It has once again bene another stellar month for the Perfect Stock Portfolio with average stock rising a little over 6%.
It seems Ben Grahm was right about all this after all. Owing undervalued stocks with solid balnce sheets and an adequate margin of safety can indeed provide outsized returns if you, as Graham suggested "make a strong effort to have more money invested in common stocks at lower market levels (at least on the basis of cost) than at what he recognizes to be potentially high levels."
We have done exactly that with the Perfect Stock portfolio and those who understand the potential of what we have bene doing have bene very well rewarded.
Year to date our average stock is now up about 25%.
This month we shall part company with shares of Commerzbank (Ticker: CRZBY) as the stock is up over 180% and now trades above tangible book value.
United States
The market spent the last month digesting a classic Goldilocks combination for risk assets. Headline consumer inflation cooled to 2.7 % year over year in July, with the monthly increase held to 0.2 %. Core inflation eased to 3.1 %. Shelter remained sticky but the broader mix leaned friendly enough to keep the rate-cut debate alive.
The labor market is no longer running hot. July payrolls showed slower hiring and a 4.2 % unemployment rate, while prior months were revised lower. The message is not recession, but a steady glide from overheating toward balance. That, combined with softer inflation, is exactly what equity bulls wanted to see.
The Federal Reserve held rates at 4.25 to 4.50 % on July 30 and repeated the familiar "data dependent" language. Chair Powell left the door open to a cut if inflation continues to trend lower and labor cools. Markets moved to price a meaningful probability of a September cut. The equity tape cooperated, with the major indices pushing to fresh records on the CPI print.
From our perspective, the important point is that the Fed can now cut without sending a panic signal. It can frame cuts as normalization, not emergency support.
My read-on positioning is straightforward. Earnings dispersion is increasing, policy risk around tariffs and targeted industrial policy is real, yet liquidity conditions have shifted from overtly restrictive toward neutral.
Europe
The European story this month is one of quiet resilience. Euro area July inflation held at 2.0 %, right on target. Second quarter GDP grew 0.1 % quarter over quarter, modest but better than the worst fears that swirled when tariff salvos started flying earlier in the summer.
PMIs suggest the expansion is continuing, led by services, while manufacturing stabilizes. The European Central Bank kept rates unchanged on July 24 and leaned into a patient stance. This combination supports a soft-landing narrative for the block.
Germany remains the swing factor. National data show inflation at 2.0 % in July with energy prices still a drag. Growth is tepid as industry adjusts to higher input costs and the persistent squeeze from global competition, but the stabilization in prices keeps real incomes from eroding further. The opportunity here is selective: high-quality exporters with pricing power and domestic champions tied to infrastructure and defense outlays.
The Bank of England, for its part, trimmed Bank Rate by 25 basis points to 4.00 % on August 6, acknowledging cooling inflation. The cut should support UK cyclicals and rate-sensitive real assets if inflation progress holds.
For investors, Europe screens as a fertile hunting ground for quality at a discount versus the United States. Use earnings season to differentiate balance sheets and avoid the value traps that are cheap for structural reasons. Currency remains a consideration. With the Fed potentially easing ahead of the ECB, euro downside may be limited, which slightly improves the case for unhedged exposure.
Japan
Japan remains the breakout equity story of 2025. The Nikkei 225 pushed through 43,000 for the first time, aided by steady U.S. inflation data and the rising probability of a Fed cut that would take pressure off the yen. Under the surface, Japan is executing a slow and credible normalization. The Bank of Japan lifted the policy rate earlier this summer and laid out a predictable plan to reduce JGB purchases over time. Wholesale inflation has cooled, but not collapsed, and corporate reforms continue to push return on equity higher across large caps.
My stance is unchanged. I remain constructive on Japan as a multi-year rerating story driven by governance, buybacks, and a less repressive rate regime that allocates capital more rationally.
