In business and investing it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. So says Warren Buffett, the greatest investor of the twentieth century.
His reasoning applies to Wing On Company, a Hong Kong and Australian office property investment company with a minor but profitable exposure to department stores. Buying Wing On Company at $2.50 in 1998 and hanging on to it would have earned an appreciation of 460 per cent by now, at $14, and that does not include 8 years of fat dividends.
The 2005 results for Wing On were excellent. Revenue gained 5 per cent year on year to $1.53 billion on better department store sales and higher rental income. Excluding exceptional items, recurring operating profit was $348 million, up 13 per cent.
Share of profit, after tax, on the American auto dealership associate was $62.6 million, up 19 per cent (but share of profit before tax dropped 9 per cent). After an interest charge of $54 million, down 5 per cent, this amounted to a recurring profit before tax of $357 million, up 18 per cent.
Major exceptional gains included a $33 million one-off compensation by a tenant on rental-lease termination, and a net gain of $23 million, consisting mainly of equity securities and foreign-exchange gains. There was also a huge non-cash investment property revaluation of $730 million, up 7 per cent, and a gain on disposal of investment properties of $9.2 million, up 198 per cent. All in all, net profit came to $997 million, up 14 per cent, ballooned by the non-cash revaluation. Excluding all exceptionals, recurring net profit was $309 million, up 20 per cent or $1.05 per share. Dividend per share was 70 cents, up 27 per cent year on year.
Analysing by business segment, property leasing captured rental income of $263 million, up 7 per cent, and earned recurring segment profit (excluding the $33 million compensation) of $224 million, up 4.7 per cent. That included Hong Kong rental income of $101 million, up 8.6 per cent. Occupancy of Hong Kong offices was as high as 95 per cent, gaining 5 percentage points on robust demand.
Wing On also charged higher rents on renewal of leases. Recurring rental income from Australian commercial properties was $120 million, up 6 per cent. Occupancy stayed at 95 per cent.