Friday, April 29, 2016

Ho Bee Land - Q1 FY16 Results Review

Ho Bee announced their first quarter results recently for FY16, so I thought of covering a few thoughts here.

The company reported a 19.9% increase in the rental income year on year from $31m to $37m due to contributions from the 3 new acquisitions in London in the 2nd half of 2015 - mainly 39 Victoria Street, 110 Park Street  and Apollo / Lunar House at Croydon. With exception to 110 Park Street which are currently let out at an occupancy of 82% due to some upgrading works, the rest are all operationally fully occupied.

These properties are currently yielding a cap rate of around 4.5% and 5.35% respectively but with debt this looks much higher. These rents are also expected to be highly reversionary once they entered the re-negotiate agreement spectrum.

When I bought the shares of the company, one of the main lookout is on these rental income because these are recurring in nature and cashflow positive to the company (I'll explain why the rest are not later below) so this forms the expectation base to which how much dividends I should be expecting from the company. I don't know if people look at cashflow anymore these days for developers. They seem to be more fixated on the traditional method of discount to book value.

The company managed to book a seemingly impressive 59.7% net profit year on year to round up the first quarter but do note that most of these gains are not cashflow positive. I don't know if anyone notices this point anymore these days.

Take the loss on foreign exchange for instance, these are mostly due to the weakening of the Pounds sterling and RMB Yuan, which has a reporting impact on Hobee's performance since they were done in SGD. If you notice the portion on "Other Comprehensive Income", you will also notice how much currency translation losses the company is suffering from as compared to last year. These will not have a bearing on the cashflow but will impact the book value of the company. If you are buying hoping that the book value of the company will increase, you will be disappointed to know that it has dropped this quarter.

The other point which stands out from the results is the good performance from the associates. The company reported a $9.3m share of profits from associate. These was contributed by the the joint venture project they did in Xujing, Shanghai which will be completed by 2016. So far, 50% of the total 1,470 units have been sold and recognized on the book. Ho Bee owned 40% interest of this JV project so we can expect approximately another $9m upon completion assuming fully sold.

Do note that these share of profits from associates are also not cashflow positive for the company for now due to the application of the equity method reporting requirement based on IAS 28, unless they chose to divest their interest in these JV one day. Under the equity method, an initial recognition on the investment in an associate or a joint venture is recognized at cost, and the carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the investee. In other words, these will go directly to increase the book value of the company instead of being cashflow positive in nature. Again, these doesn't mean much but if you are someone who wants to scrutinize on their cashflow this will be something you need to note.

The company will have some further developments from their Tangshan and Zhuhai project as well as completion of their Australian project - Rhapsody in Gold Coast and Pearl in Melbourne, but also do note that this will be how they will be similarly recognized in the book.

JV @ Xujing, Shanghai

Final Thoughts

My longer term outlook for dividends of 10 cents/share from the rental income still remain a possibility for now, though it is looking unlikely for this year given how much they need to fork out cash for working capital and completion of development costs. As such, I am expecting the company to keep their dividends at 7 cents/share for FY16, with a possibility of a much higher on in the later stages where working capital are more relaxed.

*Vested with 22,000 shares of Ho Bee as of writing.

Thursday, April 28, 2016

AGM Review - Kingsmen Creative Ltd

I made my way down today to Changi South lane where Kingsmen HQ was located. It was my first time attending the company's AGM and getting to know the management personally so it was a very good impression after listening to them speak about the company's vision towards the future. The management was very shareholder's friendly as they tried to shake and engage the shareholders before the meeting convenes.

There were also a few familiar faces of friends and fellow bloggers around so I was glad to have met them during the event as well and have a small chat afterwards.

"Humpty Dumpty sat on the wall..."

Management and Independent Directors

Andrew Cheng, the upcoming new CEO of Kingsmen, started by giving a presentation diving into what they did for 2015 and what is the prospect of clients they managed to clinch or are looking to venture a project with in the future as potential clients. I really like how he presented because for all the other AGMs I attended, the presentation was straight from the financial presentation which was rather dull. But this was different. There was a lot of glimpse sneak peak into the future and strategies the company will be undertaking. He also showed an artist impression of their new HQ (800m away from expo) which will be ready in the second half of 2018. Brilliant presentation.

