I have recently opened a position on Keck Seng Investments (KCKSF on the US OTC exchange and ticker 0184 on the Hong Kong stock exchange). As all of you know, I love real estate and am a commercial real estate investor myself.
Asian property companies, especially the Hong Kong real estate holding companies, frequently trade at discounts of more than 50% to the net asset values. However, most are plagued with high debts and poor corporate governance. We found one company that we think stands out with great corporate governance and a healthy balance sheet.
Keck Seng Investments is a real estate holding firm that owns and operates high quality commercial and residential real estate assets. In Macao, they own the Ocean Gardens residential complex, and abroad they own hotels in countries like the USA, Canada, Japan and Vietnam.
The company is owned for 74.28% by 3 brothers of the Ho Family. To be a publicly listed company in Hong Kong, there is a minimum 25% free float requirement. This blocks the family from buying back more shares. The second and third generation of the family are working together now, with the third generation soon to take over. The family has a long history of successful capital allocation.
The company has $1.65 billion (HKD) in cash & deposits, 2.1 billion in liabilities (HKD), and 7 billion (HKD) in net assets value. The 2018 free cash flow was just over $250 million (HKD), and the stock is trading at 7x FCF with a market cap of 1.7 billion (HKD).
We will go through most of their assets in a bit, but we will first start with the biggest catalyst, the hidden gem: Macao Ocean Garden complex.
Keck Seng acquired the Ocean Garden complex in the early 2000’s while it was in development. On their balance sheet, they still record this asset at development price.
Comparable listings and sales prices show that the value of this asset is at minimum 9 to 10 times as much as they value it at. They value it at $281 million (HKD). In 2012/13 they sold a few units at 7-9x that valuation price. After this sell- off they held a 70.6% stake of the 140 units and 758 car parking spots. As the sales in 2012/13 showed a 7-9x multiple of the reported price, and the market has continued to grow over the past 6-7 years, a 10x multiple would be very conservative.
Theoretically that makes it a no-brainer, but there’s one problem: the management does not want to sell it. Or they don’t want to sell it YET. They recently stated that they will not sell the Macao asset in 2019. They are waiting for more price appreciation as a result of the bridge that connects Hong Kong with Zhuhai and Macao. This will be the world’s longest bridge at 48km and connects the Pearl River Delta, an area with a population of 50 million.
In the end, everybody wants to make money, and so does the Ho family. Their strategic capital allocation decisions in the past show that they are wise about market timing, and thereby we expect them to liquidate this asset within 5 to 10 years when the full economic effect of the bridge has been priced in.
Other assets include:
- W Hotel San Francisco: This is a 4-star hotel that they acquired from Starwood in 2009, just following the financial crisis. They paid $90 million (USD) for 100% ownership of the asset. The current cap rate is 14%.
- Sofitel New York: This is a 4-star hotel that they acquired in 2014 for the price of $265 million (USD). The current cap rate is 5%. Both of the US-based hotels are on prime locations.
- Sheraton Saigon Hotel, Vietnam: a 5 star hotel located in the best district of the capital city. This is the only hotel where there is a gambling operation as well, with slot machines that generated $410 million (HKD) in revenue. They own 64.1% of this asset.
- Caravelle Hotel, Vietnam: this is a 5-star hotel that Keck Seng owns a 25% stake in.
- Sheraton in Ottawa, Canada: this is a 4-star hotel that Keck Seng owns a 50% stake in at an 8% cap rate.
- Delta Toronto Airport Hotel: this is a 4-star hotel that Keck Seng owns a 25% stake in at an 8% cap rate.
- Holiday Inn in Wuhan, China: a 4-star hotel with 41% ownership and a 10% cap rate
- Best Western in Osaka, Japan: a 3-star hotel that is 100% owned with an 8% cap rate
- A $220 million (HKD) stake in AccorInvest.
By our estimates, the Macao Ocean Gardens complex is worth $6.80 (HKD) a share. The hotels in the US (NY & SF) are worth $4.50 (HKD) a share. The hotels in Vietnam, specifically the Sheraton hotel, which is prone to cycles with its gambling operations, should be valued at least at $3.00 (HKD) a share. The other properties and investments are worth another $6 (HKD) a share. This means that we value the stock to be worth $20.30 (HKD).
As of May’s close, it was trading at $5.10 (HKD) share, so we estimate an upside potential of 290%. Trading volume will increase after the Macao liquidation, which is enough for me to exit my position.
Investing in this stock carries its risk. Near 75% is owned by the family, and the remaining flee float is mostly held by value investors. Hence there are very few shares left to trade, and therefore the liquidity is extremely thin, and the price is just as volatile. Whenever a value fund exits their position due to waiting periods, the price will sink. It is difficult to liquidate million-dollar positions in illiquid stocks. Investors do need the patience to sit on it for a few years.
If you were to build up a position, spread it over a few days or weeks to avoid moving the price too much.
I am invested because of the incredible discount to net asset value, the good corporate governance, the minimal debt and leverage and the mispriced valuation due to low yields in Macao (that doesn’t concern me the slightest). I got the US assets as a safety net, the Macao assets as a massive catalyst, and all the other assets that just make the whole picture even brighter.
This combination is very rare, and that makes it a big winner for me.