|Shares Out. (in M):||1,254||P/E||0.0x||0.0x|
|Market Cap (in $M):||2,446||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-1,600||EBIT||0||0|
In a similar vein as GVInvesting’s recent and excellent Keck Seng write-up, I recommend looking at a set of three Hong Kong hotel/property companies that are simply too cheap and where insiders are buying repeatedly. They are Asia Orient (214 HK), Asia Standard International (129 HK), and Asia Standard Hotels (292 HK).
Asia Standard trades at 0.18x tangible book, Asia Orient trades at 0.16x tangible book, and Asia Standard Hotels at 0.43x tangible book, and in all cases book value is meaningfully understated b/c the assets are largely held at cost and the value of Hong Kong hotels has been appreciating considerably in recent years. Asia Standard, where I recommend investing in the corporate structure, is nearly a Graham net net trading for ~ 2x EV/EBIT when Asia Standard’s EBIT is actually understated for reasons I will get into and when EBIT from hotel assets and leased up commercial real estate in Hong Kong currently goes for 20-30x+ EBIT. Unlike most net-nets which are cigar butt type companies, Asia Standard has a large and growing earnings stream and is chock full of valuable assets in a highly supply-constrained property market. All three companies have very conservative balance sheet with Asia Standard and Asia Orient having significant net cash (Asia Standard Hotels has no net debt but doesn’t have excess cash) vs. most hotel and property companies which are highly levered. When I first came across this family of companies I assumed that the Poon Jings (the controlling family of all three companies) must have a poor reputation, but as I’ll discuss after some digging in Hong Kong property circles we couldn’t find anything to justify such steep valuation discounts. The family has a reputation for integrity and skill and has been buying shares repeatedly over the last few months. Dalton Investments owns large stakes in Asia Orient and Asia Standard for many years and has also been accumulating.
The simple structure is the family (Richard Poon Jing is the patriarch) owns 51% of Asia Orient, which then owns 51% of Asia Standard, which then owns 73% of Asia Standard Hotels. Working from the bottom, Asia Standard Hotels are where the hotels in the structure are, Asia Standard has its controlling stake in the hotel company as well as other commercial and residential real estate assets primarily in Hong Kong, and Asia Orient has its stake in Asia Standard as well as cash and is just a hold co. We have our position largely in Asia Standard because it is the near net net in the structure as well as in Asia Orient but Asia Standard Hotels is also cheap. Dalton has been buying at the Asia Standard level and the Poon Jings have been buying at the Asia Orient level.
Below we start from the bottom and work our way up the corporate chain. At the end I touch on management integrity/ability and catalysts.
Asia Standard Hotels (292 HK):
Asia Standard International (129 HK)
Asia Orient (214 HK)
This is obviously crucial as you will be partnering with the Poon Jing family for many years. We engaged Knight Frank, a well regarded Hong Kong real estate appraisal and services firm (http://www.knightfrank.com.hk) to dig around about the family and see if unethical behavior/poor reputation could be the reason for the large discount. The upshot is management has a good reputation, is known for being conservative in how they run their business (which fits with the very low leverage levels), and are considered to be in the upper tier (but not the all-stars) in terms of the most highly regarded property development management teams in Hong Kong.
As discussed above in discussing taxes, these companies are unlikely to be sold anytime soon. However, one small thing in our favor is that the stocks are trading even below their typical low historical price to book value range, and this is further compounded by the fact that in recent years the rapid appreciation of Hong Kong real estate means that accounting book values are increasingly understated so if anything the book value multiples could be higher than the long-term average. While there is significant and perhaps justified concern about the China residential property market, these companies’ properties are almost entirely in Hong Kong and are primarily nearly 100% occupied hotels and leased up commercial/retail assets.
So over the next several years we could benefit from continued book value per share growth, a book value multiple returning to the historical average if not higher, and finally optionality on the price getting to fair value which could mean up to 8x your money.
Finally, up to now we’ve largely talked in terms of asset values, but hotels and performing real estate obviously produce earnings. Asia Standard is on a ~ 400M HKD EBIT run-rate this fiscal year (as a side note, it’s important to go to the segment reporting footnotes to calculate this, you will get a higher number from the income statement but interest income is considered as revenue which we want to exclude. This also allows us to exclude all re-valuation gains from the calculation and adjust for the minority interest in the hotel segment). Net of cash Asia Standard has an EV of ~ 800M HKD so this is ~ 2x EV/EBIT and EBIT should improve considerably from here as a large % of the company’s assets are currently non-income producing (the residential portfolio under development, the two new HK hotel properties, etc). As a point of reference, Asia Standard Hotels trades at a much more reasonable ~ 8x EV/EBIT but is still low vs. US and Hong Kong hotel valuations in the private markets.
