3 HK Stocks to Benefit from the Extradition Bill withdrawal

Article uploaded on 10 September 2019.

If you haven’t called the breaking news, Hong Kong leader Carrie Lam formally announced the withdrawal of the extradition bill around 2pm SGT.

The Hang Seng Index responded in gist, jumping up more than 4% intraday and closing the trading session at 26,523.23.

In fact, when we checked out the HK stock prices in our Webpro platform (above), we see a sea of green among the list of stocks.

With that in mind, we took the liberty to again utilize our new feature - ‘Portfolio Series’ value screener to filter for 3 potentially undervalued Hong Kong stocks poised to benefit from the extradition bill.

The criteria we used are as per below:

 

*Quick Note* the above criteria is predetermined to screen for companies which are growing their earnings, do not have excessive debt and trades at reasonable valuations. You can alter the fields to come out with your list of stocks.

While there are 59 stocks that met the criteria above, we focused primarily on the real estate sector which have been hit the hardest during this bout of HK protests which are:

  1. China Overseas (688.HK)
  2. Country Garden (2007.HK)
  3. K. Wah International (173.HK)

In this article, we will drill down into their company profiles, financial performance and the analysts’ recommendations on them.

Without further ado, let’s get things started.

1. China Overseas (688.HK)

According to its website, China Overseas Land & Investment Limited is a member of China State Construction Engineering Corporation. The Company was founded in Hong Kong in 1979 and listed on the Hong Kong Stock Exchange in 1992 (Stock code: 00688.HK, “COLI”).

In 2007, the Company was selected as one of the Hang Seng Index Constituents. Over the past 40 years, the Company has developed and launched five generations of exquisite residences and has accumulated more than 600 development projects in China, Hong Kong and Macau. The completed development and construction area has exceeded 150 million square metres.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

From the chart above, China Overseas’ revenue (blue bar) and profits attributable to shareholders (green bar) have both increased steadily over the past 5 years. The earnings margin is also pretty stable, inching up gradually to 26.3% in the latest period.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Zooming into its financial ratios, we can see that China Overseas’ price/nav figure stands at around 1x based on its FY2018 results. A quick check shows that the P/B is closer to 0.96x, a decline from 1.29x from FY2014.

If you look at the upper line, the dividend yield has increased slightly from 2.38% to around 3.5% along the years.

Analyst Consensus Estimates

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Utilizing the Analyst Consensus Estimates tool, we can see that China Overseas is covered by a good 23 analysts and the average consensus recommendation comes up to be “Buy” based on a consensus rating* of 1.09.

*The Consensus Rating is calculated based on the average of all recommendations using the following scale:

Buy: 1 Overweight: 1.5 Hold: 2 Underweight: 2.5 Sell: 3

Following that, their mean target price is HK$34.95, which translates to a 36.2% upside based on its share price of HK$25.65 at the time of writing.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Analyst coverage of China Overseas is generally positive over the past 2 years as we see no “Sell or Underweight” ratings based on the chart above. Furthermore, the number of analysts calling for a “Buy” rating is at a pretty high 87% of them.

The target price line (brown in colour) is also on the climb from HK$30.5 in Sep 2017 to HK$34.97 recently.

2. Country Garden (2007.HK)

According to its website, Country Garden ranks among “The World’s 500 Largest Public Companies” as per Forbes. On top of developing residential communities, the company also constructs green and smart cities.

Country Garden has developed more than 700 residential, commercial and urban construction projects globally, and offers its services to more than 3 million property owners.

In addition, it is the developer for the 2,000 hectare Forest City in Malaysia's Iskandar Development Region, lying adjacent to Singapore. It is currently developing 2 projects in Hong Kong – one near Kowloon City and other near Ma On Shan, New Territories.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

From the chart above, Country Garden’s revenue (blue bar) and profits attributable to shareholders (green bar) have both skyrocketed over the past 5 years.

