Hopewell infrastructure

Q&ACategory: QuestionsHopewell infrastructure
Joey Ting asked 4 years ago

Dear PC, thank you for your insightful sharing. I was particularly interested when you talked about Hopewell infrastructure. Is this company considered low, medium or high risk ? Is it fair to assume that the higher the dividend yield, the riskier the business is? I mean dividend yield of 11 is really high; the highest dividend yield for Singapore REITs is only 9.765%. Is the dividend yield (for Hopewell) consistent for the past few years? How come when I use google, the dividend yield turns out to be 5.2%?

5 Answers
pcwong Staff answered 4 years ago

Hi Joey,
The Hong Kong Financial Year is mostly July 2015 – June 2016. So the difference in the yield could be due to the calendar year. Google Finance follows the January 2016 – December 2016 period.
However, when in doubt go to aastocks.com key in the code number for the stock and click on the dividend history. it I remember correctly its total dividend is HK$0.42 which puts it at close to 11% based on today’s price.
Hopewell infrastructure invests in a series of expressways in Zuhai, which is just above Macau. The new tunnel built by the Chinese government will connect Zhuhai through Macau and to HK.
Its risk is minimal as it has a strong balance sheet. More than 90% of the net income from the expressways in Zhuhai is repatriated back to Hopewell Infrastructure, that is why you have such high dividends. It is like a REIT in that sense.
Hopewell has completed all the expressways, so there is no more financing required for any construction works.
However for the reporting period, its net profit fell 7.3% vs last year due to competing modes of transport and a slowdown in China which hampered traffic flow to Macau. Its current ratio is 3.05 and debt to equity ratio is 0.06 because it has no long term borrowing. Its NAVPS is HK$2.94 which translates to a price to book value of just 1.3x.
It is a good stock to collect over a long term period. It has fallen to HK$3.30 before. So anytime it has fallen below HK$3.80 should be good opportunity to accumulate.
When you mentioned Singapore highest REIT payout is 9.765% I hope you are not referring to Lippo Malls. The reason why its payout is high is because the share price has fallen more than the fall of its net income. So the high yield does not mean a thing if a REIT has falling net income. I did a case study on Lippo Malls when writing my second book “Invest In REITs”. Their property values have remained stagnant which means the management cannot increase rental. Also Indonesia economy is not doing well which will impact upon the consumers disposable income and affect retail sales in malls.
Hope I answer your questions.

HW answered 4 years ago

Hi Pc,
I just went through your video on Hopewell. I went to take a look on the latest annual statement, it seems the net profit has drop from 1.2B (2006) to 560M (2015). It is almost 50%. The revenue actually did not drop much, but the net profit drop alot. May i know your analysis or thoughts on this?
In additional, the 2015 annual report stated the net debt to equity ratio is at 73%, which i am not sure how this is calculated out from the financial report. May i know how is it derived? 
Refer Page 5 of below annual report 2015, 

pcwong Staff answered 4 years ago

Hopewell was one of the earliest infrastructure companies in Zhuhai but since then more expressways and alternate transportation modes have been built which are in direct competition with Hopewell’s expressways. Perhaps the single most damaging impact on the companies revenue has been the toll free days announced by the State Council in 2012 which cover all the major public holidays including the 15 days Chinese New Year.
Therefore Hopewell’s revenue as fallen in line the above mentioned. It is worthwhile to note that in the last few years, the net profit has stabilised somewhat.
Its debt to equity ratio measured by the total liabilities divided the total equity is 0.006 which is almost negligible. It has  zero long term debt and that lowers the risk of the investing in the company a lot. Also it has HK$999 million in cash.
Hopewell is an investor in the expressways in the form of JVs. The expressways themselves do have debts but if you read the opening statement by the company’s management in the H1 2016 report, the lower interest rate is expected to reduce finance cost of the expressways by RMB39 million, RMB58 million and RMB61 million in FY16, FY17 and FY18 respectively.
Hopewell Infrastructure’s share price is already reflective of the drop in revenue since 2006. It trades within a narrow range of HK$3.30 – HK$4.10 in recent years. It is mainly a dividend stock with low volatility. The impetus for growth will be when Hopewell Infrastructure starts a new expressway project in China.

HW replied 4 years ago

Thanks. For the clear analysis, but due that the company always pay dividends more than the earning. This may not be able to last long unless the new growth is realised.

I have this HPH trust singapore, one of the biggest port holding trust in asia. IPO at price 1.01 SGD. I bought at a price of 0.6 USD which receiving a yield of almost 8% -10%, but since it constantly give dividend more than its earning. Now the price is 0.44 USD. No doubt the company did not have very strong fundamentals as hopewell. Throughout the 3 years of holding, my dividend is receive percentage is 28% and the share price at 0.44 is also loss about 28%. I am not sure how this kinda of company works and maybe you also have came across HPH Trust. You could also give some advice to avoid into this pitfall?

pcwong Staff answered 4 years ago

I have come across HPH Trust before but it did not meet my KPIs at that time so decided to give it a miss.
Hopewell has at certain times given more dividends than its earnings. However, as long as the company has vast amount of cash, I will view it as rewarding the shareholders with repatriation of cash to shareholders from profits earned over time.
The danger point to trigger a concern is when a company borrows money from the issue of debts in order to support continual dividend payments or share buybacks. This is when I will sell a stock irregardless of its dividend history.
Hopewell at this juncture has zero long term borrowings and I think with the management often acts with prudence. It is run by Sir Gordon Liu a well known entrepreneur in HK and decorated individual. 
So the risk to Hopewell is when its revenue and net profit continue to show signs of distress, ie: falling more than 5% each year over 2 -3 years, then I would consider selling unless the management have new projects at hand to increase its revenue, and ultimately, its net profit. The other risk is is when it issues debts to subsidise its dividend payment   
For the mean time, I think it is a low risk investment due to zero long term debt and a large cash hoard.
Although we often focus on dividend yield, we need to measure financials against the KPIs. A stock may have high dividend yield when measure against its share price, but it could mean that the share price has fallen due to falling revenue and profits or when the company takes on debt and increase its gearing. So use dividend as a guide but makes sure the financials meet the KPIs. Then only you buy the stock.
Hope this answers your query.

pcwong Staff answered 4 years ago

I would also like to add the following:
For REITs which focus on port activities, it is best to avoid any average down because global trade is going down.
One of the best gauge for global trade is the Baltic Index. If it is down, so will be the port activities. Port activities generate income for ports. Right now the Baltic Index is more than 90% discounted off its highest peak of close to 12,000 points
Another is to look at the revenue of shipping giant Maersk which is one of the world’s largest container shipping companies
The other is to look at China’s export data. China is the factory of the world. If exports are down so will be port activities. China also has a container shipping index which you can also refer to.
Hope this helps.