Kidzania Singapore
Volkswagen Motor Show @ Seoul

Yata, Hongkong

Pangyo Department Store, Korea

Artist impression of the new HQ to be ready in 2018

1.) There was a shareholder who was concerned about the headwinds and outlook of the company going into 2016-2017 and hence he raised this up the management.

The management conceded that the general economy outlook will be tough but that does not mean they will fade away with the slowdown. Contrary, it is often during these periods of uncertainty that the company manage to strive forward and become bigger. For instance, with the retail luxury and fast fashion sector slowing down, the management will not be idle but instead offer clients solutions in alternative marketing that will help boost the experience of the customers, potentially turning traffic into sales and get a better return on every dollar they spent on their marketing with Kingsmen. Even as more retails are going into e-commerce, there will be a segment of customers which will prefer coming into stores and this is where Kingsmen is able to offer in terms of building not just design but also experiential platforms.

The management also offers potential partnership and strategic move into the extended segmentation of retail - such as pop-up stores and airport development (travel retail).

Pop-up stores concept

Travel Retail concept

2.) A shareholder raised a question about the cash the company is carrying on their balance sheet and would like to know to which extent does it become excessive at some point.

It is always going to be difficult putting a number or formula to this because where cash is concerned, it is always the more the better as it can work out as a call option that the company can utilize during periods of uncertainty and bargains.

The management responded by clarifying the nature of the industry and work they are in puts them in a situation where they will need cash to tender for the project and buffer for working capital as and when required.

In addition, the company has a total of 19 offices in different locations and each geographical areas will offer opportunities in the different segments and hence it is crucial that the cash be kept in the books of each of the entity in case an opportunity arise.

Apart from it, the company would also require cash to build their upcoming HQ which will commence anytime now until 2018. The construction work alone would require approximately $20m  to $30m spanning over 2 years.

The management do however agree that should they feel there are excess cash at the end of the day, they would return to shareholders in the form of higher dividends, but the likelihood should be low because there will always be business and opportunities for the company to grow.

Disneyland @ Shanghai

3.) There was a shareholder who asked regarding the longer term outlook of the company.

The management responded by saying that ideally they would like to see topline growth to double in the next 6 to 8 years, which is highly possible given the opportunities the market is offering.

4.) Another shareholder asked about how they designed theme park as several of them, e.g Universal Studio, Legoland, Disneyland has their own preferred design that they would like to have.

The management replied by confirming that theme parks usually have their own IP concept in mind that they'd like to build, but they are often looking for vendors who can offer good reliability in execution, design and built with attention to details and the choice is often clear who has the expertise to do so in such a niche market.

Legoland @ Florida, USA

5.) The same shareholder asked about whether the company taps on the association the Board might have on Singapore related, e.g Capitaland or CDL has hotels business.

At the moment, the company is not looking into these segments so it is not under their radar. Having said that, airport development such as the new Jewel @ Changi Airport are those they are looking out for which was just completed last week.

Project Jewel @ Changi Airport

Overall, it was a good session and this is my first time attending the company's meeting in their HQ.

I think with the management's honest take on their strategies and their assurance, I will look forward to the growing business and confident the management's ability to bring them to greater heights in the future.

Vested with 80,000 shares as of writing.

Tuesday, April 26, 2016

How Do You Position Yourself For A Sideway Market?

The STI market has not been in ferocious mood since last October when we witnessed a sharp drop from a high of 3,521 to a recent low of 2,520. Since then, the market have recovered slightly - moving up and down cautiously and consolidating without any sort of seriousness to show a longer uptrend or downtrend. 

While these movement in the market has lasted only a few months, we can sense a general cautiousness in the sentiments and at times frustrations because there isn't any particular indications where the market is heading. This can be seen from the fact that there are a rush towards the bond yield in the market and hence pushing yields lower.

