HK Stock - Stable Trophy Assets

Cash balance climbing for a company with prime assets in Hong Kong

As part of my first post on substack, I would like to get started as to why is it worth looking into individual stocks in a world of low-cost, index-based investing. If one believes in the efficient market hypothesis, pouring in time to study individual securities is of little-to-no value. Nonetheless, having observed and invested in markets for several years, my experience is that there are plenty of opportunities for retail investors to generate returns by diligently studying companies, closely following (and importantly “observing”) markets and making calculated decisions. In discussing the stock below, I hope to cover and achieve a few things, including understanding the business, comparing the bull and bear scenarios, and valuation analysis, with other side notes.

To kick things off, the stock trades at 8.5x underlying earnings with 5% dividend yield (on 2023 reported numbers). It is at 65% discount to reported NAV, with a staggering 80% of market cap in cash, cash equivalents and financial assets. The current market cap is HK$7bn (c.US$900mn), falling under the SMID cap bucket of stocks. It definitely suffers from a “illiquidity discount”, with less than 60k shares traded on average over last few months.

The company is Miramar Hotel and Investment Group (HKSE: 71). For those who live or have been to Hong Kong, you have definitely come across this company through: 1) staying at one of their hotels, 2) shopping/visiting their malls, 3) dining at their restaurants, or 4) exploring/travelling via their travel agency. The company’s origination story is that Mr. Young Chi Wan (楊志雲) purchased a hotel property on Nathan Road in Tsim Sha Tsui (a key business/retail/tourist area in the Kowloon peninsula of Hong Kong) from Spanish Catholic missionaries over 65 years ago in 1957. The company went public in 1970, and till date continues to trade on HKEX.

The company has 4 key business segments: 1) Hotels and Serviced Apartments (HSA), 2) Property Rental (PR), 3) Food & Beverage (F&B), and 4) Travel Agency (TA). To avoid repeating long segment names, I will use the above acronyms going forward.

The 4 segments are all inter-twined. A potential customer can stay in their hotels, shop at their malls, wine and dine at their restaurants and bars, and perhaps buy tour packages and tickets through their travel agency. Given the highly discretionary nature of all these activities, the company has suffered from: 1) protests in HK in 2019-20, 2) pro-longed disruption from Covid, and 3) downfall of inbound tourism into HK and increase in outbound travel post-Covid by locals. It probably can’t get any worse for this business, unless there is another global epidemic and that the Chinese economy is permanently in decline?

Looking into the financials, the company generated HK$2.5bn revenue in 2023, which stood at 83% of 2019 (pre-COVID level). PBT (before non-operating items such as fair value adjustments in investment properties and other gains/losses) of HK$970mn, however, did surpass 2019 level. PBT margin stood at 38% (vs. 32% in 2019). Revenue and profitability do not go hand-in-hand for this company, with travel generating the most revenue and property rental being the most lucrative. Revenue share in 2023 was as following: HSA at 23%, PR at 31%, F&B at 11%, and travel at 35%. Segment adjusted EBITDA share was as following: HSA at 17%, PR at 74%, F&B at 3%, and travel at a negligible 0.2%. While revenue was essentially flat from 2014 to 2019, PBT (before non-operating items) grew at 6% CAGR. RoE in 2023 stood at 5%, which is a function of the company being over-capitalized, compared to RoE in 2015 of 10.1%. There is practically no debt on the balance sheet and cash & cash equivalents stand at c.75% of market cap, with steady dividends over the last few years.

Source: Company

The bull case: 1) Hong Kong’s retail, hospitality and tourism sectors’ recovery, 2) NAV discount narrowing to 5Y average of 45-50% (2014-19 period) v.s. current discount of over 65%, 3) Efficient deployment of capital (e.g., special dividends, investing B/S cash into other income-generating prime hospitality assets). The ultimate blue-sky scenario would be Henderson privatising the business at a premium to current stock price. For context, Henderson bought into Miramar at HK$17/share back in 1993.

The bear case: 1) Continued outbound tourism from HK and mainland/international tourists staying away from HK, 2) HK’s economic stagnation and elevated pressure on discretionary spending, 3) inefficient deployment of capital (e.g., buying over-priced assets, investing into more financial assets). The ultimate bear case would be HK’s economy (and mainland China as well) going into doldrums over a multi-year period.

While one can always do a DCF, the quick and dirty math is often already helpful to gauge “fair/intrinsic value”. By applying 2-4x (conservative given low-to-no growth) EBITDA multiples to the 4 segments and deducting net debt / (cash), we get an equity value of HK$13.8/share. Alternatively, applying a 50% NAV discount on a conservative book value of HK$21.3bn in 2025E (3.3% growth from 2023 reported numbers), we get an equity value of HK$14.2/share. Blending the two values (50/50) and applying a 10% illiquidity discount on the stock (one can arguably not buy/sell sizeable amount of stock without moving the market), we get an equity value of HK$12.6/share, implying 25% upside (Happy to share more details to those interested). To further contextualise, the stock was trading above HK$14 before COVID.

Slightly over 50% of stock is owned by the CEO - Martin Lee Ka Shing (LKS) (do not confuse Cheung Kong’s Li Ka Shing). LKS also chairs Henderson (12.HK) and HK & China Gas (3.HK). Other insiders own over 5% of the stock, and a little-known individual (who made his fortune in the stock market and betting/gambling) owns 10%. Understandably, institutional ownership is <1% (Why buy Miramar when you can buy Henderson - a liquid, large cap parent company with much large property sector footprint?) and the rest of the stock is held by the public.

Source: Company, IBKR

So why does the stock trade at the current price of HK$10? A few reasons: 1) boring business with low-to-no growth, 2) old, slow-moving management (many of the directors are aged 70+), 3) lacking attractive shareholder rewards e.g., buybacks, special dividends, 4) investors staying away from HK/China stocks as indicated by depressed valuations across many names, 5) lack of competitive moats aside from being a set of prime assets at prime locations, and lastly 6) as mentioned early, why buy Miramar when you can buy Henderson (12.HK)?

Perhaps, there is really not much to expect from this stock. The current price suggests the worst is likely priced-in and indicates a decent margin of safety. A simple risk-reward skew analysis suggests the following: The stock might drop to HK$8 if revenue and profits shrink from a pro-longed economic slump, but a recovery in revenues combined with better sentiment towards HK/China stocks might bring the stock to HK$14 (pre-Covid level). The skew works out to be 2:1 (see red lines in the chart below to gauge this). A positive risk-reward skew and a stable dividend yield, perhaps it isn’t too bad after all?

Source: TIKR

Disclaimer: The above does not constitute financial advice. The above data and information comes primarily from publicly available sources, including company filings, news sources etc. and is subject to change as per new information and data that comes out after this is published. Do your own research rather than following what others are writing online. People tend to “speak” their own portfolios/books.