China
China continues to wrestle with a difficult mix of weak domestic demand and a deleveraging property sector. July consumer prices were flat year over year, and producer prices fell 3.6 %, keeping the deflation debate alive. Exports surprised to the upside in July, but the quality of growth remains a concern, and the private sector's confidence is fragile. Policy has leaned toward incremental easing, including earlier cuts to reserve requirements and central bank lending rates, but authorities have avoided the sort of broad stimulus that would reflate property.
Hong Kong remains a market in transition, caught between the gravitational pull of mainland China's slowdown and its own structural property adjustments. Transaction volumes in the residential market have been soft, with buyers still cautious despite modest government steps to ease stamp duties earlier this year. Prime office vacancy rates remain elevated, especially in Central, where multinationals continue to right-size footprints. Retail is seeing a mixed recovery: luxury brands benefit from a steady return of mainland tourists, while mid-tier shopping districts lag as local consumption stays muted. Developers are leaning on promotional pricing and flexible payment terms to move inventory, a sharp contrast to the hardline stance of the boom years.
From an investment perspective, Hong Kong's property sector now trades at some of the steepest discounts to net asset value seen in over a decade. Many of the large, listed developers and REITs are at 40–60 % below reported NAV, pricing in a prolonged slump. That creates an interesting setup for deep value investors willing to accept policy and macro risk. The capital structures remain sound for most of the major players, and asset quality is still among the highest in Asia. If Beijing delivers more forceful stimulus and capital flows stabilize, the re-rating could be sharp, particularly in high-grade office and prime retail names that have been punished in the general exodus from Hong Kong property exposure.
The Bottom Line
The last month nudged the global cycle toward a benign path. The United States has earned the option to cut. Europe is muddling through with inflation at target and growth slightly positive. Japan's equity market leadership is supported by real reform and credible policy normalization. China is stabilizing at a low nominal growth rate with persistent property headwinds. From an asset allocation standpoint, I remain overweight quality cash flows, disciplined on leverage, and opportunistic on pullbacks in regions where policy credibility is improving.
New Addition
Sun Hung Kai Properties Limited (SUHKY/SUHJY)
Investment Analysis Report
Investment Recommendation: BUY
Target Price: HK$89.95
Current Price: HK$94.30 (as of August 11, 2025)
Dividend Yield: ~4.0-4.4%
Sun Hung Kai Properties Limited stands as a towering figure in Hong Kong’s property landscape, representing not just the largest developer by market capitalization but also a symbol of quality and innovation that has shaped the city’s skyline for over five decades. Since its listing in 1972, SHKP has built an empire that extends far beyond traditional property development, creating a diversified business ecosystem that provides both growth opportunities and defensive income characteristics for investors.
The Foundation of Excellence
At its core, SHKP operates as Hong Kong’s premier property developer, but this simple description fails to capture the breadth and sophistication of its operations. The company has built its reputation on what it calls “Building Homes with Heart,” a philosophy that emphasizes not just construction quality but community building and sustainable development. This approach has resulted in some of Hong Kong’s most recognizable landmarks, including the International Commerce Centre (ICC), which at 490 meters stands as the city’s tallest building, and Central Plaza in Wan Chai, which held the distinction of being Asia’s tallest building when completed in 1992.
The company’s business model extends across six primary segments, each contributing to a resilient revenue stream that has weathered numerous economic cycles. Property development and rental operations form the backbone of the business, while telecommunications through SmarTone, hotel operations featuring luxury brands like Four Seasons and Ritz-Carlton, transport infrastructure, and various other ventures provide diversification and steady cash flows.
The fiscal year ending June 30, 2024, presented SHKP with a complex operating environment characterized by economic uncertainties, elevated interest rates, and evolving market dynamics in both Hong Kong and mainland China. Despite these headwinds, the company demonstrated the resilience that has defined its five-decade track record, achieving total segment revenue of HK$83,636 million across all business lines including joint ventures and associates.
The company’s underlying profit attributable to shareholders reached HK$21,739 million for FY2024, representing a 9% decline from the previous year’s HK$23,885 million. While this decrease reflects the challenging market conditions, it’s important to contextualize this performance within the broader economic environment. Underlying earnings per share declined to HK$7.50 from HK$8.24, but the company maintained its dividend-paying capability with a total distribution of HK$3.75 per share, demonstrating management’s commitment to shareholder returns even during difficult periods.
