Hongkong Land Holdings

[beefjerky]

I think I am clearer now. So what you are saying is, HKland uses a low cap rate of 5% > resulting in an assumed P/E ratio of 20. However, because of the instability, we should use a higher cap rate, maybe 10% > resulting in a P/E ratio of 10 which is more reasonable seeing that the growth may not be that great? Is this correct?

Let me try again. The market generally values properties at about 5% yield. These are the valuations which physical real estate change hands. 5% is generally not considered low. Low will be something like 3-3.5%. 

But HKL's stock market valuation implies that its properties are valued at about 10%. In other words, if you have the money to buy out the entire HKL at present stock prices, the rental income you will receive from its properties portfolio is about 10%. 

So what I'm saying is that, compared to the 5% which is what is usually demanded in physical real state transaction, the buyer of HKL stock can get it for half that price at 10%. 

10% is a very distressed price for properties, and there has been quite a few property-related stocks in SGX trading (or traded) at such prices. Which is why it is important for an investor to consider the factors surrounding the market's pessimism.

To me, 5% as a cap rate for HKL looks okay, but some may want to give it 7% or higher for the risks involved. As mentioned, your valuation of HKL will depend a lot on your assumptions about its future.

Thank you for the patient explanation