The majority of the Hong Kong family started with real estate, as did the Roche family of Ying Jun (00041-HK).

Born in Sri Lanka and raised in Sri Lanka, their net worth and market value also share the same fate as Hong Kong.

Since the second half of 2019, social activity in Hong Kong has led to a marked decline in tourism and retail. Since the beginning of this year, the novel coronavirus pneumonia epidemic has brought Hong Kong's tourism and service industries to a low point. With high-end office properties in Central and a large number of high-end hotels, Eagle Jun, who owns high-end office properties in Central and a large number of high-end hotels, could not escape the impact of falling revenue and profits. The market capitalization declined from about HK$27.68 billion at the beginning of March 2019 to about HK$16.36 billion at the beginning of March 2019, a decrease of more than HK$1.1 billion.

Revenue profit declined in 2019

The results just announced by Eagle Jun reflect the deterioration in the market environment since the second half of the year.

In 2019, the Group recorded revenue of HK$9.237 billion, a year-on-year decrease of 9.1%; operating profit decreased 5.2% year-on-year to HK$3,273 million.

Notably, Yingjun recorded a loss of HK$2,147 million in changes in the fair value of investment properties during the period, compared with revenue of HK$6.661 billion in the same period last year, causing its book profit to be seriously distorted by a one-time unrealized project. In 2019, Yingjun recorded a loss attributable to shareholders of HK$338 million, compared with a profit of HK$5.811 billion for the same period last year.

If changes in the fair value of investment properties and financial assets are not taken into account, and based on the apportionment income of their principal subsidiaries and the realized income and loss of financial assets, core profit attributable to equity holders actually declined 13.3% year-on-year to HK$1,731 million, or equivalent to HK$2.45 per share.

Yingjun declared a final interest of HK$0.5 per share and a special final interest of HK$0.5 per share, together with an interim interest of HK$0.33. The group's annual dividend was HK$1.33, compared to HK$0.83 the previous year.

Performance deteriorated significantly in the second half of the year

The second half of the year was heavily influenced by social movements. Half-year revenue fell 12.5% to HK$4.54 billion, and operating profit fell 8.9% year-on-year to HK$1,616 million. Excluding fair value income from investment properties and financial instruments, as well as non-recurring payments such as impairment losses, Eagle Jun's profit before non-tax deductions for the second half of the year fell 5.7% year-on-year to HK$2,347 million (author's estimate).

Eagle's income and asset composition

Yingjun's assets are mainly divided into four blocks — 66.22% equity of Guanjun Industrial Trust (02778-HK), 63.45% interest of Langting Hotel Investment (01270-HK), Yingjun's own assets (hotels in Europe, North America, Australia, New Zealand and mainland China, Yingjun Center, Yidongxuan Residence and other business income) and 49.97% equity of the US real estate fund.

As of December 31, 2019, Guanjun Industrial Trust accounted for half of its asset value, as shown in the chart below.

Judging from core business operating revenue in 2019, Guanjun Industrial Trust's distribution revenue and management fee revenue accounted for more than half of Yingjun's total revenue. Guanjun Industrial Trust is a real estate investment trust. The investment portfolio mainly consists of three properties, namely 3 Garden Road, Central, Langham Place office building, and Langham Place Mall. The property revenue contributed in 2019 was HK$1,375 million (up 8.2% year on year), HK$342 million (up 6.2% year on year), and HK$764 million (down 6% year on year), respectively. It can be seen that 3 Garden Road, Central accounted for the majority.

Real estate investment trusts distribute more than 90% of profits to fund holders. Guanjun's subsidiaries are all high-quality office buildings and retail properties in Hong Kong, so they enjoy stable and generous rental income. As Guanjun's controlling shareholder, Eagle Jun can naturally benefit from the distribution of revenue. In addition to this, it is also possible to enjoy related income through the provision of property management services.

