Wharf REIC derives 2/3rds of its profits from Harbour City. It's a massive shopping complex, with separate buildings for luxury, children, sportswear and dining. They account for 10% of HK retail sales (excluding F&B).
Their numbers are excellent. Gearing is below 20%. Their property's lease is for 800 years. Its a very simple business where the rental just flows through to the profits. Its trading at a trailing PE of 7 to 8. Thats at a payout ratio of 65% (its not a REIT).
This is a cyclical stock. Leases are short: 1-2 years, which is good in a rising markets, but bad when things go south. Management is projecting a "high single digit and even "double digit decrease" in retails sales in the second half, which may affect rents that are based on tenants' sales. This stock can be taken as a proxy for Hong Kong tourism, and Mainland Chinese luxury goods spending.
Why is it so cheap?
- The global slowdown, and slowdown in China specifically.
- HK protests
I am buying this stock, hoping that, in one to two years time the protests are forgotten. Tourism and shopping returns. Maybe China will stimulate its economy more stimulus (they have been surprisingly cautions so far), so that more people can travel and buy LVs.
The main risks to this story are:
- The downturn continues and we get a recession, despite best efforts of the Chinese government.
- Political risk. Harbour city avoided a protest, but this may have made mainland Chinese angry.
This is not a buy-and-hold forever stock. It only forms 2% of my portfolio, and thats as much as I'll buy. Long term, HK is not a place to park my money. Unless the government can improve the lives of its citizens (primarily by decreasing property prices), it will remain a powder keg. And after 2047, the Chinese government does not have to honour any 800-year property lease.
I got this idea from Kyith at Investment Moats.
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