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HPH Trust: 2011 Interim Financial Results.

Thursday, August 4, 2011

On and off, I would look at HPH Trust because there seems to be so much interest in this business trust from readers. Anyway, as I invest primarily for income these days, HPH Trust fits into my strategy but is it attractive enough for me?

Before I continue, I will say that  I do not like the fact that it is denominated in a foreign currency and in US$ to boot. On my investment journey, I have only once bought a non S$ denominated stock, TCIL, and that was in HK$. It is a bit messy having to take into consideration exchange rates.

These days, with the S$ strengthening against the US$, chances of exchange rate losses are even higher. So, for me to be strongly interested in HPH Trust, there must be a bigger margin of safety. This, fundamentally, would take the form of a higher distribution yield at the most basic level.

HPH Trust released 2011 Interim Financial Results recently and declared a DPU of HK 14.3cents. It has a NAV/unit of HK$ 7.80.

Closing price on 3 August was US 73.5cents.

Now, isn't this one confusing counter? We have to contend with US$ and HK$. Of course, being in Singapore, we have to convert everything to S$. Wah, I am getting a bit giddy already!

US$1.00 = S$1.174
HK$1.00 = S$ 0.15056
(Source: UOB, 4 August 2011)

Unit price:
US 73.5cents = S$ 0.853

HK$ 0.143 = S$ 0.0215

Well, let us see if HPH Trust is able to deliver the full year DPU of US 5.9c as per their forecast. This would be a DPU of S$ 0.0693 or a distribution yield of 8.12% at the unit price of US 73.5c.

If we were to believe that HPH Trust would deliver as per forecast, I would not enter at the current price either. Why? Well, I can get more than 9% distribution yield from Sabana REIT and AIMS AMP Capital Industrial Trust without all the messy foreign exchange calculations now anyway. A 8.12% yield from HPH Trust does not even come close.

Then, fundamentally, would I ever be interested in HPH Trust? If it were to offer a 10% distribution yield, why not? That would give me the larger margin of safety I am looking for. Everything else remaining equal, it would mean a unit price of US 59c before I get my feet wet. Wishful thinking? Well, I shall wait and see.

See financial statement here.
Added (1 Feb 17):


financialray said...

I share the exact sentiment as you.
Its definitely not wishful thinking. Someone needs to justify why QE3 is necessary when presidential election is coming. The US president of course, not Singapore president hor.

Marti said...

The USD isn't necessarily such a big issue because not matter what currency HPH trades in, you are actually buying a piece of HK&China harbors. I would expect their value to be more connected to the RMB and HKD than the USD.

Also, Chinese harbors activities and profits should naturally grow along the Chinese economy. REITs growth on the other hand is more limited, or require extra investments (which means more debt or dilution of shareholders).

AK71 said...

Hi financialray,

Yes, of course, the US presidential election, no Singapore's. Haha... ;)

AK71 said...

Hi Marti,

I am not sure that HPH Trust does not require extra investments.

The 30 years concession from the Chinese government will expire. At that point in time, unit holders will end up with nothing if there is no renewal. If there should be a renewal of concession, there will be costs involved, surely.

This leads some to question what is the real yield of HPH Trust. This, would, of course, apply to REITs too but real estate usually have much longer leases and some are even freehold.

Correcting a misconception, I would say that a competent REIT manager can use debt or equity fund raising for yield accretive investments. Such investments need not dilute existing shareholders' interests.

Why should growth be "more" limited for REITs? Yield accretive purchases or asset enhancements would provide growth opportunities for REITs.

If the global economy does well, rental income would also improve. Likewise, Chinese harbours could do better. I do not see a difference.

Marti said...

I might be wrong there (my accounting knowledge is limited, feel free to correct me here) but it seems the net profit takes into account depreciation for the lease. So even if they are not renewed the unit holders will not own nothing at the end of it.

AK71 said...

