This is an update of my prior article on Hysan Development published on March 3, 2020. Hysan Development’s share price has decreased by -13% from HK$28.20 as of March 2, 2020 to HK$24.50 as of September 3, 2020, since my last update. Hysan Development trades at 0.32 times P/B, and it offers a consensus forward FY 2020 dividend yield of 5.9%.
Hysan Development maintained the company’s interim 1H 2020 dividend at HK$0.27 per share, and there is a potential for further share buybacks in 2H 2020. Hysan Development is expected to achieve relatively flat HoH (Half on Half) earnings growth in 2H 2020, but worse-than-expected negative rental reversions pose downside risks to earnings. Taking into account the above-mentioned factors, I retain my Neutral rating on Hysan Development.
Readers have the option of trading in Hysan Development shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers HYSNF and HYSNY, or on the Hong Kong Stock Exchange with the ticker 14:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.
For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $7.5 million, and market capitalization is above $3.2 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors which own Hysan Development shares listed in Hong Kong include BlackRock, APG Asset Management, MFS Investment Management, and State Street Global Advisors, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities. markets.
Interim Dividend And Potential Share Buybacks In The Spotlight
It came as a positive surprise that Hysan Development maintained the company’s interim 1H 2020 dividend at HK$0.27 per share, which is the same as what was paid out in 1H 2019. It is noteworthy that Hysan Development went from a net gearing of 3.94% as of end-FY 2019 to a net cash position as of end-1H 2020, and the company’s balance sheet strength should be supportive of future dividend payouts.
However, Hysan Development declined to commit to maintaining dividends for 2H 2020 and full-year FY 2020. At the company’s 1H 2020 earnings call on August 10, 2020, Hysan Development stressed that “we do not make dividend projections” and “we don’t know what will happen during the second half.”
Nevertheless, sell-side analysts expect Hysan Development’s full-year dividends per share to be maintained at HK$1.44 for both FY 2020 and FY 2021, same as FY 2019. This translates to an attractive consensus forward dividend yield of 5.9% for both FY 2020 and FY 2021.
Year-to-date, Hysan Development has repurchased 1.7 million of its own shares, or approximately 0.16% of the company’s total shares outstanding, at an average price of HK$24.10, and all the buybacks were done in March 2020.
Hysan Development did not rule out the possibility of share buybacks in the second half of the year, although the company has yet to do so. Hysan Development noted at its recent 1H 2020 results briefing that “we have the ability to do” share repurchases, which is “part of our dynamic capital management.” This is response to a question from a sell-side analyst who highlighted that Hysan Development has “sizable cash on-hand” and it is “trading heavily below book.”
If Hysan Development maintains its dividend at HK$1.44 per share for full-year FY 2020 and does significant share buybacks in 2H 2020, it could potentially help to provide support for the company’s share price.
Decent 1H 2020 Financial Performance
Hysan Development’s underlying net profit decreased by -10% YoY to HK$1,257 million in 1H 2020, which represents a decent financial performance taking into account the challenging economic environment in Hong Kong. Underlying net profit is calculated by excluding fair value gains or losses on investment properties, interest income, profit attributable to perpetual capital securities, and other non-recurring, non-cash income.
Revenue for Hysan Development’s retail property segment declined by -10% YoY from HK$1,001 million in 1H 2019 to HK$900 million in 1H 2020, although the company’s overall retail property portfolio occupancy was still relatively healthy at 94% as of June 30, 2020 (versus 96% as of end-FY2019). But Hysan Development’s rental reversions for its retail property portfolio turned negative (in the mid-teens) in 1H 2020, and the company’s tenant retail sales growth in 1H 2020 was only +8.0% as compared to the Hong Kong industry average of +10.6%. Furthermore, Hysan Development’s retail property business was hurt by rent concessions offered to tenants (to be amortized over average lease period of about one and a half years), and a drop in turnover rent from HK$49 million in 1H 2019 to HK$20 million in 1H 2020.
