Is This A Potentially Undervalued Blue-Chip Stock?
 
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Is This A Potentially Undervalued Blue-Chip Stock?

Sudhan P
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The Straits Times Index (STI) is a widely-followed stock market index in Singapore.

During normal market conditions, many market watchers would expect companies that are part of the index (also known as blue chips) to be trading at a fair or expensive valuation.

However, that does not always happen.

Sometimes, a Straits Times Index component can trade at a low valuation for various reasons.

One such company right now is Hongkong Land Holdings Limited (SGX: H78), even though it has a great business going for it. 


TL;DR: Is Hongkong Land A Stock Worth Considering For Your Portfolio?

Hongkong Land (SGX: H78) potentially undervalued stock

Investors might like Hongkong Land for its:

  • Quality properties located in strategic locations
  • Strong financial track record with net asset value growing at around 9% per year from 2014 to 2018
  • Consistently growing dividends

However, they also need to recognise the short-term risks involved in Hong Kong given the current situation.


Quality Assets 

Hongkong Land is a property investment, management and development outfit with assets in countries such as Hong Kong, Singapore, and China.

The company has two business segments, namely:

  • investment properties
  • development properties

Under its investment properties segment, Hongkong Land has over 870,000 square metres of prime office and luxury retail properties.

For example, in Hong Kong, the company owns vital assets such as Exchange Square, which is home to many leading international investment banks and financial institutions. Hong Kong’s stock market operator also calls Exchange Square its home.

In all, Hongkong Land’s Central Hong Kong portfolio represents around 450,000 square metres of prime space.

In Singapore, Hongkong Land has stakes in important landmarks in the Central Business District such as Marina Bay Financial Centre, One Raffles Quay, and One Raffles Link. 

Hongkong Land Investment Properties
Source: Hongkong Land 2019 Half-Year Results Presentation

On the other hand, Hongkong Land’s development properties segment has a focus on seven countries, with Singapore and Mainland China being the key drivers.

Hongkong Land Development Properties
Source: Hongkong Land 2019 Half-Year Results Presentation

Solid Financial Track Record

Hongkong Land has a solid long-term financial track record.

Its investment property portfolio grew from US$23.7 billion in 2014 to US$33.7 billion in 2018.

Consequently, Hongkong Land’s net asset value per share rose from US$11.75 to US$16.43, up 8.7% per annum.

Meanwhile, its underlying profit attributable to shareholders (which reflects Hongkong Land’s core business and excludes items such as fair value gains or losses on the revaluation of investment properties) rose from US$980 million in 2014 to US$1.0 billion in 2018. 

 20142015201620172018
Underlying profit attributable to shareholders
(US$' million)
9809308829471,036
Investment properties
(US$' million)
23,69724,95727,71232,48133,712
Net asset value per share
(US$)
11.7512.2413.3415.6616.43

Ka-Ching!

If you’re a dividend investor, you might like Hongkong Land for its sustainable dividend payout.

From 2014 to 2016, even though Hongkong Land’s underlying earnings per share fell, its dividend was maintained at US 19 cents. In 2017 and 2018, underlying earnings grew, and that gave rise to dividends increasing year-on-year by 5.3% and 10% respectively. 

 20142015201620172018
Underlying earnings
per share
(US¢)
41.6439.5334.9240.2444.24
Dividends
per share
(US¢)
19.0019.0019.0020.0022.00
Dividend payout ratio 46%48%54%50%50%

Hongkong Land does not have a fixed dividend policy, but it aims to maintain its dividend per share through the up-and-down cycles and steadily increase it over time with higher earnings.

Its dividend payout ratio is also conservative at 50% of its underlying earnings. 

Hongkong Land’s Risks

Speaking of “up-and-down cycles”, the Hong Kong anti-government protests would undoubtedly be on investors’ minds.

On that front, there could be some short-term weakness in Hongkong Land’s business. 

However, over the long-term, Hong Kong should continue being a credible financial centre in Asia.

In Hongkong Land’s 2019 half-year earnings conference call, chief executive Robert Wong explained his thoughts on the Hong Kong situation (emphases are mine):

“And I think — I do still believe that Hong Kong, the — remains solid in terms of as a location to carry out business. The development of Greater Bay Area, the attraction of Greater Bay Areas (sic) [Greater Bay Area] and then the opportunities that it brings to Hong Kong and to the region, I think these, all business, of course, always have the short-term fluctuation and uncertainty.

 

And then looking at medium- to long-term prospects of the region, I don’t see that, that has been significantly eroded. I don’t see any strong evidence in that direction. And I don’t think business will make a long-term decision just based on short-term events. And then of course, having said that, the — who knows what happens with protests, the — how it develops. I still believe that these are more short term in nature and the — and people would be able to adjust themselves in the sense that to adjust the business strategy, the — accordingly. But in the long run, it remains an attractive place to do business.”

I agree with Wong that Hong Kong will remain an attractive place to do business since it’s also a gateway for Western companies wanting to enter China.

But the short-term risk is real, so investors should consider whether they are comfortable with the share price volatility that would come with it.

At Hongkong Land’s share price of US$5.42, it has a price-to-book value of 0.3 and a dividend yield of 4.1%. 

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the company mentioned. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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