As investors, it is very important that we stick to our strategies regardless of how the market reacts. Often, people forget that the market is irrational and may suddenly offers compelling opportunities for investors who are prepared to pounce on.

So how do I position myself during these periods of sideway market?

The first thing I would do is to review my portfolio asset allocation.

In the bigger scheme of things and to make things convenient, I would only consider liquid assets - cash and equities allocation. This means that I would exclude all other assets such as housing, CPF, gold, or anything else that is not liquid.

Cash is an important component of my strategy and I would always try to keep some cash allocation available because you never know what the market might surprise you with. Having said that, I have been allocating more cash into buying more equity recently as first I believe the market is relatively cheap and second my cashflow conditions have improved for the better. This allows me to buy companies at regular interval without needing to time the market as the latter makes it very difficult to predict, especially since we can be subjected to hindsight bias from the recent low in Feb. By doing this, I am trying to take the psychological aspect (hardest aspect of investing) out of the way.

A sideway market is also a mental test to one's patience because often you have to do things you are not comfortable with in order to get better. Sometimes, this can mean doing nothing at all for a longer period of time while observing the market. If you look at my monthly transactions each month, you'd see that I seldom have any zero transaction in a given month. Having said that, I would not buy or accumulate for the sake of doing so if I knew that the company is overvalued. I think that would be very silly.

Last but not least, I'll also continue to review the position I have, keeping tabs on any latest development while keeping fresh information abreast. This includes browsing their daily announcement, analyzing their quarterly announcement and attending the annual general meeting if schedule permits. I think this is what most investors are already doing so this shouldn't be anything new.

What about you? How do you position yourself during these period of time?

Tuesday, April 19, 2016

Recent Action - Ireit Global + AGM Review

I attended the Ireit AGM this morning which was held at Suntec convention hall which I will summarized below based on the meeting and my conversation with the CIO, Mrs. Jeremy thereafter (2nd pic from the left) 

After the meeting was concluded, I also took the chance to accumulate Ireit shares by adding them for 30,000 shares at a price of $0.70 this evening. As a result of this purchase, this has now become my core holdings to make it into the top 4.

There was not too much crowd and it’s understandable given the small size of the shareholders, so the whole session was rather cosy. As usual, the management started out with the usual presentation and thereafter open the questions to the floor for further clarifications.

Questions & Answers

1.) The first question was pertaining to the concentration risk which DT Telecom made up the majority of the tenant profile. 

This isn't new as I have heard from many fellow investors myself that this is one of the risks highlighted. The management asserted that DT Telecom is a crème of the lot bluechip tenant which comes with little risk of defaulting but conceded that they are doing something to allay the investors’ concern about it. For instance, the recent Berlin acquisition reduces the tenant profile for DT Telecom from 80% to 50% at the moment. They will continue to monitor this concentration risk which is on top of investor’s concern. 

2.) Another investor asked about the potential acquisition in 2016 which the management is upbeat about concluding the deal. I also asked the CIO thereafter about the interesting project she is working on at the moment.

The management conceded that with the portfolio yield at around 9%, it is not easy to find an accretive acquisition where most of the property yield for grade A assets in Europe are at around 5.5%. The recent Berlin acquisition was concluded at 7.1% yield, which is amazing but it’s unlikely they can repeat such a deal for a grade A asset at current environment. The Europe negative interest rate environment has made the property assets an attractive purchase and as such there are yield compression everywhere. 

Also, the management conceded that given their gearing status and 100% distributable income policy, it is likely that they would need to turn to placement or rights issue should they decide to fund any potential acquisitions. 

From the way I read their words, it appears that a placement is soon on the card since they have the acquisition on the pipeline. It is quite unlikely that they will do another rights issue this year since the acquisition this year should be much smaller than the Berlin acquisition and hence a placement plus debt would suffice at this juncture. In any case, as Reit investor, we just have to be prepared when it comes. 

3.) There was also another investor who asked if the management is looking to venture into other parts of Europe such as Bulgaria or Portugal market. 