Earnings and earnings growth provide at least a moderate catalyst as they lead to book value per share growth which combined with a return to a more normal book value discount range can produce a nice return while waiting for true value to be recognized.
|Subject||RE: RE: why so cheap?|
|Entry||03/24/2014 07:58 PM|
Our best guess is the sector trades cheap because of the near complete lack of catalysts: it requires a longer-term horizon than even most US investors and Asian markets are at least in my experience much more short-term driven to begin with. It's kind of like the Korean preferred space: for no clear reason they trade at steep discounts to the same company's common shares. I think finally of late some of the discounts have been reversing as they get more attention.
Our thinking is that the whole space is interesting so which one is the most extreme and we came to Asia Standard because for ~ 800 million HKD enteprise value you could have over 16 billion in asset value.
|Subject||RE: RE: RE: why so cheap?|
|Entry||03/24/2014 08:03 PM|
Lincott I think there is a demand linkage obviously between China and Hong Kong so if the Chinese economy tanks demand in Hong Kong will also fall (genius, I know) but the supply situation is completely different. So I can see why Hong Kong real estate would partially trade in sympathy with China real estate but I think the main driver for people's worry about mainland property is too much supply which is not the case for HK.
|Entry||03/24/2014 11:21 PM|
Interesting situation. Do you have any insight into their investment portfolio (per the 3/31/13 presentation looks like there is a 4.2 bn portfolio) And the criteria they use to make such investments?
In looking at the large discount to nav I suspect investors could be concerned about their 1.6 bn in exposure to PRC developer debt securities though that is still a long way from explaining the significant NAV discount...
|Subject||RE: RE: RE: RE: RE: RE: why so cheap?|
|Entry||03/25/2014 04:24 PM|
Thanks rh, we engaged a real estate services firm (Knight Frank) in HK to dig around about them, they came back with the manipulation case being the biggest negative thing they found and that the family actually has a good reputation. On the stock manipulation the family wasn't implicated in that, it was other shareholders. My bigger concern would be the comments from your friend so if you have more color on that that would be great.
I went through the last several years for Asia Standard, since 2010 adjusted for stock dividends the share count actually decreased over the period due to the company buying back shares and there were no share issuances in general let alone preferentially to the family. You have to go back to 2008 for a major share issuance but this was done via a rights offering and a warrants offering for all shareholders to raise equity capital, not preferential to the family. Executive options are less than 1% of the S/O and salaries are reasonable and include the work done for Asia Standard Hotels as well. All this doesn't suggest a family trying to enrich themselves at the expense of minority shareholders. There was just recently a tiny stock option issuance to an employee (not a family member) but the strike price was 2 HKD which seems fine and reasonable, I think it was for like 1,000 shares.
I also dug back through Asia Orient's history, in 2011 they did a ~ $75M convertible bond placement at an attractive price of 1.10 HKD vs stock price then of 1.24 HKD with a nice coupon as well but the family/executives were not allowed to participate.
The final thing is the recent repeated insider buying by the family at Asia Orient. If they viewed the companies as piggy banks they would just be issuing options and shares to themselves vs. buying them in the open market.
|Subject||RE: Inv portfolio|
|Entry||03/25/2014 04:30 PM|
Thanks WeighingMachine, where do you see the PRC development bond? I am looking at Footnote 24 to the annual report for Asia Standard, it shows about 1.4B in equity securities in the portfolio (roughly evenly divided between US/Europe/Hong Kong as where the securities are listed) and 2.6B of debt securities (1.1B trading in Singapore, 1B in Europe, and half a billion in Hong Kong). I am probably just missing where you are seeing that.
|Subject||RE: RE: Inv portfolio|
|Entry||03/25/2014 05:38 PM|
last page of this presentation
|Subject||RE: RE: RE: Inv portfolio|
|Entry||03/25/2014 06:16 PM|
Yup I see it there, probably some haircut of that value is warranted. I don't have any great insight into how they manage their investment portfolio but it's possible given the disclosures in the annual report about the mix between US/Europe/Asia, the losses since 3/31/13 on their China bonds have been offset by US and Europe equity gains.
|Entry||05/09/2014 05:55 PM|
The company’s most recently reported debt portfolio amounted to HK$955 million, denominated largely in US dollars and British pounds and all evidently publicly traded. In the first half of fiscal 2014, Asia Standard realized interest income on listed investments of HK$51.3 million, representing an annual return of 10.7% on the ending balance (and 13.1% on beginning balance). FY2013 interest income approximated 13.5% on average debt security balances. Do you have any idea what types of securities are represented in the debt portfolio, and what risk is associated with them?
