As long-term investors, it makes sense to avoid really terrible companies. That’s because instead of making you money, bad companies destroy your wealth.
If that’s the case, then why should we invest? We may as well keep our money under the mattress. Unfortunately, in markets all over the world there are plenty of abysmal stocks.
Avoiding these “losers” is key to long-term returns. In fact, it’s as important as picking the “winners”.
In Hong Kong, the main benchmark index is full of plenty of “losers”, which is why it’s imperative for investors to avoid any exchange-traded funds (ETFs) that track the Hang Seng Index.
When picking winners, it usually means avoiding sclerotic industries that are on the way down. Today, the Hang Seng Index is still exposed to a dying industry; that of Hong Kong property developers.
With that, here are two property stocks – which are also Hang Seng Index constituents – that I wouldn’t touch with a 10-foot pole.
1. Henderson Land
One of the big residential property developers in Hong Kong is Henderson Land Development Co Ltd (SEHK: 12).
Unfortunately for investors, having been invested in Henderson Land over the last decade would have made you a poorer person.
In fact, on a share price return basis, Henderson Land shares are 10% lower today than they were 10 years ago.
Henderson Land’s latest full-year 2020 earnings saw its reported earnings per share (EPS) down 40% year-on-year as gains from property sales plummeted around 80% year-on-year to HK$367 million (US$47.2 million).
Even on an underlying profit basis, since 2010 Henderson Land has only grown its EPS at a compound annual growth rate (CAGR) of 2.8%, a disappointing figure.
With Hong Kong still coming out of the worst of the Covid-19 pandemic, Henderson Land and its old-school business should be avoided at all costs.
2. Sun Hung Kai Properties
On the investor relations homepage of Sun Hung Kai Properties Limited (SEHK: 16), also known as SHK, the company says “we strive for creating long-term value for shareholders”.
Too bad for shareholders, of one of the largest property developers in Hong Kong, that management have not lived up to that mission.
Over the past decade SHK has seen its share price fall nearly 5%. The reasons vary but the fact that one of the Kwok brothers (Raymond, who used to be Chairman at the developer) was convicted of bribery in 2014 and jailed.
Beyond that, though, the company’s focus on Hong Kong has seen it suffer. It wasn’t prescient enough to expand further into China early on and that has seen it lose out to better-funded competitors in Mainland China.
For example, in its latest first-half fiscal year 2021 earnings, SHK derived only just over 15% of its property sales from Mainland China compared to 85% in Hong Kong.
Looking to the future
When we invest, we tend to look to the future and invest in companies changing the business landscape.
That’s why avoiding the laggards, and the ones being left behind, is so crucial. In that sense, property developers everywhere are an area we should look to steer clear of.
Lumpy revenues from property development, coupled with the stinginess of tycoons when it comes to returning capital to shareholders, means these businesses are in structural decline.
If we do want investment exposure to property, than we are much better off looking to real estate investment trusts (REITs) given the reliable and visible income streams that they generate.
Disclaimer: ProsperUs Head of Content Tim Phillips doesn’t own shares in any companies mentioned.
