The last time Hongkong Land was trading close to its book value was almost 15 years ago. Chart 1 shows the 20-year priceto-book ratio for Hongkong Land. In more recent years, this valuation metric has become much more attractive, as illustrated in Chart 2.
Hongkong Land’s current price-tobook ratio is around 0.22 times, which is roughly 1.5 times the standard deviation below its mean. Does this mean the company is cheap and undervalued, given that it is persistently trading significantly below its book?
A value trap refers to stocks or investments that appear to be trading cheaply, represented by low price ratios such as price-to-earnings (P/E), price-to-book (P/B) and price-to-cash flow (P/CF); but are not actually undervalued.
In determining whether a stock is undervalued, price multiples are merely one facet of the overall valuation. We at The Edge Singapore use a range of metrics to determine whether a stock is undervalued, such as historical performance, profitability, yields & relative multiples versus peers, financial safety, sentiment, and a price-to-value growth analysis — all of which are incorporated into a score to determine the quality of the business.
For a deeper quantitative analysis, we consider a discounted cash flow (DCF) analysis. Other types of analysis include a margin of safety analysis which examines and discounts items in the balance sheet. The divergence analysis compares the growth in price to the growth in value of the company, which comprises revenue, profits, and cash flows. Lastly, the comparables analysis looks at relative valuations in greater depth, such as forward multiples to peers. These valuations are then weighted and incorporated into our intrinsic valuation of the company. A range of valuations are given for best and worst-case scenarios for each analysis. Charts 3a and 3b show Hongkong Land’s valuation overview and intrinsic value.
See also: Frasers Property: Narrowing the discount
We think that Hongkong Land is fairly valued at current prices and fundamentals.
What is in Hongkong Land
Be that as it may, a significant portion of its portfolio is in China, where the property sector for both residential and office property are facing oversupply pressures.
In 2023, Hongkong Land invested US$1.3 billion ($1.77 billion) in mainly development projects in China, Singapore and Jakarta. In China, the group acquired a mainly luxury residential site along with luxury retail in Chongqing, comprising 301,000 sq m. Hongkong Land took equity stakes in a mixed-use site in Beijing and sites in Nanjing and Wuhan.
In Beijing, Hongkong Land owns the high-end WF Central in Wangfujing, one of the fanciest areas in Beijing. For all its prime properties built over the years, it is in Shanghai, once viewed as the Pearl of the Orient, where Hongkong Land’s mega project may be the reason why it is trading at what appears like “cheap” valuations based on price-to-book.
A mega project
In 2020, Hongkong Land acquired a site in Xuhui district, West Bund, Shanghai. In 2023, the Hong Kong media reported that Hongkong Land will spend US$8 billion on its share of the West Bund project. For context, Xuhui and West Bund are southwest of The Bund, south of the French Concession, and next to the Huangpu River.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
“We are very excited about West Bund Central in Shanghai,” says Alvin Kong, executive director, Hongkong Land, referring to the 1.8 million sq m site which — sometime in the future — will house 12 office buildings, two Mandarin Oriental hotels, the usual luxury retail and premium residential property.
In Singapore, Hongkong Land owns 100% of MCL Land, a residential developer. In November 2023, MCL Land, together CSC Land, won the tender for the Clementi Ave 1 site with a bid of $633.45 million, translating into $1,250 psf per plot ratio (psf ppr) for the 99year leasehold, 178,066 sq ft site.
In another acquisition, MCL Land together with Sinarmas Land A26 won the bid for a site on Pine Grove with a bid price of $692.388 million or $1,223 psf ppr. This price psf ppr is 7.2% lower than the $1,318 psf ppr submitted by UOL and SingLand for a neighbouring plot of land.
Singapore office
Hongkong Land owns a one-third share of One Raffles Quay and Marina Bay Financial Centre Phase I and II. Both developments comprise a Grade A office. “Physical vacancy of our office portfolio was 2.0% as at March 31, compared to 1.9% at the end of 2023. On a committed basis, vacancy remained low at 1.0%, compared with 0.9% at the end of 2023,” says John Simpkins, executive director, general counsel & South Asia, Hongkong Land.
Apart from MCL Land, which is likely to turn around its investments, in particular the more attractive Clementi site, within the next three to four years, HKL’s investment properties in Singapore and Hong Kong are not liquid and cannot be easily monetised. Meanwhile, the group is likely to invest more in its Chinese projects.
The stock is trading at a significant discount to NAV. During a media briefing on June 26, group CEO Michael Smith alluded to Hongkong Land undergoing a strategic review. All in, the discount between price and NAV is unlikely to narrow any time soon.
