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Due to the protests, shares of Hong Kong’s property developers are not in fashion right now. Despite the government withdrawing the extradition bill that started the demonstrations, the protests in Hong Kong continue. The demonstrations continue partly due to economic reasons.
One chief economic reason driving the protests is unaffordable housing prices. According to the Demographia International Housing Affordability Survey, Hong Kong was the least affordable city among 309 metropolitan housing markets in 2018 with median house prices costing 20.4 times gross annual median household income.
In contrast, the median house price in Singapore cost only 4.6 times gross annual median household income for that year. With rent being so expensive, many Hong Kong residents don’t have much in the way of discretionary income.
Because it is forward-looking, the Hong Kong market has discounted the stock price of many of the city’s property developers.
As one of Hong Kong’s leading real estate giants, CK Asset Holdings Ltd’s (SEHK: 1113) stock price has fallen as a result. Shares of the company have declined from over HK$70 in April to around HK$55.
The question on investors’ minds is has the market priced in all of the negative effects of the protests? And is the stock a good buy now that it’s trading at a discount to previous levels? Here are three reasons why I believe CK Asset’s share price has significant upside from its current levels.
1. Property values in Hong Kong unlikely to fall
Because the confidence of many consumers is dependent on housing prices and as many bank loans are backed by property, the stability of property prices is very important to the local economy.
From 2007 to 2009, a slight decline in US housing prices triggered a near-depression that almost toppled the global financial system. If property values fall a lot in Hong Kong, banks would lend less and the economy would go into recession.
There would also be the same protests in the streets. Only this time, the protestors will be made up from the owners of homes who have taken loans to finance their purchases and the unemployed who can’t find jobs due to the recession.
As a result of the systemic importance of housing prices, housing prices in Hong Kong are unlikely to fall by much (if at all).
The government will instead create more public housing programs where homes are subsidized. Some of the government’s proposals include redeveloping 75 million square feet of unused private land to build public housing.
Although property developers will lose some value because they have to donate or sell the land, the land isn’t worth all that much to their stock prices because they haven’t been developed.
If housing prices don’t fall much at all, the economy of Hong Kong will remain at relatively normal levels, and commercial and office property values are unlikely to fall by much either once the protests end.
2. Attractive valuation
If property values don’t fall by much, or at all, the market will have more confidence in CK Asset’s book value and its stock price could go up. In terms of CK Asset’s price-to-book (PB) ratio, it’s the cheapest that it has been in years.
CK Asset’s price-to-book ratios
Given the low PB ratio, CK Asset has a margin of safety that discounts the potential for a lot of price declines due to recession, donations, or the effect of public housing expansion.
3. CK Asset can expand outside of Hong Kong
Due to decades of fierce competition, Hong Kong developers are some of the most savvy and efficient enterprises in the world.
In 2016 and 2017, mainland Chinese developers tried to buy their way into Hong Kong by contributing either solely or jointly in almost two-thirds of the cumulative capital used to buy land in the city.
Although they had the cash, mainland developers weren’t as competitive and couldn’t realise the returns that the Hong Kong developers did. As a result of the poor showing, they retreated and contributed much less in terms of capital when buying land in 2018.
Because Hong Kong developers like CK Asset are very competitive, they can expand into Mainland China and elsewhere and build value in the future. The company isn’t limited to only Hong Kong.
CK Asset has an international presence. In the first half of 2019, almost a third of CK Asset’s profits were derived from either mainland China or overseas.
Since property values in Hong Kong are unlikely to fall by much and given CK Asset trades for a low valuation in terms of price-to-book, the stock has significant upside.
Although the protests might mean less property value growth in Hong Kong in the future, the company can comfortably expand internationally to make up for it.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.