The management is looking for opportunities outside of Germany but Bulgaria and Portugal are not in the pipeline because the market is small. Based on my discussion after with the CIO, it appears further that they may go into UK or Netherlands market because the cost of debt structure is what the management does like. For instance, in Germany, there is a type of bond called “Pfandbriefe” which is generally issued by German mortgage banks that is collateralized for property use. The cost of debt is currently less than 2% for the Pfandbriefe while the same in UK would cost 2.5% and in Netherlands it would cost 3%. So you can see where they are focusing at. The cap rate in those countries are also higher than the rest.

4.) Another investor asked about the tax structure in Germany and understand that it is high at 15.3%. 

The management explained the way the structure is built and all investors need to know at the end of the day is the effective interest rate is at less than 5%. Also, should the company divest the property in Germany, they would be subjected to capital gain tax.

5.) There was also a question on currency hedging and why the management is only locking in 1 year of currency hedging (FY2016 = EUR1: SGD 1.52).

The reason for this is because hedging is a tricky practice and there are usually costs associated with it. It is also very difficult to time the market in terms of currency and hence they are looking to only hedge for a year for now. But the management assured investors that this is one agenda that is high in their important list because it affects the DPU directly. 

6.) Last but not least, there was also question regarding the AUM targets on how much the company is going to grow in the next 3 years. 

The management explained that while they want AUM to grow at a sustainable rate, they would not make any acquisitions that would destroy shareholders’ value for the sake of increasing AUM. They then mentioned about how their performance fees are tied to the DPU increase, which is aligned with the shareholders’ interests. 

This reminds me of my previous Ascott case where their performance are directly linked to AUM and distributable income (not DPU/share) and hence you can see why they keep growing so aggressively. 

Final Thoughts

It was a very good session and I came out rather impressed from the way I spoke with them. 

Even though they are small in size, the management appears assuring that they would not destroy shareholders’ value with dilutive equity placement and if there are any, they would be accompanied with an accretive acquisitions to the DPU. 

Furthermore, I like the fact that the macro factors are in favor to the company with EU still on an aggressive quantitative easing program which will last for quite a while. This would keep the costs of debt low, which means that the spread return for the portfolio is rather significant. 

I also like their long WALE and stable blue chip tenant such as DT Telecom and Germany largest pension fund. I also learnt from the CIO that their Bonn campus are currently on fixed uplift while Berlin and the rest are on fixed + cumulative CPI linked variable. The hurdle rate is at 10% and once they hit that, they would be able to get an organic growth from their rental reversion, which should surprise on the upside. 

Vested with 62,000 shares of Ireit as of writing.

Thursday, April 14, 2016

AGM Review - Ascott Residence Trust

I had some time this morning so I thought I made a trip down to Star Vista to attend Ascott Reit AGM before going back to the office in the afternoon. I was back vested in this company only recently (Link here) after divesting years ago. 

The place was easily accessible and I arrived earlier than expected, so I toured around the Metropolis (owned by Ho Bee – vested) to look at its surroundings. It’s an amazing office building with many office crowds in the morning, perhaps there would come a day where that would be my office in the future – ok stop dreaming on. 

With a few minutes preceding the meeting, I registered and received a $20 Capita voucher in return which I immediately used it for lunch and some Korean snacks thereafter. For fellow investors who has the same voucher, do remember that it is only valid for a month, so please use them as fast as possible. I know this because I was talking to a fellow investor in the room who told me that his voucher expired when he attended last year AGM. 

Anyway, back to the meeting, I was pleasantly pleased on how much insights I managed to get from the meeting which I will summarized later below. Obviously, some of the fellow investors have voiced similar concerns that I have so I’m glad that I attended the meeting learning even more operational insights from the management. The CEO, Ronald responded pretty well for the questions being raised overall though this was clouded from the Chairman who tried to give very general answer throughout the meeting. 

In any case, I’ll try to summarize all insights I get from the AGM for interested investors, but please pardon if I’m making any mistakes from my quick scrambling on the paper. 


1.) Ronald went through the presentation highlight which was self-explanatory but there were things that caught my attention. 

