Wednesday, June 06, 2007

Do you have a Sound Will?

MOS last featured a HK stock in March 07. It was Wheelock (0020.HK) when it traded at HK$17. This property counter has since rallied 20% in the last two months. Today's post also features another property counter. It is Soundwill Holdings (878.HK). The company is a property developer and holding company specializing in HK real estate. The jewel in the company’s crown is Soundwill Plaza. Soundwill Plaza is located in Causeway Bay, opposite Time Square and within walking distance from Sogo. This Grade A commercial building is largely leased up, with well known beauty related products and services targeting the hip and trendy. A shopper can fulfill all her (and his, as there are many modern age men) body and beauty needs as the building’s tenants include Sasa, Marie France and City Spa.

A fair amount of the leases will be up for renewal this year. This turns out to be a great opportunity for the landlord to increase rents because a lot of these leases were stuck 2-3 years ago, when the HK property market were in doldrums. Recall the panic over HK when SARS gripped the territory in 2003?

Besides property leasing, the firm is also into urban redevelopment. In this line of business, Soundwill acquires old sites for redevelopment and future sale. They view the foregoing to be a great opportunity because several urban areas in HK are in need of rejuvenation. Closely related to this business is the Group’s activity in property development. It has two residential property development projects. The one in Sai Kung is due for sale in 2H07. In addition, they dabble in urban infrastructure development on the Mainland.

With the property leasing and residential market in HK faring well, the above sounds like a very decent story. So one may ask what valuations are looking like. The PER on historical earnings is only 2x. However, these earnings include two substantial contributions from the disposal of investment properties. To find the real PER, one would have to strip out these extraordinary items to arrive at the core earnings. We leave this exercise to the interested investor; but we can share that the resulting PER figure is a large one.

If the commercial rents for Soundwill Plaza rises as anticipated, the valuation of the building will increase further. As a result, the NAV could be as high as HK$11 per share by our back of envelope estimates, without even attributing any value to its other businesses. Based on today's closing price of HK$4.40, we are looking at about a discount of 60%.

Do such great bargains exist in the booming market today? Well, Mr Market may have thought that he apply a hefty discount because the Plaza is situated just in front of Tang Lung Street, a lane with old buildings and smallish eating outlets. After all, property is about - location, location and location. Or maybe he thinks the HIBOR will continue to rise further due to inflationary pressures and hence will adversely affect Soundwill because all their debt are floating rate issues (note that the firm has fairly high gearing). Perhaps Mr Market feels that the Chinese market will crash and drag stocks in HK down too. The truth is, we ain't sure what he is thinking about either. If you are a smart investor with a line to Mr Market, do let us know?

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5 Comments:

Blogger Jason said...

Have you established yourself a position here?

9:58 PM  
Blogger Mr Market said...

Hi Jason, thanks for leaving a comment. As stated in the notes at the bottom of the screen, for purposes of conflict disclosure, please assume that we are vested in every idea discussed.

In any case, this site is meant to be a platform for discussion of ideas, not one for pitching buys/sells. So, we welcome any comments you may have on Soundwill or any other security discussed.

5:36 PM  
Blogger Ido said...

Soundwill is my biggest holding. I am getting a very conservative NAV of 14-15. The book value is around 11$, but you need to remove the differ tax from the liabilities because there is no capital gain tax under HK tax law. Also, you need to add the 90 million profit they earned since the beginning of the year from the urban development.

This is even before we add the new 150,000 sq foot commercial property they are about to build in Tang Lung street, which according to my estimation based on the link below will be worth around 1 billion.

http://www.vigers.com/index.php?option=content&task=view&id=2730&Itemid=2

11:29 PM  
Blogger Mr Market said...

Hi Ido

Thanks for leaving your comments. We fully appreciate your points as they are very valid. Soundwill does look cheap and fairly safe. Please see our follow-up post titled "Playing the Devil's Advocate".

We look forward to receiving more views and ideas for you in future.

11:44 PM  
Anonymous Anonymous said...

I did some research and this company lost tons of money for many years back in 2002. Has anyone looked into this. I read that their auditor resigned in 2002 but I couldn't find an explanation as to why. Also, there was a loss of 423,000,000 in "other expenses" that is impossible to piece together. 150,000,000 is a goodwill writedown but the rest is a mystery to me. It seems like they don't want you to know. For those who are long, have you looked into any of this and can you explain it to me?

6:00 AM  

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