When accounting for fair value changes in investment properties, the reported profit attributable to shareholders was HK$19,046 million, down from HK$23,907 million in the previous year. This reported figure included a decrease in fair value of investment properties net of deferred taxation and non-controlling interests of HK$2,412 million, compared to an increase of HK$221 million in the prior year, reflecting the challenging property market conditions that affected asset valuations across the sector.
SHKP’s property development operations continue to serve as the primary growth driver, despite facing market pressures in both Hong Kong and mainland China. In Hong Kong, the company achieved contracted sales of approximately HK$25,600 million in attributable terms during FY2024, with major contributions coming from several significant projects that showcase the company’s ability to deliver products that resonate with market demand.
The YOHO WEST Phase 1 in Tin Shui Wai, The YOHO Hub II in Yuen Long, and Cullinan Harbour Phase 1 in Kai Tak emerged as standout performers, generating substantial sales volumes and demonstrating the market’s appetite for well-located, quality developments. Additionally, the company benefited from continued sales of completed projects, including the prestigious Dynasty Court in Mid-levels Central, Crown of St. Barths in Ma On Shan, and Ultima in Ho Man Tin, which continued to attract buyers and contribute to the overall sales performance.
However, the development profit margin compressed to 26% from 36% in the previous year, reflecting the impact of higher construction costs, elevated financing expenses, and competitive market pricing. Despite this margin pressure, the absolute development profit of HK$6,513 million remained substantial, providing significant cash flow generation to support the company’s operations and future investments.
On the mainland, SHKP faced more pronounced challenges, with revenue from property development declining by 49% to HK$2,677 million, primarily due to lower sales volumes reflecting the ongoing consolidation in China’s residential property market. Development profit decreased by 53% to HK$1,337 million, with contributions mainly coming from sales at Oriental Bund, TODTOWN, The Woodland, and Grand Waterfront projects. These results underscore the challenging operating environment in mainland China, where property developers have faced significant headwinds from policy changes and market corrections.
While development operations provide growth and cash generation, SHKP’s investment property portfolio serves as the bedrock of financial stability, generating consistent rental income that supports the company through various market cycles. The portfolio’s performance in FY2024 demonstrated this defensive characteristic, with gross rental income including contributions from joint ventures and associates increasing by 3% year-on-year to HK$24,991 million, while net rental income rose by 3% to HK$19,000 million.
In Hong Kong, the investment property portfolio encompasses over 12 million square feet of retail space, with the majority consisting of flagship or regional shopping malls strategically located along railway lines with mature transportation networks. These properties benefit from excellent connectivity to surrounding residential areas and facilities through covered footbridges, creating integrated urban environments that enhance both property values and rental stability.
The retail portfolio demonstrated resilience despite challenging conditions, registering a moderate increase in rental income during the year with a relatively stable occupancy rate of approximately 94%. This performance was particularly noteworthy given the strength of the Hong Kong dollar and changing spending patterns among both local residents and tourists, which continued to pose challenges to the retail industry throughout 2024.
SHKP’s office portfolio, while facing headwinds from uncertain economic conditions that dampened office demand in Hong Kong, maintained an average occupancy rate of about 91% during the year. The company’s strategy of differentiating itself through a diversified portfolio, high green-building standards that meet tenants’ ESG goals, and premium building quality and property management services proved effective in maintaining occupancy levels above market averages.
The landmark International Finance Centre (IFC) and International Commerce Centre (ICC) towers remained the most prominent office addresses for global financial institutions and multinational corporations, both achieving occupancy rates over 90% during the year. These trophy assets continue to command premium rents and demonstrate the value of SHKP’s focus on quality and location.
