Nikada
Elevator Pitch
Hongkong Land Holdings Limited (OTCPK:HKHGF) (H78:SP) stock is still rated as a Buy.
I previously reviewed Hongkong Land’s interim financial results for the first half of 2021 in my August 5, 2021 write-up. The company calls itself a “major listed property investment, management, and development group” with a portfolio of “850,000 sq. m. of prime office and luxury retail assets in key Asian cities” on its corporate website.
Hongkong Land’s shares are undervalued as seen with the company’s share repurchases. I am of the opinion that the new CEO appointment will serve as a catalyst to re-rate the stock, as Hongkong Land is expected to accelerate the company’s diversification plans under the helm of a new CEO. As such, I stick to a Buy rating for Hongkong Land.
Investors can deal in Hongkong Land’s shares on both the Over-The-Counter market and the Singapore Stock Exchange. The average daily trading values for Hongkong Land’s OTC shares and Singapore-listed shares were around $150,000 and $5 million, respectively, for the past 10 trading days as per S&P Capital IQ data. The company’s relatively more liquid shares listed on the Singapore Stock Exchange can be traded with US stock brokerages with international market access such as Interactive Brokers.
New CEO Will Be At The Helm In April
Michael Smith will take over from Robert Wong as the new CEO of Hongkong Land beginning on April 1 this year as indicated in the company’s earlier announcement. This upcoming leadership reshuffle is significant in many ways.
Firstly, Hongkong Land appears to be determined to make a break from the past and bring in fresh blood.
The outgoing CEO has worked at Hongkong Land since 1985. Robert Wong has been a director with the company starting in 1996, and he assumed the role of CEO in 2016. In other words, Hongkong Land has made a big decision to have a hired hand (Michael Smith) replace a long-tenured employee who has led the company for a long time.
It is also worthy of note that two of the company directors, Anthony Nightingale and Yiu Kai Pang, will retire from the board at the end of January 2024. Yiu Kai Pang was formerly CEO of Hongkong Land during the 2007-2016 time period, while Anthony Nightingale was the company’s managing director between 2006 and 2012. Both of them have served on Hongkong Land’s board for more than 15 years.
Secondly, the incoming CEO, Michael Smith, has an impressive resume, and he could play a key role in Hongkong Land’s future geographical diversification.
In the company’s announcement highlighting the new CEO appointment, it is disclosed that Michael Smith was formerly “Regional Chief Executive Officer of Europe and the US at Mapletree Investments” and previously led Goldman Sachs’ (GS) “Southeast Asian investment banking” and “Asia Pacific (ex-Japan) real estate” business operations. Goldman Sachs is a top-tier investment bank, and Mapletree boasts an AUM (Assets Under Management) in excess of S$77 billion (or $58 billion).
In contrast with Michael Smith’s expertise and experience pertaining to property markets around the world, Hongkong Land has a relatively narrower geographical focus. Hong Kong, Mainland China & Macau, and Southeast Asia account for approximately 67%, 20%, and 13% of the company’s gross assets as revealed on its investor relations website.
It will be realistic to expect Hongkong Land to leverage on the new CEO to expand more aggressively outside its home market, Hong Kong, in the future.
Thirdly, it is relevant to review Hongkong Land’s commentary on the company’s new CEO in greater detail.
Hongkong Land noted in its announcement disclosing the change in leadership that Michael Smith has a “track record in real estate investment and capital allocation.” In this announcement, the company also stressed 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 key Asian markets.”
I made reference to Hongkong Land’s narrower geographical focus earlier, and the company could also do more to diversify its property mix. As indicated in its most recent interim results presentation, Hongkong Land’s office, retail, and hotel assets represented 76%, 16%, and 8% of the company’s investment property portfolio in terms of square footage.
In summary, Hongkong Land’s current asset portfolio is concentrated in the Hong Kong market and office properties, and I believe that the new CEO will help to diversify the company’s geographical and property mix considering his experience. In time to come, Hongkong Land’s portfolio is expected to become more diversified, and that should translate into resilient earnings and a higher valuation multiple for the listed company.
Share Buybacks And Stock Valuation
Hongkong Land stock is undervalued in my opinion, and this point of view is validated by the company’s share repurchases.
Based on my calculations, the company has bought back about 20.4 million of its own shares, or roughly 1% of its shares outstanding, in 2023. Also, Hongkong Land is estimated to have spent in excess of $600 million (on a cumulative basis) on share buybacks since the initiation of a new share repurchase plan in September 2021.
In the first half of 2023, Hongkong Land allocated a mere $100 million (source: 1H 2023 results presentation) to capital investments as compared to the company’s average yearly capital investments of $2.4 billion for the 2017-2022 time frame. This shows that Hongkong Land’s shares have become very attractively valued, and this has led the company to prioritize share buybacks over investments.
Hongkong Land hosts results briefing for investors twice every year, as the company only releases complete financial statements on a semi-annual basis.
At its 1H 2023 earnings call (transcript sourced from S&P Capital IQ) on July 31, 2023, the company emphasized that “it’s hard not to acknowledge the attractiveness of the (share) buybacks at these current (stock price) levels.” The market valued Hongkong Land at a trailing P/B multiple of 0.25 times (source: S&P Capital IQ) on July 31, 2023 (the date of the results briefing), while the company’s most recent share buyback was executed on November 14, 2023 when the stock was trading at 0.23 times P/B. As a reference, Hongkong Land currently trades at a P/B ratio of 0.24 times.
It will be reasonable to refer to Hongkong Land as an undervalued stock, with the company’s shares trading at a quarter of its net asset value. The company’s share buybacks provide further support for the view that Hongkong Land is trading below fair valuation.
Final Thoughts
I have a favorable view of Hongkong Land’s new CEO appointment, as the incoming CEO Michael Smith has the relevant experience to spearhead 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’s shares re-rating in a positive manner over time, as the company diversifies its property and geographical mix under a new leadership.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
