Kate Lin: Welcome to Morningstar. Headlines on China regulations and developers' defaults have unnerved the market. But in fact, there are some less affected Hong Kong businesses trading at an attractive valuation. What are some interesting names? Morningstar analyst, Michael Wu, is here to tell us.
Hi, Michael.
Michael Wu: Hi, Kate.
Lin: You have three undervalued Hong Kong stocks for us. Where would you like to start?
Wu: Yeah. So, it's been more than two years since these names have underperformed since the social unrest in 2019. But in the long term, we continue to see Hong Kong as an international finance center, and post-COVID, we expect an economic recovery to continue to improve once the domestic and international borders are reopened. So, with that in mind, we do see value in a number of names in banks, real estate and conglomerates with their majority businesses derived in Hong Kong.
So, the first name is HSBC. It has been a very difficult operating environment for all banks in general. The low interest rate environment as well as the slowdown in economic activities have reduced their profitability. The lockdown has also raised concern about asset quality. Now, both of these issues are behind them, and we do think that they are going to benefit from a better operating environment going forward. Now, the recovery itself is depending on the central bank policies and the recovery itself is probably going to be a bit bumpy. That's illustrated by the Bank of England's decision to leave interest rates unchanged this month. So, focusing on the fundamentals of HSBC, the bank itself is progressing well in its restructuring in terms of divesting its subscale business and also refocusing on Greater China and in Asia. So, we expect the above initiatives to result in improving profitability for the bank trading at 25% discount to our fair value. We do not believe that the recovery is factored in the current share price. Dividend yield of 4% is also attractive. And we expect some further share buyback or capital management initiative in fiscal 2022.
Lin: Another name you like is Swire Pacific. What do you think is the key catalyst for the group?
Wu: Yeah. So, Swire Pacific is also deep value currently trading at price to book of below 0.3 times. We expect that discount to narrow to the historical average of 0.5 times. Now, the most obvious positive catalyst is the reopening of the borders. That will benefit their aviation division the most, Cathay Pacific. Without a domestic market Swire's aviation division has been severely impacted relative to peers. So, the reopening of borders, we also expect that to benefit the group's cooperation in real estate. Now, the group itself is one of the largest landlords in office space in Hong Kong. Occupancy generally has been quite resilient, but rental has obviously been down in the last two years due to social unrest and later the COVID situation. So, leasing activity has generally been supportive for the last few months. But any acceleration in terms of rental growth, we do expect a reopening of borders to be the key catalyst. The lesser-discussed beverage division, we think that has been quite resilient for the group. Swire is one of two bottlers – Coca-Cola bottlers in Mainland China and they also have a bottling operation in Greater China and in the U.S. as well. The Mainland operation itself has benefited from a restructuring of geography that has improved margins, and we do expect that to continue in the near term.
Lin: Right. The Hong Kong government says in the latest policy address that it is refocusing on housing and land issues. On this policy, which name do you think is a beneficiary?
Wu: Yeah. So, we don't expect the recent policy on housing and land-related measures to have an impact on the demand and supply imbalance of affordable housing in Hong Kong. So, the overall situation should not change too much. So, we expect the overall residential property prices to remain high in the near term. And that's supported by improving economic fundamentals. So, Sun Hung Kai is our preferred pick. They do have a strong pipeline of properties under development and also a large land bank to take advantage of the continued housing demand in Hong Kong. And on the commercial side, there's plenty of investment properties that are completing or in the pipeline, both in Hong Kong and in Mainland China.
Lin: Michael, thank you so much for your time. For Morningstar, I'm Kate Lin.
.jpg "Kate Lin")