For some perspective, revenue soared from HK$106.89 billion in FY2014 to HK$449 billion in FY2018 and profits jumped from HK$12.8 billion to HK$41 billion in the same period.

Although the earnings margin fluctuates a bit over the past 5 years, the average margins would be at around 8%.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

That said, the Price/NAV ratio stands at 1.5x which is pretty high compared to the real estate industry average of approximately 0.72x. This may be attributed to the explosive revenue growth the company had chalked up over the years.

A quick glance at the upper line shows that the dividend yield has been relatively stable but jumped up to above 6% dividend yield due to its depressed share price recently.

Analyst Consensus Estimates

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Employing the Analyst Consensus Estimates tool, we can see that Country Garden is widely covered by 20 analysts and the average consensus recommendation comes up to be “Overweight” based on a consensus rating* of 1.43.

*The Consensus Rating is calculated based on the average of all recommendations using the following scale:

Buy: 1 Overweight: 1.5 Hold: 2 Underweight: 2.5 Sell: 3

Following that, their mean target price is HK$13.5, which translates to a 29.8% upside based on its share price of HK$10.4 at the time of writing.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Moreover, we observe that the analysts have turned more positive towards Country Garden over the past 2 years with the percentage of “Sell” ratings (red colour) decreasing from 23% to only 5%.

To add on, the target price (brown in colour) has also moved up to HK$13.5 from a low of HK$8.95.

3. K. Wah International (173.HK)

According to its website, K. Wah International Holdings Limited ("KWIH" in short) is the listed property arm of K. Wah Group.

With a strong foothold established in Hong Kong, KWIH has grown and prospered into a leading integrated developer and investor of exquisite and niche projects, with a strategic focus on Hong Kong, the Yangtze River Delta and Pearl River Delta regions.

Investors can explore its whole list of properties in the website here. A quick glimpse indicates that the company has developed and operated a good list of Hong Kong properties under its arsenal. You can also check out their latest presentation done on 20 August 2019 here.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

From the chart above, KWIH’s revenue (blue bar) and profits attributable to shareholders (green bar) have seen encouraging growth in the past 5 years.

Total revenue increased from HK$2.39 billion in FY2014 to HK$10.76 billion in FY2018 and profits jumped from HK$1.83 billion to HK$4.04 billion in the same period.

Excluding the outlier margins in FY2014, the company’s average margins are relatively high at above 30% over the past 3 years.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

To top it off, the Price/NAV ratio last came in at 0.35x for trailing 12M Jun 2019, down from 0.57x in FY2014. A quick comparison to the other 2 stocks mentioned above will point out the cheapness of KWIH.

The dividend yield is another good boost to the low price/nav ratio, increasing from 2.8% in FY2014 to more than 4.5% in FY2018.

Analyst Consensus Estimates

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

Utilizing the Analyst Consensus Estimates tool, we can see that KWIH is only covered by 3 analysts and the average consensus recommendation comes up to be “Buy” based on a consensus rating* of 1.17.

*The Consensus Rating is calculated based on the average of all recommendations using the following scale:

Buy: 1 Overweight: 1.5 Hold: 2 Underweight: 2.5 Sell: 3

Following that, their mean target price is HK$5.43, which translates to a 31.4% upside based on its share price of HK$4.13 at the time of writing.

As of 4 Sept 2019 | Sourced from ShareInvestor’s WebPro

On the other hand, we notice that the mean target price (brown in colour) has to be “taken with a pinch of salt” due to its big fluctations.

It soared from HK$4.11 in Dec 2018 to a high of HK$9.35 in Jul 2019 and crashed to HK$5.43 in Sep 2019. The sharp dip in target prices may be due to the on-going protests at Hong Kong but probably due to recover again with the extradition bill withdrawal.

Happy Investing!

Keen to analyse other stocks using the above features? Check out our ShareInvestor WebPro’s Free Trial here!

 

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