Henderson Has Analysts’ Backing Amid Lawmakers’ Ire

July 22 (Bloomberg) -- Henderson Land Development Co., the flagship company of Hong Kong’s second-richest man, has lost 20 percent of its market value this year as it became the focus of government efforts to curb property prices and police raided its offices. Now some analysts say it’s time to buy.

“Whatever the outcome, it’ll only be the tip of the iceberg compared to the sheer size of their business,” said Castor Pang, Hong Kong-based research director at Cinda International Holdings Ltd. “It won’t have much impact on the fundamentals.”

Henderson, founded by Lee Shau-kee in 1973, said in October it sold 24 luxury flats for as much as a record HK$88,000 a square foot. Eight months later, it said 20 of the sales fell through, sparking a government probe. The company has denied any wrongdoing.

The investigation may have tarnished the public image of the 82-year-old billionaire, though 17 of 25 analysts who cover Henderson rate the stock a “buy,” according to data compiled by Bloomberg. Lee has steered the company to buy land outside of government auctions, the main source of development plots in Hong Kong, to build a 40 million-square-foot (3.7 million- square-meter) landbank in the rural New Territories, the most among local developers.

“This controversy has no doubt dented their reputation and image,” Pang said.

The average 12-month price forecast of 20 analysts who provided targets is HK$58.24, 25 percent higher than the shares’ closing price yesterday. That’s the most bullish forecast among the seven developers in the Hang Seng Property Index.

Henderson shares rose 0.1 percent to HK$46.55 at 10:49 a.m. in Hong Kong today.

Conduit Road

Henderson said June 15 it will take a charge of HK$734 million ($94 million) against earnings after prospective buyers canceled purchases of 20 apartments at the 39 Conduit Road luxury development in the Mid-Levels district. Among those was an apartment with a price tag of HK$439 million, or a record HK$88,000 per square foot.

The shares have dropped 2.4 percent since then, while the property index rose 5.3 percent in the period.

The government said on June 18 that regulatory and law enforcement authorities would probe the Conduit Road transactions. Police seized documents from the developer’s offices July 14, while lawmakers in the city’s parliament met twice to discuss Henderson. The company declined an invitation to appear before a July 12 Legislative Council meeting.

Home prices in the city have risen 38 percent since January 2009, sparking government policies to stem the climb such as higher stamp duties and selling more land.

Henderson has insisted the transactions were “genuine.” Lee, whose fortune Forbes magazine estimated at $18.5 billion in March, last spoke publicly when Henderson announced that the sales fell through, and declined to comment to Bloomberg News.

Shell Companies

“The company strongly rejects” allegations that there have been irregularities in the sale of the apartments, it said in a statement published in the English-language South China Morning Post newspaper last week.

The sales were to shell companies, which Henderson has said is a “common practice” in the industry.

Given the incentives and the size of the transactions “there is nothing unusual in the fact that the buyers in Conduit Road were all companies,” said David Webb, a Hong Kong- based shareholder activist who defended the company in regard to Conduit Road in a July 12 report on his Webb-site.com.

The prices reported and recorded with the Land Registry represented agreements to buy, not completed purchases, he said.

Landbank

The government probe may lead to “more pressure for legislation to rein in the developers in Hong Kong where they are seen often to have way too much power,” Peter Churchouse, chairman of Hong Kong-based property investment firm Portwood Capital, told Bloomberg Television July 19.

Industries such as banking and property currently decide half of the city legislature’s 60 seats. The Election Committee that picks the city’s Chief Executive includes the heads of developers including Lee and the city’s richest man, Li Ka-shing, chairman of Cheung Kong (Holdings) Ltd., the world’s second- biggest developer by market value.

CLSA Ltd., the regional brokerage unit of Paris-based Credit Agricole SA, has an “outperform” rating on Henderson because of the company’s low debt level and rental income, said Nicole Wong.

“There may have been some issues lately, but given the strength of the property market and its current price level, this is the appropriate rating,” said Wong, Hong Kong-based regional head of property research at CLSA. “Henderson’s balance sheet and landbank are still sound.”

Negotiating Tactics

Lee was born in the neighboring Chinese province of Guangdong and arrived in Hong Kong at 19. He helped co-found Sun Hung Kai Properties Ltd., now the world’s biggest developer by market value, in 1963. Ten years later, with HK$50 million and about 50 staff he started Henderson, according to Feng Bangyan, author of “A Century of Hong Kong Real Estate Development” and a professor at Jinan University in Guangzhou in Guangdong province.

Lee, who still holds shares and is a vice-chairman and independent director of Sun Hung Kai, listed Henderson on the Hong Kong exchange in 1981. The shares have risen more than 20- fold since 1986, according to data compiled by Bloomberg.

The developer’s landmark properties include the International Financial Center, co-developed with Sun Hung Kai, and luxury residential projects such as the Grand Promenade in Sai Wan Ho in the Eastern district of Hong Kong Island and the Grand Waterfront in East Kowloon.

While most rivals bought land through government auctions, Lee sent negotiators to persuade owners of dilapidated buildings in older residential areas in the New Territories that border the mainland to sell. Henderson also acquires agricultural land from the government and owners.

Old Buildings

“This strategy means they can often add land bank at a very cheap price without any competition,” said Feng. “It is Henderson’s killer move and not one that can be easily emulated. It takes a lot of experience to build up a team like this and the negotiations are often lengthy.”

Taking advantage of rising incomes among the city’s working class, Lee focused on building apartments of 300 square feet to 500 square feet as he expanded Henderson into a HK$100 billion company. About 50 percent of the city’s 7 million residents live in subsidized housing.

In 1975, the company led a group comprised of Sun Hung Kai and Cheung Kong that won the right to develop the first phase of a 10,600-apartment complex in the Shatin district, the first of projects Henderson would develop in the New Territories.

Henderson’s acquisitions of old buildings “have picked up significantly,” Morgan Stanley analysts led by Theo Cheng said in a June 18 report. “Its shares have been held back by bad press.” They have an “overweight” rating on the stock.

Bullish Beliefs

Lee is showing no signs of wavering from his bullish view on property prices, which he has said will be driven by demand from mainland China. Henderson plans to build 45,000 units across the city, Lee said June 1 without giving a timeframe.

Lee’s youngest son Martin, who is married to a former model and actress, bid HK$1.82 billion for a site at the Peak, Hong Kong’s most exclusive residential area, in May to build a family residence, setting a per-square-foot record for a Hong Kong public auction.

After the sales at 39 Conduit Road were canceled, the elder Lee said the flats may fetch an even higher price later.

“I doubt he’d change his style or the way he does business because of this” investigation, said Anita Leung, author of Lee’s 1997 biography and a sequel to be published later this year. “He has been a property developer his whole life and has been tested many times in the past.”

Lee, who still goes to work every day at his office in the International Finance Centre, Hong Kong’s second-tallest building, is known for his frugal lifestyle and his interest in the Taoist philosophy, which emphasizes compassion, moderation and humility.

Taoism

He is an honorary adviser of the Hong Kong Taoist Association and has made donations to other Taoist organizations and spoken at their forums. He’s donated millions of dollars to universities in Hong Kong and mainland China, and various charity organizations, including 10 million yuan ($1.5 million) to a Taoist forum in 2007 and 100 million yuan to victims of the Sichuan earthquake in 2008.

It’s unlikely there will be “any real serious” charges brought against the company, said Portwood’s Churchouse. “Perhaps the shares have been marked down a little aggressively. It has a great portfolio of properties, it does great business in Hong Kong and China.”