Should long-term investors buy Henderson Land Development Co Ltd (SEHK: 12) shares? –
With the US and much of the developed world still struggling from the global Covid-19 pandemic, I think it’s worth looking at how much local real estate developers in Hong Kong have recovered.
With the severe drop in economic activity, the Hong Kong Hang Seng Properties Index is down 32% since 2018. Meanwhile, Henderson Land Development Co Ltd (SEHK: 12) shares are also down 32% over the same period.
This reflects a sign of downside risk in the property sector given the long-term structural issues.
I’ll take a look at why property prices in Hong Kong still remain at 10-year highs despite low affordability.
Given the disparity between property valuations and developers’ stock prices, does that make Henderson Land a buy for investors?
Land banking for future development
Top local developers have seen their market share decline (in terms of land auctions) as cash-rich mainland China players began taking an interest in Hong Kong.
Henderson Land, though, has taken an alternative approach by combining site sales at government tender and private land acquisitions to replenish its land bank at the time of rising property values.
Henderson Land has a long reputation of acquiring old buildings and farmland in the New Territories.
With approximately 24.5 million square feet (sq.ft) in Hong Kong properties and 44.9 million sq.ft in agricultural land, the company can wait for the right time to capitalise on the redevelopment plans of the Hong Kong government.
This strategy has enabled Henderson Land’s share price to stay resilient given this strong asset support on the balance sheet.
Business re-orientation to China
Other than a strong balance sheet, Henderson Land has, however, experienced a significant drop in property development and sales by 14% and 73% year-on-year, respectively, to HK$5.88 billion (US$758.3 million) and HK$1.68 billion.
This is due to the social unrest affecting the sales of properties since mid-2019. When look at Henderson’s current investment portfolios, it also has a steady leasing income of HK$7.1 billion in both Hong Kong and China as of FY 2019.
With the impact of Covid-19, the vacancy rate of office leasing is expected to increase with less leasing income in 2020.
To mitigate this downside risk, Henderson Land is looking to expand its footprint in Chinese investment properties, with a focus on tier-2 cities.
The company has recently added some development projects such as a residential site in Beijing, and commercial developments in Hefei and Nanjing. They are expected to be completed and contribute rental income in the coming three years.
Agricultural land policy
Based on the latest annual report, Henderson Land is the largest farmland owner in Hong Kong.
The land sharing pilot scheme should further unlock the value of its farmland holdings. Any other development in agricultural land conversion could also lead to the stock’s re-rating.
I believe that Henderson Land should be stepping out of a trough after experiencing social unrest and Covid-19 since 2019.
With a strong balance sheet and massive land bank, in addition to its collaboration stance to develop non-residential land with the government, investors can expect positive returns from Henderson Land shares and an upward adjustment of its dividend payout in the near future.
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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 Hong Kong contributor Edmund R doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020