0184.HK - Keck Seng Investments

[yadayada]

It looks really cheap at face value. Looking at how much cash it generates, at their property values and their cash stash. Not sure what the catch is here?

 

They own and develop properties in hong kong thailand singapore and Macau and the US. FCF yield is like ~20%. But they had a drop in revenue in 1st half 2013 so far.

[king888]

They don't have property in Thailand . They own Sheraton Saigon (Vietnam) which is bith hotel & casino.

The litigation with this casino and player had been a drag to share price for many years. The lawsuit was dismissed last year , not sure if the play can still appeal.

Will Thrower of Global VI board has followed this company for 2-3 years . You can check his long in that board thesis http://investorshub.advfn.com/boards/read_msg.aspx?message_id=95561211

 

I have a small position since last year . My long case is it's legit with good dividend and was trading at discount to nav and the lawsuit was non-sense ( Player claimed to win jackpot from slot machine's malfuncion)

[yadayada]

yeah got them switched up your right. And it looks like they will pay v large dividends soon, now that they paid off most of their debt?  Is the law suit the only reason it was cheap? Price didn't really jump up after that announcement.

[rayfinkle]

Any governance issues to think about?

[yadayada]

It seems insiders own a large amount, and what about those minority interests? Half the dividends go their way. I also cant figure out why they have almost their market cap in cash. What will they do with that?

 

If minority interests get those dividends, does that mean there are like private preferred shares for this company? And what % of the assets do regular equity holders really own then?

 

Only like 1/6th of the profits went to shareholders through dividends.  They generated roughly 2 billion in cash the last 8 years or so. But most of it is just in bank deposits now still on their balance sheet. You would think they should buy back some of their own shares.

 

Does anyone have acces to the VIC write up?

 

They did do some serious investments in real estate in 2009-2011. So i wonder what that is worth now.

[Packer16]

To be compliant with IFRS they need to perform annual RE appraisals on their properties so the book value of equity should reflect any increase in value.  I don't understand the VIC posting as it writes up the already IFRS adjusted book value based upon recent transaction (pretty speculative unless you are RE appraiser).  If you use the IFRS numbers you come up with a discount of 43%, pretty typical of HK real estate hold cos.

 

Packer

[yadayada]

yeah i think your right. They didnt make a significant gain on sale when they sold alot of real estate, like the VIC article implies. So the book value of 3.4 billion should be roughly correct. Still not a bad pick to invest in tho, but i guess not nearly as much upside.

 

[thefatbaboon]

The main uncertainty is regarding the value of the macau assets - which I think do have the potential to be significantly higher than their book/ for example they sold two apartments there during 2012 or 2013 at a good clip over book

 

As regards the minority interests you mentioned earlier it is predominantly the two Vietnamese hotels where they own 64% of the Sheraton and 25% of the Caravelle

 

The big sale you mentioned where they only realized a small gain was of two properties in Japan/  They had only bought the properties in 2010/ I think the sale was either lucky or clever because they got out just before the yen revaluation and with a small gain

 

They made an excellent purchase of the W hotel in san francisco in the summer of 2009/

 

Other than a small run in with the tax man decades ago the controlling family is typical wealthy singapore with a history of working together with some other big and reputable families in singabpore and hong kong i.e. this doesn't look anything like a typical fraud

 

I have no idea what the cash balance is for

 

 

 

 

[yadayada]

(g) Fixed assets

(i) Investment property

Investment properties are land and/or buildings which are owned or held under a leasehold

interest (note 1(i)) to earn rental income and/or for capital appreciation. These include land held

for a currently undetermined future use and property that is being constructed or developed for

future use as investment property.

Investment properties are stated at fair value, unless they are still in the course of construction

or development at the end of the reporting period and their fair value cannot be reliably

determined at that time. Any gain or loss arising from a change in fair value or from the

retirement or disposal of an investment property is recognised in profit or loss. Rental income

from investment properties is accounted for as described in note 1(s)(ii).

When the Group holds a property interest under an operating lease to earn rental income

and/or for capital appreciation, the interest is classified and accounted for as an investment

property on a property-by-property basis. Any such property interest which has been classified

as an investment property is accounted for as if it were held under a finance lease (note

1(i)), and the same accounting policies are applied to that interest as are applied to other

investment properties leased under finance leases. Lease payments are accounted for as

described in note 1(i).

