Abstract: recently, there have been a number of large property transactions in Hong Kong, which have attracted investors' attention to Hong Kong real estate stocks, and in addition to large real estate stocks, small real estate stocks have also attracted the attention of the market. Capital strategy real estate, which has been engaged in asset acquisition and appreciation for many years, is now trading at a discount of 74% to its net asset value per share. It is understood that the company intends to achieve an annual net profit of about HK $1.5 billion through property acquisition-value-added and residential property development (similar to fiscal years 16 and 17), which represents a price-to-earnings ratio of only 2.6 times. However, the dividend payout rate of a company is usually only 12% Murray 15%, which is the main reason for the extremely low valuation of shares. If the company listens to the demands of investors and increases the dividend ratio, the shares will have the potential to be significantly revalued.
Company background: the company is a Hong Kong property investment / development company focused on the Greater China market. One of its main businesses is to reposition and enhance the value of properties in high-quality locations, and then release the value by selling the project. The company also selectively develops residential projects in Hong Kong and Chinese mainland (mainly Shanghai). Zhong Chuyi, the chairman of the company, holds 47.91% of the shares in the company, and he acquired a controlling stake in the company in 2004.
Property acquisition-value added: a successful business model with a track record of more than a decade. In terms of commercial property development, Capital Strategy Real Estate has a unique business model: (I) identifying and acquiring commercial properties in prime locations; (ii) developing repositioning plans to increase the value of commercial properties; and (iii) when rental yields increase and become stable, the company will sell the project to release value. The average cash cycle is about three to four years. One example is the Golden Dragon Centre in Sheung Wan, which bought the project for HK $523 million and sold it for HK $665 million 20 months later, with an internal rate of return of 26 per cent. In the past, the company focused on the Hong Kong market and has expanded its business coverage to Shanghai in recent years.
In recent years, residential projects have been selectively developed. In addition to engaging in commercial property acquisition and value-added, the company has developed luxury housing projects in Hong Kong, Shanghai and Beijing in recent years.
A rich portfolio. By the end of March 2017, the distribution of the company's properties by floor area is as follows: 50% Hong Kong commercial properties, 20% Hong Kong residential properties, 12% Chinese commercial properties, 17% Chinese residential properties and 1% Macao commercial properties. The total value of the property attributable to the company is about HK $21 billion. Due to foreign exchange controls, the company hopes to keep the proportion of its Chinese business at about 30%.
Focus on the relatively stable annual net profit of maintenance. In the past few years, 10% of the company's revenue came from rental income, and 20% from real estate sales. The company's net profit was HK $1.6 billion in fiscal year 16 and HK $1.3 billion in fiscal year 17. We understand that the company will try to maintain its net profit at a similar level in the next few years. Considering that the value of the company's property assets should amount to HK $21 billion, we believe that the above target can be achieved if the sales schedule is properly managed.
Financially healthy. As at the end of March 2017, the company's net liabilities were approximately HK $7.2 billion. If its property assets are marked to market, the adjusted net debt / equity ratio is 47%. The weighted average financing cost is about 3%.
In the medium term, increasing soil reserves is a big challenge. The company points out that increasing land reserves is becoming more and more difficult because of rising land prices. In addition to obtaining land through government bidding, the company will also cooperate with other real estate developers to obtain new projects.
Valuations are grossly undervalued because of conservative dividend policies. At market prices, the company's net asset value as at the end of March 2017 was about HK $15.2 billion, representing a discount of about 74 per cent to the net asset value. The current price-to-earnings ratio is also extremely low, less than three times earnings. We believe that one of the main reasons for the low valuation is that the company adopts a very conservative dividend policy, with a dividend ratio of only 12% and 15%. The company has noted that there is a high demand from investors to increase the dividend payout rate, and the company has re-examined its dividend policy from time to time. If the company increases the dividend ratio from 15% to 25%, the dividend yield will increase to 7%. Therefore, if the company decides to increase the dividend, the shares will have great potential to be revalued.
