Value Investing

Investment Journal 01/01/2016 – Value in Hong Kong Property Developers?

The current economic climate has produced incredible investment opportunities.

The trip to Hong Kong led me to conclude two things:

1) Residential housing prices are due for a major correction
2) The demand for prime district commercial properties will continue to be strong with Hong Kong serving as the financial hub for Asia to access China.
Legal systems and financial hubs are not built overnight – as China came to learn last year. Such systems take decades of mistakes and experiences to build up, painful lessons which Hong Kong endured in 1997.
Interestingly enough, the dramatic increase in price has not led to a typical supply side response, as what was seen in 1996. Although the government has set long term increased in housing supply that is 1.6x the average completion of the last ten years, two points must be taken:
1) Supply the last ten years has been extremely low
2) This supply side response by the government will take time to bear fruition
Given the tiny size of flats, it seems to me that new families must move out at some point of time.
Another boon to property developers is that the cost of land has fallen by close to 40% since its peak – meaning that a drop in property prices may be buffered by lowered input cost.
In light of this, I find it hard to see where the sustained massive drop in prices will come from, with forthcoming supply low and players acting rationally, and pent up demand there.
Still, this says nothing about the short term price movements and if economic conditions worsened, the key to survival will be liquidity and solvency.
Avoid companies with bloated balance sheets, and find ones that are trading at the biggest discounts to book value. There exists now an opportunity to buy prime district land at 60-70 cents on the dollar, a remarkable feat on its own.
Interestingly enough, the premium/discount anomaly seems to persist just as it does in close ended funds. A similar strategy should be utilized.
To close off, one must also consider not only the premium/discount, but the implicit growth in book values.
Inflation guarantees that the replacement cost of these investment properties will be significantly higher five or ten years from now. Add on the productive economic activity of these companies from reinvesting rental income and property development, and one should see a growth in book of 5 – 7%. This does not include dividend payments.
The key here is to always be selective, and paying below NAV. More research is needed.
This will in turn imply we receive the full rental income of the properties, but at 60% of market price. Our net rental yield becomes dramatically higher as a result.
  1. Counters that look interesting are:
    Sun Hung Kai 0016 HKEX,
  2. Hang Lung Properties 0101 HKEX
    Henderson Land 0012 HKEX
  3. Sino Land 0083 HKEX
  4. Cheung Kong Property 1113 HKEX