Hang Lung Group vs Hang Lung Properties - which is a better investment?

Introduction

In this article, we will look at two closely related real estate developers listed on the Hong Kong Stock Exchange. The two companies are Hang Lung Group (0001.HK) and Hang Lung Properties (0101.HK). Both companies consistently pay dividends, and they are currently trading at very attractive dividend yields. We shall attempt to compare the financials of the companies and determine which stock is a better investment.

Company Description

Hang Lung Group (00010.HK) is an investment holding company that was founded in 1960 in Hong Kong. The company has accumulated more than six decades of experience in the real estate industry in Hong Kong and mainland China. Hang Lung Properties (00101.HK) is the property development arm of Hang Lung Group.

Together, the Group's business operations comprise of the following segments:

i) Leasing of Investment Properties 

ii) Sales of Development Properties

In recent years, the Group has primarily relied on the leasing of investment properties, both in Hong Kong and on Mainland China, to generate revenue and profit.

Revenue Breakdown

The following table summarizes the revenue breakdown for Hang Lung Group and Hang Lung Properties for Financial Year 2023. The revenue for both companies is predominantly from property leasing, with a minute contribution from property sales for Hang Lung Group. 

Geographical Breakdown

The following charts show the geographical breakdown for the revenue and operating profit:

The charts indicate that Mainland China accounts for the majority of both companies' revenue and operating profit, with their investment properties in Hong Kong contributing the remaining amount.

Financial performance comparison

We can note the following from the comparison table:

• Hang Lung Group has a lower dividend payout ratio. Potentially, it has more room to increase dividends.
• Hang Lung Group has a lower net debt-to-equity ratio. A lower ratio indicates that the company has more financial flexibility to pursue growth and is more resilient to headwinds.
• Hang Lung Group has a higher interest coverage ratio. That usually translates into better credit worthiness and investor confidence.

Valuation based on Gordon Growth Model: Implied Rate of Return and Intrinsic Value

The Gordon Growth Model estimates the implied rate of return for Hang Lung Properties and Hang Lung Group to be 10.11% and 11.24%, respectively, based on the closing prices for both companies on May 14, 2024.

We also calculate the intrinsic values for both companies using the Gordon Growth Model. We estimate the intrinsic values for Hang Lung Properties and Hang Lung Group to be 6.69 HK$ and 8.39 HK$, respectively, based on an expected rate of return of 12%, a personal hurdle rate. These prices represent very attractive entry points to buy the stocks.

Conclusion

Both Hang Lung Properties and Hang Lung Group are currently (May 14, 2024) trading at good valuations with dividend yields above 9%, price to earnings ratios of less than 10 and significantly discounted price to book values. These two companies tick all the traditional value investing checkboxes.

Nevertheless, if I had to make a choice, Hang Lung Group represents the more compelling choice, and is potentially a better investment for the following reasons:

• Lower price-to-earnings ratio
• Lower price-to-book ratio
• Lower gearing
• Lower dividends payout ratio
• Hinger interest coverage
• Higher implied rate of return

I have no hesitation to accumulate Hang Lung Group at current price levels and I would back up the truck if the stock ever trades below the intrinsic value of 8.39 HK$.

Disclaimer:

This article is a record of the thinking behind a personal investment decision. It does not represent any recommendation to purchase any stock mentioned in the article. As always, readers are strongly advised to do their own due diligence before making any investment decisions.