Based on the presentation, the company’s portfolio have 46% (30% Master Leases and 16% Management Contract with minimum income support) which was deemed as “stable income”. This means that regardless of how the asset performs operationally, Ascott was always going to collect these fixed “stable income”. This leads to the stability of the gross income which translates into DPU for unitholders. E.g, The assets in France, Belgium and Spain are under these category so regardless of whether there are uncertainty in these places, the company is always able to receive the same stable income every year. 

In terms of the SG market geographically, the service apartment rev/par are holding up well though the slowdown is in the short stay segment which competes directly with over supply of hotels. In particular, Somerset Liang Court was the main apparent one affected. 

The management also reiterated that the 3 top currency they are hedging is GBP, EUR and JPY simply because these 3 made up more than half of the gross income. The rest are not hedge because either it was a more expensive exercise or they have a natural hedge against the currency itself through the assets and borrowings from that aspect. 

2.) The second question was pertaining to the concerns which I have also raised earlier in my post. 

In an ideal situation, the company is embarking on an aggressive plan to increase its AUM to $6B by next year. They are currently on $5.2B at the moment after their latest US acquisitions. This means that we would continue to expect the company to tap on capital funding, either in the form of debt or equity to fund these acquisitions. If we’ve taken a look across the past 5 years, while it is evident that AUM has been growing, DPU has not been growing in tandem as much as what the shareholders would like and this has upset many shareholders. 

The management defended by immediately pointing factors relating to market forces, where they are not able to control the demand and supply. However, they assured investors that every acquisition considerations are being made with an accretive return in mind. Even if they are not immediately accretive to the DPU, it will come in the form of potential increased market value where they are able to divest at a higher price later on after redevelopment. 

The Finance VP also quickly stepped in to state that there was a one off adjustment made to repay back the financing loan in 2014. Without the one off, 2015 DPU would have trend up. 

My thoughts after hearing this was that the management knows of these issues but are continuing to be adamant in meeting their AUM goals, by hook or crook. I think as a shareholder, we just need to be careful if one day they’d ask for rights issue. Given the recent placement and successful MTN issuance, I think we can rest on our shoulders for now. 

3.) There was a shareholder who asked about the importance of China’s tourism play, both inbound and outbound, and what is the company’s strategy in view of this. 

The management was apparent on the importance of China’s tourism play, which explains why China is the number one concentration in their overall portfolio with 17% assets in the country. The CEO also added that China tourism inbound within the country amounted to over 4 Billion annually while outbound there are over 5 Billion. 

In fact, as part of the strategy in acknowledging this, they have tied up a partnership with China’s local agency – “Tudra” and “Alitrip” in bringing more customers both inbound and outbound into Ascott properties for short and long term stay. The result of this implementation would only be visible fully by 2H of 2016. 

4.) There was a shareholder who asked about the competitiveness of the Singapore hospitality market and how the recent market glut has gloomed the rev/par downwards. 

The management reiterated again that their business model are mainly to focus on the extended stay segment since this is a rather untapped market than pure hospitality play where there are supply glut in the hotel sectors. Corporate traveler usually stay between 1 to 3 months and these segments make up 80-85% of the overall segments. 

The management also conceded that even though they are able to attain higher rev/par for short stay travelers, the risk is also higher because of the competition in the local market. Having said this, the management is very confident that 2016 will remain a stable year in terms of the SG market and they are already looking into an acquisitions on the Cairnhill property to be completed by 2017. 

Final Thoughts

The overall session was good and I think it gives me a better insight on what the strategy of the company is in more detail and any latest updates on their operational day to day. Given that I am buying this mainly for its income, I will continue to hold on to my holdings. 

Ascott will be releasing their results tomorrow, Friday end of business.

Saturday, April 9, 2016

"Apr 16" - SG Transactions & Portfolio Update"‏

No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
Ho Bee Land
ST Engineering
China Merchant Pacific
Fraser Centerpoint Trust
IReit Global
City Development
HK Land*
CapitaCommercial Trust
Ascott Reit
Keppel DC Reit
Nam Lee Metals
First Reit
Total SGD

This will be an early update for the month as I don’t foresee any more additions until next month where most of my companies are paying out dividends. The following coming weeks will also be busy with AGM updates and Q1 results.

