Frank Sixt: 600.

Canning Fok: It will be 600 points. And then a lot of the news is talking about a trade war, intensify. So I just want to talk about this. And if you go to our segmentation information, so that most -- you can -- the containers that's come from China to America is captured under the trust and the China divisions.

If you look at those, it's about 22% of our revenue, okay? That was $2.5 billion. And then you look at -- because like Shanghai and all those places, they are actually -- we are doing only the European trade because the -- we are in Huizhou, and then the American trade at [indiscernible] Yantian. So there's approximately at most 50% of those revenue are going to United States. So assuming a profit margin of 70%, so the affected is about less than $1 billion and this is -- you get that, that is 100% no American trade. So that I just wanted to say this is less than...

Frank Sixt: 2%. Yes, 2% EBITDA.

Canning Fok: 2% of our EBITDA. So that the effect. And then if that happen, our European trade, our Asia trade will go up.

So that actually, all in all, I dare to stand up here and say that the effect of this trade war with United State America, and that you -- have minimal effect on us because that -- one is going down, the other will come up. And also, because of our shareholding in the trust has been reduced, so through the trust, we have reduced our shareholding. So our exposure through that is not great, is minimal. So if you look at the division by growth, everybody is doing well, I think, 9%, 15%, 20%, 47%. And then three Group, 14%.

The Indonesia is doing well and the Hong Kong. All right? So next page. Oh, cash flow, I think, this is belongs to the -- to Frank.

Frank Sixt: Yes. I'll go very quickly on this one.

But obviously, operating cash flow is probably much more important to look at than EBITDA. What we do here is EBITDA, of course, includes, which was $55 billion in the last slide, includes a share of EBITDA of associates and of joint ventures. We basically take that out, and so we substitute the EBITDA that we control in our subsidiaries, and we put in the actual dividends the cash that we received from our associates. So those 2 numbers add up to this $36.6 billion of cash generation in at the half. You then knock off what we spent in terms of CapEx and as investments in associates and joint ventures, and you end up with an operating free cash flow for the half of HKD 26.3 billion, which was up 25%.

That reflects both a spending discipline and a very good cash flow to earnings profile for the group as a whole. That 25% increase basically came from CKI, number one, increased by more than 40%. And something you really need to bear in mind when you look at CKI is that cash and earnings are 2 very, very different things in its profile. Came from retail next. Very -- we'll be spending a lot of time on retail, so I won't dwell on it.

And it actually came from the telecoms group. The telecom group's operating free cash flow was up 19% for the half. This breaks down who contributed what. You'll notice that Husky Energy is a teeny, teeny little sliver. That's only because they only restored the dividend in the fourth quarter of last year.

So there is very small dividend payment actually in the first half. Good news on that front is that the dividend was increased by 2/3 at the board meeting last week. And so this contribution in cash terms will be even better in the periods going forward.

Canning Fok: So we talk a lot about ports. So I just quickly run down this.

Actually, this is our book value, $12.9 billion, $13 billion, 290 berths, 52 ports and in 26 country. Can I finish it, the last page? And then the last here, 84 million containers. All right? Next page. So this year, it dropped 1%. Almost the same because that China is a little bit weak, but then European pick up, so that, all in all, it balance.

And EBITDA went up by 9%. All right? So if you look at the first half, $5.7 billion, at the end is -- and then is pick up by Europe, mostly by Europe. It's basically from the Rotterdam and Barcelona. These 2 ports are going very well. U.K., in spite of our IT -- IT's a problem lately, but then, it's still doing very well.

And EBITDA. And then if you look at the -- in local currency, and then you saw that the Mainland dropped 10% basically because of -- what's that place? Ling Po. Ling Po , we have an accident, and then the last year, we have insurance company. This year, we don't. Other than that, it's all more or less the same.

And Europe is very good. And then the same thing, we add 3 berth. And then volume and then -- why are we doing well? Because the mix is better. Last year, it was 63% local. This year, it was 65% local.

And then local shipment almost triple or double the value of China shipment. So that all that result in good financial performance. All right? Now I'm going to just do the introduction because we have my colleagues up here and also responsible for the retail. It's the retail return is $27 billion, 14,000 store in 24 market and then 130 million loyalty member, and we've got count. So this is all very exciting number, but I don't want to do -- I got specialist here who know everything about retail.

Dominic?

Dominic Lai: Okay. Yes. See, for the first half of 2018, I think the retail division has relatively good half. And we are working very hard. I'm confident that, that will continue.

So there's a lot of numbers on the screen. In terms of store numbers, you can see that the store portfolio grow 7% to 14,432. So if you look at China, which -- how do you press the pointer? Okay. So in China and Asia, the grow at 12%. So in China, we now have 3,377 stores.

And then in Asia, close to 3,000. So Western and Eastern Europe also have a modest growth of 3%, these two area. So in terms of EBITDA, with revenue going 14% to reach $84 billion. EBITDA grow 15% to $7.53 billion, so very respectable growth. And then the -- if you look at the China and Asia together, they account for 51% of the EBITDA total.

And then the rest of the Western Europe, Eastern Europe, they account for 44%. And then their 5% other retail represent our PARKnSHOP, the supermarket business, the electrical business as well as the manufacturing business. So if you look at the center chart, you can see that all divisions contribute positive growth, which enables the group to report EBITDA growth of 15%. So China, Asia, Western Europe, Eastern Europe, they all grow. So if you look at on year-to-year changes in local currency, which were the important indicator of the underlying growth of business, this outstanding star is Health and Beauty Asia because we got excellent performance in Thailand, Philippines and Malaysia.

And even in China, we have a respectable 4% growth in EBITDA against a backdrop of 7%, 7.3% growth in revenue. So the Western Europe is flat mainly because of the underperformance and the challenging market positions -- or market conditions of the luxury business in Benelux and U.K. We have this mass business. It's doing very well, our Superdrug, our Savers and Kruidvat. In Eastern Europe, a good 6%.

So net-net, on a local currency basis, the group achieved 6% growth in EBITDA. We're just a nominal of 15%. Again, if you look at the EBITDA margin percentage, China maintains it's healthy 20%; Health and Beauty Asia, 9%; Western Europe, 7%; and then Eastern Europe, 13%, based on had to put up by Poland. And so overall, the EBITDA margin percentage of 10%, I think, is a very respectable percentage in the retail world.

Canning Fok: I just want to emphasize there's nowhere in the world that -- really, this is really a good figure, 10% EBITDA margin.