(ii) Hotel property

Hotel properties are stated at cost less accumulated depreciation (note 1(h)) and impairment

losses (note 1(j)).

So it looks like the VIC article is right about their hotels being worth more.

 

And the real estate could also be worth more, if they  are still technically under construction?

 

Profit from sale of properties in Macau rose to HK$96.4 million during the year as

compared to HK$14.3 million in 2011

so revenue there was 129 million i think. and 96 million in profit. This means a 4x mark up right?

 

So coming back to accounting rules

Property development 335,931 – 335,931

that is at cost. And not fair value.

 

[Packer16]

They may be able to be sold a premium to book but the VIC report has the properties held for sale at HK$1.939 b versus a BV of HK$283.5 m.  These properties are appraised annually see footnote 29 (a) (i) and 12 (a) (i).  Is this amount of mark up believable?  If the financial statements are this far off using the fair value standard then I think the auditors would have a big problem with Keck's financial statements. 

 

For the hotels there may be some mark-up but if you look at there assumption for the Vietnam hotels @ 10x earning/FCF that is not cheap considering it is in Vietnam.  This marks up cost by about 150%.  If we look at NOI then BV is cap rate of 38% and the VIC report is 15%.  If we use the mid point we write-up $450m.  The other big hotel mark-up is SF about 100%.  I could not find the implied $109m of NOI but was only able to find about $58m.  So the BV is pretty close to the NOI/cap rate (7.8%).  So if you mark to BV the investment properties and Vietnam hotels to the mid point between VIC and BV is 40% of BV similar to Wheelock.

 

Packer

[yadayada]

If you search fro macau, in the  beginning:

 

Macau

As a result of strong economic activity arising from increased visitors arrivals to Macau, robust gaming receipts, as

well as continuing development and construction of hotels and infrastructural projects, the property sector has been

a significant beneficiary. The sector witnessed enhanced capital values as well as strong increases in rental rates

for properties across the board. Profit from sale of properties in Macau rose to HK$96.4 million during the year as

compared to HK$14.3 million in 2011, whilst profit from leasing activities increased to HK$85.7 million as compared

to HK$59.1 million in 2011.

 

And note 17':

 

At 1 January 303,384 306,190 10,727 10,727

Properties sold during the year (note 5©) (19,857)

 

So 19 million was written off, and a 96 million HK$ profit was noted. So that is a mark up of 5.5x right?

 

If you look at the revaluation of their regular property then it was rerated by 78 million hkd

 

The sale of property in japan:

In September 2012, the Group disposed its interest in the investment properties in Japan to an

independent third party with an aggregate consideration of JPY4,900,000,000 (equivalent to approximately

HK$488,530,000) and realised a gain on disposal of HK$9,870,000

 

So if you add up the stated profit of development profit of 96 million something doesn't add up. shouldn't this be 96+ 10m = 106 million, instead of 78 million?

 

I dont think that property held for sale is held at fair value, but at cost. That is the only way this makes sense here.

 

Seems that properties held for sale is treated as inventory, so the profit of that doesn't show up in fair value adjustment. And inventory is held at cost normally

[Packer16]

They did obtain good pricing for those units about 7% of the total held for sale but I think it is a big assumption they would be able to obtain that pricing across the rest of the development sales.

 

Packer

[yadayada]

they sold them for 6.5-8.5k$ usd per square metre untill now. His valuation of 2.7 billion assumes slightly under 10k$ per square meter. Given that they have 38k square meters to sell, that is 380m us = 2.9bn HK$. Since their last sales in 2012 real estate prices have risen more then 50%. various websites say average real estate price for living space is now 10k$/sqm. Since they sold the last apartment.

 

And it is still half of that in hong kong with 20k$/sqm and singapore with 17k sqm$. Japan at 11k$/sqm. And Macau has limited space with more and more business flowing in every year. So not weird that prices of real estate are high. also their blocks seem to be in a good location.

 

Also the newly built light rail transit will stop right before one of their apartment blocks when it is finished this year.

 

What is really convincing in this argument, is that soon Macau will open up to more chinese people when the bridge is finished. I read a blog post on some casino stock in macau a while back. And his research looked pretty convincing with some interesting links. He deleted his blog tho. Ill try to dig up some stuff on that.

