Why Hongkong Land (SGX:H78)’s Shares Trades at a 67% Discount?

Hongkong Land Holdings (SGX:H78) is one of the best Singapore-listed property companies of the old economy. 

It’s part of the Straits Time Index (STI), and has a strong property portfolio in Hong Kong and Singapore.

The fact is, Hongkong Land is the largest office landlord in Hong Kong Central — the heart of the semi-autonomous region (SAR)’s financial district. 

This dominant property player has 12 prime office buildings, including Landmark Atrium, The Landmark Mandarin Oriental and Three Exchange Square. 

What’s more, Hongkong Land owns major office buildings like One Raffles Link, One Raffles Quay and Marina Bay Financial Centre in Singapore.

You might not know, Hongkong Land is owned by the Keswick family, who owns the conglomerate Jardine Matheson. 

They are a long-time family-owned business which extends across multiple businesses, including this company whose stock is trading in the bargain bin.

From a numbers perspective, Hongkong Land looks very attractive. 

These office properties don’t carry a huge amount of debt. In its latest June 2020 financial results, Hongkong Land’s debt gearing ratio is only 28%

Debt gearing ratio is simply total debt divided by shareholders’ equity. It’s a quick way to calculate a company’s leverage. The higher the ratio, the lousier is the company’s financial health.

Now, what’s more interesting is these office properties are close to full occupancy. 

Although rental income has fallen during the Covid-19 pandemic last year, the company has largely been stable. Which suggests that its properties are still in great demand. 

Now, I know Hongkong Land owns very strong trophy assets, like Keppel REIT. 

But what’s not so clear to me, though, as an investor, if I want to invest in a company like Hongkong Land. 

You see, Hongkong Land’s entire rental properties and development projects, is selling for more than what it’s worth on the stock market. Let me explain. 

The book value of both office properties and development projects are worth US$36 billion today. 

And this is calculated by independent property valuers and verified by auditors. 

Book value is simply total assets minus all of its liabilities. It’s also the “net-worth” of a company.

As the company collects more rental income, and the properties increase in value over time, this book value will increase. Hong Kong Land has a very solid book value. 

And by right, Hongkong Land’s share price should be the same as its book value.

Yet, today the company is priced at a 67% discount to its book value. 

Hongkong Land’s 67% discount — What you need to know

So why is this the case?

Hong Kong’s big property giants like Hongkong Land rarely sell their assets off. 

The fact is, family-owned businesses prefer to sit on their property assets and continue collecting the high rent, and hopefully doing so forever. 

So there’s no way small shareholders like us who can “realize” the market value of these properties. 

And that’s why Hongkong Land’s share price is forever punished, by having the company’s share price “trading below (at discount) its book value”.

If you look closely, Hongkong Land trades at US$11.6 billion market capitalization. 

Yet the book value is less than US$36 billion!

This simply means the market value is trading 67% cheaper than the entire net-worth of the company!

No matter how independent property valuers like JLL or Knight Frank assign a property value, as long as Hongkong Land has no intention to sell its properties, there will always be a discount to the book value.

And my main concern, as an everyday investor, is you might just end up buying a “value trap”.

Hongkong Land’s bright spot for dividend-only investors

Of course if I were a dividend-only investor, I wouldn’t care too much about this. 

I could collect steady dividends from Hongkong Land year after year, but not expect the share price to rise over the long term. 

And that’s one thing good about Hongkong Land — its steady, growing dividends.

Since 2010, Hongkong Land grew its dividends from 14 cents per share to 22 cents per share in 2019. During Jun 2020, during Covid-19, it maintained its interim dividend of 6 cents per share. So that’s a plus point for Hongkong Land.

Hongkong Land’s dividend yield is about 4.4% (based on the last 12 months payouts) today, which it’s still a good candidate for an investor only looking at dividend payouts. 

For me, I prefer to buy companies which give me both capital gains and dividends. 

That’s how I build my dividend growth portfolio — looking at the total returns (includes both capital gains and dividends). 

And that’s how I grow my wealth over the long run.

Willie Keng, CFA

Founder, Dividend Titan

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