So that we're very proud of that. Hopefully, by the time go on, we get rid of the single-digit figures. Tzar

Kuoi Li: I would like to draw your attention to the 34% over there, exclusive sales. We talk about this as a name calling ourselves retail group, but that 34%, actually, we're in the business no longer retail. We are in the business of forming franchises and brands.

Those are brands that we created. So the 34% is a different business, is a much better margin and much more competition resilient, much more recession-proof. And that 34% has been growing year-by-year. And we're very proud of that 34% there because it transforms the company into -- the quality of the business is much better than ordinary retail.

Frank Sixt: Yes.

Dominic Lai: So if you look at our Health and Beauty business, which account for over around, say, 95% of the earnings, so total sales increased 17% to $68.5 billion. And as Victor said, the 34% of the sales is from exclusive products, either our own brand or exclusive products from our suppliers. Tzar

Kuoi Li: You can't buy it anywhere.

Dominic Lai: Yes. And loyalty members, we got...

Canning Fok: Before we go there, can you tell them the -- in China market, what...

Dominic Lai: Well, in China, it's over 50%, which I will cover in the next slide. So loyalty members, 130 million. We're the world's largest loyalty member base. And what's more important is that 62% of our sales come from these loyalty members.

So that's represent a very unique differentiated position of the retail business. So last but not least, we have been talking it for the last few years, our investment payback on new stores is still maintained below 1 year. So next slide. Again, if you look at our Watsons China business, Watsons China will continue to be a growth story, operating in a country of more than 1.3 billion population. So let me start.

If you look at the strategy we are taking in China is O + O. We are not O to O. A lot people talk about online to off-line and off-line to online, but we are talking about O + O is online plus offline. This is the strategy, and then we have built foundation now to carry out. We are implementing, not planning it or wishing it.

We are implementing it. So at the center of our China strategy is the customer connectivity. So we have 65 million loyalty members in China, and then we have over 1,300 KOLs, the key business -- key opinion leaders who promote our products. On social media, we have already created 55 million social fans. And then social apps, we have our own social apps with over 15 million downloads and 65 repeat rates.

So these actually enable us to connect and engage our customers very closely. And what do we offer them, customer offer? Again, as I mentioned, 50% of the sales in China Watsons is from exclusive products, i.e., our own brand, exclusive, private label. And then those products are only available in Watsons stores, online and off-line, and nowhere else. So that is a big differentiating factor for us in China. And equally important, over 25% of that sales is from imported products, where we have an advantage and have knowledge, experience and sourcing capabilities.

And of course, in store concepts, we continue to upgrade our store format to fit the customer's preference. So if you go right here on off-line, that's our heritage, that's our foundation. Highly profitable new stores, as I said, within-1-year payback. And if you look at the -- these terms, they are so flexible for us to adapt and adopt because over 80% of the turnover of the leases are on turnover basis. That help us to control the rental cost.

And 99% of the leases are with tenant-only breaks so we can exit any time with three-month notice, six-month notice with little or no compensation. So we will be able to build our agility and flexibility in chasing after offices. And of course, in operating in a country of 1.3 billion population, there is a lot of opportunity by deeper penetration and also densification of our network. So again, with our such a strong off-line basis, we are leveraging it to serve better our online business. So how do we do that? In fact, by the vast network, we are actually creating more than 3,000 collection, picking and distribution points.

We pick in our stores. These 3,000 store or distribution points are the envies of all online retailers in China. You ask them. We are the biggest network of picking and distribution. And of course, how do we serve our customers? We have models, Click & Collect, which Malina will be talking about later.

Click & Collect, i.e., you buy online and then you collect in stores. And then we have -- we can complete this transaction, this model, in 30 minutes. Picking the store, people -- customer come to the store, 30 minutes. For Click & Deliver, i.e., buy online and deliver to home or in office, we can complete it within 1 hour. So this is the capability that we have built.

So all in all, there's a lot of happenings in the retail world in China and elsewhere. And I want you guys to know more about it. And that's why, in a moment, we have asked Malina Ngai, Chief Operating Officer of A S Watson, our retail division, to give you a fuller view of our journey of digital transformation that we have gone through in the last few years. People talk about digital transformation a lot, but it's not just technology, it's a mindset, it's the software, it's the people that make it happen. Okay, yes.

Frank Sixt: Thanks. I'm going to go really very, very quickly through infrastructure and energy because both of them are reporting issuers and everybody knows this. But just a reminder of the scale of CKI's business, it now represents 34% of our EBITDA. As we saw before, it represented 40% of our operating cash flow in the first half. And there is a huge difference between the cash generating profile of this business and the earnings generating profile simply because of the scale of depreciation and the scale of the asset base involved and so on.

So let's just go to next slide. This is stuff that we all know. The announced net profit after tax was up 5%. If you strip out the impact of couple of one-offs in the first half of 2017, that was better than 10% in the reported earnings. Obviously, a very, very strong financial company and, as I said, hugely cash generative.

Just a reminder, these little things here at the end that talk about EPS and talk about dividends per share, these are only for half the year. So it's going to continue in the right direction. Let's go to next let's slide. Again, Husky is a huge business that we have put an awful lot of time and effort into over the last few years. Basically, cleaned the balance sheet up and started to rotate the production base from higher cost, lower profitability to lower cost, higher profitability.

That's all started to come home and work well this year. This 297,000 barrels per day, by the way, from last year. The exit rate this year Husky has already guided towards will be over 400,000 barrels a day. Let's just go to next slide. The only thing that I really want to focus on here, because this is all announced and it's all stuff that we know, is why.

Why is this happening? And the reason is basically all in this diagram. This is a Husky diagram. What we've done is we've moved to a much lower cost base of production. So 41% of the company's production today comes from low-cost thermal, which is profitable at very, very low oil prices and very cash generating. 15% comes from Asia, Indonesia and South China Sea, all of which are, essentially, fixed price take-or-pay contracts, so they are not the WTI volatile.

So we're focused on growing the base in a way that's going to maximize returns in a low-commodity-price environment, and that shows very, very good results when you're in a healthy commodity price environment, as I believe we are today. Tzar

Kuoi Li: Also, because of our refining pipeline capacity, we're practically a Brent company rather WTI company. So the gap between heavy oil and light and WTI and Brent doesn't affect us as it affects other oil companies.

Frank Sixt: Yes. That was something, actually, that you saw in the first half that it was quite important, that production rate was relatively low at 297,000 barrels.

