Hong Kong leader Carrie Lam yesterday announced that her government would formally withdraw an extradition bill that started massive protests in the territory. Earlier in the day, the Hang Seng Index (HSI) soared almost 4% on reports that the bill is set to be removed.
Well-known Hong Kong companies such as railway operator MTR and flag carrier Cathay Pacific jumped 6.4% and 5.3%, respectively.
Over in Singapore, one company with a strong focus on Hong Kong rallied as well. And that company is none other than Hongkong Land Holdings Limited (SGX: H78), a property group with assets mainly in the Special Administrative Region (SAR). Hongkong Land’s shares soared 8.3% to US$5.89 yesterday. Despite the rally, the company’s shares still look cheap. Let’s find out why.
Behind the scenes
But before we look into why Hongkong Land’s shares are undervalued, let’s briefly look at what the company does and its latest financial performance.
Hongkong Land has two business segments – investment properties and development properties. Under the investment properties arm, it owns prime buildings such as Exchange Square, Jardine House, and Prince’s Building in Hong Kong.
Exchange Square, for example, houses many leading international investment banks and financial institutions, including Hong Kong’s stock market operator. The following chart shows the geographical breakdown of Hongkong Land’s assets:Source: Hongkong Land 2018 annual report
As for the property development business, it has plenty of projects in Mainland China such as Central Avenue, Landmark Riverside, and Yorkville North. In terms of assets by business activity, the investment properties arm takes up the bulk of assets, at 88%.
Source: Hongkong Land 2018 annual report
Show me the moolah
For the six months ended 30 June 2019, Hongkong Land’s revenue slumped by 47% year-on-year to US$803.9 million. The fall was mainly due to lower revenue recognised from its development properties segment. This segment’s revenue is lumpy due to the recognition of revenue at various stages of completion. However, Hongkong Land’s investment properties division saw revenue improve by 4.5%.
Meanwhile, underlying profit attributable to shareholders, which excludes things such as fair value gains or losses on the revaluation of investment properties, increased by 2% to US$466 million. The dividend per share (DPS) was stable at 6.0 US cents per share.
The property outfit’s book value per share, an important metric for a real estate business, also grew, up 3.6% year-on-year to US$16.50.
Hongkong Land’s chairman Ben Keswick was upbeat about the company’s prospects for the rest of the year. He mentioned the following in the earnings release:
“The solid performance from the Group’s Investment Properties is expected to continue in the second half of the year, while higher profits are anticipated from the Group’s Development Properties primarily as a result of more sales completions in Mainland China.”
At the closing share price of US$5.89 yesterday, Hongkong Land had a price-to-book (PB) ratio of 0.36 (based on its book value of US$16.50 per share in the first half of 2019). Its dividend yield stood at 3.7%.
In comparison, the SPDR STI ETF (SGX: ES3), an exchange-traded fund that can be taken as a proxy for the Straits Times Index (SGX: ^STI), was valued at a PB ratio of 0.9 and had a distribution yield of 3.8% on the same day.
Overall, it can be seen that Hongkong Land is hugely undervalued with its far lower PB ratio and comparable dividend yield.
Having said that, there’s no guarantee that things will return to normal in Hong Kong immediately. Anything can happen in the short-term, but in the long-term, Hong Kong should continue to attract businesses and that should bode well for Hongkong Land.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Hongkong Land Holdings Limited. Motley Fool Singapore contributor Sudhan P owns shares in Hongkong Land Holdings Limited.
Motley Fool Singapore 2019