Hi Investors,
This is an Investment research summary on Hongkong Land Holdings Ltd.
Key Findings
1) Limited Recurring Growth
2) Uncertain Earnings
3) Lack of Competitive Advantage
(A) Business Description
Hongkong Land Holdings Limited, together with its subsidiaries, engages in the investment, development, and management of real estate properties which it owns and manages approximately 850,000 square meters of office and luxury retail property primarily in Hong Kong, Singapore, and Beijing. The company also develops and sells residential properties. In addition, it is involved in hotel investment and finance businesses. Also, Hongkong Land Holdings Limited is a subsidiary of Jardine Strategic Holdings Limited.
(B) Macroeconomic Activities
GDP growth
GDP growth in areas where Hongkong Land is situated in is constant and there is no signs of poor economic showing in the past few years (Figure 1). Furthermore, the positive economic growth in Vietnam, Thailand, Indonesia and China supports Hongkong Land’s recent expansion activities into these countries.
Figure 1: GDP Growth Source: World Bank
On the other hand, Hongkong Land main area of business . Hong Kong, is one of the worst performing countries in the group (Figure 2). Thus, Hongkong Land’s strategic expansion could generate a better return on investment as these countries continue to grow economically.
Figure 2: Hong Kong Land’s Gross Assets by Activities Source: Annual Report
(C) Investment Summary
⇒ Limited Effect from Rental Growth
Rental income is expected to continue to increase because of the new sources from WF Central, Exchange Square and a future property that is yet to be developed in a prime location in the central business district of Thailand. However, if Hongkong Land relies solely on rental revenue for future growth, they would face challenges because as compared to sales of properties, it is generally a slower growth process (Figure 3). Furthermore, a slower growth would translate into less capital to acquire new land as compared to its peers. Hence, with their peers being more capitalised to outbid Hongkong Land for the limited prime locations for investment properties purposes, Hongkong Land would eventually inflict damage on its business.
Figure 3: Hongkong Land’s CAGR for Rental and Sales of Properties Source: Annual Report
⇒ Uncertain Earnings
On the other hand, the revenue from development properties is generally more unpredictable due to their positive correlation with the macroeconomic activities as the cost of land is a major factor in Hongkong Land’s business model. Additionally, despite the consistent performance for the past 5 years, Hongkong Land might not be able to sustain because their properties under development that is more than 12 months has been falling (Figure 4). Hence, with less backlog of properties to develop, the future sales might be negatively impacted. Therefore, the revenue from development properties could be facing some headwind in the coming years.
Figure 4: Properties under Development (More Than 12 Months) Source: Annual Report
⇒ Lack of Competitive Advantage
When compared to its peers, Hongkong Land produces a lower margin for the development properties projects they undertake (Figure 5). This would mean that Hongkong Land is less efficient in developing properties than its peers. This could be because Hongkong Land is relatively smaller in size which means they lack the economies of scale that its peers are enjoying. Furthermore, Hongkong Land does not seem have a differentiating factor they are unable to command a higher price for the properties they are selling which would result in a higher margin. Thus, Hongkong Land’s lack of competitive advantage could hinder its future growth.
Figure 5: Hongkong Land’s Sales of Properties Margin vs Peers’ Source: Annual Report
(E) Catalyst
⇒ Declining GDP Growth
If the economy is in poor shape, the price of the property and rental income would fall because the demand for these properties would fall. Furthermore, when businesses are not doing well, they are unable to pay the increased rental price to conduct business and could opt for cheaper alternative in order to save cost.
⇒ Foreign Exchange Risk
Since Hongkong Land has started venturing into regions outside Hong Kong, they are susceptible to the foreign rate risk as the revenue collected would be in foreign currency. Moreover, the economic situations in SEA is currently not stable and this would create a risk of currency depreciation that could eventually hurt Hongkong Land’s earnings.
(F) Risk
⇒ Increased Purchase of Bargain Sites
If the price of land falls, Hongkong Land could make more site purchases that could be used for development or investment purposes. Either option would improve Hongkong Land’s revenue growth.
⇒ Improved Economic Activities
When the economy improves in the area where Hongkong Land has business in, it would boost the attractiveness and price of the properties in the area. As a result, Hongkong Land could rise its sales price and the rental rate which could improve the overall growth of Hongkong Land. Furthermore, the Southeast Asia countries provides exciting opportunities as the combined GDP growth excluding Singapore is 5.5%, which is close to the growth in China and India.
(G) Conclusion
In conclusion, Hongkong Land’s growth seems limited and challenging. Nonetheless, with the stable and safe recurring revenue generated from rental income and attractive valuation (P/B: 0.46 as of 14th May 2018), it could be worth a buy.
To your dreams,
Mind Kinesis Research Team
Click here for our Free Value Investing Guidebook :
Would you like to accelerate your training on investments? Click here to join our Free Value Investing Masterclass In Singapore :
Click here to hear what our graduates have to say about the value investing course in Singapore :
