Hongkong Land Holdings

[donmihaihai]

HK Land or Jardine view on China property is not the same as Hong Kong/SG property. There is a pipeline of mall/office coming online in China and my understanding is these assets are REITable. Bases on the short lease term in China, it is understandable.

Still, it is a concern that Jardine increased the hiring of outside guns while at the same time increase the talks on creating internal talents. Not sure if anyone has noticed, current Jardine at the top level is managed by accountants which mean Jardine might not the best place for operating guys to come up.

And I agree with ghchua, if the accountants or family does not agree with the asset monetisation, there is no way the operating CEO can do anything and Robert Wong said it before, if he wants his job, HK properties are not REITable or for sale.

[Choon]

Hi Choon,

The change of CEO doesn't change the structure of Hong Kong Land, as it is still majority controlled by Jardine Matheson. Unless you think that Jardine Matheson's objective in those investments changes, I don't think it would have a significant impact on the operations of Hong Kong Land.

Remember that any major asset monetization or otherwise need the blessing of Jardine Matheson, even if the CEO is a professional hired from outside the company.

I certainly hope that my worries will not come true. 

Did some research recently and found several glowing commentaries on HKL on 知乎 (some links below). HKL's developments, especially their retail properties, 长嘉汇 in Chonqqing, 光环 in Chonqging, look very impressive. The way HKL is gushed on  知乎 makes one think that HKL is an organisation of artists rather than a commercial enterprise. Quality is in HKL's corporate DNA. 

Hopefully this operating culture of delivering high-quality / iconic products will stay strong and not be de-emphasised by a focus on doing deals / monetisation or worse, following the path of Capitaland China Trust to expand into the mediocre business of business parks or logistic parks in pursuit of 'diversification' and 'earnings resilience'.

I recall soon after the previous CEO of DFI (Ian Mcleod) came onboard, he gave a scathing assessment on DFI, essentially saying that due to short-termism, DFI had forgotten what it takes to be a competent supermarket. The CEO before him was Graham Allan.

Ian Mcleod was from Coles, Graham Allan was from Yum. My point is CEOs, with their different strengths and backgrounds, can impact an organisation profoundly. In my view, the past 10 years was a lost decade for DFI. 
 
https://zhuanlan.zhihu.com/p/466068154
https://zhuanlan.zhihu.com/p/578423620
https://zhuanlan.zhihu.com/p/368991378

[Choon]

Does anyone understand if this summary table [attachment=1857]:

- include only projects that HKL is currently still selling/constructing; or
- include all projects to date, past (sold) and present?

[Choon]

• Earnings outlook for FY24 has deteriorated sharply with unexpected impairment charge of USD200-300M anticipated in 1H24.
  
• This charge is 2-3X larger than the impairment charge of USD90M in FY23, probably indicating that market conditions have deteriorated sharply in 1Q24.
  
• With the impairment charge, full year FY24 underlying PATMI may dropped to USD434M.
  
• While impairment is non-cash, HKL may for financial prudence reduce dividend payout. 
  
• Risk that dividends may be significantly reduced. HKL has maintained DPS at USD22cts since 2019 despite a continued slide in earnings. Would HKL finally be forced to reduce dividends? 
    HKL.pdf (Size: 297.2 KB / Downloads: 17)
  

[CY09]

Thanks Choon, one of the interesting point is this "projected sales price is lower than the development cost". First time, Im hearing that the price of land + constructions outsizes the sales price. You wont encounter this in Singapore projects but this tells you how severe the residential property in China has worsened.

HK land is not a risk taking developer whose projects are concentrated in Tier 3 and 4 cities like country garden. If any, their profile is similar to Yanlord and KSH's, but this could provide a glimpse the potential impairment the latter 2 have to take

[Choon]

I was surprised / shocked to read that sentence too!

Grateful if anyone can enlighten why is there a need to recognise an impairment. Since the residential units are not sold yet, why not wait till they are sold and then based on the sale price then, determine whether it's a profit / loss?

[donmihaihai]

I was surprised / shocked to read that sentence too!

Grateful if anyone can enlighten why is there a need to recognise an impairment. Since the residential units are not sold yet, why not wait till they are sold and then based on the sale price then, determine whether it's a profit / loss?

This is standard. When you know the project is going to be loss making. Take impairment. Go through all project based companies.  You will see them. Yanlord took impairment that turn profit into losses. Same for those china property companies. 

Anyway why kid yourself and if future turn out to be better reverse back.

[Yoyo]

I was surprised / shocked to read that sentence too!

Grateful if anyone can enlighten why is there a need to recognise an impairment. Since the residential units are not sold yet, why not wait till they are sold and then based on the sale price then, determine whether it's a profit / loss?

Principle of Accounting - Conservatism

The conservatism principle dictates that estimates, uncertainty, and financial record-keeping should be done in a manner that doesn't intentionally overstate the financial health of an organization
Conservatism dictates that if it is more probable than not that the loss will be incurred, accountants are encouraged to record it immediately, regardless of whether it has actually been paid out yet. In contrast, if there is a possibility of a gain coming the company's way, they are advised not to record it in the financial statements until virtually certain of receiving some benefit.
https://www.investopedia.com/terms/a/acc...vatism.asp

A short video on Lower of Cost or Net Realizable Value Rule for Inventory
https://www.youtube.com/watch?v=AyynzjP3Hy8

[Choon]

Then the important question is would HKL choose to sell the projects at below development cost and suffer a real loss (vs accounting loss).

Can they hold the properties for years (and let the properties take the beating of sun and rain) and wait for market sentiment and prices to recover?

[weijian]

Then the important question is would HKL choose to sell the projects at below development cost and suffer a real loss (vs accounting loss).

Can they hold the properties for years (and let the properties take the beating of sun and rain) and wait for market sentiment and prices to recover?

Hi Choon,

Developers market, build and sell properties. Capital from the current project is either borrowed from the bank or earmarked for the next project. If capital cannot be released, short term borrowings have to be rolled over to long term borrowings, incurring higher interest. Working capital for the next project also has to be borrowed, incurring further costs.

Empty blocks of apartments priced out of market demand, may eventually become ghost towns, making it even harder to sell in the future. After all, if the market sentiment and prices do recover in future, there are always new projects to recover/benefit from.

Different classes of real estate also have different leasing demand. It probably make sense to hold and lease commercial and industrial real estate. For example, Far East Orchard leases their unsold Woods Sq office units and HLS their unsold industrial units. In United States, multi-family homes are an "accepted" asset class but may not be so for China.

So IMHO, the question is not "Can they hold" but "Should they hold".