Summary in seconds
Hong Kong Land Holdings Limited (OTCPK:HKHGF) (H78: SP) the stock is always considered a buy.
I have already reviewed Hongkong Land’s interim financial results for the first half of 2021 in my Article from August 5, 2021. The company is called a “major publicly traded real estate investment, management and development group” with a portfolio of “850,000 m² of prime luxury office and retail assets in key Asian cities” on its Company Website.
Hongkong Land’s shares are undervalued, as shown by the company’s share buybacks. I believe the appointment of the new CEO will serve as a catalyst to re-rate the stock, as Hongkong Land is expected to accelerate the company’s diversification plans under a new CEO. As such, I’m sticking with a Buy rating for Hongkong Land.
Investors can trade Hongkong Land shares on both markets. the over-the-counter market and the Singapore Stock Exchange. The average daily trading values of Hongkong Land’s OTC shares and Singapore-listed stocks were approximately $150,000 and $5 million, respectively, over the past 10 trading days, according to S&P Capital IQ data. The company’s relatively more liquid shares listed on the Singapore Stock Exchange can be traded through U.S. brokerage firms with access to the international market, such as Interactive Brokers.
New CEO will take the helm in April
Michael Smith will succeed Robert Wong as the new CEO of Hongkong Land effective April 1 this year, as stated in the company’s previous statement. announcement. This upcoming leadership shakeup is important in many ways.
First, Hong Kong Land seems determined to break with the past and bring in new blood.
The outgoing CEO has been with Hongkong Land for 1985. Robert Wong has been a director of the company since 1996 and he assumed the role of CEO in 2016. In other words, Hongkong Land made the important decision to hire an employee (Michael Smith) to replace a long-time employee who has been running the company for a long time.
It is also worth noting that two of the company’s directors, Anthony Nightingale and Yiu Kai Pang, will step down from the board at end of January 2024. Yiu Kai Pang served as CEO of Hongkong Land between 2007 and 2016, while Anthony Nightingale served as the company’s managing director between 2006 and 2012. Both have served on the board of directors of Hongkong Land for more than 15 years.
Second, the new CEO, Michael Smith, has an impressive CV and he could play a key role in Hong Kong Land’s future geographic diversification.
In the company’s announcement highlighting the appointment of the new CEO, it is revealed that Michael Smith was previously “Regional Managing Director for Europe and the United States at Mapletree Investments” and previously led Goldman Sachs (GS) Commercial operations “Investment banking in Southeast Asia” and “Real estate in Asia-Pacific (formerly Japan)”. Goldman Sachs is a leading investment bank and Mapletree has AUM (Assets Under Management) more than 77 billion Singapore dollars (or $58 billion).
Unlike Michael Smith’s expertise and experience in real estate markets across the world, Hongkong Land has a relatively narrower geographic scope. Hong Kong, mainland China, Macau and Southeast Asia account for approximately 67%, 20% and 13% of the company’s gross assets, as revealed in its report. investor relations site.
It would be realistic to expect Hongkong Land to rely on the new CEO to expand more aggressively outside of its home market of Hong Kong in the future.
Third, it is relevant to take a closer look at Hongkong Land’s comments on the company’s new CEO.
Hongkong Land noted in its announcement revealing the leadership change that Michael Smith had “experience in real estate investment and capital allocation.” In the announcement, the company also highlighted that the new CEO will “evolve our business” in terms of investments in “commercial, retail and mixed-use assets” and “growth in China and other Asian markets keys”.
I referred earlier to Hongkong Land’s narrower geographic scope, and the company could also do more to diversify its real estate mix. As noted in his most recent presentation of intermediate resultsHongkong Land’s office, retail and hotel assets accounted for 76%, 16% and 8% of the company’s investment property portfolio in terms of area.
In summary, Hongkong Land’s current asset portfolio is focused on the Hong Kong market and office buildings, and I believe the new CEO will help diversify the company’s geographic and real estate distribution given his experience . In the coming times, Hongkong Land’s portfolio is expected to become more diversified, which should result in resilient earnings and a higher valuation multiple for the listed company.
Share repurchases and share valuation
Hongkong Land shares are undervalued in my view, and this view is validated by the company’s share buybacks.
By my calculations, the company repurchased about 20.4 million of its own shares, or about 1% of its outstanding shares, in 2023. Additionally, Hongkong Land is estimated to have spent more than $600 million ( on a cumulative basis) on share buybacks since the launch of a new share buyback plan in September 2021.
In the first half of 2023, Hongkong Land allocated only $100 million (source: H1 2023 results presentation) to capital investments, compared to the company’s average annual investment of $2.4 billion for the period 2017-2022. This shows that Hongkong Land shares have acquired a very attractive valuation, leading the company to prioritize share buybacks over investments.
Hongkong Land holds a results briefing for investors twice a year, as the company only publishes full financial statements on a half-yearly basis.
During its conference call on the results for the first half of 2023 (transcript from S&P Capital IQ) on July 31, 2023, the company emphasized that “it is difficult not to recognize the appeal of (stock) buybacks at current (stock price) levels.” The market values Hong Kong Land at a current P/B multiple of 0.25 times (source: S&P Capital IQ) on July 31, 2023 (date of presentation of results), while the last repurchase of shares of the company was carried out on November 14, 2023 when the stock was trading at 0.23 times P/B. For reference, Hongkong Land currently trades at a P/B ratio of 0.24 times.
It would be reasonable to consider Hongkong Land an undervalued stock, with the company’s shares trading at a quarter of its net asset value. The company’s share buybacks further support the view that Hongkong Land is trading below its fair valuation.
I have a favorable view of the appointment of Hongkong Land’s new CEO, as new CEO Michael Smith has the experience to lead the company’s diversification efforts. More importantly, Hongkong Land is valued by the market at a massive discount (75% or more) to the company’s book value. I see Hongkong Land shares revaluing positively over time as the company diversifies its properties and geographic spread under new management.
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