In fact, we actually didn't produce some of our own heavy oil because we could buy stranded heavy oil from other producers who didn't have pipeline and processing capacity and make more money by running theirs through our pipelines and through our processing. So that integration of the system is why Husky has been more -- one of the good reasons why Husky has been a lot more profitable than many of its peers in a low-heavy-oil-price environment. Tzar

Kuoi Li: And the beauty is that pipeline a joint venture with CKI also.

Frank Sixt: Ah, yes. Almost forgot about that.

So our target this year, we think that we will have an earnings breakeven if the oil price averages $42 a barrel, so we think we're going to continue to be a lot better than breakeven. First half cash flow is obviously way above earnings because of the DD&A rate in the energy business. So cash flow was CAD 2.1 billion against the announced earnings of $696 million. Our mantra, you can invest in new stuff provided it meets this hurdle, it's got to do a 10% IRR at a $45 per barrel WTI rate or $2 per Mcf Alberta Energy gas price. If it doesn't do that, we don't invest.

And we think that if we do that, we have a very safe and solid business. As I said, we restored the dividend in Q4, and we just increased it by 2/3 . So it is now a very competitive dividend-yielding stock by comparison to its peers in Western Canada. I think that's all I have to say.

Canning Fok: I just want to add one more point.

This -- the whole business model of Husky is a very well-thought-out business model because the differentiation between WTI and Husky Canada price, at the peak, this first 6 months is 20s, almost 30 -- 27% discount. Because we have the refinery in America, we are able to actually upper trust that oil. Actually, our Husky oil in Canada is being sold most of them at Brent price, which is the highest. So that this is why you saw this result. Okay, next page.

Wow, this is advertisement and also self-praise. Victor, you better look at this. Now asset $25 billion, 130 million customer in 11 country. Four in-market consolidations because we are the leader in mobile industries and everything, actually. Network sharing, we are the first one.

And then don't subsidize handset, we are the first one. And then in-market consolidation, we are actually -- we are the professor of that now. We have success, we have failed, but the thing is that we have 4 already. And also, I would like to point attention to my chairman. Over $200 billion disposal profits has been done.

So that this is our history. All right? We are being said as the most profitable telecom operator ever exist on Earth. Unidentified

Company Representative: I thought this presentation is for them.

Canning Fok: Okay. Going back to business.

So service revenue, plus 7%. So that if you notice that there's a minus 4% in the local currency, why? Because is -- Italy is our biggest one, and then for the first half, whatever is reason, which I will explain further, but however, port help us. And then we have a tailwind on foreign exchange, so plus 7%. And customers, more or less the same, minus 1%. And then, AMPU is getting competitive.

And then our digitalization, the transformation is on progress, so that this is, in fact, on whole year. But nevertheless, if you look at the EBIT -- if you look at EBITDA, go from $11 billion to 12 -- almost $13 billion. And that come from U.K. And Italy is, if you look at that -- if you look local currency, is minus 6%. Basically, we lost $100 million in revenue, $120 million to be exact, in margin.

And of course, we will make it back in our cost saving because we are still putting the two network. Unfortunately, that process is a little bit slower because of ZTE. I hope in value we will get it back because, under the agreement, they are in breach. But that -- but it doesn't go as fast as we want. But all in all, the headwind is -- the tailwind help us.

And then... Tzar

Kuoi Li: We're running two sets of cost, and we still delivered these results. So when the transformation is completed and cost is down, then the margin will increase even more so.

Canning Fok: And so in Italy -- I just talk a little bit about Italy. We have the combination of the two company.

As we said last time, we find out some subscriber have been inactive, and we are watching it. And on the other hand, it's a very competitive market. And then we are handling that. Of course, you saw Iliad coming in laying tons of brick. But however, we don't fight them.

We quite enjoy them. So what we try to do is that we try to limit our subscriber going through their network because whatever they have in their base, they come back to our network and then buy our formula. When we do of them, we foresaw this. I would like to say we foresaw this, and then actually, the whole thing should be a plus.

Frank Sixt: Yes.

No question in the near term because, as part of the remedies package, we had to provide wholesale but on commercial terms to enable them to get into the market. So every time they take a customer from Telecom Italia or take a customer from Vodafone, we get a nice healthy proper commercial wholesale margin on that customer's activity.

Canning Fok: As long as less than 50% of the customer come from us, we are benefiting. Today is about 40%, okay? Our market share is above 36% on mobile, all right? So that I think we are within what we see. I think that the thing that surprise us in Italy this year is ZTE.

When that order came, we didn't understand it, neither do them. Eventually as of the game unfold, the thing is spinning bigger and bigger, it become like TV series. Every day is something new. However, we've been -- I will say this, we benefited from it. We went back to the market for tendering, and then the price that we get, hopefully, will be -- is better -- is certainly much better than the ZTE price.

So that for us, if you look at the two-year term, we are okay. But we are still claiming ZTE so I can't say too much, all right? And our Sweden, they are okay. They are -- as I say, because that they are on -- ramping their base. If you remember last time, they sell too aggressive for the customer. Worse, customer have 2 or 3 sim card, and then they become very angry when they buy.

So that we have been trying to help our customer to understand what they bought, maybe give them a break and dot, dot, dot. So that last year has been a very stationary year. And this year, they begin to come back. Denmark is always doing very good. The 11% in local currency just because that we have been -- they have been doing -- claiming VAT against the government, and we talked the position that because our customer are international customer so that they only pay the VAT when they use in Denmark.

So for those for unused, they do not entitle of VAT. But in the first instance, we lost so that we -- and the case was decided against us. So that now we are appealing. But in the meantime, we don't book those income, and then this is exactly that amount. Tzar

Kuoi Li: We have never booked that income, Canning?

Canning Fok: Huh?
Tzar

Kuoi Li: We have never booked that income? In the head office?

Frank Sixt: Local books.

Canning Fok: Local books. Tzar

Kuoi Li: Okay. Head office, yes.

Frank Sixt: Head office. We always provided [indiscernible] against the risk.

Canning Fok: Austria is doing quite well but don't mistaken by it. They are doing quite well because we helped to them to acquire Tele2, so that they kind of earned bonus because of this. Ireland. Last year, they foot themselves in the foot by raising price and everybody leave them. So they restart again at this year.

The churn is so low because it all churned last year. So this year, the result is very good. So they are very proud of themselves, but they got to make up last year. So again, the bonus will be review of last year's result together, all right?

Frank Sixt: Italy.

Canning Fok: Italy, Italy.

I think, sophisticated thing, I leave it to Frank.

