Hong Kong protestors are back in the streets again. This happened after China submitted a draft resolution to impose national security laws in Hong Kong.
The protests started in March 2019 and Covid-19 came along in Feb 2020. Hong Kong has been dysfunctional for over a year. That’s bad for the economy and businesses.
Hongkong Land (SGX:H78)’s share price has almost halved from a year ago and it is trading at its 10-year low.
It is hard for shareholders to swallow a 50% loss over a year considering Hongkong Land is a blue chip in the Straits Times Index (STI).
Some shareholders may be at a lost thinking about what to do. This post is not meant to make the decision for you but to present you with some important points to think about. Hopefully it can help you make a more informed decision.
Hongkong Land has a huge exposure to Hong Kong premium office real estate which faces headwinds from protests and Covid-19
About 85% of Hongkong Land’s investment properties are in Hong Kong and Macau.
Hongkong Land has very valuable investment properties in Hong Kong’s CBD area and these properties are worth US$26 billion alone, or 69% of the entire investment property portfolio.
Hongkong Land has generated most of the revenue and operating profits from Hong Kong and Macau too.
As such, the protests would pose an impact to these properties. Central (Hong Kong’s CBD) is one of the common places in which the protestors gather. It would be hard for employees to go to work safely and the retail shops would have to stay closed, if not damaged. Tenants may not want to renew their leases when they expire.
Also, Covid-19 has posed a new paradigm for office work as companies were forced to adopt work-from-home policies. It might lower the demand for office space permanently should this be the new norm.
It is hard to see any upside for Hongkong Land in the near term with the presence of these headwinds.
The property valuers were bearish too. The valuation of Hongkong Land properties have declined by US$854 million.
Hongkong Land has always enjoyed valuation gains in the past so it was an unfamiliar sight of a sizeable valuation loss in 2019.
This valuation loss has caused Hongkong Land to report a mere US$202 million net profit in 2019.
The effects of protests and Covid-19 are likely to persist and may cause further valuation losses and lower rentals.
Hong Kong is ground zero for US-China tension
My worst fear is that Hong Kong will persist as a political battleground between US and China. It wouldn’t be a war zone but Hong Kong will continue to be a sacrificial lamb in this tension. It is akin to a kid suffering collateral damage while her parents quarrel.
Imposing national security laws is China’s response to an alleged foreign influence and interference in Hong Kong matters.
The U.S. vowed to retaliate and has repeatedly threatened to terminate Hong Kong’s special trading privileges as a way to hurt China.
The situation is likely to deteriorate from here and would put pressure on Hong Kong’s economy and businesses. Hongkong Land would not be spared.
Situation may not be that bad as Hongkong Land results have been resilient
At the end of 2019, vacancy at the Group’s Central office portfolio was 2.9% on both a physical and committed basis. At the end of 2018, office vacancy was 1.4%.
Hongkong Land Annual Report 2019
The protest didn’t hurt Hongkong Land’s occupancy rate in its Central office portfolio by much. Vacancy doubled but occupancy rate of 97.1% is still impressive.
Moreover, Hongkong Land was able to increase the rent rate in the Central region despite the protest in 2019.
If we strip away the valuation gains and losses, Hongkong Land’s net profits have been doing well in the past 5 years. It even increased its profits (less valuation losses) in 2019 despite the impact of the protest.
Hongkong Land’s performance has been resilient and the 50% drop in its share price seemed overly pessimistic and doesn’t reflect the underlying health of the business.
Conclusion
Should you sell hongkong Land?
I cannot make the decision for you. No one should. But I have laid out some of the considerations so you can make your own assessment.
The bearish view includes the effects of Covid-19 on office spaces. More companies may adopt more Work-From-Home (WFH) policies which will result in lower demand for office spaces. And Hongkong Land is heavily invested in premium office space in Hong Kong’s CBD.
Second, Hong Kong is expected to suffer the wrath of the US-China tension. This would put her economy and the businesses into jeopardy. If so, Hongkong Land might have to lower rents and suffer valuation losses in the future as the economic activities decline.
But not all is bad as we can see the resilience in Hongkong Land’s performance in 2019. It continued to increase the rental rate in Hong Kong Central while the low profits were mainly due to valuation losses. The actual profits was higher in 2019 despite the protests.
The fundamentals of Hongkong Land business remained strong and appeared resilient against the protests in 2019.
There can be other considerations to sell or keep Hongkong Land. For example, you might want to trim if you have a large Hong Kong exposure. But it might not be that bad to keep it when you are well diversified. Your investment horizon matters too. You may be able to ride out this bad period if you have a long enough investment horizon. But if you are looking at short term recovery, maybe it isn’t wise to bet on it.
Hope this helps. All the best!
Hi Alvin,
Thanks for the timely write-up.
Many Chinese companies are listed in HK. In your opinion, does China have a viable alternative financial centre to HK in the near future (5 years), e.g. Shanghai or Shenzhen, so that China could afford to totally crush HK to make a point? What sort of steps would they need to take to replace HK?
I ask because Tracker Fund HK is one of my major holdings and it comprises >50% Chinese businesses, wondering if it will survive and maybe just take on a higher % of Chinese companies as the HK businesses suffer, or will the weight of Chinese listings will start to shift heavily to SH / SZ and HK will start to lose its importance.
Thank you for your time.
in terms of economy, hk is merely about 3% of China’s GDP, down from 18.4% in 1997.
HK is more important as an international finance hub for China since the domestic markets are not as open as HK at this point in time.
My view is that HK will definitely be around but would have increasing Chinese influence. so a tracker fund on hk index should be fine.
thanks, Alvin, for the very timely write-up.
Hi there, Alvin!
In chronological order:
1. https://www.scmp.com/business/companies/article/3016580/soho-china-struggling-flagging-profits-and-stock-price-put-us113
2. https://www.caixinglobal.com/2019-10-31/soho-china-plans-to-exit-mainland-commercial-property-market-101477070.html
3. https://www.globalcapital.com/article/b1kzgb9732rllj/soho-china-eyes-$1bn-loan-for-take-private
4. https://www.benzinga.com/m-a/20/03/15513822/blackstone-offers-4b-to-take-soho-china-private-report
5. https://www.bloomberg.com/news/articles/2020-05-04/blackstone-s-soho-china-investment-discussions-are-said-to-stall
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I was doing research after reading Ethan’s comment in your colleague article on HKLand as well (https://drwealthcom.wpcomstaging.com/i-am-holding-hongkong-land-despite-the-unrest-in-hong-kong-heres-why/) and…there seems to be a big problem that Soho China seems to be facing in China market.
So with that as an example, I’m concerned with how HKLand is so confident with its development in Shanghai while a native China developer is seeking to exit the public market totally by going private and selling away most of their properties.
This, combined with the unrest in HK and the huge problem with COVID-19 posing a long term health concern, how is HKLand going to strategize their plan moving forward to overcome all these tough issues.
If China is able to arrest the protest issue and HK unrest were to stabilize, there is still a huge concern with a shifting paradigm of the fundamental change of WFH and etc. listed in your article…
Looking forward to hearing your comments. Cheers!
1) There are mixed news currently about the situation in HK and the general commercial real estate market. And no one really knows the impact. While Soho China has sold properties but there are buyers on the other side too (China Vanke).
2) Office won’t go away totally. Just that the way we use it would change. More shared office concept with multiple locations rather than big impressive office where everyone rushes to work in each day.