In contrast, Hysan Development’s office property segment was relatively more resilient and defensive. Revenue for the company’s office property business only declined marginally by -0.2% from HK$929 million in 1H 2019 to HK927 million in 1H 2020. It is also noteworthy that Hysan Development’s office property segment still managed to deliver positive rental reversions (in the low teens) in 1H 2020. On the flip side, the occupancy rate for the company’s overall office property portfolio still declined from 98% as of end-FY 2019 to 96% as of end-1H 2020. There is no significant industry concentration for Hysan Development’s office tenants, but it is important to pay attention to banking & finance and co-working tenants which accounted for 23% and 10% of the company’s total office portfolio in terms of floor area, respectively as of June 30, 2020.
Lackluster 2H 2020 Outlook With Downside Risks Relating To Negative Rental Reversions
Market consensus expects Hysan Development to achieve a normalized net profit of HK$2,416 million for full-year FY 2020. Considering the company’s underlying net profit of HK$1,257 million in 1H 2020, Hysan Development should deliver relatively flat HoH (Half on Half) earnings growth in 2H 2020.
More importantly, there could be further downside risks to Hysan Development’s earnings in the second half of the year. Hysan Development expects flattish rental reversions for its office property segment in FY 2020, which implies a reversal from a positive low teens rental reversion in 1H 2020 to a negative rental reversion in 2H 2020.
Separately, the outlook for rental reversions for Hysan Development’s retail property segment in 2H 2020 is also negative. The company disclosed at its 1H 2020 earnings call on August 10, 2020 that the average occupancy cost ratio for its retail tenants was around 30% in 1H 2020 and the rent concessions helped to lower the average occupancy cost ratio by “a few to mid-single-digit percentage points.” Hysan Development has approximately a quarter of its retail property portfolio by floor area up for renewal this year, and about half of the retail lease renewals have been completed in the first half of the year.
Strong Liquidity Position And Upside From Potential Investment Opportunities
As of June 30, 2020, Hysan Development has HK$21,103 million in cash and bank deposits, and an additional HK$4,700 million in un-drawn committed credit facilities. The company is currently in a net cash position as of end-1H 2020, but it is willingly to leverage up to a net gearing ratio of between 15% and 25% if opportunities arise.
This suggests that there is upside if Hysan Development can leverage on the company’s strong liquidity position to invest in future growth opportunities. Hysan Development emphasized at its recent 1H 2020 results briefing that “we are always open to look at accretive opportunities and opportunities to help with our diversification plans.”
One potential investment opportunity is the Caroline Hill Road commercial site, which the company expects to be put up for tender by the end of 2020. Yolanda Ng Yuen-ting, a district councilor, was quoted in a July 24, 2019 South China Morning Post article saying that the Caroline Hill Road commercial site “is like a back garden of Causeway Bay.” Notably, Hysan Development is differentiated from other Hong Kong property developers with regards to the fact that its property assets are concentrated in Lee Gardens, Causeway Bay. It is likely that Hysan Development will be very keen on adding the Caroline Hill Road commercial site to its property portfolio.
Hysan Development is valued by the market at 0.32 times P/B based on its share price of HK$24.50 as of September 3, 2020. As a comparison, the stock’s five-year and 10-year mean P/B multiples were 0.53 times and 0.61 times, respectively. Hysan Development last traded as low as 0.32 times P/B in November 2018 during the 2008-2009 Global Financial Crisis.
Notably, the fair value of Hysan Development’s investment properties declined by -4.4% from HK$79,116 million as at 31 December 2019 to HK$75,630 million as at June 30, 2020. This was partly attributable to an expansion in capitalization rates used for the valuation of the company’s retail properties from 5.00%-5.25% to 5.25%-5.50% over the same period.
The key risk factors for Hysan Development include weakness in Hong Kong’s retail and office property markets for a prolonged period of time, overpaying for future investments and acquisitions, and a cut in dividends in the future.
Note that readers who choose to trade in Hysan Development shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.