SHKP’s mainland operations, while facing significant market challenges, continued to demonstrate the company’s ability to operate successfully across different regulatory and economic environments. The mainland rental portfolio, including contributions from joint ventures, increased by 8% in Hong Kong dollar terms to HK$6,305 million, with net rental income reaching HK$5,027 million. In local currency terms, rental revenue increased by 12% to RMB5,822 million, driven primarily by rental contributions from newly completed properties and the discontinuation of rental concessions that had been provided to tenants in the previous year.
The company’s premium shopping malls on the mainland, typically forming part of large-scale integrated projects, continued to impress customers with innovative interior designs, creative marketing activities, comprehensive amenities, excellent transport accessibility, and outstanding customer service. Shanghai IFC Mall in Pudong’s central business district has established itself as a distinctive luxury destination, with notable brands expanding their global flagship stores within the mall, reflecting confidence in SHKP’s capabilities and the property’s positioning.
A significant milestone was achieved with the grand opening of the one-million-square-foot Nanjing IFC Mall in late July 2024. This property achieved high occupancy since its soft opening in January 2024, with nine floors filled by duplex luxury flagships and new concept stores of renowned retailers. The mall’s innovative western-garden-themed interior design and striking facade offer an unconventional experience that has resonated with both locals and visitors.
Diversified Business Portfolio: Strength Through Variety
Beyond its core property operations, SHKP’s diversified business portfolio provides additional revenue streams and demonstrates the company’s ability to identify and capitalize on opportunities across different sectors. The hotel segment delivered particularly strong performance in FY2024, with revenue increasing by 25% to HK$5,261 million and operating profit surging by 304% to HK$650 million after depreciation charges.
This exceptional hotel performance reflected the recovery in Hong Kong’s hospitality sector, despite the slower-than-expected return of inbound tourists. SHKP’s portfolio of luxury hotels, including Four Seasons Hotel Hong Kong and The Ritz-Carlton, Hong Kong, maintained their leading positions in the Hong Kong hotel sector, while the Royal brand hotels achieved high average occupancy rates throughout the year.
SmarTone, SHKP’s telecommunications subsidiary, demonstrated resilience in a highly competitive market environment, maintaining revenue of HK$6,221 million while keeping operating profit stable at HK$701 million. The company successfully expanded its customer base and increased its 5G penetration rate to nearly 40%, with the 5G Home Broadband service emerging as a growth engine. The recovery in roaming revenues following Hong Kong’s reopening provided additional support to the telecommunications segment’s performance.
SUNeVision, the data center and IT infrastructure business, continued to benefit from strong demand for its services, with revenue increasing by 14% to HK$2,674 million and operating profit growing by 8% to HK$1,266 million. The emergence of artificial intelligence applications has raised demand not just for data center capacity but also for quality infrastructure, playing to SUNeVision’s strengths in premium location, service, and infrastructure capabilities.
Financial Fortress: Balance Sheet Strength
One of SHKP’s most compelling investment characteristics lies in its exceptionally strong balance sheet, which provides both defensive characteristics during market downturns and financial flexibility to capitalize on opportunities. The company’s shareholders’ equity reached HK$606.7 billion or HK$209.4 per share as of June 30, 2024, representing a solid foundation of accumulated wealth built over decades of successful operations.
The company’s commitment to prudent financial management is perhaps best exemplified by its conservative gearing ratio of 18.3%, calculated based on net debt to shareholders’ equity. This low leverage provides significant financial flexibility and contrasts sharply with many property developers who operate with much higher debt levels. Net debt stood at HK$110,866 million, with the company maintaining substantial cash resources and committed banking facilities to support its operations.
SHKP’s debt management strategy reflects decades of experience navigating various economic cycles. The company maintains a well-diversified funding base with 68% of gross borrowings consisting of bank loans and 32% representing notes and bonds repayable on various dates extending to June 2033. Importantly, 74% of borrowings were raised through wholly owned finance subsidiaries, while 26% came through operating subsidiaries, providing structural flexibility in debt management.
The maturity profile of the company’s debt portfolio demonstrates sophisticated treasury management, with approximately 76% of borrowings repayable after two years and a weighted average duration of approximately 3.3 years. This structure minimizes refinancing risk while providing time to optimize capital structure as market conditions evolve.
