Tai Cheung Holdings (88.HK) a potentially undervalued real estate company in Hong Kong
Introduction
Tai Cheung Holdings Ltd. (88.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 Tai Cheung, 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
Tai Cheung Holdings Ltd. (88.HK) is a real estate development company listed on the Hong Kong Stock Exchange under the ticker (88.HK). Their primary business consists of property development, sales and also investment holdings.
In 1956, Tai Cheung established itself as a construction company. Over time, the company experienced significant growth, eventually evolving into the ultimate holding company of the Tai Cheung Group, which was successfully listed on the Hong Kong Stock Exchange in 1990.
Over the years, the Group has built up a strong reputation for developing and delivering many prestigious properties in Hong Kong, consisting of office towers, residential developments, and industrial buildings.
The table below provides a summary of the company's stable of properties as reported in the FY2023 Annual Report to shareholders:
The crown jewel for Tai Cheung group is its 35% ownership interest in the luxurious five-star Sheraton Hong Kong Hotel & Towers at Tsim Sha Tsui, Kowloon.
Company Financials
The following discussion on the company's financials is mainly based on the latest interim results for the period ending September 30, 2023.
Balance Sheet
The company has a solid set of balance sheets. As of September 30, 2023, its latest interim earnings results show that it has cash in the bank totaling 1,257.7 million HK$ against total debt of 182.9 million HK$. The company's net cash position is approximately 2.00 HK$ per share, which is enviable.
Profitability
The latest interim results show that the company has returned to profitability. Revenue grew by more than 400% year-over-year to 94.2 million HK$. The substantial growth in revenue helped the company reverse the loss from a year earlier to register a net profit of 36.3 million HK$.
Debt Load/Gearing
The total debt to total equity ratio is a minuscule 2.82%, and the company is in an enviable net cash position. In the current high interest rate environment, the massive cash holdings will continue to generate valuable interest income for the company.
Sustainability of Dividends
The company has a history of rewarding shareholders with dividends. I expect the company to maintain its current dividend rate of 0.24 HK$ per year, given the turnaround in profitability, its solid balance sheet, and its net cash position.
Asset Valuation
As of September 30, the company's net asset value is reported as 6476.2 million HK$ or 10.48 HK$ per share. Interestingly, the balance sheet records the value of its 35% ownership interest in the Sheraton Hotel, its crown jewel, at cost, minus accumulated depreciation.
The interim report provides supplementary information on page 18, restating the value of the hotel properties based on open market information as of March 31, 2023. Refer to table below.
With this adjustment, the updated net asset value of the company works out to be 9611.8 million HK$, i.e. 15.56 HK$ per share.
Based on the closing price of 3.18 HK$ (June 4, 2024), the stock is trading at around 80% discount to the revised net asset value of 15.56 HK$. If we exclude the nett cash per share of 2 HK$, the discount widens to more than 92%. At this level of valuation, the stock is potentially grossly undervalued.
Conclusion
At a stock price of 3.18 HK$ per share, the dividend yield is an enticing 7.55%, which is a 3.87% spread over the current Hong Kong 10 year Government bond yield.
It is also trading at a discount of 70% to the reported book value (historical cost model). The discount widens to 80% when taking into account updated market prices for the Sheraton Hotel in Tsim Sha Tsui. If the net cash is excluded, the resulting discount is a whopping 92% to the net asset value.
With the reopening of China and Hong Kong in early 2023 and the resumption of inbound tourism, hotel revenue is expected to steadily return to pre-pandemic levels, providing a much needed boost to the company's profit rebound.
With the removal of spicy measures in February 2024, luxury Hong Kong properties are now attracting wealthy mainland Chinese buyers looking for diversification. This can only mean good news for Tai Cheung's luxury residential properties.
In summary, Tai Cheung is potentially a grossly undervalued stock trading at a massive discount to its net asset value. It is also a relatively safe investment due to its rock-solid balance sheet with net cash position, which benefit from the current prolonged interest rate environment.
With minimal downside, investors can look forward to the eventual rerating of the stock while being paid an attractive 7.55% annual dividend for their patience.
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.