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Can You Buy A Dollar For Sixty Cents With This Blue Chip?

Here’s a simple thought experiment. What would happen if I were to suddenly offer legitimate $1 bills for 60 cents? My guess is, I’ll be flooded with orders while some might question my sanity for doing so.

But the thing is, the stock market can be a place where such insanity is on full-display at times. And for investors who believe in the accounting value of the assets of commercial property owner and residential property developer Hongkong Land Holdings (SGX: H78), now might be a case of the market offering up a dollar for sixty cents.

According to the company’s current financials, it has a tangible book value (i.e. the theoretical ‘left-over’ value that a company has after subtracting all liabilities from its physical assets) of US$11.42. Compared to its current share price of US$6.80, which is 40% below its tangible book value, Hongkong Land Holdings could perhaps be said to be a dollar that’s being sold for only sixty cents today.

The bread and butter of Hongkong Land

The company, which is 50%-owned by fellow Straits Times Index (SGX: ^STI) component Jardine Strategic Holdings (SGX: J37), has had a big hand to play in transforming the 中環 (pronounced “Cheung Wan”, otherwise known as Central) part of Hong Kong into the territory’s premier Central Business District today. Honkong Land Holdings currently owns 12 prime commercial and retail properties in the Central region that are worth a combined US$22.3 billion as of the end of 2013.

In Singapore, its other core market, it owns (either wholly or through joint-ventures) three pieces of prime commercial and retail real estate in the CBD area here. These are One Raffles Link, One Raffles Quay, and Marina Bay Financial Centre and they are collectively valued at US$3.60 billion.

Elsewhere in Asia, the company also has interests in commercial and retail properties in key cities that include Jakarta in Indonesia, Hanoi in Vietnam, Bangkok in Thailand, Phnom Penh in Cambodia, and Beijing in China. Together, these properties contributed US$1.85 billion to the company’s assets.

All the commercial and retail properties mentioned above provide stability to Hongkong Land’s earnings as they could appreciate in value over the long-term while providing growing rental income.

That just about sums up the company’s commercial and retail property business operations. Its other arm deals with property trading – i.e. the development and sale of “luxury and high-quality” residential properties. Within the residential property segment, Hongkong Land Holdings is active in Hong Kong, Macau, China (especially in the city of Chongqing), Singapore, Indonesia, and the Philippines. Singapore remains its most important residential property market, accounting for 1/3 and 2/3 of the segment’s underlying profit for 2012 and 2013 respectively.

All told, for 2013, the residential property arm of Hongkong Land Holdings accounted for 11% of the company’s gross assets (excluding cash) of US$29.92 billion and 44% of the company’s underlying profit of US$935 million.

Historical growth

Over the past 10 years since 2003, the company’s tangible book value per share has grown almost seven-fold from US$1.64 to US$11.42 in 2013. This translates into an annual compounded growth rate of 21.4%.

Much of the company’s asset growth was buoyed by its investments in the Central area of Hong Kong, where its portfolio of commercial properties have managed to command an average office effective rent that had grown from US$4.04 per square feet per month in 2004 to US$12.70 in 2013. Interestingly, rentals at Hongkong Land Holdings’ Central commercial properties proved remarkably resilient even during the 2007-2009 Global Financial Crisis as it grew from US$6.33 in 2007 to S$8.52 in 2008 and then increased to US$10.84 in 2009.

Cyclical valuation

But despite the steady growth in Hongkong Land Holding’s tangible book value per share, the premium awarded by the market for the company’s net tangible assets have fluctuated wildly, as seen in the chart below.

Source: S&P Capital IQ

If Hongkong Land Holdings can continue growing its tangible book value in the years ahead while the ratio of its price to tangible book value starts moving closer to its long-term average over the past 10 years, this blue chip real estate outfit might just really be a dollar that’s selling for sixty cents or less. But, that can be a real big “if”.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.