Strategic Land Bank: Future Growth Foundation
SHKP’s substantial land bank represents perhaps its most valuable strategic asset, providing the foundation for future growth and development profits. As of June 30, 2024, the company’s attributable land bank in Hong Kong totaled approximately 57.8 million square feet, with the composition reflecting a balanced approach between income-generating completed properties and future development potential.
Of this total, approximately 38.2 million square feet consisted of diversified completed properties, with the overwhelming majority designated for rental and long-term investment purposes. These properties contribute substantially to the company’s recurring income base, providing stable cash flows that support dividend payments and fund future growth initiatives.
The remaining portion, approximately 13.3 million square feet, represents residential properties under development for sale, expected to be completed in phases over the next six to seven years. This development pipeline provides visibility into future revenue and profit generation, with projects strategically located across Hong Kong to capture different market segments and price points.
On the mainland, SHKP held a total attributable land bank of 66.7 million square feet as of June 30, 2024, including approximately 21.0 million square feet of completed properties primarily located in major business hubs of first-tier and leading second-tier cities. The vast majority of these completed properties are designated for rental and long-term investment, contributing to the company’s growing mainland rental income base.
The remaining 45.7 million square feet represents properties under development on the mainland, with over 50% planned for development into quality residential units and office space for sale. This substantial development pipeline positions SHKP to benefit from any recovery in mainland China’s property markets while providing the company with options to adjust development timing based on market conditions.
Market Position and Competitive Advantages
SHKP’s market position rests on several fundamental competitive advantages that have been built and refined over more than five decades of operations. The company’s brand reputation for quality and reliability has created a premium positioning that allows it to command higher prices and rents compared to many competitors. This brand strength is particularly evident in the company’s ability to achieve strong sales responses for new project launches, even during challenging market conditions.
The company’s vertically integrated development model provides significant operational advantages, allowing SHKP to control quality standards and costs throughout the development process. This integration extends from initial land acquisition through design, construction, marketing, and ongoing property management, creating efficiencies and quality controls that are difficult for less integrated competitors to match.
Strategic location selection represents another key competitive advantage, with SHKP’s properties typically situated in prime locations with excellent transportation connectivity. The company’s focus on developments near MTR stations and major transportation hubs creates inherent value that tends to be more resilient during market downturns and provides stronger long-term appreciation potential.
Current Valuation
From a valuation perspective, SHKP presents a compelling investment opportunity at current price levels. The stock trades at a trailing price-to-earnings ratio of 11.80 times and a forward P/E ratio of 9.40 times, multiples that appear attractive given the company’s quality assets and market position. The enterprise value to EBITDA ratio of 10.68 times provides another perspective on the company’s reasonable valuation relative to its cash generation capabilities.
Perhaps most compelling is the significant discount to net asset value at which the stock currently trades. According to DBS Bank estimates, SHKP shares trade at a 67% discount to appraise current net asset value, representing a discount that is more than one standard deviation below the company’s 10-year average discount of 54%. This valuation gap suggests substantial potential for re-rating as market conditions normalize, and investor confidence returns to the Hong Kong property sector.
The company’s dividend yield of approximately 4.0-4.4% provides attractive income generation while investors wait for capital appreciation. The FY2024 total dividend of HK$3.75 per share, while representing a 24% decrease from the previous year’s HK$4.95, demonstrates management’s commitment to maintaining shareholder returns even during challenging periods. The dividend payout ratio of 62.37% suggests sustainability while providing room for future growth as earnings recover.
The combination of substantial asset value, conservative financial management, attractive dividend yield, and significant valuation discount creates a compelling investment proposition for investors seeking exposure to Hong Kong property markets.
The company’s substantial development pipeline, including major projects like the International Gateway Centre atop the High-Speed Rail West Kowloon Terminus and the phased completion of Three ITC in Shanghai, provides clear catalysts for future growth. These projects should contribute meaningful increases to the company’s rental income base over the next two to three years, supporting both earnings growth and dividend sustainability.
