Let me be upfront about this: Sun Hung Kai Properties stocks once again look attractive to me.
Sun Hung Kai Properties Limited (0016.HK) is listed on the Hong Kong Stock Exchange.
I have bought and sold SHKP shares before. (read here and here) To recall back, I bought SHK PPT shares in 2 May 2012 (when the price was around HKD 88) and sold the shares on 1 June 2015 (when the price was 131). When I bought the shares in May 2012, the prices then were depressed due to the saga of the Corruption trial involving Thomas and Raymond Kwok, the billionaire co-chairmen of Sun Hung Kai Properties Ltd (read here).
I didn’t think much about the company ever since I sold the shares, and was happy I made a profit of 71%. After all, I am not a big fan of cyclical stocks, and am more into growth stocks (probably due to my terrible track record with cyclical stocks).
I still held on to the scrip dividend shares of SHKP (well, that is probably one of the reason why I occasionally check the stock prices of SHKP).
In recent times, I glanced through the stock price of the company and was surprised at the low price now. I knew the China market was frothy then (in June 2015) but did not expect the prices now to drop below my initial buying price in May 2012 (and so soon).
So here we are. The share prices of Hong Kong Property stocks falling faster than the property prices (see below).
Investors are pulling money out of the city amid concern that it will be squeezed between China’s economic slowdown and rising interest rates in the U.S., which drive up borrowing costs in Hong Kong through the currency peg.
Hong Kong Property Stock Gloom Seen Deepening in Options Market (read here)
Ratings agency says Hong Kong developers can withstand 30 pct price drop (read here)
For some, with the sell-off comes opportunities. And with Sun Hung Kai Properties, we are talking about a company that is reputed (as per BBC News) to be the second most valuable real estate company in the world.
T. Rowe Price Sees Value in Asia Stocks Amid Selloff (read here)
For many of HK Property Stocks, yields are all north of 4% and it’s not hard to find 7% or 8%. Forward Annual Dividend Yield of Sun Hun Kai Properties is 4.15%. In addition, they’re trading at 50% to 60% discount to net asset values.
The Tangible Book Value per share (also know as Net Asset Value) for Sun Hung Kai Properties as shown in Wall Street Journal for the latest fiscal year end is HKD 155.40. The share price of SHKP on 16 Feb 2016 is HKD 84.10. Hence the share price is at a 46% discount to the net asset value.
I came across this article by Big Fat Purse (see below):
Analysing Stocks With Conservative Net Asset Value (CNAV) Strategy (read here)
In the article (and an earlier article mentioned in the post), the author created a CNAV (Conservative Net Asset Value) strategy – investing in stocks below current valuation and not future valuation.
According to the author: this is to have a quantitative approach because we cannot trust ourselves. We are bias – we see what we want to see and a qualitative method allows our biases to work their full effect on us.
He used the example of Hongkong Land.
In this case, we will adopt the CNAV strategy for Sun Hung Kai Properties Limited, using their latest Annual Report for the year ended 30 June 2015 (read here).
The below are items we would count as Assets: and similar to Big Fat Purse method, let’s be conservative and only consider properties and cash, and exclude other assets which are less valuable and stable:
- Investment properties: HKD 309,205 m (main bulk of their assets) – Pg 152
- Bank Balances: HKD 32,561m (cash) – Pg 167
- Ignore Tangible fixed assets. Also known as Property, Plant & Equipment. Usually companies would give a break down but not in this report, so we do not know what constitute properties or furniture)
- Exclude properties for sale (these are development units for sale. We exclude it first and assume these are not sold)
- Sum all these assets after discount, Conservative Assets = HKD341,766m
These are items we count as Total Liabilities (most reports would state the Total Liabilities as a line item – did not see in report). We have to add the non-current liabilities together too.
- Current liabilities: HKD 57,733m – Pg 152
- Non-current liabilities: HKD 89,559m – Pg 152
- Total Liabilities = Current Liabilities + Non-current Liabilities = HKD147,292m
Sum Conservative Assets and minus Total Liabilities to get CNAV = HKD 194,474m
Look to Pg 186 to get the number of shares = 2,876 m
Divide CNAV by the number of shares, we will have CNAV per share = HKD 67.6
At the time of writing, Sun Hung Kai Properties is trading at HKD 84.10 (both report and share price are in HKD so no conversion is required), there is no discount to CNAV. In fact, the share price is around 24% higher than the CNAV.