Hi Marti,

Concessions are for fixed periods. At the end of the concessionary period, the government takes back everything (if the concession is not renewed). Unitholders will be left with nothing. That is the way it works.

So, the idea is to work the assets as hard as possible and to get as much out of them as possible during the period of the concession.

Imagine if the distribution yield is 8% per annum, it would take an investor slightly more than 10 years to recover his capital. This would mean that the real yield of his investment is closer to 5.3% per annum, everything else remaining equal.

HPH Trust at the current price is not attractive to me because I feel that there are higher yielding investments out there if we are investing for income. :)

Anonymous said...

In short, 8% yield with the risk of a depreciating USD. Nah. I will pass.


AK71 said...

Hi SnOOpy168,

Yup, something like this.

So, although in US$ terms, everything might look OK but once converted to S$, it might not look so good. ;)

Marti said...

Yes the concession is worth zero when it expires, however if the business accounts for that depreciation in its accounting (as it should) then you are not left with nothing at the end of it.

For example the raw yield (cash flow) of the concession could be 8% but if 3% is put into depreciations, you'll only see a 5% operating profit. However the reality is that there's 3% cash put aside to compensate for the shortening (and hence loss of value) of the concession. When the concession runs out all this cash (or whatever else it has been put into) is supposed to be equivalent to the original value of the concession.

So it boils down to knowing if the net profit presented is after depreciation or not.

Regarding the USD quotation, the trust incomes are apparently in Yuan and HK Dollar, so they are the currencies that really matter if you invest long term.

AK71 said...

Hi Marti,

Thank you very much for the explanation. You could be right, of course. Perhaps, you might want to seek clarification from HPH Trust's managers.

Yes, I quite understand your point on income. I like income in RMB (Yuan) but I am somewhat less attracted to income in HK$ (which is pegged to the US$). This is about value but when we buy a stock, we have to look at price and pricing in US$, a depreciating currency, does present forex risk for us in Singapore.

If you have more insights, please share with us again. Thanks. :)

Marti said...

Actually after digging around for a while it seems trusts are allowed to distribute more than their net profit (at least in some jurisdictions). So the reported net profit properly accounts for the loss of value of concessions or leases (with proper depreciations), but the distribution to unit holders might actually be higher so long as the cashflow allows it. In that case you might indeed own nothing at the end of the concession.

So what we need to watch is if DPS is higher than the stated EPS: this seems to be the case for HPH from what I have read.

This is one reason infrastructure assets operated under a regular incorporated company should be preferred as they are not allowed to distribute more than their net profit, so the yield you get is pure gain and not part of the asset being returned to you.

Regarding the HKD, the market compensate for the USD peg by pushing inflation (as it did with the Yuan too). Hopefully the port can increase it's prices along.

AK71 said...

Hi Marti,

Yes, that is how business trusts and REITs work. They distribute their income to unitholders, not earnings. So, chances are unitholders would end up with nothing once the leases expire or they would have to cough up more funds to renew the leases. So, distribution yields must be attractive enough to cover these eventualities.

As for pushing up prices to account for inflation, it would really depend on economic conditions as well. I remember how very soft conditions in the last bear market caused airports around the world to slash charges to attract carriers. We can only wait and see.

Whatever the case may be, unless HPH Trust is able to give a minimum of 10% distribution yield, it would be hard to convince me to park any money there. ;)

AhJohn said...

Hi Ak, no more post after this, I think you really don't favor HPH Trust. Will diversification be your consideration when choosing REITs? Now HPH div yield increase to 8% plus again.

AK71 said...

Hi Ah John,

I don't think I know HPH Trust well enough to favour or not to favour. ;p

AIMS AMP Capital Industrial REIT, Sabana REIT, LMIR and First REIT probably form some 90% of my total investment in REITs. This is just off the top of my head. I am not sure if it is accurate.

I am not a big fan of diversification and I don't really think about it. If I have identified something as a good investment, I am usually quite enthusiastic. ;p

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