Social activity in the second half of 2019 led to a significant decline in the contribution of its Hong Kong hotel property portfolio, and the office occupancy rate declined. However, it is worth noting that the epidemic at the beginning of this year further plunged Hong Kong's hotel, tourism, and service industries into a low point. Compared with that, the impact of social activity in the second half of last year was simply insignificant. Moreover, because of social movements in the second half of the year, some multinational luxury brands and multinational companies may consider withdrawing from Hong Kong, which may have an impact on their future performance.

Faced with such adverse factors, Eagle Jun's market value fell as it should.

However, Yingjun's majority shareholder, Roche Family Trust, as well as the company's chairman, Roche family member Dr. Luo Jiarui (personal shareholder), and other family members have continued to increase their stock holdings since the second half of last year. The price of the increase ranged from HK$25.6 to HK$33.16. Certainly, this is related to the lawsuit between Grandma Roche and HSBC International Trust over the latter's favor of Dr. Luo Jiarui and caused her personal holdings to encroach on the family trust, but the high level increase in holdings reflects that the Roche family still has full confidence in their own business.

For small shareholders, is Yingjun worth taking a break at the current price of HK$23.25?

The current price is HK$23.25, which is equivalent to 9.49 times Eagle Jun's core profit of HK$2.45 per share in 2019, which is slightly lower than the valuation of other local property investment companies in Hong Kong. At the current price of HK$28.40, the 2019 recurring basic price-earnings ratio of Hysan Industrial (00014-HK) was 11.46 times.

Yingjun proudly added a special dividend in 2019. The annual dividend reached HK$1.33 per share. Based on the current price of HK$23.25, the 2019 dividend yield was 5.8%, which is quite attractive.

The author calculates Yingjun's fair value using the segmented plus total valuation method. Among them, Guanjun Industrial Trust and Langting's holdings are calculated at market prices, and Eagle's assets and US funds are calculated based on the net asset value as of December 31, 2019, deducting net cash, and calculating Yingjun's fair value per share is HK$58.29.

Notably, Guanjun Industrial Trust's current price is HK$4.54, and Yingjun's market capitalization is either HK$17.656 billion, or equivalent to HK$24.92 per share of Yingjun's shares, which is higher than Yingjun's current market price of HK$23.25. It can be seen from this that Eagle Jun's current price is not that expensive.

In 2020, Yingjun's hotel business profits, rental income, and income from its trust funds and hotel portfolios will definitely be negatively affected by the pandemic at the beginning of the year. However, Yingjun's property development project “Lang Tao” in Baishijiao will be delivered in 2020. Property development revenue is expected to be confirmed in July, and more than half of the units have now been pre-sold.

According to information provided by Eagle Jun, the development cost of the project is HK$7 billion per square foot (including land prices), so the cost per square foot may be about HK$9577.63. Judging from the opening price in July last year, the discounted price may be between HK$11446-16202. Taking the median estimate of HK$13,824, the cost may be equivalent to 69.28% of the selling price, which means that the profit margin before tax may be 30.72%.

The author estimates that if all units of the project were sold out and all were recorded in 2020, the real estate development business would contribute about HK$3.1 billion in profit before tax, or HK$2,592 million in profit after tax, equivalent to a net profit of HK$3.66 per share, far higher than the core profit of HK$2.45 per share in 2019. It can be seen from this that Yingjun's 2020 results are still expected to see strong growth.

However, it is important to note that these valuation methods are ultimately based on Yingjun's property valuations, especially the Hong Kong property that is crowned king. Once property prices in Hong Kong fall due to the epidemic, social issues, and a significant economic slowdown, their current valuations will not be guaranteed. The market values of Guanjun and Langting will be further pressured, and Yingjun's property valuations will be significantly lowered and losses will occur due to changes in fair value. Therefore, Eagle Jun's valuation is highly correlated with the Hong Kong property market. If investors are not optimistic about the prospects of the Hong Kong property market, it is recommended to avoid it.

In the “Top 100 Hong Kong Stocks” selection last year, Eagle Jun ranked among the top 10 medium-sized enterprises in terms of overall strength. What will be the performance of this year's selection? Please keep an eye out.