Frank Sixt: Yes, this is really not terrifically sophisticated. HAT, obviously, we know has been recovering very, very nicely in Indonesia. So although the number of customers may have dropped as a result of the new rules on prepaid identification and so on and so forth, actually, the value per customer has been going up and the value of our business has been going up. Obviously, we're reinvesting in Vietnam at this point, so that's a negative wind.

But overall, HAT is providing a better picture than it has in the past. Let's just go to the next slide. I was going to elaborate on the Wind Tre acquisition, but actually, I don't think it's worth the time. I think you all understand it. The target here was really two things, One was the earnings in the cash flow accretion.

I'll only give you two numbers. In the first half of 2017, 1/2, 50% of Wind Tre represented €200 million of our NPAT and represented €480 million out of our EBITDA. So we just bought the other half. What we got for it was the other half of those earnings and of that cash flow and the rest of the synergy bucket of opportunities and so on, which were not revising the guidance on, but we are certainly going to get the targeted synergies when it's brought under one single control. It's also terrifically important to have the full control of this because of the stuff that we're going to talk about on in the next slide.

And let's just go to the next slide straight away. Before I turn you over to a much, much more interesting and attractive speaker on what we're doing in retail, I just want to talk about what we're doing in innovation and opportunities briefly because we'll have time in future sessions to spend a lot more time on this. We've set up a new unit across the whole group, which is called the IOD group, which is basically, innovations, opportunities and developments. And it looks at things that reach across all 11 of our networks. We don't look at them as 11 separate retail businesses in 11 separate countries.

This is the group that looks as a platform. The first thing that we did was put a global digital hub in place, which basically means, for over-the-top operators, you integrate once and you are -- you'd be produced on all of our networks after one single integration. So that's run globally for all 11 networks. We make partnerships that effect the group around the world. Xiaomi, you've heard a lot about.

Razer, you know in gaming. We also have partnerships with operators that have nonconflicting footprints on things like wholesale, on things like roaming, on things like Internet of Things and on things like corporate and enterprise sales. All of that is done across all of the operations. We're developing in every one of our telecom companies new IT and technology core platforms, not core networks but, basically, core IT platforms. And that's the sign of stuff that you saw Hong Kong announcing last week, where we're working with the likes of Matrixx in billing and we're working with Sales force and we're working with Vlocity and we're working with Tech Mahindra and we're working with Teradata and we're working with Teralytics and I could just go on and on.

That's ongoing in all of our companies. And we've done one last thing, which I personally think is extremely interesting but is very, very early days, we've set up one global data capture company for the whole group. It's based in Ireland, and it's called Delta CK, believe it or not. What it does is that it uses a Teradata data management platform, which is compatible with all of the data management platforms in all of our telecoms businesses, our retail business, most of our infrastructure business. It has done all of the necessary contracting and GDPR group of work and so on so that it's able to, basically, access that data on an appropriate basis, protecting privacy and so on, and is now getting feeds -- early feeds from all of our telecom businesses from our retail businesses and some of our infrastructure businesses.

The point is obviously to develop new use cases and new monetization cases for the combination of data that this group generates on any given day from all of our platforms So with that, I will turn you over to a much, much more interesting and entertaining speaker.

Dominic Lai: So let me introduce you the star of today is the Chief Operating Officer of Retail Group, Malina Ngai.

Malina Ngai: Right. Good afternoon. I hope you like one of our brand video on the screen.

It actually generated 110 million views and 500 million reach earlier this year in China. Today, I want to share with you the digital transformation journey at A.S. Watson, but I want to, first of all, make it very clear that I'm not trying to share with you a plan that we just came up with yesterday. I'm not trying to share with you a plan that we recently came up with and in the process of finding a team to implement it. In fact, we have been implementing our digital transformation plan since year 2012.

And this has helped us to deliver the growth and deliver the profitability you have been seeing since 2012, despite the very volatile trading environment. Now this is not new to you. You're aware that we are the largest international health and beauty retailer. But what is important is that in today's world, not only scale is important. Our uniqueness is the geographic coverage that we have for A.S.

Watson. Now we have 14,000 stores, which you already know. But we cover 4,000 cities. And in this 24 operating markets that we are in, we are #1 in 15 of them, first of all. And actually, in terms of the opportunities, we are covering 2.4 billion of population.

And this is -- represents 32% of the world population. So this is the kind of growth potential that we have. Now the other thing is a lot of these markets that we operate in, they have very favorable demographics for the products that we sell. They have a growing young population, which as you know is very high growth customer segment. So what do we sell? When I say it's high growth, when I said we target at the younger customer in the world.

So these are some of the products we sell, cosmetics, skin care, personal care, health and well-being. As you know, these are categories, which has high growth, and they have a quite prudent growth and the growth comes from both volume growth as well as retail price growth. And a lot of these category are also going to more premium, premiumization. So this creates a great opportunity for us. We are also the fastest growing retailer in the world.

We open one new store every 7 hours. So by the time you leave the room, we should have opened 2.5 stores today. So on that -- meaning that every year, we open 1,300 stores. Now but the most important is that, we are not just opening or building physical store. We're using this network and we are building customer connectivity.

I'll try to illustrate a little bit more as I go along. We are connecting a lot of quality customers. Just now you have already seen these figures, 130 million members. Now I just want to tell you also that 85 million of them are paid members. So in Asia, except in Hong Kong, customers have to pay about HKD 20 to HKD 30 to be a member.

So you can understand the quality of those. We don't have a KPI about customer acquisition costs, so they pay to be members. And they represent 62% of our sales. To just put a little bit into context, 130 million means that we are the tenth populated country in the world, just a little bit ahead of Mexico. So we are the largest active retailer loyalty member-based in the world.

Now what I want to share with you on this line is when we talk about digital transformation, what are we trying to transform into? Now traditionally, for retailers, it's very simple. You have manufacturers developing the product. They push it to you. And then you have stores, you merchandise it. Of course, you need supply chain and a little bit of marketing.

And there you go, you have a retail store or you have a retail business. But this is not what the customer needs today, and this is not sustainable. So what we have been building ourselves into is this. Because for the customer today, they don't only just want the products, they want transaction, they want interactions, they want customer experience. So to actually build a sustainable retail business, you need to provide O+O experience.

You need to create stories around your products. You need analytics to help you to make smarter decisions and do personalizations. You need social analytics, social listening to understand what people are talking about your products or your brand on social media. We have massive amount of data. So you also need technology to manage your data, so on and so forth.

So meaning that what we have been trying to do since 2012 is to transform ourselves to just focus on transactions, to focusing on interactions. Now again, the importance of focusing on interactions, it brings us repeat customers. And that's how you sustain growth or how we sustain growth. And I've already mentioned about our member base and also the -- how much they contribute to our sales. I talked about customer connectivity earlier.

