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This Blue Chip Has Gained More Than 20% in a Year – But It Might Still Be a Bargain

For anyone compiling a list of the best performing blue chips (shares which are part of the Straits Times Index (SGX: ^STI), Singapore’s market barometer) over the past 12 months, Hongkong Land Holdings Limited (SGX: H78) will likely be near the top of the list; since 8 May 2014, shares of Hongkong Land have gained some 21% from S$6.64 to S$8.03.

But while Hongkong Land has already delivered some strong returns, there’re signs that the share may still be a bargain.

The makings of a bargain

At its current price, Hongkong Land’s valued at just 0.68 times its book value (total assets minus total liabilities). The company’s business lies predominantly in the ownership of prime commercial properties in Hong Kong and Singapore. As such, its book value can be a good proxy for its real underlying economic value. With its price-to-book (PB) ratio of just 0.68, investors can be said to be paying less than 70 cents for a dollar of value.

But that’s not all. We can take things one step further and compare Hongkong Land’s current valuation with its long-term average.

Hongkong Land's price-to-book (PB) ratio from 1 January 2005 to 8 May 2015 (2)

Source: S&P Capital IQ

As you can see in the chart above, Hongkong Land’s current PB ratio of 0.68 is a fair bit lower than its long-term average PB ratio (from January 2005 to today) of 0.82. This sets up the potential for a reversion to the mean to occur in terms of the company’s valuation.

Reversion to the mean is an important concept for bargain hunters. Investor Dean Williams describes it as the idea “that something usually happens to keep both good news and bad news from going on forever.” In investing, it can manifest itself in how below-average valuations tend to be followed by above-average results – that is something which has the chance of happening with Hongkong Land.

A Fool’s take

Despite having enjoyed a strong jump in price of more than 20% over the past 12 months, shares of Hongkong Land still carry an attractive valuation.

But while a low valuation can be an important part of the recipe for great returns, there are still important considerations to think about for Hongkong Land before any investing decision can be made.

One particularly crucial question to mull over would be: Are the company’s assets on its balance sheet fairly valued? If its properties carry inflated values, the low valuation we’re seeing now may just turn out to be a mirage.

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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.