The Three Numbers That Constrain Hongkong Land Holdings Limited

If you have great assets, why would you want to sell them? That has been the underlying strategy for Hongkong Land (SGX: H78), which still owns the Praya it bought in 1889. The Praya or promenade in Hong Kong is now more commonly known as Central. It is the foundation of Hongkong Land’s property portfolio.

Hongkong Land’s conservative buy-and-hold business model has allowed it to generate a consistently high Net Income Margin, in much the same way that a Real Estate Investment Trust might do. It sweats its assets over the long term rather than flog it to the highest bigger at the first available opportunity.

Over the last 12 months, Net Income Margin has been 74%. It implies that the property developer has delivered S$74 of profit for every S$100 of revenue generated. By comparison, the Net Income Margin for City Developments Limited (SGX: C09) and CapitaLand Limited (SGX: C31), which are seen as more traditional property developers, have been 19% and 24% respectively.

As an asset-heavy company, Hongkong Land is not expected to be hugely efficient. And it’s not. Last year, the company generated S$1.9b of revenues on the S$32b of assets that it owns. In the last 12 months, it only generated S$1.5b of sales on its S$32.9b of assets. That equates to an Asset Turnover of 0.05. By comparison, the Asset Turnover for the 30 companies that make up the Straits Times Index (SGX: ^STI) is some 10 times higher.

Interestingly, Hongkong Land is not massively leveraged. That could be due, in part, to the lessons that it learnt in the 1980s. At that time, the then heavily-leveraged company suffered badly from the Hong Kong property collapse. Today, Hongkong Land has Net Debt of S$4b compared to nearly S$34b of shareholder equity. Its Leverage Ratio of 1.2 is considerably lower than its peers and also the Leverage Ratio of 1.6 for Singapore’s blue chips.

Hongkong Land is not outstanding in terms of its Return on Equity. Its RoE is only about half that of the Straits Times Index. But by deconstructing the company’s Return on Equity, it is easy to see why it is constrained. The RoE of 4.5% is the product of a high Net Income Margin of 74.5%; a low Asset Turnover of 0.05 and a conservative Leverage Ratio of 1.2.

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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.