Just to illustrate and visualize it using the China example, we have 3,300 stores in 260 cities. Now this penetration helps us to build the branding. And currently, we have 65 million members. Again, paid members. And they represent over 80% of our sales.

This is the kind of quality members that we have. Now we have beauty advisers in our store, about 20,000 of them. And we are changing their role as well. That's part of the transformation. They are not just our colleagues working in the store.

We are using their network. Every one of them on average have 500 friends. So currently, they are also promoting the company's products and promotions to their friends, and we have created an app for them, which I can demonstrate later on. And we also have our social media app, and we have 55 million fans. And very importantly, we have our own network of key opinion leaders.

They like to focus. A lot of the companies in China, they do it through agencies. But we have been building our own network for a couple of years now, so this scale helps us to promote our own exclusive product as well as our branding. So this is the kind of connectivity that I'm referring to is what we have been transforming ourselves. Now you probably think, why did you start your digital transformation back in 2012? If you recall in 2010, is the year when the social media revolution starts.

So Dominic called up all the country management and we sat in the room and started to talk to ourselves, "Okay, what does that mean to our business?" It means that we have to really stay very close to them, because with that kind of social media and digital revolution, we can have a lot of change and change very quickly. So we have started our own -- the first customer strategy back in 2010, and immediately, we have also put together a digital strategy. We have asked all the countries, operating countries to focus a lot on building digital capability. Then in 2012, we've also realized that we have to immediately invest in technology. So we have put a lot of investment into upgrading the infrastructure.

That involves the data management infrastructure, the technology, plus also the technology for our e-commerce platform. So now we have a global platform, which we can upgrade in much faster speed. We have one global platform for data management and all analytics, advanced analytics. And the whole database management is done in-house. We have then built our own digital agencies.

Now we have not gone through any acquisitions like other retailers where you just acquire the company and there you go. We decided to build our own digital agencies, called eLab, three years ago. And started to build a lot of capabilities within the organization. Now traditionally, we don't run e-commerce. So it's not like we're born with e-commerce operation skill set.

So meaning that when you go through digital transformation, it's not about just putting technology in and there you go, it's done. It's not. There's a lot of changes in terms of capabilities, in terms of culture. And we have to also have new strategic alignment as well. So we have put together a very, very clear customer strategy, cultural change, and we are now building machine learning and a lot of advanced analytics and trying to accelerate our social branding as well as O+O opportunities.

Again, I'll come back to that O+O. I mentioned about their customer strategy. Why is that important? Every company has a strategy. Now this is important for the reason that if we want to drive change in a very rapid pace, things need to be simple and things need to be very aligned. This is not a strategy that we ask the consultancy firm to do it for us.

Because usually consultancy firm give you a strategy, it's not quite successful when it comes to execution because you don't have enough ownership in your management. So all our cost country managers we're involved in discussing what are changing, what has been changing in the customer behavior. Besides, we have also done a customer research with all our members. Remember, we have 130 million members. So we have done the research with 140,000 of our customers asking them, "What do you expect from retailers when you shop?" That common thing they told us is, one, they want something different.

They want something -- no, without any differentiation. Because something that's different, either it's product or experience, something they can share and share upon. They want us to be anywhere. Anytime, if they want to walk into a shop, if they want to talk to us online, on social media, they want to be with us or they want us to be with them. They want a relationship and they want experience.

So this is their strategy. Now the importance of that is it helped us to set priorities so that we can change with speed. It also helped us to set alignments with all our business partners, the suppliers, the Procter & Gamble, the L’Oréal, Unilever, Shiseido, Coty, Beiersdorf, Henkel. I'm 100% sure that you pick up the phone and call anyone of the CEO and ask them about their strategy, they know about it. This is how aligned we are because we need them to support us along all these pillars.

Some examples, just want to show you under-the-stair strategy. When we say we want to be different, we have been really upgrading our stores in a much shorter space of time. Some of the store formats that you can see here from -- we just launched in Singapore and Taiwan, very different in terms of look and feel, and we have added a lot of service. When it comes to service, we actually have 130,000 of our customer service advisers in the store, and gradually, we are using technology to change their role. They are not just people doing administration in the store, but they are servicing our customer.

Amongst these colleagues that we have, we have 3,800 of them, they are health professionals. So some of these format, like Watsons health and Watsons baby, you can find in Hong Kong and other parts of Asia. This is the latest format that we have done. A little bit of expense, we don't have very big size store. We have very profitable store, but still we want to input -- put in some experience in-store because health, pharmacy doesn't need to be really that clinical.

This is the Colorlab, a new store that we have created together with L’Oréal in China, a sub-brand that we have built. We're going to roll out in China plus some other parts of Asia. So you can see the massive difference versus the traditional Watsons. And this is a team of makeup artist that we have built and help to service the customer. This is a store that is in Poland that we are trying out.

In a very small city, this store is only 100 square meters. So the customers in the small city, we have about 6,000 catchment, not only we don't put a store there. But this store, we are going -- we'll put there to try and we'll only put 1/4 of normal inventory that we used to put. And then we -- besides the products, we then -- the customer can then shop on digital panel laid out in usual shelf way. And the next day, she can come back and pick up the other products very easily.

So with different model, we try to penetrate into different cities, different catchment, different demographics. This just opened last week. Besides the experience in the store and the service, Dominic has already mentioned about exclusives. Now this is the -- some of the power brands that we have within our company. We created them.

And remember that we have -- the geographic coverage that we have is so unique. So basically, we have a very powerful brand distribution platform. Currently, we are talking about 30 billion annual sales for all these exclusive products. And some of you would recognize Aaron Kwok there. We -- he has a men's range with Watsons in China.

And this is some of the range in Europe. Besides products, I just also want to show you this massive large-scale events. We have large-scale zumba dance events in Taiwan, Malaysia, and then we have yoga event in Singapore. Again, this is just to show you the kind of customer activity that we have. These are not just any people on the street.

These are members. You need to be members. And you need to make purchase of certain amounts during that period to get a ticket to join this event. And they join every year. They queue up for the tickets.

Now in terms of technology, it's obviously an enabler for the journey of the digital transformation. So in 2 occasions, we have announced the investment we have put in. So amount of about $1 billion. So we have been putting in, as I mentioned, data management platform, e-commerce platform. And currently, we're working a lot on Big Data, advanced analytics going into the year 2020.

