Hongkong Land Holdings Ltd (SGX: H78) recently held its earnings call for the first half of 2019. Hongkong Land’s management team provided useful insights on topics such as the impact of the Hong Kong protests and Singapore’s residential market supply overhang. Here, I have compiled a list of things that investors need to know.
On rental rates in Hong Kong’s central office district amid the ongoing trade war
Analysts are justifiably worried that the ongoing trade war between the US and China will impact Hong Kong’s central office rental rates. This is especially concerning for Hongkong Land whose investment portfolio consists predominantly of assets in Hong Kong’s central office district.
Chief executive, Robert Wong said that Hongkong Land has prepared itself for a weakening office rental rates by increasing the length of its leases.
The weighted average lease terms are now 4.6 years, compared to four years at the end of last year. On top of that, only 10% and 20% of its leases are due for rent review in the second half of 2019 and 2020 respectively. Wong also said that almost half of these have been “dealt” with and is confident that Hongkong Land will have a stable rental income from its Hong Kong central office portfolio over the next 18 months.
On its dividend policy
Hongkong Land declared a dividend of six cents for the first half of 2019, unchanged from last year. Chief financial officer, Simon Dixon, said:
“We like a dividend that is consistent and that grows over time in line with our earnings.”
“We’ve just always held the interim dividend at $0.06 and then made the adjustment for the final dividend.”
The property giant paid a final dividend of 16 US cents per share for 2018. Together with its interim dividend and the current share price of S$6.03, the trailing dividend translates to around 3.6%.
On the impact of the protests in Hong Kong
Despite the ongoing Hong Kong protests, Wong is optimistic about Hong Kong as a destination for multinational corporations to do business over the long term. He said:
“I don’t think business(es) will make long-term decision(s) just based on short-term events. And then, of course, having said that, who knows what happens with (the) protests (and) how it develops. I still believe that these are more short term in nature and people would be able to adjust themselves in the sense that to adjust the business strategy accordingly. But in the long run, it (Hong Kong) remains an attractive place to do business.”
On its net debt position and cash flows
In the last 18 months, Hongkong Land experienced a slight uptick in its net debt as the group made some aggressive investments. However, Dixon said that the cash flows expected from investments will likely be realised over the next few years. As such, its net debt position can quite quickly turn into a net cash position.
“Most of those (investments in China), or a significant portion of those investments, tended to be single-phase, relatively short duration. So we will see the benefit of that coming back, not so much the second half (of) this year, (but) it will be very much into 2020, ’21, ’22. Clearly, we’ll need to keep reinvesting in them to get the benefit of that as we move forward in the future. It will also be a function of what notional investments we’re able to make. But absent any new notional investment, we will expect to see very strong operating cash flows come through over the next 3 years. And the business can reasonably quickly turn sort of net cash from a net debt position absent new investment or any change in (the) dividend.”
On Singapore’s residential property market
Hongkong Land’s management reiterated its stance that Singapore remains a key market that it can make meaningful large investments in. However, it warned that Singapore’s residential market is experiencing a supply overhang, representing “4 to 5 years” of unsold inventory. As such, it will be more cautious when bidding for residential development sites in the foreseeable future.
On share repurchases
Hongkong Land spent around US$132 million on share repurchases in 2018. Dixon emphasised that the company continues to believe that its current share price remains attractive.
With an earnings yield in excess of 7%, the group believes share repurchases represent a good way for the company to return value to shareholders. At its current price, shares also trade at a 63% discount to its tangible book value.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended shares of Hongkong Land Holdings.