Cheung Kong Property Holdings (HKSE:01113, Financial), the $28 billion real estate developer headquartered in Hong Kong, reported 18.9% growth in total sales to 69.9 billion Hong Kong dollars ($8.965 billion) and 13.5% profit growth to 19.4 billion Hong Kong dollars – a 27.8% margin vs. 29% in 2015 – in its fiscal 2016 operations.
“Several unexpected events occurred in 2016 that reshaped the global political and economic landscape.
“Cheung Kong Property Holdings Ltd. continues to follow a prudent and disciplined approach to development amid the challenges of a constantly changing marketplace. All of its property businesses recorded steady progress with a solid overall performance achieved for the year. Meanwhile, the group has pursued global investment opportunities in line with the criteria set out in the 2015 annual report and consistent with its strategy to broaden its growth prospects through diversification and globalization. Since late 2016, our footprint is poised to extend to the energy infrastructure and aircraft leasing areas to enhance our recurring revenue streams and mitigate the cyclical nature of cash flows associated with property development.
“China’s GDP growth in 2016 was in line with expectations with the support of growth stabilizing policies. The growth is especially impressive when viewed against the prevailing difficult global economic environment. Policies targeted at deflating asset bubbles and forestalling potential risks will continue to deepen supply side structural reform and boost the real economy. China is expected to sustain a healthy and steady economic development over the longer term.
“Hong Kong is under challenges from the complex and volatile external environment. The local property market is likely to remain stable given the relatively solid economic fundamentals and the pent-up demand for properties. Government housing policies will continue to be a determining factor for the property market both in Hong Kong and on the mainland.
“The group is well positioned to diversify globally by building on its strong financial strength, with ample liquidity and a low debt ratio.”(1) –Â Chairman Li Ka-shing and Managing Director Victor Li Tzar Kuoi, Hong Kong, March 22
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Total return
Cheung Kong ADR (CHKGF, Financial) shares outperformed the broader Standard & Poor's 500 index in the past year with 27% total gains vs. the index’s 18%.
Valuations
Cheung Kong is trading below its book value. According to GuruFocus data, the real estate firm had a trailing price-earnings (P/E) ratio of 11.6 times vs. the industry median of 13 times, a price-book (P/B) ratio of 0.83 times vs. the industry’s 1.1 times and a price-sales (P/S) ratio of 3.2 times vs. the industry’s 2.9 times.
The company also had trailing dividend yield of 2.63% with a 28% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 3.1 times and 11.7 times.
Cheung Kong Property Holdings
Cheung Kong Property Holdings is a property developer registered in the Cayman Islands with its headquarters and principal place of business in Hong Kong. The company was established in 2015 as part of a restructure of the CK Hutchison Holdings (HKSE:00001, Financial) conglomerate by spinning off its property holdings into a separate company.
Cheung Kong is principally engaged in the property development and property investment businesses.
The company is also engaged in the hotel and serviced suite operation business as well as the property and project management business.
Cheung Kong has interests in three listed real estate investment trusts, including the Hui Xian REIT, Fortune REIT and Prosperity REIT. The company’s diversified properties are mainly located in Hong Kong, the mainland China, Singapore and the United Kingdom.
Also, the company is also engaged in financing business through its subsidiaries.
In 2016, 53% of Cheung Kong’s revenue was generated in mainland China, 46% in Hong Kong and the rest from other countries. As observed, Singapore once contributed 6% of Cheung Kong’s total business but fell to just 0.1% of total revenue in 2016.
The principal activities of Cheung Kong are property development and investment, hotel and serviced suite operation, property and project management and aircraft leasing.
Cheung Kong’s operations can be reviewed in five segments:property sales, property rental income, revenue from hotel and serviced suite operation, income from property and project management and aircraft leasing income including the company’s share of revenue of joint ventures per respective segment.
Property sales
In 2016, property sales grew by 16% to 56.8 billion Hong Kong dollars (81% of total unadjusted company sales) and reported a profit contribution*** margin of 31% vs. 32% the year prior.
***Profit contribution is profits excluding any interests in real estate investment trusts, finance costs, increase in fair value of investment properties, profit on disposal of joint ventures and taxation.
Property rental income
Sales in property rental income improved by an impressive 45% to 7.4 billion Hong Kong dollars (10.6% of total unadjusted company sales) and reported a profit contribution margin of 91% vs. 88% in 2015.