I mentioned a lot about eLab already. eLab is the team of very young colleagues. They're really young. Average in my team is about 25. We have about 400 of these digital talents based in Hong Kong, Milan, London as well as in China.

So they focus on the digital technology development, focus on digital marketing and social listening as well as content development. So some of the work they have done in terms of in-store experience, including some of these digital device in the store, with virtual mirrors and also skin analyzers. This is an example of the virtual mirror that we have put in some of the stores. Not only that the customer can pick a brand, and then test the different makeup without putting the makeup on and take a picture. But then it's all connected to the products that we carry.

So they -- she can easily click the look she likes, and it will show up about 3, 4 products that will help you to make that look. And later in the year, we are going to put a skin analyzer, similar technology, similar experience to help the customers understand their skin when they come into our store and recommend products to them. In order to transform the role of our colleagues to provide excellent service, if you recall the chart that I showed you because in today's world, the new normal of retail, I call it, you need a lot of experience and excellent service in the store. So we try to put in things like Self Checkout so the -- so our store team can focus more on the customer rather than just dealing with checkouts. Some of these you have already seen in a few hundred stores in Hong Kong, Watsons and PARKnSHOP, just -- is one of the most user-friendly type of Self Checkout in the world according to a social media blogger.

Another one that we have is Scan & Go. So when you shop, you can scan and -- along the way. And then when you leave the store, you just go to pay in a Self Checkout with your mobile payment. A more advanced version of this Self Checkout is in China. As you know, in China, everyone use mobile payment.

So the customer walk in a store, just scan the code before entering the store, so you know where she is. And when she shop around she can easily see, not only for payment, she can only easily see the comments and reviews of this product. For example, this [indiscernible], four stars according to a lot of users. And then the next product, she is interested in is a skin advance, oh, there's five stars. So, oh, this must be really good.

So then she decided. Okay, this is the product I need. And check out, pay on the phone, bye-bye. So this is a Scan & Go technology that we have introduced in a few hundred stores in China already. Now the last module I want to show you is that -- is even better, you don't need to even scan the product.

This is we call RFID Module. So after you shop, you just put in a checkout counter. It will immediately scan your whole basket. And then you pay, and then you go. So these are just some of the things that we have created through eLab and we will be putting in store where we think is necessary for the customers and the market is ready for this type of technology.

Now besides this kind of in-store technology, we are trying to also create a community online, as I mentioned. So currently, we have 80 million social media fans. The thing I want to mention is this, we have been doing social listening for two years now. In the past, retailer had to wait for the manufacturers to tell you what's the trend next year. And then you plan for next year, what type of product to stock.

Now we don't wait for them. We just go online and find out what is trending. What is trending, if there's a product trending, is there a niche brand trending, the buying team would have to go and find the product. If there's some keywords trending, because we do search engine and analytics as well, if the keywords trending, marketing team will have to change all their marketing materials to use that word, so when the customer search for us online they can find us faster. So this is the way we use social listening.

A bit on about the data. Early on I mentioned about the 130 million members that we have. So we are using data science to help us create that interactions that I mentioned. So we have a data lab that help us actually to create data models for day-to-day analytics that we use in retail business and then the countries can then take the data model and do it on a day-to-day basis. They continue to create advanced analytics model.

We have created this year an AI lab. The AI lab work with a network of technology partner. And every month, we create a user case from our business and ask the technology partner to come up with AI solutions, and we test it every month. If it works, we will start to expand to it, if it doesn't, we will have to change it. So this is something that we are currently doing.

Now, what do we actually do -- use the data for? Besides the 130 million data, obviously, we have other company data and also the market data. And we use it to build our store strategy, to manage the store performance of every individual of the 14,000 stores. We use it for space planning in the store, assortment planning and marketing. Now usually when people talk to you about CM data, they focus a lot on marketing. But we use it a lot actually for decision-making.

Probably you're wondering what all this means. These are actually textbook wording, you can find it anywhere, so I better give you some examples. So for the store segmentation, every market, we actually segment the store so we can put the right assortment. So besides the catchment data that we use, we also use our CM data to understand the demographics and the type of customers and the products they need so that we can into our segmentation in a much more accurate way. When it comes to store performance, okay, if there's a store -- if there's a new store, we can easily understand where the sales come from.

Sometimes, because we open so many new stores, sometimes the sales actually come from another existing Watson store or Superdrug store. We can easily understand from the data that, "Oh, actually 30% of the sales come from another store. And then we have these from the new customers." And likewise, when we relocate -- when we see the performance, we want to relocate store, we can estimate how much sales we can transfer if we close store A and we move to store B. And in terms of assortment, all retailers do to assortment review fairly regularly, half year, annually. They usually, what they do, they cut the tail, the ones that are not so performing in terms of sales and margin.

But then, "Hey, you are missing something." Because sometimes your slower moving products or we call SKU is actually brought by your VIPs. So every product, we can allocate a loyalty index to it using the data science. So before we cut the tail, we will look into some products to see if the VIPs like it, we better hear it. Because if they don't find one product, they may not come for the other 9 products. So this is the way we use data science.

Now the opportunities that we have found so far, in terms of customer shopping with us online and also off-line is that the average spending every year is 2 to 3x more. And the visit frequency doubles. Higher customer loyalty. What does that mean? Evangeline only shop with us in the store and then Susan shop with us also online. Your spending every year is double.

So if you want more details, these are some more details in terms of Asia and Europe. Hong Kong is actually quite high, 3.1x, U.K. is 2.5x. So this is -- we continue to monitor this. Now e-commerce is only just part of the incremental opportunities.

But we also have Click & Collect, as a Dominic said, because we have 14,000 store. Customer can easily do the shopping in midnight when they have time and then pick up in the store near their workplace. So when they come to collect, we have retained our staff so that we can sell them more products, more products that is on promotion or new products. So actually 20% to 30% of the customer, who come into the store to collect, they buy extra products. Actually, Taiwan is 52% last month.

And in places like in the Netherlands, actually 52% -- sorry, 56% of the online order, they chose to click and collect in the store. So this is the opportunities, meaning they bring traffic back to our stores, and we can get more transactions. We do analytics, this is just an example, we do analytics, what they shop online, and when they come to the store usually what else do they buy so that we can adjust our promotion mechanics, and we adjust also our category strategy. I want to also show you the matrix or the unique model that we are able to create then. I talked a lot about e-commerce, Click & Collect in-store.

