Elevator Pitch

I downgrade my rating on Hong Kong-listed property company Sino Land Co. Ltd (OTCPK:SNLAY) (OTCPK:SNLAF) [83:HK] from Bullish to Neutral.

This is an update of my initiation article on Sino Land published on March 20, 2017. Sino Land’s share price has fallen by -33% from HK$13.48 as of March 17, 2017 to HK$9.00 as of September 30, 2020, since my initiation. US-China trade tensions, social unrest and Covid-19 have had a negative impact on Hong Kong property companies in the past two years, and Sino Land was no exception. Sino Land trades at 0.43 times P/B and 6.7 times consensus forward FY 2021 (YE June) P/E, and it offers a consensus forward FY 2021 dividend yield of 6.6%.

Sino Land’s underlying net profit attributable to shareholders only declined by -2.4% YoY to HK$4,557 million in FY 2020 thanks to the resilient property rental business, and the company’s earnings are expected to double in FY 2021 given its significant contracted sales backlog of approximately HK$24 billion. Sino Land’s huge cash pile and its FY 2021 project launches are also in the spotlight.

I acknowledge that Sino Land is a cash-rich property company offering attractive dividend yields. But Sino Land’s significant contracted sales backlog could have already been priced in, so a further positive valuation re-rating is dependent on the company’s future capital allocation decisions and the performance of its new property project launches. As such, I see a Neutral rating for Sino Land as fair.

Readers have the option of trading in Sino Land shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers SNLAY and SNLAF or on the Hong Kong Stock Exchange with the ticker 83:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that are internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $9 million, and market capitalization is above $8 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors that own Sino Land shares listed in Hong Kong include The Vanguard Group, BlackRock, Norges Bank Investment Management, and State Street Global Advisors among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers or Fidelity, or international brokers with Asian coverage, like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Resilient FY 2020 Financial Performance

Sino Land announced the company’s FY 2020 (YE June) financial results on August 26, 2020, and the company’s financial performance was resilient notwithstanding the negative impact of Covid-19.

Sino Land’s underlying net profit attributable to shareholders, excluding non-cash and non-recurring items such as fair value changes on investment properties, only declined by -2.4% YoY from HK$4,671 million in FY 2019 to HK$4,557 million in FY 2020. Strength in the company’s property rental business was offset by weakness in its property development and hotel operations businesses.

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The company derived 71%, 17% and 4% of its FY 2020 operating income from its property rental, property development and hotel operation businesses, respectively. The property management, securities investments and financing businesses contributed the remaining 8% of Sino Land’s operating profit in FY 2020.

Sino Land’s property rental business was the bright spot in the most recent fiscal year. Attributable net rental income (including share of associates and joint ventures) declined marginally by -2.3% YoY from HK$3,685 million in FY 2019 to HK$3,600 million in FY 2020. A -6.1% YoY decrease in retail portfolio revenue was partially offset by a +1.6% rental growth for the office portfolio which benefited from positive rental reversion for leases renewed in the most recent fiscal year.

Sino Land’s retail property portfolio was negatively impacted by measures to support tenants such as rent relief and rent deferral, and a decline in occupancy rate from 97.2% as of end-FY 2019 to 96.0% as of end-FY 2020. Nevertheless, the performance of Sino Land’s retail property portfolio was also not as bad as feared. This is likely attributable to Sino Land’s focus on mass market shopping malls in the New Territories and West Kowloon which makes its retail properties less vulnerable to the plunge in tourist arrivals due to Covid-19.

The company’s property development business did not perform as well as its property investment business in FY 2020. Attributable property development revenue decreased by -20.6% YoY from HK$2,987 million in FY 2019 to HK$2,372 million in FY 2020. This was because Sino Land had fewer property development projects which completed construction in the most recent fiscal year. Sino Land recognized HK$1,305 million in property development revenue from the Commune Modern project for FY 2019, but there was no major new completion of property projects at the subsidiary level for the company in FY 2020 with the bulk of revenue derived from projects at the associates & joint ventures level.

The poor performance of Sino Land’s hotel operations business was no surprise, considering international travel restrictions put in place in various parts of the world to contain the spread of Covid-19. The operating profit for the hotel operations business fell by -64.1% YoY from HK$537 million in FY 2019 to HK$193 million in FY 2020. Sino Land’s The Olympian hotel in Hong Kong saw occupancy rate fall from 83% in FY 2019 to 58% in FY 2020, while the occupancy rate for the company’s 30%-owned Conrad Hong Kong hotel decreased from 89% to 35% over the same period. Similarly, Sino Land’s hotels in Singapore, The Fullerton Hotel Singapore and The Fullerton Bay Hotel Singapore, had their occupancy rates drop from the mid-80s in FY 2019 to the mid-50s in FY 2020.

