Book and Market Value of Hkld

The case here selected is Hong Kong Land (referring as HKLD in following) for the year 2010, the company focuses in both commercial and residential property investment, management and development across Asia from Hong Kong, Singapore, Macau to the Greater China Area. HKLD is listed in London stock exchange and also Singapore, Bermuda.

Book Value and Market Value in 2010

Based on 2010 Annual report, book value of HKLD is 19447.5 (USD m), with market value in USD 16990 (7.22* 2,353.2m) as on 3rd Jan 2011 in stock Exchange of Singapore. (Hong Kong Land, 2011) The difference between book value and market value is -2292.7 (USD m) and the Market / Book Value ratio is 0.87.

The difference

With Book value higher than market value, a general explanation is the company might be undervalued or doing not as good as expected or expecting to perform worse. Since HKLD from the real estate industry generating revenues mainly by its properties, they require more infrastructures capital, including higher cash level and land bank, the book value would be higher compared to other industries like general services industry. On the other hand, the higher cash level and land bank could not totally reveal the company is able to make wise decision in managing or investing those capitals and normally investors is concerned about that, such worries lower market expectation and thus the market value. Thus, it is a general observation that real estate / property development companies are in lower market/book value ratio.

Another reason is that, the book value is the accounting value of company’s asset, which might not change when any appreciate or depreciate. For the assets of HKLD, there includes properties not yet valued as a profitable assets before further investment and development, for example a land that not yet starting any construction or the office building remains in a low rental rate contract until next year, thus the market is not likely to overvalued those “undeveloped” or “non-current” assets before those become value-added. For there 70% of total assets of HKLD are “Investment properties” in 2010 year end, the commercial portfolio stated that roughly 10% of the commercial properties are under development plus almost all residential property are under development (Hong Kong Land, 2011). Those uncertainties resulted to a rather conservative market value. Taking reference on the industries, quite some property / real estate company are in a lower ratio. For example, Hysan Development Company Limited, in the similar region as HKLD, it is calculated the ratio in <0.30 for 2010, even lower than HKLD, while checking the Profitability Analysis ratio and Return on Investment Analysis ratio, etc, from 2008~2010, an increasing trend is observed. (Internet Securities, 2012)

During the value-adding period of the properties (assets),