So meaning that with our penetration and with our digital transformation, obviously, you see, we can -- you can shop in our store or you can shop online. And you can pick up your product in the store or we can deliver to you. Now this means that when -- if they choose to shop in so many of our store in different markets, of course, we can immediately pick up. Even if we don't have the product -- because he sang very well -- if you're going to London, you buy a Lancome perfume. I feel about it's the top perfume in Paris and we don't have it during lunchtime.

But if you pay in the store, we will deliver it to you in the afternoon, it's no problem, okay? If you shop online, then we can collect. Currently, already, we have turned on 10,500 stores where you can do the collect. Now turn on meaning that we have to reset the technology on supply chain and store operations in order to be able to do this, and we will be able turning on the rest of the store very soon. But the other point is that we have also started to do picking in the store. So if I pick in the store, after you have done your transaction online, you can come in 30 minutes, like in China.

If you want to be delivered, we can also do that. If you pick in the store, it can be delivered in 30 minutes. What else technology can do? We also have analytics that can -- real-time camera, we monitor the consumer behavior in the stores. Don't worry, it's legal, we only do it legally. The technology allow us to understand how many customers walk in different aisles, how much time they spend in the aisle, how much time they touch the products, and which part of the shelving that they have touched.

And why do we need to do that? We can immediately adjust our in-store communications, our space arrangement, so that we can increase the conversion rate in the store. Internally, we also have created different dashboard, make the data much easier for the management team to assess, and then find the trends and make decisions. Now this is very important. Digital transformation is not just for customers. If the management makes decision too slow, it doesn't work.

And these are just some other tools and we have also tools for the store team. Our store team is very, very young. We have already started for two years, no more cost from training or menus, they only train on their own social -- their own smartphone, we have an app for them. We have revised all the contents. It's very easy Q&A, and everyone can understand very quickly what this new product is about or what is this new skin care regime.

This is something interesting I want to show you. This is a social app in China. So what is this? A staff can easily take a photo. For example, this is a new product that I want to share with my friends. This app we created.

So they can then add easily -- add a title, for example, here is actually my phone, I did the video, pure beauty from Korea, easy as that. And once I did that, I can then share on social media. This is the social role that we have entered to the store team and this is the new value that we have added to the access that we have. And this is why I shared with you earlier that we have a community of 10 million from the beauty advisers. And in the first 9 months that we launched, the exposure is 100 million.

So a lot of them share with their friends and help us to actually bring the traffic to the store. Last but not the least, this is very important. Again, a lot of company when they invest in digital, they just focus on the technology. Hey, but what about the people? Early on I mentioned that we have very young customers. 70% of them are Gen Y, and Gen Z, meaning they are 35 years and under.

Okay, so they are very young. And likewise, when we have looked into our staff, they're also very young. On average, in Asia it's 3two years old in A.S. Watson, in Europe it's 38 years old. So for this young people, how do we actually get them to help the business drive growth.

So we created a project called 2020. We have gathered a group of young managers together and asked them, "How do we actually talk to you? How do we recruit you? How do we train and we retain you?" So we have been doing all this transformation in the last two years. So in conclusion, before transformation, we built a network of stores, okay? After digital, with digital transformation, we are building customer connectivity through the O+O integrated platform. So this is what A.S. Watson has transformed ourselves to be.

So I hope the presentation has helped you to understand A.S. Watson more, has helped you to understand how we are connecting customers. And also the reason why we deliver 15% EBITDA growth in the first half. Thank you very much. Unidentified

Company Representative: Thanks, Malina.

We can start the Q&A session now. Please welcome our top management, again. A -

Canning Fok: All right. Okay. Questions.

Oh, good.

Karl Choi: Karl Choi from Merrill Lynch. I have a couple of questions. First of all, the retail business, can you talk about how much of your sales are actually generated online? Or how that percentage has changed over time? And then second, more broadly, I think, Victor, you mentioned also last time for the whole group, you've been making a lot of digital investments, and those investments might be sort of hurting the margins a little bit in the near term. Can you talk a little bit about since you are competing with some of these pure online competitors that don't necessarily have sort of profitability in mind.

So how do you balance between investments and returns when you make these digital investments?
Tzar

Kuoi Li: The digital investments are one-off. But we took them as experience rather than capitalizing it. So in that period, it's just because of our conservative accounting policy rather expense most of it. And so we are carrying the overhead at this time. But still, we're delivering the result.

Sorry, I didn't get your first question? Online sales percentage? Dominic.

Dominic Lai: Well, in fact, we don't take e-commerce or online sales as independent channels. As Malina said, the purpose is to give us seemless journey to the... Tzar

Kuoi Li: The line is very blurred now between online and off-line. I think the more important thing from a bottom line standpoint is that cost of delivery of the goods, including the real estate cost.

Between online and off-line, it's actually getting very similar. In some cases, the other way around, too, mainly because we have high turnover. So the real estate cost per square foot may not be the lowest, but in terms of item of goods sold, it's actually quite cost-efficient.

Dominic Lai: Actually, one has even realize is that our [indiscernible], our CRM customer is more and more becoming part of our online. Because our online, we define online is connected to the customer.

How we can promote to customer? How they come in to buy? So that if you ask me, I will say that 62.5% of our revenue come from this type of customers that have a connection with us, they don't just come in and disappear and then resurface then. We talk to them and -- through in our shops and through our online. So that this is the way that we are -- the way that we run our business. We are who we are. We are not a -- somebody else.

We are who we are. And then for us, on a world-wide basis, customer connectivity, is what we have been concentrating. And this $113 billion figure will continue to increase.

Frank Sixt: And just to reinforce one point that Malina made. If we have a digital touchpoint with the customer, right, on average, they sell, they buy 2, 3 times as much from us as a customer with whom we don't have a digital touchpoint.

So is it online, is it off-line doesn't matter. Tzar

Kuoi Li: Okay, other questions. Or we've already given you too much information already.

Frank Sixt: Might be too long.

Canning Fok: I thought that, that will fuel questions, with all this information we gave you.

Thank you. I'm dying for questions.

Jonathan Galligan: Jon Galligan from CLSA. Can you talk a little bit about last mile delivery on the retail side. Is this something that you do in-house, or are you outsourcing the last mile delivery?

Canning Fok: Both, in fact, both.

Because the intention is to really satisfy the customer needs because 30 minutes is not -- we'll do it in 30 minutes. So internally, through post office, through our third-party, we do it.

Angus Chan: Angus Chang from UBS. With the whole digital strategy now, I guess -- I mean, is it right to think about the store expansion will slow down. And then what does that mean for CapEx in terms of, going forward, do we see less CapEx intensity for the retail business? And the second thing is around, I guess, cash flow as well as kind of return in dividend.

