Sun Hung Kai & Co Ltd (HKSE:00086) (H1 2026) Earnings Call Highlights: Strategic Pivot to ...

Positive Points

• Sun Hung Kai & Co Ltd ( HKSE:00086 ) reported a resilient performance with an EBIT margin of around 50%, reflecting disciplined cost management and operational efficiency.

• The Alternative Solutions business, SHK Capital Partners, saw strong growth with total AUM rising 17.7% to USD3.7 billion and fee income up 24.7% year-on-year, demonstrating successful strategic partnerships.

• Consumer Finance delivered a strong performance with pretax profit up 50.7% year-on-year to HKD565 million, driven by disciplined underwriting and improved loan charge-off ratios.

• The company maintained a strong balance sheet with net gearing reduced to 27.1% and interest cover at 3.9 times, supporting financial stability.

• The interim dividend was increased by 8.3% to HKD0.13 per share, reflecting confidence in the company's earnings base and commitment to shareholder returns.

• Strategic partnerships with Janus Henderson, Aquilius, and Pinegrove Credit Partners are expected to unlock new investment opportunities and drive long-term recurring revenue growth.

Negative Points

• Attributable profit declined 22.4% year-on-year to HKD688 million, primarily due to the absence of a sizable liquidity event compared to the high baseline in the first half of 2025.

• Total income decreased 10.9% year-on-year to HKD2.5 billion, reflecting lower net investment income and market volatility.

• The public portfolio recorded a small loss amid broader market volatility and sector rotation in the second quarter, impacting overall investment returns.

• The company faces ongoing challenges from geopolitical shifts, interest rate trends, and AI disruption, which could affect future performance.

• The earnings mix remains dependent on episodic realizations, and the shift towards more recurring fee-based income is expected to take time, as noted by management.

• The company incurred an exchange loss of HKD42 million related to the liquidation of certain Chinese Mainland subsidiaries, impacting consumer finance results.

Q & A Highlights

Q: 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? A: Brendan McGraw (Group CFO): The company has made a conscious effort to change the earnings mix over the last few years, seeking to make fee and interest-based income more prominent. This income grew by almost 4% over the year, but it will take time to scale as AUM builds within the platform. Tony Edwards (Deputy CEO) added that while realizations might be cyclical, the investment process is systematic, as evidenced by the 15.8% net IRR over 15 years. The flywheel effect from GP partnerships will bring better opportunities and risk-return profiles over the next few years.

Q: Could you provide more color on the latest partnership with Clipway and Aquilius? What are the opportunities that we expect to see from these partnerships? A: Antony Edwards (Deputy CEO): Both Aquilius and Clipway are secondaries managers, with Clipway focusing on Global and Aquilius on Asia. Their role is to provide liquidity to LPs looking to sell private equity or real estate fund positions. This gives us significant insight into the secondaries market, including pricing and valuations of holdings, making us smarter in determining our own investment opportunities. These opportunities are scarce and unique, offering significant discounts and an edge, which is what our clients are interested in accessingwhat we call privileged risk return.

Q: 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? A: Brendan McGraw (Group CFO): We are aware of the tightening on cross-border capital flows, but so far, the impact on our business in Hong Kong has not been large. In fact, our impairment has dropped by about 20% over the period, and we are not experiencing repayment issues because of this issue. We already have tight lending standards and will continue to apply that model, which is why we have been able to control charge-off ratios in the past.

Q: 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? A: Antony Edwards (Deputy CEO): We are continuing to look to expand our GP partnerships with a number of JV partners in the pipeline. We have an opportunistic view, seeking the right people in the right asset classes that can scale with our capital and assistance. We see the greatest opportunity in the credit space over the next few years, possibly in Europe. We don't chase the latest investment theme but create opportunities with downside protection and asymmetric exposure. Brendan McGraw (Group CFO) added that they look at GP track records in depth and re-up with good GPs that have provided good returns over multiple vintages, providing protection against chasing the latest trend.

Q: 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? A: Brendan McGraw (Group CFO): There is always that risk and challenge when looking at private equity. The honest answer is that you need to have very deep research, discipline in the investment strategy, and ensure you are investing in different sectors, geographies, and GPs with a portfolio approach, not just focusing on the latest theme. Antony Edwards (Deputy CEO) added that their heritage as a credit investor means price is really important. For example, they invested in Janus Henderson at high single-digit multiples based on an AI thesis rather than investing in AI names with extremely high multiples. They are more comfortable using price and valuation to justify investment opportunities rather than expectations of what might happen in the future.

Q: 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? A: Brendan McGraw (Group CFO): Our net interest margin has been maintained, not just by chasing after more clients but also by developing our products. We have seen good initiatives within UA Finance to develop new products, particularly the credit card, which gives us new forms of income and helps maintain our net interest margin. There is no hard limit for the size of the loan book, but we need to keep it within levels comfortable from an overall balance sheet perspective. We would not be setting any set limits.

Q: 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? A: Antony Edwards (Deputy CEO): The flywheel effect involves activating GPs that create privileged risk returns, which are exclusive investment opportunities with an edge that we wrap into solutions for family office and insurance clients. A good example is with our credit platform and real estate equity platform in Australia called Wentworth. We sourced two hotels in Sydney from a Middle Eastern sovereign fund and, through our expertise and structuring, purchased them at a very good valuation. Our clients participated in the acquisition and provided more capital to Wentworth for future investments. This cycle is driven by good investment ideas, underwriting capabilities, access, and expertise, improving relationships with GPs and LPs, which will provide success in the future.

Q: 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? A: Brendan McGraw (Group CFO): We will maintain our strategy for investment management, which is embedded in deep research, selective investments, and looking for downside protection, not just chasing returns. This is why we have been able to maintain a strong net IRR of 15.8%. We don't have a crystal ball to predict exact performance, but over the cycle, this strategy has proven to work.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .