RnR Weekly is a recurring series where I cover the past week’s major news stories and earnings results in the markets from a SIngaporean perspective.
In this week’s edition, I take a belated look at the Hong Kong Protests and review the quarterly results of some US S-REITs.
Commentary - Protests and HK's future
Unless you have been living under a rock for months, you would have heard about the protests in Hong Kong. HK Markets were roiled in the wake of the violence and chaos, and my portfolio was not spared.
While I generally do not talk about politics on this blog, political tensions are at an all time high now in Hong Kong and it has affected its stock markets. As such, it seems appropriate to talk about it now, think about how the long term future of Hong Kong will play out and how I would manage my investment strategy going forward.
A Failure of foresight
Income inequality is at a all time high in Hong Kong. For a place with some of the highest GDP per capita in the world, the accompanying benefits and opportunities are not sufficiently accruing the city’s poorest. This has led to plenty of images of wizened old grannies pushing carts of cardboard to try and make a living.
Housing is another peeve for the Hong Kongers, where the Government has lacked the foresight to control the land supply in the city and left it mainly to the private developers to manage. Knowing this, the Government has lacked the strength to make tough decisions to either change policy or to forcefully acquire land from the private market.
These are all contributing factors to the ongoing protests, which I feel is the manifestation of a primal scream for help by its people, if you set aside all the external meddling.
The ways forward
There are 2 ways I see this play out over the long term for Hong Kong:
- The HK Government miraculously grows a spine and develops foresight, thereby effectively turning around the situation
- The status quo is maintained and Hong Kong eventually declines in relevance as a gateway to China. This can be achieved through anarchy or through China’s continued push to develop its own capital markets.
Beijing's PoV
To me, the more probable outcome is Outcome 2. If HK is able to stave off its current and future turmoil, I feel China will eventually reduce its reliance on it.
Let’s face it, Hong Kong is part of China, even if the protesters feel otherwise. As such, we need to factor in Beijing’s thoughts as well.
Hong Kong has served as a useful gateway to raise foreign capital when Beijing wished to retain control over their companies. This exclusivity has benefited Hong Kong greatly as the only game in town with access to Chinese markets.
However, with China’s increasing desire to spread its influence globally (as evidenced by its Belt and Road Initiative among others), Beijing has slowly opened up its capital markets.
It started with the HK-Shanghai-Shenzhen Stock Connect, which enabled foreign investors to trade and invest in companies listed in China’s exchanges. Recently, the Shanghai Exchange even took the step of bypassing Hong Kong all together with the London-Shanghai Stock Connect, potentially giving Chinese and British companies access to each others’ capital markets.
This strategic shift has provided Hong Kong with direct competition in its own backyard and will over time dilute its value proposition.
Impact on my Investment strategy
Given this thought process, I think it is prudent to evaluate HK companies for their level of reliance on the HK economy. If a company relies exclusively on the HK economy, perhaps it is best to assign it a greater risk premium before buying.
The most direct long term impact I can think of is on companies and REITs with HK properties. This is because property prices are very much linked to whether HK remains desirable economically. Other companies will probably need to be evaluated on a case by case basis.
Only time will tell if this thesis plays out.
PS: I know this is probably an unpopular view. I’ll just say that there is still hope for change. Also, if change is not forthcoming, Outcome 2 will probably not happen overnight. However, as investors, we need to assess the situation objectively and this is how I currently see things going down.
Earnings Watch
Manulife US REIT and Eagle Hospitality Trust reported decent results on the 13th and 14th of August respectively. This is a little late I know, but I couldn’t find time to get down to it last week. Here are my quick thoughts.
Manulife US REIT
Some highlights:
- Giant increases in NPI and DPU due to acquisitions
- Adjusted DPU was flattish
- Notably long leases executed during the quarter, increasing to WALE to 6.2 years
- Figueroa loan refinanced with the Singapore banks at a lower interest rate, bringing WA interest cost down to 3.32%
The REIT provides some slides within the results announcement to provide continued investor education about the REIT and the US Office Market. This quarter’s edition was about the typical characteristics of US Office leases – Tenant Improvements, Free Rent and Leasing Commissions. It also described why US Office buildings can be much older than Singapore buildings and yet continue to attract tenancies.
Quite an interesting read and explains why US Office Leases are so long.
Eagle Hospitality Trust
Eagle Hospitality Trust reported its maiden set of earnings. Here are some highlights:
- The trust missed on Revenue projections while exceeding on DPU projections.
- The Revenue miss was due to renovation delays that shortened the property’s ramp up period.
- DPU beat was due to interest rate swap that was executed by the Trust, lowering its cost of debt during the period.
The more interesting part of the presentation was the slides on Revenue Mix and Operational performance. It is relatively equally balanced between leisure and corporate guests, while its hotels are 91% catered to domestic travellers.
Pre-IPO, I was concerned about the < 100 RevPAR Index and whether it was a sign of bad management. I’m glad to see that the RevPAR index has now exceeded 100, which means the Trust’s hotels are outperforming its direct competition. There are corresponding improvements in ADR, RevPAR and Occupancy as well.
As a side note, continued price weakness from the Trust post results has caught my attention. The only thing I can use to explain the weakness is due to the NPI miss mentioned earlier and the subsequent share dumping of a substantial shareholder in EHT.
I’ve initiated a position in the Trust as a result, hopefully my faith will be rewarded.
Related articles
Eagle Hospitality Trust IPO Review
Follow up on Eagle Hospitality Trust
Happy Hunting,
KK
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Considering that there is no more extradition to china, and with China continue to grow aht 6.5-7% a year compounding. China will have more and more millionaires and billionaires and more of them will want to park their $$ in hong kong given is languages and location proximity. Compound that with the HKD being pegged to the USD, and you see we are entering a new cycle of lowering interest rates in the US. I see the 2 combined affect will further pushes assets prices up in hong kong.
I agree that china may sideline hong kong and try to push up other cities, but i dont expect the assets to drasticallyf fall in the short of mid term…
Yup I do agree that short to mid term should be fine. I’m looking at the long term here.
What I didnt write too much about in the article is my speculation on Beijing’s thought process in handling this crisis.
For the immediate crisis, I do not expect Beijing to directly intervene (PLA intervention) unless there is a threat to mainland China. This is because the economic and reputation damage to HK will be too great and HK is still useful to them. However, without that happening, I have no idea how this episode of protests will be resolved, other than letting it die a natural death.
For the long term, I expect China to adopt a hands off approach. Beijing will be willing to let HK prosper as long as its citizens fall in line with its chosen government. If you prosper, good. If you fall into anarchy, it doesn’t matter to Beijing as they never had full control of you anyway. But either way, I’ll need to be prepared to have replacement markets ready to mitigate the impact.
This thought process leads into my eventual conclusion that long term, we need to look to diversify away from HK specific assets.