Hongkong Land Holdings Limited (SGX: H78) reported a severe 92% decline in profit for 2019 but the business is not as badly impacted as the headline suggested, something I pointed out in yesterday’s article.
However, that does not mean that Hongkong Land is free of any trouble.
In fact, there are two areas which are particularly weak for the company at the moment.
1. Weak retail
The situation at the retail component of Hongkong Land’s Central portfolio is not as promising.
Source: 2019 earnings presentation
Hong Kong’s retail sales have taken a big hit as Mainland Chinese tourists avoided the city due the street protests. As a result, tenant sales tanked by as much as 50% at the height of the protests.
Tenant sales started to improve in December 2019, but only to be derailed by the Covid-19 outbreak.
Between August and December last year, the company provided average rental concessions of 15% to its retail tenants. At the moment, Hongkong Land is offering as much as 50% for select tenants.
Despite the strong headwinds, the company remains focused on what’s important, working to persevere the right retail mix by securing key tenants with long-term contracts by offering lower rentals.
The management team’s efforts are reflected in the 0.3% vacancy for Central’s retail component at the end of 2019, albeit at a 5% lower average rental rate.
Given the circumstances, I think the management team is doing the right things.
3. Development property dilemma
Development properties, as the name suggests, tend to be premium residential and mixed-use developments which are built for the purpose of being sold.
In the interim, the company may hold the property for rental income until it is sold.
Due to the nature of the business, these profits can be lumpy.
Source: 2019 earnings presentation
The majority of the sales booked in the development properties segment is from Mainland China.
As the first graph above shows, the development properties segment delivered strong operating profit growth in 2019.
In addition, for the current year, there is around US$1.1 billion worth of development properties in the pipeline that is earmarked to be recognised as revenue.
However, Hongkong Land CEO Robert Wong threw caution to the wind, saying that the Covid-19 outbreak could lead to construction delays and subsequently lower revenues recognised during 2020.
In addition, the gross margins for 2019 were exceptionally good (due to lower land costs) which will not repeat in 2020.
As it stands, the situation at the development property segment is fluid in the short term.
Get Smart: Shades of grey
Investing is rarely ever clear cut.
If it was, the shares in question would not come cheap.
As investors, we have to get comfortable in living with the potential upsides alongside the downsides of a business.
In other words, the picture is rarely ever black or white … but rather, shades of grey.
As in any investment, you should always go in with your eyes wide open to the potential risks at the same time as the possible payoffs.
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Disclosure: Chin Hui Leong owns shares in Hongkong Land.
