K.Wah International Holdings (173.HK) - a potentially undervalued real estate company on the Hong Kong Stock Exchange

Touzibozhu
K.Wah International Stock Valuation

Introduction

K.Wah International Holdings Ltd. (173.HK) is a potentially undervalued real estate development company on the Hong Kong Stock Exchange. This article will be a record of my personal research notes on K. Wah International, discussing the company background, its financials, the understated asset value on the balance sheet, and the reasons why I find the company to be potentially undervalued.

Company Background

K.Wah International Holdings Ltd. (173.HK) is the listed property arm of the K.Wah Group, a conglomerate with business interests in the property, construction, entertainment, leisure, and hospitality industries. The company is a mid-sized property developer with a focus on the Hong Kong and mainland China markets. K.Wah owns a diversified residential land bank for development in Hong Kong, the Yangtze River Delta, and the Greater Bay Area, leading to a geographically diversified development earnings profile.

K.Wah International Holdings was listed on the Hong Kong Stock Exchange in 1987. Over the years, they have developed a solid reputation for delivering quality projects consisting of large-scale residential communities, premium residential developments, Grade-A office towers, hotels, serviced apartments, and retail premises. In addition to their property development and sales activities, K. Wah also holds many investment properties in Hong Kong and mainland China, which contribute a recurring stream of rental income to the company.

More details on the company's development and investment properties in Hong Kong and mainland China can be found on the company website:

Interestingly, K.Wah also owns a 3.72% stake in Galaxy Entertainment Group, the entertainment and leisure division of the K.Wah Group, which trades on the HKSE under the ticker 27.HK. The ownership interest in Galaxy Entertainment, consisting of 162 million shares, has a current market value that exceeds the company's market capitalization.

Company Financials

The following discussion on the company's financials is mainly based on the latest FY2023 annual report for the period ending December 31, 2023.

Balance Sheet

The company has a conservative set of balance sheets. As of December 31, 2023, the company has total assets of 72,507 million HK$, including cash and equivalents of 7,496 million HK$.

Total debt is 15,182 million HK$, and shareholder's equity stands at 42,328 million HK$. The net gearing ratio (net debt to shareholders' equity) is a relatively healthy 18%.

The reported net asset value per share is 13.51 HK$.

Profitability

Year over year, the company's profit fell 47% to 769 million HK$. The company attributed the reduction to lower property development income, impairment of development properties, write-downs on non-current assets, and a weaker RMB.

On a more positive note, as of December 31, 2023, the company reported attributable contracted sales that have yet to be recognized, amounting to 12,600 million HK$. The bulk of these are expected to be booked in FY2024 and FY2025. This points to improved earnings visibility going forward.

Gearing

The company had a total debt of 15,182 million HK$ and cash holdings of 7,496 million HK$. Net debt amounts to 7,686 million HK dollars. Based on shareholders' equity of 42,328 million HK$, the net gearing ratio is around 18%, a relatively comfortable level.

Sustainability of Dividends

The company has a history of rewarding shareholders with dividends. Given better earnings visibility and its healthy balance sheet, the company is expected to maintain its current dividend rate of 0.16 HK$ per share in 2023. The current yield of 8.74% is also enticing when compared to 10-year Hong Kong government bond yields.

Net asset value

The company reported a net asset value of 13.51 HK$ per share as of December 31, 2024. At its current share price of 1.83 HK$, K.Wah International is trading at 13.5% of the historical book value. The stock is potentially undervalued, with a discount to the net asset value of around 86.5%.

Equity holdings in Galaxy Entertainment Group

The company has a 3.72% equity stake (around 162 million shares) in Galaxy Entertainment Group, the entertainment and leisure arm of K.Wah Group, listed on the Hong Kong Stock Exchange under the ticker 27.HK. Galaxy Entertainment owns a valuable portfolio of integrated resort, retail, dining, hotels, and gaming facilities in Macau. Among the prominent properties in Galaxy Entertainment's stable are:

Based on the closing price of 40 HK$ per share on June 7, 2024, the company's stake in Galaxy Entertainment Group is worth 6,508 million HK$. This works out to be worth slightly more than 2 HK$ per share of K.Wah International. Interestingly, K.Wah International ended trading at 1.83 HK$ per share, translating into a market capitalization of 5,733 million HK$, a level that is less than the value of its equity stake in Galaxy Entertainment Group.

Conclusion

At the current stock price of 1.83 HK$, the dividend yield is an enticing 8.74%, representing a 5.14% spread over the current Hong Kong 10-year government bond yield of 3.6%.

Earnings visibility is expected to improve in the future, considering the recognition of attributable contracted sales over the next two years. With a net gearing ratio of 18%, K.Wah International maintains a conservative debt position.

The stock is also trading at an 86.5% discount to its historical net asset value. Its current market capitalization (June 7, 2024) is less than the value of its equity investment in Galaxy Entertainment Group, so investors are getting good value for their money.

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.