FY 2021 Net Profit Expected To Double Given Significant Contracted Sales Backlog

Sell-side analysts expect Sino Land’s underlying net profit to double from HK$4,557 million in FY 2020 to HK$9,185 million in FY 2021, prior to declining -10% YoY to HK$8,217 million in FY 2022.

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The market’s expectations of strong earnings growth for Sino Land is backed by the company’s significant contracted sales backlog. Sino Land has approximately HK$24 billion of contracted sales from prior project launches, which the company has yet to recognize as revenue pending project construction completion. Sino Land’s HK$24 billion contracted sales is mainly derived from past projects such as Grand Central in Kwun Tong, Kowloon, Mayfair By The Sea 8 in Pak Shek Kok, New Territories, and Madison Park at Cheung Sha Wan, Kowloon.

Downside earnings risks for FY 2021 are the worse-than-expected performance of Sino Land’s retail property portfolio and its hotel operations business.

Huge Cash Pile Draws Attention

As of June 30, 2020, Sino Land has a net cash balance of HK$38,414 million (or HK$5.45 per share) which accounts for approximately 60% of its market capitalization, or close to 10 times its annual dividend payout for FY 2020.

On the positive side of things, Sino Land’s huge cash pile implies that the company should maintain or even increase its dividends going forward. This makes Sino Land a more defensive yield play, compared to a large number of its property company peers which are either cutting or suspending dividend payouts. Furthermore, Sino Land could leverage on its strong balance sheet to purchase land banks at bargain prices, if and when such opportunities arise.

On the negative side of things, holding excess cash in an environment of low interest rates is not exactly the best of capital allocation decisions. This could make Sino Land more motivated to allocate cash to higher-return opportunities, which increases the risks associated with bidding for land at sky-high prices or diversifying outside of its core property businesses.

In other words, having a huge cash pile is a double-edged sword for Sino Land, and a lot will depend on the company’s capital allocation decisions in the future.

All Eyes On Project Launches In FY 2021

Looking ahead, Sino Land has six property projects with a total attributable area of one million sq ft and 1,272 residential units planned for launch in the new fiscal year, as per the table below.

Sino Land’s New Project Launches Planned For FY 2021

Source: Sino Land’s FY 2020 Results Presentation Slides

It is noteworthy that Sino Land’s new property projects planned to be launched in FY 2021 are mainly focused on the luxury segment. The market is divided on the prospects of the luxury segment of the Hong Kong housing market. Some think that the luxury segment should be more resilient as the wealthy continue to see property as an attractive asset class, while others feel that buyers of luxury properties could defer their purchases in view of economic uncertainty. Nevertheless, one of the units at Sino Land’s St George’s Mansions was sold at a relatively high price of HK$53,738 per sq ft in August 2020, suggesting that there is still demand for luxury properties.

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Also, there is a consensus in the market that Sino Land acquired certain land banks at relatively high costs a few years ago. This could possibly have a negative effect on Sino Land’s property development margins for future projects.

Valuation And Dividends

Sino Land trades at 0.43 times P/B based on the company’s net asset value per share of HK$20.57 as of June 30, 2020, and its share price of HK$9.00 as of September 30, 2020. As a comparison, the stock’s five-year and 10-year mean P/B multiples were 0.60 times and 0.70 times, respectively.

The stock is also valued by the market at consensus forward FY 2021 and FY 2022 P/E multiples of 6.7 times and 7.7 times, respectively. In contrast, Sino Land’s five-year and 10-year average consensus forward next twelve months’ P/E multiples were 14.2 times and 14.1 times, respectively.

The company declared a final dividend of HK$0.41 per share for the second half of FY 2020, bringing full-year FY 2020 dividends per share to HK$0.55 which was unchanged from FY 2019. Sino Land’s dividend payout ratio (based on underlying earnings per share) increased from 80% in FY 2019 to 85% in FY 2020.

Sino Land offers consensus forward FY 2021 and FY 2022 dividend yields of 6.6% and 6.8%, respectively. Market consensus expects Sino Land to increase its dividends per share from HK$0.550 in FY 2020 to HK$0.597 in FY 2021 and HK$0.614 in FY 2022. Expectations of higher dividends in FY 2021 are supported by Sino Land’s huge cash pile and its strong earnings recognition from property development projects this year.

Risk Factors

The key risk factors for Sino Land include sub-optimal capital allocation especially with regards to how it utilizes its huge cash pile, weaker-than-expected sales for new property project launches, and lower-than-expected dividends for FY 2021 and beyond.

Note that readers who choose to trade in Sino Land shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Via SeekingAlpha.com