In addition to the CNAV, Big Fat Purse has a step two test which they termed as POF score
Profitability – The company should be making profits with its assets. As shown in Yahoo Finance, Return on Assets is 2.39%.
Operating Efficiency – A positive operating cashflow will ensure the company is not bleeding cash while running its business. As shown in Yahoo Finance, Total Cash Flow From Operating Activities is HKD 13,243 m for 30 Jun, 2015.
Financial Position – The gearing of the company. This is tricky since developers normally have debts. However as shown in Yahoo Finance, current ratio is 3.54. Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses. 3.54 seems a bit excessive, but SHKP has sufficient resources to pay its debts over the next 12 months.
So in spite of the high share price in relation to the CNAV, POF score is relatively good.
However, as mentioned in the Big Fat Purse article, there are many doubts and concern with this method. One of which is: “The property value is based on current market valuation, which is considered ‘high’, what if the property market comes down?”
And as per the earlier article (read here): Bocom International sees property values sinking as much as 30 percent this year, while UBS AG says that may happen by the end of 2017.
So for all we know NAV (and CNAV for this matter) will drop even lower, and a lower share price is required to achieve the same discount to NAV/CNAV. Eg. A moving target. In fact in this article dated 17 March 2015, when the share price of SHKP was HKD 115.90, it mentioned that ” Jeff Yau, an analyst at DBS Group Research, thinks the shares look attractive, trading for a 40% discount to his net asset value estimate of HKD183.”
Sun Hung Kai Properties stocks are considered as cyclical stocks.
Cyclicals, in comparison to Growth stocks, respond more violently to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom.
Sun Hung Kai Full-Year Earnings Fall 7.4% on Fewer Projects (read here)
As per the article above: “Net income from property sales in Hong Kong slumped 40 percent to HK$4.6 billion, contributing to a 30 percent decline in profit from sales in all regions to HK$7.3 billion, according to the filing. Profit from sales in mainland China fell 5 percent.”
Peter Lynch who made many investments in cyclical companies, mentioned that cyclical investors need to think differently. He said that with most stocks, a low PE ratio is a good thing, but not with cyclicals. Buy high, sell low. (read here)
Another article mention that investing base on P/E for cyclical stocks is tricky (read here): Investing based on a low price-to-book value is a much smarter strategy. When a company is priced below book value, investors are saying that its future is so bad that the firm isn’t even worth the money that management has spent on assets to conduct business. Buying at a price below NCAV allows you to achieve significantly higher returns than your peers when the industry eventually turns, while taking far less risk. The approach is to buy cyclical NCAV stocks when the industry is deeply depressed and then to sell those stocks shortly after they reach their average earning potential.
Let’s take a look at Sun Hung Kai Properties PE and Price to Book values (data from Morningstar).
It is obvious that both PE and Price to Book values are trending downwards. The Price to Book value is the lowest in over 10 years at around 0.53!
In this article, it mentioned the following:
“Investment guru Jim Slater mentioned that it’s best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.”
Now I can’t help wondering, the US Fed just raised the interest rates some time back and interest rates around the world has started to rise.
However, on the other hand, we have other developed countries having negative interest rates (read here). China has been lowering interest rates for the past year (divergence from the US policy) – read here. Hmm…
Next in the article it mentioned: “Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering.”
Tycoons buy as shares fall (read here)
In the article above (dated 15 Feb 2016), it states that Henderson Land (0012) chairman Lee Shau-kee and Kwong Siu-hing , the matriarch of the family controlling Sun Hung Kai Properties (0016), have spent hundreds of millions of dollars to increase their stock holdings in the past few months. So what does that tell you? Well, then again a few hundreds millions could be just the tip of the iceberg for them.
Well, there are many concerns, and share prices of SHKP may drop even further. However I feel that it is a good time to start picking up shares of this company.
Oh by the way, beside shares of Sun Hung Kai Properties Limited, I have also recently bought shares of Riverstone Holdings Ltd and Super Group Ltd.
Hope it is once again a Good Time to buy these stocks. Shall leave you with this song.