How this Value Stock performed, 2 years after everyone told us not to buy it

Alvin Chow
Alvin Chow

I first mentioned about Hongkong Land almost a year ago (14 May 2014).

It closed US$6.94 on that day.

It closed US$8.33 yesterday (20 May 2015).

Including the dividends of US$0.06 (19 Aug 2014) and US$0.13 (19 Mar 2015), the total returns would be about US$1.58 or 23% gain.

Be A Contrarian

It is easy to say the gain is obvious and anyone would have invested. We have to understand the situation one or two years ago. When I first invested in Hongkong Land at US$5.90 on 30 Dec 2013, many peers were very bearish about property counters. The property cooling measures were coming out one after another. Buying property stocks was considered suicide. I think there are many investors who still think so today.

The more practical way is to deduct x% from the property valuation carried in the balance sheets of these property companies, and see if the margin of safety still exists. We are indifferent as we do not know the future and we do not try to predict.

Just pick the stocks when they are cheap, build a portfolio of stocks in various industries, and stay invested patiently.

I observed that many investors understood this but they found it very difficult to follow.

The Truth About ‘Forex Risk’

Another concern I have heard was that Hongkong Land was traded in USD and there could be forex losses because USD was trending down. Think about it. All companies who carry out businesses in other countries will have forex risk! Just because you are not directly involved in the exchange loss, doesn’t mean you are not exposed to it. If you check the income statements of companies you will notice they have forex gains and losses stated in the report. The company has taken the forex risk on your behalf. So you still have forex risk, regardless what the stock price is denominated in.

You see, we love to tell stories like these. The real intention of these stories was not to have an objective evaluation of what was in front of us.

But we have decided NOT to invest in Hongkong Land, and we need to seek closure. So we developed stories why we should NOT invest in Hongkong Land. The reverse is true, if you want to invest in a stock, you will cook up all kinds of stories to support that decision. Understanding this bias in us is the first step to improve your investment results.

Below is the stock chart which you can see the price gapped up in early 2015 and it continued to rise.:
Hongkong Land 21 May 15

I do not know the reason what accounted for such stock behaviour. Some would say the Shanghai-Hong Kong stock exchange connect. We always like to find the cause and effect.

The problem with financial markets is that causes are never clear. The worst is we assume a coincidental correlation as the cause. So I am not going to act smart like a lot of other gurus who appear to know-it-all and come out with a mother-of-all analysis which are often baseless except for great entertainment value.

Interesting Facts About Hongkong Land

Hongkong Land belongs to the Jardine group of companies, alongside with other prominent companies like Dairy Farm (owns the Giant supermarkets), Jardine Cycle & Carriage (dealer for the Mercedes and Mitsubishi running on our roads), Mandarin Oriental (the hotel chain) and a lot others.

Hongkong Land is also an Straits Times Index (STI) component and the only stock that qualifies our CNAV criteria. No other STI components are able to.

Hongkong Land co-owns the Marina Bay Financial Centre and One Raffles Quay with Cheung Kong (Li Ka-Shing’s company) and Keppel Land.

But Singapore properties are a smaller part of Hongkong Land vast property portfolio. The key properties are in Hongkong Central Business District area. The most famous is the Exchange Square, where the building hosts the Hong Kong Stock Exchange, one of the most traded market in Asia. In short, Hongkong Land owns a lot of prestigious Grade A office space in Asia.

Hongkong Land’s latest dividend has tripled the amount given ten years ago.

CNAV Calculation Based On 31 Dec 2014 Annual Report

Before you get carried away with the story of Hongkong Land, it is important to keep your biases at bay. Sometimes we love a company so much that we will just find reasons to buy it even though the numbers do not prove to be a sensible price to pay. In fact, our CNAV approach advocates to go by quantitative analysis first, before we look into the business of the company. This is to prevent our biases from acting up early in our analysis.

I am going to use the 31 Dec 2014 annual report to calculate the CNAV of Hongkong Land.

From the balance sheet

  • Leasehold Land = US$7.6m
  • Investment Properties = US$23,697.3m
  • Bank Balances = US$1,662.6m
  • Sum of all properties and cash only = US$25,367.5m
  • Total liabilities = US$6,034.1m
  • Non-controlling interest = US$50.3m

From note 21, number of shares = 2,352.8m

CNAV per share = [(Sum of properties and cash) – (Total Liabilities)] / (number of shares) = US$8.20

NAV per share = US$11.71

NAV is dependent on the valuation of the properties. Given the price of US$8.33, it implies that the Hongkong Land prime properties are selling at about 29% below valuation!

The CNAV of US$8.20, if you buy below this price, will give you the necessary margin of safety in case the property valuation drops in the future. If you have invested at US$6.94, you could potentially make 69% returns if you sell at US$11.71.

Hence, investing in stocks is about valuing the companies objectively and apply a margin of safety.

DISCLOSURE: I am a shareholder of Hongkong Land.

DISCLAIMER: This is an example to illustrate the CNAV strategy and this information shall not be serve as an investment recommendation nor a financial advice to the reader.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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4 thoughts on “How this Value Stock performed, 2 years after everyone told us not to buy it”

    • Just gonna add my 2 cents here on top of the excellent information presented in this article. This is a company that has grown it’s asset balances since this article was written. Based on the net asset value (not strictly Dr Wealths criteria), it is actually trading at ~50% discount to book value. It also has reserves roughly twice the market cap. The PE is seemingly a ridiculously low multiple of 3. It also has a low net gearing of 8%. Now these factors may imply that HL land is undervalued. However if you look at the underlying PE, not considering property revaluation, it rises to 17. Couple that with a sub-10% return on equity and I would say from an earnings standpoint, it may be fairly valued. To me, it seems to be one of those stable huge moat companies. So you’ll have to weigh the factors, but if it gets liquidated today (which it wouldn’t), you’ll make out like a bandit.

      Disclosure: I am long HKL.

  1. Hi, interesting article, why do we take “investment properties” in CNAV2 calculation but not the property/plant/equipment ?


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