Property stocks have taken a beating and as the rate hike cycle reaches a plateau, all the bad news may already be discounted and reflected in the low share prices. Undoubtedly, the spate of interest rate hikes has raised costs for property stocks.
Ho Bee Land’s interest expense rose 71% y-o-y to $33.2 million in 1HFY2022 ended June 30. In addition, the developer’s acquisition of The Scalpel in London in February was financed by internal resources and bank debt.
As at June 30, Ho Bee Land’s short-term liabilities stood at $1.889 billion versus $814.2 million in current assets. Based on its current ratio which comprises current assets to current liabilities and is a measure of liquidity, Ho Bee Land is way below a liquid current ratio. Interestingly, the Singapore Exchange has not queried the developer on its current ratio despite querying some Chinese REITs when their current liabilities were greater than their current assets.
At any rate, in its first half, Ho Bee reported a 31.5% growth in net profit to $150.7 million. On the other hand, if Ho Bee Land adopts the fair value approach to its valuations, there could be a mark-to-market impact on its investment properties in the UK. While the developer has adopted a natural hedge approach, the sharp rise in UK risk-free rates during September and the volatility in October of the gilt yields, coupled with the Bank of England raising policy rates could cause valuations to ease.
Ho Bee Land’s share price reflects this. The market has a quick discounting mechanism. As a result, price action in December may be a lot calmer. After all, despite its high short-term debt position and its gearing of 0.88 times, the loans are secured against the properties. Its investment properties are in the UK, Australia and Singapore, all developed markets with clarity on regulations.
Furthermore, there is a series of positive divergences between the price and short-term indicators suggesting that some sort of rally should be forthcoming. Resistance appears initially at $2.54. Similarly, the share price of Hongkong Land has also factored in the current bad news. On July 28, the company announced a further US$500 million ($701 million) in share buybacks, taking total buybacks to US$1 billion. Would shareholders have been better served if the monies had been distributed as a special dividend or even a capital return via a capital reduction?
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
Five years ago, Hong Kong Land’s net asset value stood at US$15.63; as at June 30, the NAV was US$14.99. P/NAV is still at a very low 0.27 times. Since July 28, the share price has lost 15%; since the start of the year, Hongkong Land is down 21% and from a year ago, prices are 27% lower. Probably, a share buyback programme has not been the optimum way to enhance shareholder value.
Hongkong Land’s main investment properties are in Central in Hong Kong where it owns 450,000 sq m of office and retail space, and in Singapore. The company holds a one-third stake in the three towers of Marina Bay Financial Centre and One Raffles Quay. Whether there are impairments in its development portfolio, particularly in China, remains to be seen. Hongkong Land’s development properties are mainly in China, and Singapore where demand has been resilient so far.
At any rate, with prices down to current levels — the stock made a low of US$3.85 on Oct 11 — and shortterm indicators showing a positive divergence with price, Hongkong Land is likely to have the opportunity to rebound and perhaps rally. Resistance is at US$4.60 initially.
See also: Continued steps towards a Chinese New Year rally
