Cheung Kong Holdings
01/17/2014 7:00 am EST
Focus: REAL ESTATE
The MSCI Asia ex-Japan Index trades at 12 times earnings—well off the highs hit during the bull markets of 2007 and 2009; our top pick for investing in Asia this year is a Hong Kong-based developer of residential properties, writes Yiannis Mostrous, editor of Capitalist Times.
Cheung Kong Holdings (HK:1) also owns a portfolio of commercial properties on which it collects rent, and a 52% interest in Hutchison Whampoa (HK:13), a conglomerate whose diverse range stretches from ports and retailers to property development and infrastructure.
Cheung Kong Holdings' strategy of selling its properties relatively quickly, and at opportune times, helps to insulate the firm from downturns in the residential property market. For example, the company recently sold its Oriental Financial Center project in Shanghai for US$1.16 billion.
China remains important for the company, and 2014 should prove management right for judiciously launching projects in the mainland. So, Cheung Kong has some interesting projects that it is developing in Shanghai, including:
An 8.6 million square foot one that consists of commercial, residential, and hotel space. A 3.2 million square foot GFA (gross foot area) retail and office project, and a 624 thousand square feet GFA project. The latter two are to be completed in 2015.
The firm's total property sales should be around US$4 billion in 2013, a year-over-year increase of about 20%. Cheung Kong Holdings has become more judicious in its land purchases over the past 12 months, a calculated decision that appears prescient now that prices have declined.
We expect the company to enjoy a solid 2014, thanks to a robust project pipeline in Hong Kong and steadily growing income from its rental units and hotels. The company will be launching three projects in 2014 in Hong Kong (HK), for a total of 4,715 units, and once they receive their presale consents from the HK authorities, it will be a positive catalyst for the company.
Like other conglomerates, shares of Cheung Kong Holdings trade at a discount to their net asset value, because of the firm's complicated nature and diverse business interests. Even when you take into account the relative volatility of the company's earnings—a product of lumpy project completions—the stock looks cheap at nine times earnings.
With a strong balance sheet, net debt to equity of about 14%, and access to inexpensive financing, Cheung Kong Holdings stands out among its peers and rates a buy up to HK$150.