Great Eagle: Hong Kong’s Dividend Powerhouse, Deep Value REIT

Summary

Hong Kong real estate conglomerate Great Eagle Holdings Ltd released its results for the fiscal year Dec. 31, 2021 last month with basic earnings per share of HKD 1.87. The company has declared a final and special dividend totaling HKD 1.00 to be paid in June, which at its current share price of HKD 18.71 offers a dividend yield of 5.34%. Add in an interim dividend due in October (forecast 0.33 HKD) and that brings a 7% return in seven months. Great Eagle trades at a price-to-book ratio of just 0.198x, based on a book value per share of HKD 94.1 in December 2021. Net leverage is low at 10.5%. Given Great Eagle’s consistent, long-term dividend history and valuation, the stock represents a Hong Kong value and dividend driver. Detailed information about the company can be found in previous articles.

Total revenue for fiscal 2021 was HKD 5,696.9 million, down 31% year-on-year. However, this was mainly due to the fact that most of the sales of the sole contributor to the real estate sales segment (development of luxury condos Ontolo) were made in fiscal year 2020, and a much smaller contribution from Ontolo to the fiscal year 2021. Revenue for fiscal year 2021 from real estate sales was HKD 1,802 million compared to HKD 5,107.9 million for fiscal year 2020. Previously, I described Great Eagle as having a version discipline of Warren Buffett’s “expectation of the perfect pitch” applied to Hong Kong property development. The company very rarely swings in acquiring sites for property development in Hong Kong, but when it does, it’s a spectacular home run. This also means that income from real estate sales will vary significantly from year to year. With Ontolo mostly sold, the next major contributor to Great Eagle’s property development sales is its Box Ho-Man development, which is expected to be completed in 2024.

More significant in the results is the recovery of the company’s hospitality division, amid a lifting of social distancing restrictions in most countries for much of 2021. The hospitality division recorded revenue of 2,835.3 million HKD in fiscal 2021 compared to 1,815.2 million HKD in fiscal 2020. EBIDTA was negative 105.4 million HKD in fiscal 2021 versus HKD 625.8 million in fiscal 2020. Performance is expected to continue to improve in fiscal 2022 as the travel business continues to pick up in the division’s core markets of China. North America, Australia/New Zealand and Europe. It’s also worth noting that most of the stock prices of the world’s leading hotel operators and owners factor in the future normalization of travel business. Despite the market sell-off, the world’s leading hospitality stocks are trading at the high end of their 52-week and historical ranges. In contrast, Great Eagle’s upscale hotel group within a real estate conglomerate is currently trading at all-time lows.

The summary of the company’s results is presented below.

Source: Annual results

Company Outlook

The company’s outlook on page 17 of its annual results takes an overall cautious tone, noting the headwinds experienced both in Hong Kong by the fifth wave of the pandemic and global headwinds.

The Group will continue to carefully navigate its business amidst these challenges and uncertainties. He will remain proactive, with due caution, in seeking new investment opportunities that will bring lasting benefits for the future. The Group is also exploring new and diversified sources of income in other areas of investment in addition to its existing real estate and hotel sectors.

I am once again reminded here of the legendary Mr. Buffett and Berkshire Hathaway (BRK.A) – the caution of conservatism in the outlook amid current global challenges and risks, but as we will see, very high optimism from their own business prospects that is demonstrated in their actions.

On page 20 of the report, the company states:

Given the Group’s strong financial position and the capital gain from the investment in 13.4 million shares of US-listed electric vehicle company Lucid (US stock code: LCID.US), the Board recommends the payment of a final dividend of 50 HK cents per share (2020: 50 HK cents per share) and a special final dividend of 50 HK cents per share (2020: 50 HK cents per share) for year ended 31 December 2021 to Shareholders subject to the approval of Shareholders at the next Annual General Meeting in 2022 (the “2022 AGM”).

As previously expected, Great Eagle has declared a special dividend in addition to its final dividend. It will be paid on June 21, 2022. Later this year there is also the interim dividend which is regularly paid. Last year it was 33 cents HKD and paid on October 13. Therefore, assuming the same interim dividend, a handsome dividend of HKD 1.33 per share is envisaged over the next seven months, for an attractive dividend yield of 7.1% at the share price of 18, 71 HKD.