•Evidently the company leases the land on which its Hong Kong hotels are located. From whom and at what rate? Is there any risk that the costs of this arrangement couldrise dramatically in the future?
•I assume that Asia Standard Hotel would be treated as a “PFIC” for US tax purposes. Do you know whether the company has provided, or would provide, information which would enable US investors in its shares to make a “QEF” election?
•The September 30 book value of the hotels is HK$3,046 million. On a fair value basis, they are worth an additional HK$6.5 billion, or, say, HK$9.5 billion in all. The hotels operate at 90%+ occupancy and have experienced little growth in REVPAR in recent years. In the LTM to September 2013, they generated HK$180 million in operating profit, or an indicated pre-tax return on fair value of less than 2%. Why would a prospective buyer wish to purchase the company’s properties on this basis?
•It looks like the “revenue reserve” account is the equivalent of retained earnings in US accounting. Why is this account so small? (Note that book value consists substantially of “share premium” and “contributed surplus”, and that it is only possible to review the reserve accounts going back as far as FYE March 2009).
|Entry||05/09/2014 07:53 PM|
Thanks for the questions.
On the debt securities, see previous thread, the presentation here gives some breakout of what is in the portfolio:http://www.asiastandard.com/wp-content/uploads/doc/en/2013-Final-resultsb.pdf
Are you lookin at the right debt portfolio though? On 9/30/13 Asia Standard International had over 3B HKD of debt investments and in 1H14 earned 294M HKD in total from its financial asset portfolio. You might be looking at Asia Standard Hotels the subsidiary when the write-up is on Asia Standard International?
Yes the hotel assets in HK are under long-term lease holds, we don't know the length but if you look at the footnotes the carrying value for the leasehold interests (which are at cost amortized over length of the lease) are at nearly 3B HKD and the annual lease payments are below 8M HKD suggesting a long life. This may be skewed though because the carrying value includes the building cost as well, not just the land. The HK firm we engaged indicated judy from checking local market color that the leases are very long-term dated but this is not known definitively.
Why would you assume that Asia Standard Hotel would be a PFIC? It's a hotel operating company and not an invesmtent company?
On the cap rate used for the hotels, please see the write-up, we used a lower value than the appraised value taking into account market cap rates for the asset.
I don't know on the revenue reserve account to be honest, my focus was on overall book value vs. the individual components because in a sale what counts is obviously just asset value minus liabilities.
|Subject||RE: RE: Questons|
|Entry||05/14/2014 11:26 AM|
Thank you for your prompt responses. A few more thoughts/comments.
I am focusing on the hotel company on the theory that it’s plenty cheap and less entangled with mainland China, which scares me. My calculation of interest income was, in fact, based on the hotel company. Does the hotel company provide a summary like the Asia Standard one you linked to in your response to my questions?
As already described, the hotel company seems to be earning in the range of 10-13% on a largely sterling and dollar denominated debt portfolio. I would assume that such a portfolio would be incredibly risky. Do you have any thoughts on this?
I also note that per note 13 to the hotel company interim financial statements the face (“nominal”) value of the securities in the debt portfolio is HK$1,077 million v. a carrying value of HK$955 million, implying that the YTM is even higher than the 10-13% current return previously calcluated.
I’m checking with my accountant on the PFIC issue.
|Subject||RE: RE: RE: Questons|
|Entry||05/14/2014 06:31 PM|
No problem. One thought on Asia Standard International (ASI) vs. Asia Standard Hotels (ASH) is ASI is so much cheaper than ASH than you really aren't paying anything extra for those mainland assets. But yes it's possible that if China crashes ASI gets entangled more than ASH.
I wasn't able to find a similar presentation for ASH so don't have further clarity on what's in their portfolio than the footnotes in the financial statement. The one thing you can learn from that though is that most of their debt securities while demoninated in USD/sterling are actually listed in Singapore or HK and carry interest rates ranging from 2-13%. So given the Singapore and HK location, high coupons, and the fact that Asia Standard International has heavy exposure to China development bonds, I would guess that a meaningful % are China exposed which are why they get the coupon they do. Just a guess though.