Hongkong Land Holdings (SGX:H78, Financial), the $17.6 billion real estate company reported its 2016 fiscal year performance in April, registering 3.2% revenue growth to $1.99 billion and a contrasting 45% drop in profits to $1.1 billion – a 55.5% margin compared to 104.1% in fiscal year 2015.
In review, overall expenses rose by 9.1%. Meanwhile, most profit reduction took place in the company’s "change in fair value of investment properties." The top line contribution from this part of Hongkong Land’s operations dropped to $999.9 million in 2016 from $2.5 billion in the previous year resulting in lower overall profits.
“Results from the group’s commercial portfolio continued to be strong due to largely positive rental reversions in Hong Kong and higher occupancy in both Hong Kong and Singapore. In the residential sector, while profits from mainland China were flat and profits from Singapore were only marginally lower in 2016, overall earnings declined in the absence of a gain recorded in the prior year on a redeveloped property in Hong Kong.
“A stable performance is anticipated from Hongkong Land’s commercial property portfolio in 2017, while in the group’s residential business a higher contribution from mainland China is expected to be offset by lower profits from Singapore.” – Ben Keswick, chairman
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Valuations
Hongkong Land trades at discount compared to its peers and book value. According to Reuters data, the company had a trailing price-earnings (P/E) ratio of 5.2 times vs. the sector's multiple of 29.54 times, a price-book (P/B) ratio of 0.56 times vs. the sector's 5.29 times and a price-sales (P/S) ratio of 8.73 times vs. the sector's 5.29 times.
The company also had trailing dividend yield 2.57% with 13.36% payout ratio.
Average 2017 sales and earnings-per-share estimates indicate forward multiples of 8.3 times and 18.7 times.
Total returns
Hongkong Land has outperformed the broader Standard & Poor's 500 index so far this year with 20.12% total returns vs. the index’s 9.6% (Morningstar). The company has underperformed, having generated 6.95% (annualized) returns vs. the index’s 14.48%Â in the past five years.
Hongkong Land
According to filings, Hongkong Land was founded in 1889 and is a listed leading property investment, management and development group.
Hongkong Land owns and manages almost 800,000 square meters of prime office and luxury retail property in key Asian cities, principally in Hong Kong and Singapore.
The company’s Hong Kong Central portfolio represents some 450,000 square meters of prime property. It has a further 165,000 square meters of prestigious office space in Singapore mainly held through joint ventures and a 50% interest in a leading office complex in Central Jakarta.
The company also has a number of high quality residential and mixed-use projects under development in cities across Greater China and Southeast Asia, including a luxury retail center at Wangfujing in Beijing. In Singapore, its subsidiary, MCL Land, is a well-established residential developer.
Hongkong Land Holdings is incorporated in Bermuda and has a standard listing on the London Stock Exchange, with secondary listings in Bermuda and Singapore.
The company’s assets and investments are managed from Hong Kong by Hongkong Land Limited. Further, Hongkong Land is a member of the Jardine Matheson Group (JMHLY, Financial). According to the latter’s recent filings, Jardine owned 50% of Hongkong Land.
Hongkong Land’s revenue can be separated into: Commercial Property and Residential Property.
(Annual filing)
Commercial Property
Hongkong Land develops prime commercial properties, which it retains and manages as long-term investments, and premium residential and accompanying commercial properties, which are developed for sale.
According to filings, Hongkong Land’s prime commercial properties are predominantly in core central business locations in Asian gateway cities with a concentration in Hong Kong and Singapore.
The company’s returns principally arise from annual rental yields and long-term capital appreciation.
In addition, the company’s Hong Kong and Singapore portfolios remain its most important investments as they provide a stable stream of earnings and balance sheet strength, which enables Hongkong Land to continue to invest and grow both its commercial and residential portfolios in its core markets in Greater China and Southeast Asia.
Residential Property
Hongkong Land’s premium residential and accompanying commercial developments are primarily in mainland China and Singapore with emerging businesses in the Philippines, Indonesia and Vietnam. The division’s returns principally arise from short to medium-term trading profits.
In Singapore, MCL Land, the company’s wholly owned residential developer, continues to be an important contributor to earnings and is working to maintain a steady pipeline of projects.
In 2016, Hongkong Land derived 70% of its revenue from Greater China and the remaining in Southeast Asia and other countries. Greater China generated most underlying profit to shareholders with a margin of 68.7% while other countries delivered 43.8% margin profitability.
In that year, Hongkong Land derived 50% of its revenue from property sales, 43% from rental income, and 6.6% in service income.
Sales and profits
In the past three years, Hongkong Land had an average revenue growth of 2.4%, profit growth of 41.16%, and profit margin average of 114% (Morningstar).
Cash, debt and book value
As of December, Hongkong Land had $1.91 billion in bank balances and $3.92 billion in debt with debt-equity ratio 0.13 times vs. 0.14 times in the same period last year. As observed, equity has increased by $2.61 billion while overall debt increased by $6.7 million.
No goodwill or intangible assets were noted in the company’s balance sheet while book value has grown by 9.1% year over year to $31.3 billion (Morningstar data).
Cash flow
For fiscal year 2016, cash flow from operations rose by 22% from prior year to $1.1 billion. Capital expenditures were $148 million leaving Hongkong Land with $948 million in free cash flow compared to $744 million in 2015.
The company provided 46.8% of its free cash flow in dividend payouts while having averaged 60.5% payout ratio in the recent three years. Hongkong Land also took in $2 million in borrowings net any repayments and other financing activities.
Conclusion
Hongkong Land is unusually discounted compared to its peers and book value. The company’s method of including fair value changes in its top line could be a reason why investors have long neglected the stock –Â having averaged a 0.6 times book value in the past three years.
Nonetheless, the company has cemented itself to be a consistent profit generator, even surpassing its revenue secondary to consistent revenue generator in its commercial and residential property business in recent years.
Hongkong Land also has maintained a less leveraged balance sheet for a property developer and operator while having kept steady payouts to its shareholders.
Should Hongkong Land eventually trade even just 0.7 times its book value would indicate a possible 24.4% upside to $9.3 per share from the share price of $7.48 (at the time of writing).
Disclosure: I do not have shares in any of the companies mentioned.