The market continues the sideways consolidation as we’ve moved up and down within the range of 2750 – 2850 from the past month. I think we’ll see this range of consolidation for quite some time probably. 

This has been a good month in terms of cashflow as I received a cash injection from my variable bonus payout which I channelled it right into the market. As a result of these buying activities, my cash balance has remained rather low so I’ll have to remain discipline with keeping some of these money on the side for any good opportunities. My definition of good opportunities involve at least a 10% ROIC annualized including dividend. Hopefully, I’ll be able to spot more of those. There will also be dividends pouring in from next month so I’ll have to wait until then to make the next purchase. 

From the last update, I’ve made a couple of transactions which I have blogged them about it in detail.

First, I made a purchase on Ascott Reit for 10,000 shares at a price of $1.065 which I have blogged here. Since I have bought them before the placement was concluded, I am also entitled to the advance distribution which I am entitled of at 1.5 cents/share paid out in April. As mentioned in my post, I am purchasing this company for income play so I am not expecting any upwards capital appreciation from the purchase other than the dividend of around 7.6%. Hopefully, they’ll prove me wrong so I can achieve a higher returns. 

The AGM will be held on the 14th April at 10am but I’m still deciding to see if I should attend them.

I also used the recent market weakness to accumulate my position in Kingsmen further which I purchased at a price of $0.61 for 23,000 shares. If you are interested, you can view my post here. As mentioned in my post, the share price has been battered pretty badly over the last 6 months and any disappointments in their FY15 earnings seemed to have been factored in. The near term outlook is no anywhere promising but the longer term aspect and moat are still standing strong. I think the market has overly been pessimistic about discounting these factors. 

The company has recently announced change in their top management personnel so we might see some positive synergy coming in from the new CEO, who has previously held the position of the company’s COO. The share price has also recently surged 10% from when I last purchased so there seems to be more interested investors on this company now. 

Finally, I also made my maiden purchase in Hongkong Land for 1,500 shares at a price of US$5.95. As mentioned in my post, my intention here is to monitor their commercial recurring income which I believe has provided sufficient safety for any downside. The company is in a very comfortable position to continue paying 19 cents/share dividend out of their recurring cashflow so anything from here is a bonus. 

My portfolio has been consolidating within range since last year and the last 2 months performance have been great because I've been able to take advantage of the bear market when STI went down to 2500s. This is why I love downmarket because opportunities are aplenty and you can get more value out of your money than when the market is near the bull. Many of those names which I have bought during the recent bottom has performed well, notably Ho Bee, CDL, HK Land (Hey, who says developers are lousy investment!!??), ST Engineering, OCBC and Kingsmen.

The portfolio has subsequently benefited from the previous month of $371,890 in Mar to $400,314 in Apr (+7.6% month on month; +30.4% year on year). With the market still consolidating sideways at this point, it will be a good time to allow investors to raise cash while waiting to see if there will be a sell in May and go away tantrum.

How has your portfolio been in Apr?

Tuesday, April 5, 2016

Selling The Idea of Passive Income

This is a true story.

I was lunching with my colleagues the past week and midway we had a conversation about the topic on finance and the stuff I was writing in my blog every other day which they saw appear on their facebook news feed.

The conversation goes something like this:

Colleague A: "Hey, I saw you were blogging about passive income in your blog and all those financial jargons you researched about on companies. What was all that about ?"

Since they are not accounting or financially trained, I gave them a brief explanation on what investing in equities mean and how I was trying to build up passive income from the companies I own. I also tried to explain to them that investing means owning a part of the business which we think will have great potential to grow in the future. In other words, it is not a mere paper trade we are talking about but a piece of real business.

At this point, I get the feeling that they are somewhat a bit lost so I tried to pull the topic back to make the explanation easier for them and ultimately tried to get them interested in investing.

I explained about how when we invest our money in a company, we become a shareholder and will receive profit sharing scheme in the form of dividends when the company makes profit at the end of the year. 

