How to Buy a Dollar For 20 Cents... and Get an 18% Dividend Yield
By Tom Dyson
December 2, 2008
The mall was so busy, the crowd kept jostling me. It was like entering a football stadium 10 minutes before kickoff...
The mall's stores were aimed at teenagers and 20-somethings. There were no furniture or baby clothes shops here... just trendy boutiques carrying the latest zany fashions from Japan, beauty products, and video games.
The manager was showing me around. He was trying to explain some of the financial metrics of his business to me... like price per square foot and occupancy rates. But there were so many people, it was impossible for us to walk side by side. Plus loud music was pulsing from almost every store, different music coming from each one. I couldn't hear what the manager was saying...
I came to Hong Kong to give a speech at a conference held each year by the publisher of DailyWealth. But because it's such a long way to travel, I took the opportunity to do some research on the local real estate market.
First I met with analysts from the major investment banks. On the 65th floor of the Goldman Sachs building, for example, I watched gargantuan container ships slide in and out of Hong Kong's port every few minutes as I chatted with the analysts about REITs. I also met with UBS and Daiwa Securities.
Then I met the companies themselves and got a tour around some of Hong Kong's landmark properties. The mall I described above is owned by one of the largest property REITs in Asia, Champion REIT.
"We don't sell luxury products here... and this isn't for tourists," said Champion's CFO about his shopping center. "We cater to Hong Kong's younger generation. So we think retail sales and rents will be much more resistant to recession here than in the high-end properties owned by our competitors."
In addition to the mall, Champion also owns a large office building in the heart of central Hong Kong. This building is named the Citibank Plaza. Rents are among the highest in Hong Kong... even though the building is 18 years old.
Citibank Plaza should also resist this recession quite well. The four largest tenants in the building are Citigroup, Merrill Lynch, Industrial and Commercial Bank of China, and Barclays Bank. Together, they occupy 60% of the structure.
You'd think these customers would represent a major risk to the landlord. After all, Citigroup has said it will cut 50,000 jobs. The other major tenants will also have to make major cutbacks in staff. But here's the thing: Champion REIT got lucky. All its major tenants renewed their rent contracts in 2007 and 2008. In other words, Champion has 90% guaranteed rental income through 2009 and into 2010.
One more thing, Champion does not carry a heavy debt burden. It has assets of HK$45 billion and debt of HK$15 billion.
You can buy stock in Champion REIT on the Hong Stock market. The stock comes with an 18% dividend yield and is trading at an 80% discount to net asset value. In other words, you're buying Champion's properties for 20 cents on the dollar right now.
What's crazy is that all the property stocks in Hong Kong have valuations like Champion REIT: double-digit dividend yields, 50%-90% discounts to NAV, and low debt ratios. I just picked Champion to give you an example of the incredible values I found here.
If you have access to a broker that can trade foreign stocks, I recommend you take a look at the Hong Kong property sector. You can earn big dividends from companies with real assets producing real cash flows. There's no new supply of real estate coming on the market, and Hong Kong's importance as a financial center isn't going to decline. Yet the stocks are priced as if they're all going out of business...
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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LOOKING TO PLAY A REBOUND? HERE'S YOUR SECTOR
Our advice for traders looking to play a rebound in the stock market: Check out infrastructure.
You'd be hard pressed to find a worse investment this year than the companies that design and build the world's roads, bridges, refineries, pipelines, and ports. After all, if the global economy enters a recession, business should dry up for engineering and construction firms like Fluor (FLR), Foster Wheeler (FWLT), and Shaw Group (SGR). Power-plant specialist Shaw, for instance, fell from $65 per share to $15 in just four months.
Well... the world has a habit of not coming to an end. And it's a no brainer that Obama & Co will throw hundreds of billions at improving America's infrastructure. It's politically irresistible. You can argue against wars, drug laws, and censorship... but what kind of unpatriotic scum doesn't support new roads, electrical capacity, and bridges?
Put the likes of Shaw, Fluor, and Foster Wheeler on your watch list. If the general market goes into rebound mode, these beaten-down builders have huge rally potential.
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The Commerce Department said that construction spending dropped 1.2 percent in October, much more than the 0.9 percent decline that many analysts had expected.
The weakness was led by another sizable drop in home construction, which has fallen every month except two over the last two and a half years. Nonresidential building also weakened as developers faced tougher times getting financing.
Government building projects showed strength in October, rising 0.7 percent to an annual rate of $316.1 billion. State and local construction was up 0.3 percent to a rate of $291.1 billion, while federal construction activity totaled $25 billion at an annual rate, an increase of 5.5 percent from September.
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About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies. The shutdown already has sent U.S. car makers, desperate for cash, to Washington for emergency loans.
Only one U.S. company – MGM Mirage, with its $700 million deal last month – has been able to raise debt in the junk-bond market since the end of September, according to Dealogic. Yields of 20% or more make it too expensive for borrowers. That is about triple the 7% yield threshold that used to define the term junk bond.
That isn't great news for companies needing cash, and may force them to scramble to find it elsewhere.
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