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Would Warren Buffett Buy Hongkong Land Holdings Limited?

HklandlogoAs unlikely as it might sound, Warren Buffett is not against investing in bricks and mortar.

However, he strongly advises against buying real estate for speculation purposes. He urges investors to think carefully about what the physical asset is capable of producing rather than where we believe property prices are going. In his view, focussing on the former is investing, while an obsession of the latter is speculation.

So what would Warren Buffett make of Hongkong Land Holdings Limited (SGX: H78)?

Hongkong Land is one of Asia’s leading property developers. It has a market value of around S$20b, which makes it a larger than CapitaLand (SGX: C31) and City Developments (SGX: C09).

Hongkong Land is profitable. That said, the property developer’s bottom-line profits can be disproportionately affected by changes in the fair value of its properties. Over the last five years, Hongkong Land’s Net Income has fluctuated between S$1.5b and S$6b.

Interestingly, the company’s dividends tend to be remarkably stable. Since 2008, it has paid around S$0.21 a share in dividends every year. This only represents about a third of profits, which suggests that the company retains a hefty chunk of earnings for growing the business. The current dividend yield is an unspectacular 2.8%.

Hongkong Land is a capital intensive business. Consequently, its efficiency as measured by its Asset Turnover is not especially high. It only generates $5.70 for every $100 of asset employed in the business. By comparison, the average for the Singapore market is some ten times higher.

The property developer, unsurprisingly, uses debt. That said, its Leverage ratio of 1.2 is not worryingly high. That could help explain its relatively low share price volatility. Hongkong Land is also trading at a discount to its book value. At the current share price of US$6.88, Hongkong Land is valued at 60% of its Net Assets of S$33b.

There are lots to like about Hongkong Land. There are a few negatives to bear in mind too. As to what Warren Buffett might make of the company, the heavy discount to book could be a persuasive deal-clincher.

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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 Director David Kuo doesn’t own shares in any companies mentioned.