I also explained to them the risk of investing and making money is not to be taken for granted. In fact, a lot of hard work has to be taken before hand to ensure our personal finance (income > expenses) are taken care of before we invest our hard earned money in companies which we then need to research and hope that our thesis would prove to be right before we can see the fruits of our labor.

At this point, they seemed disinterested because it all appears too difficult and dry to absorb.

Sensing the atmosphere, I tried to lighten the atmosphere by explaining what passive income can do for them.

Me: "When you had sufficient passive income to cover your expenses, it means that you have achieved financial freedom. You can shake your leg at home, sleep while people are working or read a book by the beach and money will still continue to flow in. Heck, you can even quit your damned job and still receive income every month"

Their eyes start to lighten up a bit.

Colleague B: "Wow, that is really cool. I've never heard that there are such thing in this world. Can you please let us know how we can do that ?"

Colleague A: " YES, please teach us!!! I can't wait to quit my job after that. How do we do that "?

Me: "(in my mind) ........... Didn't I just tell them at the beginning how to do it ?"

Now, we know why there are so many people who fell to scams on courses that does marketing on how you can build passive income easily and kiss your crappy job goodbye after. What appeals to these people seemed to be the easy solution instead of the process of what that might work or not work for them.

The next time you read about passive income story and if the related article mentioned anything about beach, hairy leg and easy peasy or sound a little cheesy, be wary of it. You might just be your own next downfall.

Sunday, April 3, 2016

Recent Action - Hongkong Land

This will be a short update to the latest portfolio as I've recently added 1,500 shares of HK Land at a price of US$5.95.

For the benefit of those who had never of HK Land, they are one of the top 5 STI constituent in terms of market capitalization and a conglomerate which develops and manages commercial and residential properties across the globe - China, Singapore, Indonesia, Hongkong. Since they are a conglomerate with various businesses in many different countries, it is very difficult to value each of them accordingly, so I will be using a similar strategy to how I similarly did for Ho Bee recently.

In my last article (here), I've highlighted the main difference in the business model between Reits and developers. Obviously, we've seen very different fate in the market for Reits and developers over the recent years with many investors preferring Reits in their portfolio for income play. This has resulted in surged valuations from Reits which makes it a less compelling play than developers.

From a valuation stand point, I remain firm on my belief that they are an overlooked, unloved and compelling valuations that no one wants to touch. When they are unpopular, this is when I think they are worth a look.

I've tabulated the company's performance over the last 8 years and there are something which I am particularly looking out for.

In the table above, I have separated the company's earnings into the Total EPS (includes fair value change), Underlying EPS (exclude fair value change) and Recurring EPS (only rental income portion) and their relevant earnings yield. Since sales of their residential are more lumpy in nature, I am focusing more on their recurring income from their commercial properties. This is rather similar to how we have been trained to value Reits usually based on their recurring income.

If we take a look at the recurring income (green highlighted), which mainly focuses on the rental income and the recurring shares of profits from associates, we can see a positive uptrend in the last 8 years. The only time that it has seriously been jeopardized when it was in 2008 during the gfc when the economy was so bad. Back then, we also see an impairment being done to their properties for up to US$10m, but in all fairness it was minimal at best.

The company continues to trade at compelling valuations at price to book value of below 0.50x and an enticing dividend yield of around 3.2%. If this was structured like a Reit, then the company would be able to distribute dividends for as much as 6.4%, a very decent levered yield if you are considering the gearing they have (at 8%) compared to reits like CCT with dividend yield of 6.2% (gearing of 28%), FCOT with dividend yield of 7.2% (gearing of 38%) or Keppel Reit with dividend yield of 7.7% (gearing of 41%).

Most importantly, based on the company's recurring earnings yield, they would be more than comfortable to pay out the 19 cents dividends they have paid in the last 2 years.

The share price has recently weakened and I think for as long as their fundamentals remain solid as they are, it would be an easier decision for me to accumulate should the share price heads south.

Vested with 1,500 shares as of writing.