Is it fair to say that, I guess, Husky is not paying dividend, and your cash flow situation has improved from last year. Is it fair to say that there's more flexibility in the head office from a cash perspective to increase dividend versus last year?
Tzar

Kuoi Li: Maybe I answer the dividend question. I'm not making commitments such as dividends in the future, but it is our general policy to increase dividends in line with our profit growth. And in a very Hong Kong tradition, we tend to err on the conservative side during interim compared to final. It's a very Hong Kong thing.

Canning Fok: See, on the retail CapEx. In fact, we invest to enable us to serve our customers who connect with them on multi fronts. So if you look at the -- well, last year's, say, annual numbers, EBITDA wise, retail makes around, say, $14 billion. With CapEx of less than $3 billion. So that shows how strong the cash flow is and now also give us ample room to invest in technology.

Frank Sixt: Our focus has been amazingly organic. So what we haven't done is we haven't been Amazon gone out and bought foods nor have we been Walmart and gone out and bought an e-commerce player, that we have grown it organically from it's own roots, as Malina said, starting in 2010. Now the capital investment in doing that is infinitely lower than going out and buying platforms when they're already established as platforms. Tzar

Kuoi Li: Since we're on retail, I'd like to use this opportunity to comment on one topic. From time-to-time, when I read your report, there is always a reference to same-store growth.

If I may offer my opinion on that because in other type of retail operation, let's say, you're comparing Walmart or other things, the same-store growth makes more sense than looking at same-store growth in Watsons. Now I can't say it is not one of the barometer, but it is not as important of a barometer as compared to other types of retail. Let me quote an example. Let's say in one area we already have two stores, and Dominic, please, interrupt...

Dominic Lai: Yes.

Tzar

Kuoi Li: Let's say an area already have two stores and they're having wonderful business. Now they're so good that we should open a third store even though it means a bit of cannibalization, because they are good business, which the three stores put together even with some negative impact on same-store growth, they are still wonderful business. Should we not open that third store because we're afraid of a deterioration in same-store growth, definitely not. Because it's good business. So when you look at the Watsons business, the same-store growth actually is not the best barometer, you should look at return on our equity and the growth in total volume.

Canning Fok: Yes, totally agree. Because particularly I see in markets across Asia and also in China, this fashion shift is so intense as a result of a massive transportation infrastructure build up. So when we see the shift in fashion , we establish new stores to follow those. So the current stores may be trading at less value, but remain profitable. Because by the time it becomes marginally profitable or loss making, we have closed them using our bid clause, which I emphasized.

99% of our lease, we can break with three-month notice. So actually, this is a very agile model that I want you to understand because every time I see you every six months, you ask about, "How is the [indiscernible] growth?" What Victor says, we should be using our commercial sense of purpose and total growth to drive profitability and cash flow.

Dominic Lai: See, in other countries, you get used to retail store have long lease. If the store doesn't grow you are stuck. But in here, we have really lease shorter and also pick up of this is the way we want it, so that when store doesn't perform, we break.

And also, 80% or even 95% is on turnover rent. 80% is surely on this, 15% have a minimal rent. And then turnover, most of them are on turnover, so that if you do a store, that it will make sense for us. That store who will not perform at the rental cost, we'll decrease accordingly.

Canning Fok: So give you some statistics, all of our portfolio, say, I'm talking about China, 3400 stores almost.

Only 65, that's not making money. That is the result of the agile strategy we have been adopting. 3400, only 65 not making money, not making huge losses, because we can always get out. So that speaks for itself. Tzar

Kuoi Li: I mean, same-store growth is one of the few barometers we look at.

But sometimes, we have to remind ourselves and reminding our colleagues, let's not get obsessed with one barometer. That's what we want to convey to you, the same that we -- the way we look at our internal numbers. Maybe you can look at it through our angle. Other questions? Yes.

Unidentified Analyst: Maybe around the retail business.

I just want to get a sense of the, let's say, the new formats type of stores versus an old traditional store, what's the kind of productivity or kind of revenue per GFA if -- just there trying to understand how much more productive they are. And second thing is how much -- how many stores of that portfolio is kind of, let's call it, revamped under the new type of...

Dominic Lai: In fact, we try to apply to all -- entire portfolio. If you're talking about China, the foremost of this digital transformation. We are actually remodeling the model.

We're feeling the model. Put the technology, put the beauty advisers in. So the sales intensity. Actually, we see it increasing. Particularly, if you look at the statistics, all these so-called multi or omni-channel offers all customers, they buy 2x more 3x more.

Canning Fok: Okay. Going back to store, just give you some statistic. If you're going to restore, we say we need to do something, just do something, fixing. We're fixing. We fix, right?
Tzar

Kuoi Li: We lay.

Canning Fok: We lay, okay? 2% increase. Now if you're going to restore, that is somewhere you should be less than $100,000. So that is $5,000. But for some store we do both, we lay and fix is 7%. This is why we are now focusing on refurbish and we lay.

And then, now I don't know whether Dominic answered it. Well, on the new store, which I'm so excited about in Shanghai where you have to look at those mirror, I think they report to me it went up by 30-odd-percent. And then I said to Dominic, we should do much more of this much more often. So that -- actually as the business -- when customer they can find online, then why do they come to us. Come to us because we are interesting and then our service is good.

And then our, as you say, that Malina has reported, all our beauty additions, they have their own friends. They come in and so it's a great business model that we follow. Tzar

Kuoi Li: The beauty of the application of technology and customer relationship is that we can be very nimble. So in a way, it's not sitting in the head office deciding what the customer want and what is right and what will increase sales. As we can to do a bit of tweeting, the customer tell us whether we did the right thing and if we do, we're going to do more of it.

So it's a very healthy relationship.

Canning Fok: So this strategy, this agile way of attacking it. Actually, it's helping us. If you look at our EBITDA increase, 17%, 7%, beauty. If we look at even on local currency, is 7.3%.

So that speaks for itself. So that's why, today, we arranged this presentation to you so you'd understand more when you talk about retail. When tomorrow, we talk about the analyst meeting, one-on-one, you don't need to ask that many questions as before.

Dominic Lai: Now I got -- in front of my station, I got Malina with me. Tzar

Kuoi Li: We are all very excited about our business, we can talk for hours.

But Frank just reminded me, we should let people go home.

Canning Fok: Yes. Tzar

Kuoi Li: Unless, you want to keep us here forever. So thank you.

Frank Sixt: Okay.

Thank you very much. And this concludes our session.