Sino Land: Hong Kong Asymmetric Opportunity With 53% Net Cash At Below Half Of Book

Summary

Sino Land Company Limited (OTCPK:SNLAY) (OTCPK:SNLAF) is a leading Hong Kong listed property company (Hong Kong ticker 83 HK) focused on premier commercial, residential, industrial and hotel real estate. I covered the stock on 17 December 2021, when it traded at HKD9.50, and it reached my article’s price target and its year high of HKD12.20 in August of this year. Now, back at the lower end of its historical price range (HKD9.70), Sino Land is my favorite Hong Kong listed stock for investing, trading and/or as a dividend yield play. The company has a massive net cash position of HK$41,534.3 million as of 30th June 2022 representing 53% of its market cap and trades at a price to book of 0.475x. It has a 1-year low of HKD8.39 and 1-year high of HKD12.20. The stock has a 5.87% dividend yield based on its dividends in the last financial year. Sino Land Chairman and majority shareholder Mr. Robert Ng continues to consistently buy stock in the company.

Hong Kong’s Hang Seng Index has rallied 26.7% (to 19,593) from its October lows, amidst a relaxing of travel requirements to the city, and China ending most Covid controls. However, the Hang Seng Index is still down 15.52% in the past year and down 33.76% over the past five years. Hong Kong is aiming to reopen its border with China by the mid of January. 2023 looks like an opportunity for the Hang Seng Index to register a solid positive performance. Sino Land at its current stock price represents an asymmetric opportunity and an ideal defensive play for Hong Kong exposure, in my view.

I view the potential for 30% upside for the stock in 2023 from price appreciation and dividends. I also view there is limited downside to the current stock price and that downside in the next 12 months is a low probability outcome. My 12-month expected return for the stock is 29% based on my assumed probability of outcomes.

Company overview and performance update

A detailed background on Sino Land is covered in my previous article. Per latest results:

As at 30th June, 2022, the Group had a land bank of approximately 20.4 million square feet of attributable floor area in Mainland China, Hong Kong, Singapore and Sydney which comprises a balanced portfolio of properties of which 45.7% is commercial; 29.9% residential; 10.8% industrial; 7.7% car parks and 5.9% hotels. In terms of breakdown of the land bank by status, 6.8 million square feet were properties under development, 12.1 million square feet of properties for investment and hotels, together with 1.5 million square feet of properties held for sale.

Financial results highlights for FYE 30 June 2022 are shown below:

FYE 30 June 2022 profit before tax of Sino Land’s three main business segments are shown below:

The company reported EPS of HKD0.76 for the financial year ended 30 June 2022, down 42.8% from the previous financial year, due to FY2021 having seen increased revenue from property sales of its Grand Central development. Property sales do vary from year to year due to the development timeline/pipeline of the company (current pipeline shown below), and thus the last financial year’s decrease in property sales is not significant to me. Sino Land’s massive net cash position gives it tremendous optionality to deploy when there are attractive opportunities to add to its landbank, particularly in the current higher rate environment and property market cooling. It is unlike most listed property companies in Hong Kong and internationally, which will undertake a net debt position for their property developments and investments. I am not aware of any other major listed real estate company globally with this high ratio of net cash to market cap.

A major positive from the latest results is that the company’s hotel operations turned around to be profitable. Sino Land’s hotel properties comprise The Fullerton Hotel Singapore, The Fullerton Bay Hotel Singapore, Conrad Hong Kong, The Fullerton Hotel Sydney and The Olympian Hong Kong. Some of these hotels are amongst the finest high-end hotels in Asia. With Singapore and Sydney seeing resurgent travel and Hong Kong having now removed previous entry restrictions, the hotel operations can be expected to register a stronger result in FYE 30 June 2023.

The company’s property rental division recorded a marginal dip of -3.14% from the previous financial year. This should see improvement in 2023, amidst a recovery of inbound travel into Hong Kong. Besides, whilst Sino Land’s peers that have net debt may see an impact from rising rates, Sino Land has the benefit of an unlevered balance sheet for its investment properties.

Dividend yield

FY2022 saw a total dividend of HKD0.57 per share which was a payout ratio of a generous 65.8%. This is equivalent to a 5.87% yield at the current share price.

Hong Kong market outlook

With Hong Kong’s removal of its prior travel restrictions, inbound travel is set to gradually rebound. The border with China is also expected to open in January and could be as early as 3 January. As mentioned, the Hong Kong stock market’s Hang Seng Index has been a major underperforming market over the past 1 and 5 years and is more than 10% lower than where it was 10 years ago. However, there is reason to be optimistic for the Hang Seng Index to register a positive return in 2023. Aside from enhancing its position as a leading global financial center, I view that Hong Kong will re-establish itself again as a premier international travel destination in the next 12 months or so.

Potential risk factors and mitigants

The potential risk factors to Sino Land’s stock price are similar to those previously described. Hong Kong real estate prices have plummeted to five-year lows this month. Real estate prices in major international markets have similarly also dropped significantly. The outlook for real estate prices in Hong Kong and other major international cities is generally expected to drop further in 2023. This could adversely impact Sino Land.

However, the impact of this on Sino Land is mitigated by its net cash position which is equivalent to 53% of its current market cap. Therefore, stock price downside from current levels is limited, in my view. Sino Land’s cash pile gives it tremendous optionality. The company can selectively add to its landbank or property portfolio during this continuing market downturn. It can choose to further increase its dividend payout ratio to shareholders or declare a special dividend.

Since dollar and HKD deposit rates are at decade highs, Sino Land will earn a higher yield on its cash that is held in bank deposits. With 12-month fixed deposit rates in the high 4% in dollars and HKD, there would be a higher hurdle rate needed for making new acquisitions or investments in real estate development and rental properties, compared to the previous low-rate environment. A higher required hurdle rate for new investments and a continuation of real estate price declines – this environment may be a good motivation to distribute even higher dividends to shareholders.

Trading pattern of Sino Land and margin of safety

Buying Sino Land at the low end of its historical price range has proved to be a compelling investment/trade on several occasions since 2020. During the March to May 2020 period, Sino Land was below HKD9 before reaching above HKD12 in May 2021. The stock subsequently went back down to the low HKD9 in November 2021, before going above HKD12 in August 2022. For traders, there would have also been many other smaller surges and dips in the stock over a shorter time horizon in these periods. Sino Land has now retraced to the HKD9.70, although has rebounded from its October lows.

Further, apart from the price upside, one receives an attractive dividend yield during the holding period. The company’s massive net cash position, prime real estate assets, and a good discount to book value provide the margin of safety. I am forecasting a 29% expected return for the stock in the next 12 months, based on my view of a 90% probability of 30% upside with a price target of HKD12.12 (plus an assumed minimum 5% dividend return) and a 10% probability of 10% downside from the current HKD9.70 level.

5 year price chart

Conclusion

Sino Land, at the current low end of its historical price range, represents an asymmetric opportunity for a potential 30% upside in a time horizon of 12 months or less. Whether as an investment, trade and/or dividend yield play, there is something for all styles of investors here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.