Nikada
Elevator Pitch
CK Asset Holdings Limited (OTCPK:CHKGF) [1113:HK] is rated as a Hold. On its corporate website, CK Asset calls itself a “multinational conglomerate” that is “one of the largest property developers in Hong Kong.”
With my previous write-up published on June 29, 2021, I touched on CK Asset’s capital allocation moves in terms of M&As and buybacks. This article is focused on the assessment of the company’s recently announced full-year FY 2023 financial results.
CK Asset’s group revenue, pre-tax earnings, and dividends for fiscal 2023 were below expectations. On the flip side, CK Asset has low financial risk and the stock’s valuations are undemanding. Taking into account the mixed outlook (volume and price) for Hong Kong’s real estate market, it is premature to turn bullish on CK Asset now which explains why I have retained a Hold rating for CK Asset.
Investors should be aware that CK Asset’s shares can be traded on both the Over-The-Counter market and the Hong Kong Stock Exchange. The three-month mean daily trading values for the company’s OTC and Hong Kong-listed shares were approximately $20,000 and $20 million (source: S&P Capital IQ), respectively. CK Asset’s Hong Kong shares can be bought and sold with US stock brokerages such as Interactive Brokers.
Fiscal 2023 Financial Performance Was Weaker Than Expected
CK Asset released the company’s full-year FY 2023 results announcement on March 21, 2024, and its key financial metrics for the prior year failed to meet the market’s expectations.
Group revenue (excluding joint ventures’ contribution) for CK Asset contracted by -16.1% from HK$56,341 million for fiscal 2022 to HK$47,243 million last year. The company’s actual FY 2023 group revenue came in -2.6% lower than the sell side’s consensus estimate of HK$48,506 million as per data drawn from S&P Capital IQ.
The company’s pre-tax profit declined by -10.4% from HK$22,683 million in FY 2022 to HK$20,326 million for the most recent fiscal year, and that was -5.5% below the analysts’ consensus forecast of HK$21,501 million (source: S&P Capital IQ).
The property development or property sales business was the weak spot for the company last year. Specifically, revenue and profit generated by CK Asset’s property sales business segment fell by -49% and -57% to HK$13,153 million and HK$4,475 million, respectively for FY 2023 as disclosed in its earnings presentation.
In its results announcement, CK Asset noted that “worsening economic conditions and weak property market sentiment in Hong Kong” had been a drag on the performance of its property sales segment and the company as a whole in the previous year.
Dividend Cut In Absolute Terms Was Another Negative
On top of the below-expectations financial results, CK Asset’s dividend distribution for fiscal 2023 was another disappointment. The company’s final and full-year dividends per share were lowered by -12.4% and -10.1% to HK$1.62 and HK$2.05, respectively. As a comparison, the sell side’s consensus full-year FY 2023 dividend per share forecast for CK Asset prior to its earnings announcement was higher at HK$2.29 (source: S&P Capital IQ).
It is worthy of note that the company’s FY 2023 dividend payout ratio (excluding earnings from discontinued operations like aircraft leasing in the calculation) at 42% was the same as that for FY 2022. But it is natural that investors would certainly have preferred that CK Asset adopt a progressive dividend policy where dividends are not reduced in absolute terms even if earnings decline.
In response to the dividend cut, CK Asset noted at its FY 2023 analyst results briefing (transcript sourced from S&P Capital IQ) that the company “spent almost $2 billion buying back over 45 million shares” last year which “would also be part of our (capital return) strategy” for the future. In other words, there is a possibility that the lower dividends for 2023 might be “compensated” by an increase in future share buybacks.
Healthy Financial Position Is Attributed To Cautious Land Acquisition Approach
In its FY 2023 earnings presentation slides, CK Asset highlighted that its net gearing or net debt-to-shareholders’ funds ratio was a very comfortable 3.2%. The company also has A2 and A investment grade credit ratings from Moody’s and S&P, respectively.
At the FY 2023 analyst briefing, CK Asset highlighted that “if we had bought a lot of land during the peak, let’s say, 4 and 5 years ago, our gearing would not be at 3%, and we may be holding quite a few projects with book values that are higher than market values.” This worst case scenario was avoided for CK Asset, because the company’s management took a very cautious approach towards land acquisition for property development.
CK Asset’s healthy financial position protects the company’s downside and also allows it to capitalize on potential investment opportunities for the future. Assuming that interest rates rise going forward, CK Asset’s interest expenses won’t increase substantially thanks to its low gearing. On the other hand, if there are good assets or businesses available at attractive prices, CK Asset has the financial strength to invest in these opportunities.
Mixed Outlook For Hong Kong Property Market
Recent commentary from the company and industry insiders suggests that CK Asset’s Hong Kong property development or property sales business should have already seen its worst days, especially in terms of sales volume.
CK Asset mentioned at the company’s FY 2023 results briefing that “the downside pressure seems more limited than the potential upside” for the Hong Kong real estate market, as evidenced by a “significant pickup in volume in the (Hong Kong property) market recently.” Separately, a news article published by South China Morning Post on March 17 this year cited comments from the Hong Kong Estate Agents Authority’s chairman that there was a “doubling of transactions in the (Hong Kong) property market” in recent weeks.
On the flip side, the recovery in property sales volume might not be accompanied by a significant rise in home pricing for Hong Kong.
The elevated home supply for the Hong Kong market is the key factor that will likely suppress property price increases. Bloomberg’s March 13, 2024 news report quoted data from Jones Lang LaSalle (JLL) which indicated that the number of unsold new homes in Hong Kong as of end-2023 was roughly seven times the mean yearly annual home sales volume in the past three years.
Final Thoughts
CK Asset is now trading at around 0.3 times P/B based on its end-2023 net asset value per share of HK$108.72. The stock’s valuations aren’t particularly demanding and the company has a strong balance sheet. But the prospects for the Hong Kong property market are murky, so I will stick with a Hold rating for CK Asset.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
