Hongkong Land to be hit hardest by Occupy Central
SCMP headline, April 2
I have a sure-win idea for these Occupy Central people. Don't ever occupy Central. Just keep promising that you will. You are sure to have a much greater and continuing impact that way.
It seems hardly a day passes without some self-appointed big noise in government pontificating about the threat to stability and prosperity. In Beijing they talk as if the pillars of Communist Party rule are rocking on their foundations. To the shelters, comrades. The bomb is about to drop.
There must of course be investment implications to anything so dire and an investment bank, UBS, has now come out with them. Hongkong Land, with its fiefdom of Central office properties, is the most exposed to this potential investment calamity.
Safe choice, fellows. For the last 30 years the ruling Keswicks have already done their best to limit the firm's upside potential. You would almost think that a strong share price doesn't accord with their Scottish principles. Strange thought.
Anyway, there is likely to be no risk of great embarrassment in picking on Hongkong Land as a sell target. It may not go far down but it will also never go far up and that means you can never be far wrong, which is the safe career objective of any investment analyst.
Let us examine it, however, as an investment analyst ought to do. This begins with the assumption that the investment value of any stock is the discounted net present value of its future stream of earnings.
The discounted part is easy to understand. Ask yourself a simple question. How much would you pay me today for the right to receive $100 from me in a year's time?
Did I hear $99? Done deal. Pass me that $99.
Oh, you just changed that to $90, did you? No go, I'm not dealing.
What about $95, you say? Hmmm… OK.
And there you have the net present value at a 5 per cent discount rate of earnings of $100 in one year's time. Fancy words. Simple concept.
And now to these earnings. We shall take it as an assumption that Occupy Central ignores my sage advice and actually manages to pull some people together for a sit-in at a prominent location in Central.
We shall further assume, and it is by far the most likely scenario, that our government will let them sit there for a few days, perhaps even a week or two, in order to prove to the world that Hong Kong respects civil freedoms.
The police will then move them out in order to prove to Beijing that this government does not entirely consist of a bunch of weaklings who should never have been given any autonomy at all. End of story for Occupy Central if it won't listen to my advice.
And just how much will this affect Hongkong Land's future stream of earnings or the discount rate that the market will set on these earnings?
That's a tough question, that is. For a clue to the answer hold up your right hand and crook your index finger so that it touches the tip of your thumb. What numeral do you see represented there?
I doubt that any of the company's office tenants will even bring the matter up when renegotiating their leases. They will be looking for new office premises if they insist.
Which brings up the real question of the day. Why should an investment bank bother publishing this scare rating as an investment report?
Once again there is a simple answer. The majority of any stockbroker's clients are speculators who have short-term price movements in mind when they deal.
If the dealing desk can then sanctify this speculative thinking with an investment analyst's report that says it is actually in tune with fundamental valuations then there is all the more prospect of tipping these clients into a sell decision on Hongkong Land.
What we have here, in short, has more to do with the UBS dealing desk's earnings than with Hongkong Land's.
But that's fine with me. I was also once an investment analyst. It's a bit late for me now to invoke present-day Victorian ethics in such matters.