|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|
|TEV (in $M):||846||TEV/EBIT||0.0x||0.0x|
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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.
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