Hong Kong Property Companies

 Quick notes on 3 HK property cos:

Link REIT

  - Yield 4.55% (at HKD 63, year ending March 2020 results), 100% payout ratio, mostly 50 year property leases

  - Neighbourhood shopping centers, a bit like FCT in Sg.  Largely unaffected by economy/covid.

  - Good LT track record growing assets without raising cash from shareholders, but yield too low for me, esp with 100% payout ratio.

Wharf REIC:

  - Yield 6.3% (at HKD 32.10, end Dec 2019 results), only 50% of CFO paid out, mostly freehold property. 

  - 75% operating profit from one mall: Harbour City.  Overall high exposure to luxury/tourism: 81% rental from leather, fashion or jewellery. 

  - Luxury brands are reducing their footprint in HK: eg: LV closing their Times Square store after Wharf refused a rent reduction.  Aug 19: (pre-covid) Prada's Causeway Bay landlord "willing to cut rent by 44%" after Prada leaves.

  - If Wharf's 2019 rents fall by 40%, CFO is down roughly 50%.  I think the market is pricing this in.

HK Land:

  - 65% of 2019 operating profit from investment properties portfolio, 35% from development.  Development is lumpy, so ignore it now.  Conservative estimate 515m operating profit (excl D&A (not clear?) and change in properties' values) from investment properties in 2019.  Or USD 22c/share.

  - Dividend is also 22c/share (in 2019 and 2018), thats a 5.6% yield (@ USD 3.89/share).  Mgt said they intend to keep it constant.

  - For investment properties: 83% operating profit from HK central, 11% from Sg.  Mostly office (banking/legal).

  - Stock is cheap based on recurring income from Investment Properties alone.  Their development are is highly leveraged, but lets them expand their portfolio without raising more capital.  So cheap value with some growth.  Worth looking further.

Sold Wharf REIC (HK.1997)

Sold this stock yesterday for an SGD 600 loss.  Two reasons:

One: China is not stimulating.  They are still in a downturn from the 2016 credit expansion.

Source: CEIC

Maybe they need lower US rates in order to stimulate.  China is short USDs (too many USD denominated loans, plus a current account deficit), they need to borrow them, and high rates hurt.

Source: hedgeye webcast (6th Nov)

Or maybe the CCP is just waiting for the US election to be over, before giving global stock markets some juice.

Either way its not here yet. I should have waited for the stimulus to start first.  Wharf REIC is a cyclical China play, and we need cashed up Chinese tourists buying LVs and Rolexes for it to take off.

Two: protests are getting worse.  On Sunday, a student was shot.  School holidays have started.  Protesters are now trying to disrupt the city's transport on weekdays - previously the effect was limited to weekends.  Parts of the city look like CNY on weeknights.  People are leaving work early most days, and even many normal restaurants and shops in the CBD are closed.  The protests will not die down, as I initially expected.

Tsim Sha Shui: 8pm Tuesday night

I was too early.  This may be a better trade in 3 to 6 months.

Bought Wharf Reic (HK.1997)

Bought 2000 shares of this company last week, on news of the extradition bill being cancelled.  This action decreases the chance of bloodshed (Tiannamen 2.0) - there's a chance both sides can talk now.

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.