Hysan Development Company Limited

Why I Chose To Close My Position in Hysan Development?

Although I still believe Hysan Development is undervalued at current levels, I have chosen to close my position and free up some cash after Iran attacked Israel on April 13, 2024, right after the opening of the stock market on Monday the 15th. Thankfully, the market didn’t plummet in response to escalating global tensions. However, since my portfolio primarily consists of Russian stocks hindered by sanctions, I’m content to hold onto some cash until signs of eased global tensions emerge, or until an irresistible opportunity presents itself.

The Total Return on my investment in Hysan Development from the initial purchase date on October 23, 2022 to the final closing date on April 14, 2024, amounted to 17.47% in local currency (EURO) and 15.7% in HKD.

For reference, I’ve included my original investment thesis for Hysan Development below.

Why I Chose to Invest in Hysan Development Co Ltd (0014.SEHK)

During the Evergrande crisis in China, numerous regional real estate companies experienced a significant decline in their stock prices. Amidst the chaos, I sought to identify a company whose share price had dropped disproportionately, indicating a potentially undervalued investment opportunity. This search led me to Hysan Development Co Ltd, a company with a rich history of owning prime real estate in Hong Kong and conservative management practices that span nearly a century.

Hysan Development’s largest shareholder, the Lee family, collectively held approximately 50.7% of the company’s issued share capital as of December 31, 2021. The primary factors that drew my attention to Hysan were its robust balance sheet and attractive dividend yield, both of which suggested financial stability and potential for long-term growth.

Additionally, I discovered that Hysan Development made strategic investments in Shanghai during the height of the crisis. I interpreted this move as a savvy, opportunistic play by the company to capitalize on undervalued assets that would likely bolster future rental income and market valuation.

In conclusion, my decision to invest in Hysan Development Co Ltd was based on the company’s strong financials, resilient management, and prudent investment strategy amid challenging market conditions.

Disclaimer: This is not financial advice. Always conduct thorough due diligence before making any investment decisions.

Financial Data Analysis

The following financial data were relevant when I made my initial investment in Hysan’s shares (further details about my trading activity is provided below). The calculated “Key Metricsprovide a window into my approach to valuation. For a deeper understanding of this approach, as well as comprehensive explanations on what these revealing ratios truly signify, I encourage you to read the following article.

For my due diligence, I primarily focus on the most recent annual Cash Flow and Income Statements to gauge the company’s performance relative to the previous years. However, when reviewing the Balance Sheet, I always refer to the most recent quarterly statements. This allows me to accurately understand the present state of the company’s assets and liabilities, essentially giving me a snapshot of what I’m investing in at that moment.

Selected Quarterly Balance Sheet Data as of December 31, 2023Key Metrics
Total InventoryN/ACurrent Ratio4,252 / 1,807 = 2.35
Total Current Assets4,252Quick RatioN/A (No Inventory)
Total GoodwillN/ABook Value per Share114,526 / 1,027.01 = 111.51
Total IntangiblesN/ATangible Book Value per ShareN/A (No Goodwill, No Intangibles)
Total Assets114,526Price to Book Value16.59 / 111.51 = 0.15
Total Current Liabilities1,807Price to Tangible Book ValueN/A (No Goodwill, No Intangibles)
Total Equity79,691Total Equity / Total Assets79,691 / 114,526 = 0.7
Total Common Shares Outstanding1,027Total Tangible Equity / Total Tangible AssetsN/A (No Goodwill, No Intangibles)
Selected Annual Income Statement Data as of December 31, 2023Key Metrics
Diluted Net Income(872)Diluted Normalized EPSN/A (2023 Resulted in a Loss)
Diluted Weighted Average Shares1,027.01Price to Earnings RatioN/A (2023 Resulted in a Loss)
Selected Annual Cash Flow Data as of December 31, 2023Key Metrics
Total Cash Dividends Paid1,109Dividend per Share1,109 / 1,027.01 = 1.08
Dividend Yield1.08 / 16.59 * 100% = 6.51%

Catalysts for Future Revaluation

  1. Despite the strict quarantine regulations imposed during the COVID-19 pandemic and shifting business requirements for office space, the company successfully maintained the occupancy rates in its retail and office portfolios. With the reopening of the Hong Kong-Mainland China Border in January 2023, a resurgence in tourism and business activities is expected, which should positively impact the company’s revenue.
  2. The company experienced a notable fair value loss of HK$3,250 million in 2022 as opposed to a loss of HK$1,200 million attributable to the owners. However, absent this non-cash write-down, the company could have realized a profit of around HK$2,000 million during 2022. It is exciting to envision the potential earnings in a normalized business climate devoid of COVID-19 restrictions.
  3. In 2023, the Hysan incurred a loss of HK$872 million, primarily stemming from a non-cash fair value decrease of investment properties amounting to HK$2,763 million. I am optimistic that, following the substantial non-cash write-downs experienced in 2022 and 2023, the company’s present balance sheet will reflect a fair valuation of its assets, signifying that a significant portion of the financial challenges has been absorbed.
  4. The company’s aggressive plans for significant enhancements to its core portfolio could catalyze future growth. Initiatives include connecting buildings, car parks, and other notable sites to alleviate traffic congestion and reduce pollution. A case in point is the Caroline Hill Road Project, slated for completion in 2026. This venture promises state-of-the-art, sustainable amenities for commercial tenants and a lifestyle park, which should enhance the value and allure of the company’s properties, thereby attracting more tenants.

In conclusion, Hysan’s earned goodwill through its supportive role as a landlord during the pandemic, its prime location in Lee Gardens, and the continual development and expansion of its portfolio are key factors that are likely to bolster its long-term prospects.

Company Information

Hysan Development Co Ltd is a company principally engaged in the properties leasing. The Company operates its business through four segments. The Retail segment engages in the leasing of space and related facilities. The Office segment engages in the leasing of office space and related facilities. The Residential segment engages in the leasing of residential properties and related facilities. The Property Development segment engages in the development and sale of properties.

Company Website: https://www.hysan.com.hk/

Trading Activity – When I Bought These Shares

  • October 23, 2022 – HKD 17.86
  • September 11, 2023 – HKD 15.82
  • January 11, 2024 – HKD 14.68
  • February 29, 2024 – HKD 12.96
  • March 5, 2024 – HKD 12.66
  • (Average price – HKD 15.34)

Dividend Activity – When I Received Any Dividends

  • Ex-dividend date: March 2, 2023 – HKD 1.17 (Final Dividend for 2022).
  • Ex-dividend date: August 23, 2023 – HKD 0.27 (Interim Dividend for the Six Months Ended June 30, 2023).
  • Ex-dividend date: March 6, 2024 – HKD 0.81 (Final Dividend for 2023).

Trading Activity – When I Sold These Shares

  • March 14, 2024 – HKD 11.67

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