According to filings, significant increase in business was brought by leasing of the properties previously held by CK Hutchison Holdings and its subsidiaries and also from those previously held by Hutchison Whampoa Ltd. (HKSE:00013, Financial) and its subsidiaries in a 212-day period in 2015.
Revenue from hotel and serviced suite operation
Sales in hotel and serviced suite business grew 21% to 4.85 billion Hong Kong dollars (6.9% of total unadjusted company sales) and reported a profit contribution margin of 31% vs. 32% in 2015.
Similar growth figures were brought by previously held assets by the two companies formerly mentioned in the previous segment.
Income from property and project management
Sales in the division improved by 4.9% to 620 million Hong Kong dollars and reported a contribution margin of 43% (same as in 2015 operations).
Aircraft leasing income
During the second half of 2016, Cheung Kong invested in the aircraft leasing business to broaden its future income growth prospects and acquired or committed to acquire a total of 108 aircraft for an aggregate consideration of approximately 35 billion Hong Kong dollars.
According to the company, the aircraft leasing business provides a steady income on a medium- to long-term basis and mitigates the cyclical nature of cash flows associated with property development.
Sales in the aircraft business registered 206 million Hong Kong dollars in 2016 while having delivered a contribution margin of 41%.
Sales and profits
In the past three years, Cheung Kong increased its sales by an average of 60% and profits by an average of 11%. The company also had a three-year profit margin average of 42%.
Cash, debt and book value
As of December, Cheung Kong had 62.6 billion Hong Kong dollars in bank balances and deposits and 70.2 billion Hong Kong dollars in bank and other loans resulting in a leverage ratio of 0.26 times vs. 0.23 times in 2015. As observed, the company improved its equity by adding another 7.1 billion Hong Kong dollars while also adding 9.2 billion Hong Kong dollars in overall borrowings therefore resulting in a little higher leveraged balance sheet for the year.
Cheung Kong did not report any goodwill or intangible in its assets while growing its book value by 2.7% to 270 billion Hong Kong dollars from the previous year.
Cash flow
In 2016, Cheung Kong increased its cash flow from operations by 2.2 times to 39 billion Hong Kong dollars from 2015. Capital expenditures have markedly increased from 483 million Hong Kong dollars in 2015 to 12.2 billion Hong Kong dollars in 2016. These capital expenditures included a 6.9 billion Hong Kong dollars allocation to aircraft expenses and 4.5 billion Hong Kong dollars increase in expenses related to investment properties.
For the year, Cheung Kong still generated positive 26.7 billion Hong Kong dollars in free cash flow compared to 17.4 billion Hong Kong dollars the year prior.
Further, 29% of the company’s free cash flow was allocated to dividends and share repurchases. In review, Cheung Kong allocated more than its cash flow, 190%, in dividend payouts –Â including a payout of 31 billion Hong Kong dollars to Cheung Kong (Holdings) Limited and its subsidiaries in 2015.
The company also took in 292 million Hong Kong dollars in borrowings for the recent year, net any payments.
Conclusion
The newly spun-off properties business exhibited outstanding overall business growth in its recent fiscal year. While most growth could be attributed to the company’s adjustment of carrying over full-year operations from formerly held properties, Cheung Kong still delivered impressive levels of profitability.
Cheung Kong’s decision to allocate hefty amount in an aircraft-leasing business showed its willingness to lose focus on its primary business –Â property –Â to gain some diversification. Nonetheless, the newly formed division also showed profitability.
The company also carried an acceptable leveraged balance sheet at a 26% leverage ratio. Cheung Kong also appeared to be conservative in providing dividend payouts – averaging low 20% of free cash flow after excluding payouts to Cheung Kong Holdings.
Meanwhile, asking a 20% margin from the company’s book value would indicate a value of 216 billion Hong Kong dollars – 0.4% upside from today’s market capitalization of 215 billion Hong Kong dollars (at the time of writing). This would indicate a -0.95% downside from ADR market capitalization.
In summary, Cheung Kong is a hold with a $7.5 per ADR target price.
Notes
- Me: to view the complete statement from Cheung Kong, please go to investor relations at the company's Web site.
Disclosure: I do not have shares in any of the companies mentioned.
