Tag: Shanghai Market
Over more than a century, it assiduously assembled, maintained and upgraded these assets and turned them into a portfolio consisting of the most desirable office addresses and retail locations in the city. The HK portfolio accounts for nearly 65% of the company’s earnings, all of which stable rental incomes.
HKL is the second-largest office landlord in Hong Kong behind Swire Properties, but one with the most centrally located assets. It is the clear beneficiary of rising demand in the HK office sector, prior to a weakened market in 2020. Driven by strong demand from Chinese corporates establishing presence in the city, corporates are particularly attracted to the high-grade office spaces offered by HKL. Beyond the attraction of modern grade-A office spaces, these assets offer sizable floor plates, unrivalled visibility and prestige, due to their storied histories and locations.
Fundamentally, existing office space and new supply in HK is below that of world financial centers. The small CBD with tight supply was a key driver of the decentralization trend. While office demand weakened in 2020 due to the social unrest and coronavirus pandemic, HKL’s assets maintained near full occupancy, attributable to its selection of blue-chip tenants and lease management. We expect the company’s portfolio in the city to fare well in coming years, underpinned by demand from Chinese corporates and the city’s status as a world financial center.
The company holds investment properties in Singapore, Jakarta, and Beijing. It also currently has development projects in Singapore and China. Given Hong Kong’s current high asset value, acquisitions in recent years include large commercial projects and development projects in several cities across the Asia-Pacific. However, the company’s focus in Hong Kong is clear. During the downturn in 1982, the company disposed most of its overseas assets in a bid to shore up its balance sheet and hold on to its core portfolio in Hong Kong.
Fair Value and Profit Drivers
Our fair value estimate for Hongkong Land is USD 7.20, implying a price/book ratio of 0.5 times, a forward P/E of 20 times, and enterprise value/EBITDA of 22 times. Our valuation is based on a cost of equity of 8.5% and a weighted average cost of capital of 6.9%. Over the next five years, we expect average return on invested capital to average 9%.
As Hongkong Land is a property investor first and foremost, and its development projects in Singapore, China and elsewhere are more opportunistic, we believe the long-term growth is driven by rental growth of its core portfolio in Hong Kong, and to a lesser degree in Singapore. For the Hong Kong office portfolio, we assume spot rental of HKD 110 per square foot per month, compared with an average rental of HKD 120 per square foot per month in 2020. With lease expiry at 4.6 years, we assume 20% annual lease expiry over the next five years. As such, we project blended net rental declines by 1.5% annually over the next two years, before a recovery thereafter.
Average net rent for its retail portfolio was HKD 164 per square foot per month in 2020, due to rental subsidies offered. Excluding the subsidies, rental was HKD 212 per square foot per month. Our spot rental in 2021 factors in a decline of 10%. With lease expiry declining to 1.9 years as retailers are unwilling to commit to longer leases, we expect blended rental to fall 8% in 2021. We assume near full occupancy as most luxury brands’ flagship stores are located in Hongkong Land’s properties in Central. As such, we do not expect any impact from a consolidation of luxury stores to be a negative impact. Further, fitouts for flagship stores are high.
Hongkong Land Holdings Ltd
Hongkong Land is a property investor mainly holding prime commercial assets in Hong Kong and Singapore. The company is the second-largest office landlord in Hong Kong with a portfolio of centrally located assets totalling 4.1 million square feet of office space along with 0.6 million square feet of retail space. It also holds 1.6 million square feet of prime office space in Singapore. Rental income accounts for about 75% of the operating profit, with most coming from Hong Kong. Property development projects in Singapore and China contribute the rest. The company was founded in 1889 and is dual-listed on the London Stock Exchange, with a secondary listing on the Singapore Exchange. It is 50%-owned by Jardine Matheson Holdings.
Source: Morningstar
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.
Xiaomi’s smartphone segment had another strong quarter with Xiaomi’s total number of smartphones sold globally rising by 69% and smartphone revenue increasing by 70% from the previous year. Smartphone gross profit was up 170% with gross profit margin increasing to 12.9% from 8.1% in first-quarter 2020. Until the third quarter of 2020, the average smartphone gross margin for the previous 15 quarters had been 7.5% with a range of 3.3% to 9%. The margin then jumped to 10.5% in fourth-quarter 2020 and 12.9% in first-quarter 2021. Given Xiaomi generates around two thirds of its revenue from smartphone, its valuation is very sensitive to the smartphone gross margin assumption. If we double the smartphone gross margin assumption from 7.5% to (say) 15%, holding all other assumptions equal, Xiaomi’s valuation nearly doubles. Xiaomi pointed toward the shift in product mix toward higher end smartphones and reduced marketing and promotion spend given tightness in the semiconductor supply chain as the key drivers for the margin increase.
We estimate that reduced competitive intensity from Huawei has probably also helped smartphone industry margins and there may also be some premium attached to 5G phones. In the first-quarter 2021, key competitor, Samsung, reported its highest quarterly smartphone operating margin since the second quarter of 2016. The first quarter also saw Apple reporting its highest quarterly company operating margin since first quarter of 2016.
Xiaomi admitted that gross margin expansion had not been its main focus nor does it expect it to be in the near future as it is quite rightly focused on increasing market share, particularly in the mid-high end phone segment. It expects future growth to come from increased penetration into the offline segment in China as it is currently expanding its store footprint with a target of around 10,000 stores by the end of 2021. We forecast Xiaomi to grow its smartphone revenue by 44% in 2021 and at an average of 18% per year thereafter out to 2025 and assume its smartphone gross profit margin increases from 11.0% in 2021 to 11.4% in 2025 having lifted these assumptions by around 200 basis points following this result.
Revenue from the Internet of Things and lifestyle products segment increased by 41% year over year in the first quarter after growing by 8.6% in 2020. We note that the prior period was negatively impacted by COVID-19. Gross margin increased to 14.5%, which was also a quarterly record. Management had previously indicated that it had proactively reduced the number of stocks keeping units in this division to focus more on those products that interworked with the smartphone ecosystem. The company indicated that global shipments of its smart TVs were down 4% to 2.6 million for the first quarter. Larger television competitor, TCL, reported global TV sales volumes up 33% for the first quarter with TV sales in China up 8.3% and non-China sales up 43%. We forecast that Xiaomi can grow its Internet of Things and lifestyle products revenue by an average of 15.1% per year out to 2025 with gross margins averaging 12.0%.
Revenue from internet services was below expectations, increasing by 11.4% year over year in the first quarter after growing at 20% in 2020. Monthly active users, or MAUs, of its Mi User Interface increased to 425 million at the end of March from 396 million at the end of December 2020 and were up 29% year on year. However, average revenue per user was down 13% to CNY 5.3 per month. Advertising revenue was strong growing by 20% to CNY 3.6 billion and making up 58% of total internet services revenue. This is mainly driven by smartphone sales with the improved mix of higher end smartphones helping Xiaomi to grow the preinstalled app revenue. The high percentage of advertising revenue and improved margins from the fintech business drove internet services gross margin to 68.4% for the quarter. We believe the dominance of advertising in this revenue stream speaks to the difficulties Xiaomi has faced in building non-hardware-related internet revenue streams. We forecast internet services revenue growth of 20% per year to 2025 noting that growth in first-quarter 2021, internet services revenue was slower because of the very high gaming revenue in first-quarter 2020 due to the pandemic.
Source: Morningstar
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.