 

The fact that real estate shot up 50% in almost 1.5 years should tell you something as well about anticipation of increased revenues from main land china. I dont think that is because of a bubble forming.

 

And his other argument on that fully serviced apartment blocks should fetch a premium also sounds reasonable. When apartment hunting I looked at those places and they generally seemed to want higher rents. Especially if they are not much around. 21k of the 38k sqm is serviced.

 

So if they only get 6k$/sqm, that is still 1.7 billion x 0.7 = 1.2 billion HK$ for keck seng. And that really seems like lowballing it. a 40% discount to current average prices! For better then average real estate.

 

Only problem i might have with the sqm, is that often they count hallways and elevators as well. So the real number could be smaller. Especially if there are several apartments in a hallway. I doubt they did this in their annual report tho.

[thefatbaboon]

yada,

 

you're looking in the right place - macau is the key uncertain value. 

 

keep in mind though that the sale you referred to was of a couple of filet-mignon apartments, and the sale was to the brothers who control KS ;)

 

i'm not implying that the values were inflated (or deflated)  - and you're right that values in Macau have risen significantly since then.

 

 

 

[yadayada]

http://www.samachar.com/Macau-gambling-boom-spawns-a-housing-crisis-oehhLbajdfe.html

 

http://www.businessweek.com/articles/2013-05-22/betting-on-a-new-gambling-boom-in-macau

 

@thefat: they were sold pretty much at average market values I think. Just have to wonder who will buy those appartments. But I guess as long as prices keep shooting up, it means there is loads of demand.

[Laxputs]

Wondering what they would do with that cash pile?  http://www.keckseng.com.hk/Files/Announcement/2014/LTN20140814035.pdf

 

Does this make the stock more or less attractive or neutral? I'm sure there is a lot more to it than EBIT/PurchasePrice because 5% Operating Profit margins aren't attractive to me. But these guys are obviously skilled real-estate investors.

 

 

Also: http://seekingalpha.com/article/2418555-keck-seng-4-star-real-estate-play-offers-5-star-return-with-149-percent-upside-to-nav

[Packer16]

The transaction does appear expensive .  If I use $16m EBITDA (assuming a 15% EBITDA/EBIT ratio similar to Keck Seng's 2013 ratio) and the purchase price of $273m, the total EV/EBITDA goes up from 2.1 to 5.7x EBITDA.  With these numbers the purchase price implies a EV/EBITDA if about 17x.  Hopefully they will disclosure more to understand the purchase price.

 

Packer 

[yadayada]

More then 20x earnings for a hotel is pretty expensive right? Maybe they see a way to squeeze more money out of it? Track record isn't bad, so I hope this is not the institutional imperative at work.

 

Looking at ratings it seems to be a very highly rated hotel.

[Packer16]

Here is a lament about the purchase price:

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/114379

 

I can only see one response because I am a guest.

 

Packer

[yadayada]

he is saying different metrics as what I see in the report. They paid 20x net earnings after everything right? The comment is complaining they paid 20x EBITDA.

[Laxputs]

I had 13.5x EBIT or a 5% cap rate. Cash would be better imo but it's a nice property that likely won't lose value.

[Laxputs]

Comments from Red Corner:

 

"I'd have preferred it if they'd bought a deeply discounted property elsewhere but at a cap rate of 5% the purchase price is in line with Manhattan hotel valuations.

 

There is no tax treaty between the US and Hong Kong and they may have decided that, rather than pay the 30% withholding tax on dividends back to the parent, the company as a whole would be better served if the sub used the free cash flow from San Francisco to buy another quality asset in the United States. And one would imagine that they'll use cheap non-recourse debt to do so.

 

That's better than hoarding cash and, in the long term and for most of their stockholders, better than a special dividend.

 

That's the appeal of this stock, after all: it is (and it is run as) a long-term compounder with some treats along the way."

[Laxputs]

Ha, nice timing...

 

Pretty great article:

 

http://seekingalpha.com/article/2444995-keck-seng-churning-out-profits-and-growing-through-acquisition?source=kizur_seekingalpha

[yadayada]

yeah i guess that is something we overlooked, the tax of bringing the cash back to shareholders.

[Packer16]

Do you know the source for the $20m EBIT (13.5x EBIT) as the Keck Seng PR has only $13.5m operating profit in 2013? 

 

Packer