Looking at Great Eagle’s dividend history, we can see the regular and attractive dividend payouts every year. Based on the current share price, the dividend yield over the past six years was 7.1% (2021), 15.1% (2020), 7.1% (2019), 4.4 % (2018), 9.5% (2017) and 6.68% (2016). This year’s dividend yield is expected to be at least 7.1%, assuming the final dividend is 33 HK cents. In addition, the continued recovery of travel to pre-pandemic levels in 2023 and the potential completion of the Ho Man Tin development in 2024 should mean that dividends in coming years will be at least above average in the long run. business term. The completion of Ho Man Tin itself could bring another outsized special dividend in 2024 or 2025, similar to that of 2020 (total dividends of HKD 2.83) when the start of Ontolo sales led to increased revenue. . Recall that the Pak Shek Kok land for Ontolo was purchased by Great Eagle in 2014 at “nearly half the price for which nearby waterfront sites changed hands in 2007”, per SCMP. The purchase of the Ho Man Tin site by Great Eagle was made at an attractive valuation, in a possible distressed sale.

Source: AAStocks

In addition, looking at the documents filed by HKSE, it is worth noting a resumption of the purchase of his company’s shares by the chairman and majority shareholder, Dr. Lo Ka Shui, in a very significant way.

Source: HKSE

Hong Kong Perspectives

Hong Kong is going through a difficult situation, with the fifth wave of COVID overwhelming hospitals, and most of its 3,500 total COVID deaths (as of last week) have occurred in the past two weeks. COVID infections in Hong Kong have recently reached over one million.

Stock market performance in Hong Kong reflected the lackluster situation on the ground, with the Hang Seng index hitting lows last Tuesday not seen in more than a decade. However, following Beijing strong statement to ensure market stability in China, we have seen the strong recovery of the Hang Seng index from last Tuesday’s low.

Over the weekend, Hong Kong Chief Executive Carrie Lam declared that a plan to resume quarantine-free travel to Hong Kong will be developed once the fifth wave passes. Media reported last week that the fifth wave in Hong Kong may have peaked. The Hong Kong government, like other major economies during their outbreaks of pandemic cases, has unveiled business tax support, and fiscal stimulus to households.

When markets reflect gloomy times, it should be noted that sustained market rallies and the potential beginnings of a bull market do not start when all is well again, but when things look a little less gloomy. The Hang Seng Index is still at its lowest level since June 2016 and has been one of the worst performing global stock markets. Property groups in Hong Kong are trading at or near their historic lows. However, property prices in Hong Kong remain close to their all-time high reached in the third quarter of 2021, and I expect property prices to remain resilient. This means that price-to-book valuations are at historic lows, as illustrated by Great Eagle stock. Take a look at HKSE filings and there have been dozens of major real estate groups that have seen significant insider buying, both during recent lows and at much higher price levels seen in 2021.

Look to 2023 and 2024 and consider how Hong Kong will be positioned then. It may be hard to imagine now, but I believe that Hong Kong will emerge with its position as a world financial center of even greater importance and once again become a leading international travel destination and a leading cultural and entertainment center.

Conclusion

At Great Eagle’s current valuation, there is a huge margin of safety, in my view. As value investors know, once the potential downside has set in, the greatest risk becomes that of potential time-adjusted returns (and the opportunity cost if time-adjusted returns ultimately fail to meet expectations to). I believe Great Eagle should have a fair value over a 12 month horizon of 30 HKD or more, and will eventually revalue to 40 HKD levels with the completion of Ho Man Tin, the global travel resumption at levels pre-pandemic and Hong Kong’s return to the bustling financial, entertainment and cultural center of the world. This simultaneous trio of catalysts for a potential double-bagger from current equity price levels will require at least a two-year horizon. The risk is that it takes longer than that and therefore lower time-adjusted returns. But keep in mind that we are well paid to wait, in dividends.

I think Great Eagle could see HKD30 levels next year, but even if we assume that a target of HKD30 (60.3% upside from current levels) takes two years to achieve and a return of average dividend of 7% each year, this translates to a return of 74.3% and 37.15% per year on a simple basis. This makes Great Eagle a compelling value investment for me.