Market Outlook

5 August 2017

Dear Fellow Investor,

As conservative investors we should hold  some selected property investments.  After all they are real assets producing cash flow, rents and dividends. Property prices in Singapore/ Hong Kong have stabilized  According to the Edge newspaper affordable residential properties in Malaysia have begun to slowly rise.

Qualities I look for are low gearing, a book value less than the value of its assets  rising cash flow and a strong balance sheet.  Hongkong Land meets all these criteria.

Hongkong Land (SGX:H78) is a share we hold in our PGWA accounts. It is a proxy for Hong Kong and Singapore commercial property.  Yesterday they released their first half earnings. It was a good set of results for the company.

Using their retained earnings Hongkong Land  is expanding into Phnom Penh. They are developing a site next to the US Embassy to be let to corporations, accountants and financial service companies. So far most of the space has been booked in advance of completion. Cambodia being a frontier market is a fast growing economy attracting major corporations

The State Of The Business Now

Here are some important financial numbers for the first half of 2017:

• Underlying profit attributable to shareholders jumped by 32% to US$517 million.
• Total profit attributable to shareholders (this includes non-trading items) soared 147% to US$3.125 billion largely due to a revaluation gain of U$2.608 billion on the company’s investment properties. This compares with a revaluation gain of just US$870 million in the first half of 2016.
• Consequently, underlying earnings per share increased by 32% to US$0.2199. Total earnings per share also spiked by 147% to US$1.328.
• An interim dividend of US$0.06 per share was proposed, unchanged from a year ago.
• Hongkong Land’s operating cash flow in the first half of 2017 came in at US$572.7 million. With renovations expenditure and developments capital expenditure of US$99.8 million in the same period, the company generated US$472.9 million in free cash flow, 32% higher than the free cash flow of US$358.2 million a year ago (US$467.4 million in operating cash flow and US$109.2 million in capex).
• The company’s net debt decreased from US$2.322 billion (US$1.560 billion in cash and US$3.882 billion in debt) in the first half of 2016 to US$1.882 billion (US$1.902 billion in cash and US$3.784 billion in debt). Hongkong Land’s balance sheet remains strong in our view, with a net debt to equity ratio of just 5.5%.
• Hongkong Land’s book value per share – an important metric to track as we think it is the most relevant measure of the company’s value – increased by 15.0% from the first half of 2016 to US$14.54 in the latest reporting period. This is also an increase of 9.4% from the book value per share of US$13.30 seen at end-2016. (It’s worth noting that Hongkong Land currently does not have intangible assets, so its tangible book value per share and reported book value per share are identical.)

In the first half of 2017, Hongkong Land’s investment properties in Hong Kong, which are all located in the special administrative region’s Central area, mostly performed well. 

The company commented that office rental reversions were positive as market supply remained tight.

Vacancy for Hongkong Land’s Central office portfolio as of 30 June 2017 was just 1.5%, an improvement from 3.1% a year ago, and 2.2% at end-2016. The portfolio’s average monthly office rent also increased to HK$106 per square feet, up from HK$103 in the first half of 2016. 

Hongkong Land’s retail portfolio saw its vacancy rate increase from zero in the first half of 2016 to 0.6%. There was also little change in rental reversion for the retail portfolio. But, positive reversions in 2016 caused the retail portfolio’s average rent to increase from HK$216 per square feet in the first half of 2016 to HK$224.

In Singapore, Hongkong Land’s investment properties saw their vacancy rate improve from 1.0% at 30 June 2016 to 0.2% in the latest reporting period. But, there was “mildly negative rental reversions” in the portfolio, and the average office rent actually declined year-on-year from S$9.40 per square feet to S$9.10.

The majority of the tenants in Hongkong Land’s investment properties in Singapore and Hong Kong are still financial institutions, legal firms, and accounting firms.

Coming to the company’s development business, there were increased profits in both mainland China and Singapore because of higher sales.

What’s Next?

Hongkong Land said that the “good performance” of its “investment property portfolio is expected to continue in the second half of the year.” On the development business, the company does not expect to benefit from further sales completions in Singapore.

In its earnings release, the company also gave updates on some of its growth projects for its investment properties business:

• There is WF Central, a retail/hotel project located in Beijing’s Dongcheng district. The retail component is scheduled to open in the later part of this year, while the hotel side will open in 2018.
• In Jakarta, the 73,000 square metre fifth tower at Jakarta Land is expected to be completed in early 2018. Hongkong Land owns 50% of Jakarta Land.
• The company’s 26,000 square metre mixed-use complex in Cambodia is seeing space “being progressively taken up by tenants.”
• A joint-venture agreement was reached in June 2017 to “construct and manage a well-located site within the Marina Bay Financial District of Singapore with a developable area of 120,000 square metres.” Hongkong Land will own 33% of the project, which will be connected to the company’s existing Singapore properties in the district.

I will continue to watch for growth in Hongkong Land’s book value per share (the performance in the first half of 2017 was good). The balance sheet remains strong and its dividend is well-covered. At the company’s current stock price of US$7.80, it has a price-to-book ratio of just 0.54. Warren Buffet would be interested in this company as it meets his investment criteria.

The KLSE  continues to be in an uncertain state. Volume has fallen and an average of a third of listed shares  untraded. in the last 2 weeks.  I am waiting for a catalyst to move the market. Our focus on quality dividend producing shares protects us in this uncertain environment.

Invest well and grow your wealth
Bill

Today’s critter is the maned wolf.  It is the largest canid of South America. Its markings resemble those of foxes, but it is not a fox, nor is it a wolf, as it is not closely related to other canids — and unlike other canids, it hunts alone.  

This mammal is found in open and semi-open habitats, especially grasslands with scattered bushes and trees, in south, central-west, and southeastern Brazil, Paraguay, northern Argentina, Bolivia east and north of the Andes.