0184.HK - Keck Seng Investments

[yadayada]

According to the management accounts of the Hotel Property provided by the Seller, the

net operating income attributable to the Hotel Property was US$11,785,000 (equivalent to

approximately HK$91,333,750) and US$13,499,000 (equivalent to approximately

HK$104,617,250) respectively for the years ended 31 December 2012 and 2013. The said

net operating income is calculated by deducting management fees, property taxes,

insurance and reserve for replacement from the gross operating profit.

 

 

So apparantly there is also some growth? Maybe NPAT is 14-15 mill this year? Added with possible 30% tax rate and it does not seem so bad all of a sudden.

[Packer16]

In the US since this is being purchased from an LLC (a non-tax paying entity), no corporate tax is paid and  in real estate property taxes are operating expenses, the actual EBITDA will probably be closer to $15 million versus $20 million.

 

Packer

[yadayada]

so what you are saying is that actual FCF will be higher because Keck seng is located in Hong kong because they do not have to pay those taxes?

[Packer16]

What is I am saying is no matter who owns the property they have to pay property taxes and the entity from which they purchased the property does not pay US income taxes because it is an LLC.  So the reported net income is equal to EBITDA less D&A.

 

Packer

[phil_Buffett]

http://www.valuewalk.com/2014/10/vanshap-long-keck-seng-bhr-capital-long-glng/

[Laxputs]

Doesn't say anything new and doesn't give enough credit to the Macau properties, but still a good article on Keck Seng.

 

http://online.barrons.com/articles/expect-rebound-for-hotel-owner-keck-seng-1415761377

[thefatbaboon]

Weird for such a microscopic foreign company to get a write up in Barrons.

[Laxputs]

I think it is an exciting time to be a shareholder in Keck Seng. I have an 11% position.

 

Keck bought Sofitel in Nov/14. The price paid was about equal to their former market cap! They purchased Sofitel at about a 5% cap rate. Whether or not that makes you happy has no effect on what it will do to their bottom line. Keck went from 7% levered pre-Sofitel to 47% levered post-Sofitel.  They only paid for the purchase with about 25% cash and the rest was debt. It seems they were able to utilize very cheap debt (appears to be about 2%). They have 1.5b HKD in cash and that interest income about cancels out the interest expense. 

 

Sofitel is a productive asset that will show up directly on their bottom line. The only had about 2 months of operations in 2014 with Sofitel so the earnings power has not been revealed in full. Adding 110m in NI to a company that was doing 300m recurring income pre acquisition, and that has a policy of paying out 30% of earnings, should have a significant effect on the share price.

 

And still the Taipa properties held for sale is the dry powder that will be lit in 2017. The sale date will come after the completion of the HK-Macau-Zhuhai bridge that has been pushed back from 2016 to 2017.

 

It's pretty easy to confirm that the held for sale properties are worth between 5-7x what they are carried for. The properties are listed in detail in the AR. One can google search price sq/ft of that specific region in Macau. It is a very desirable spot that will increase in value when the bridge comes through and the arrivals of the new casinos and hotels that are slated to open this year and next.

 

 

Valuation: http://postimg.org/image/5yqu53uj9/

 

 

With about recurring FCF of 1.22/share the stock is worth 12.20/share before the coming property sales that will add 5-7.50$/share.  That's 60% appreciation on recurring revenue before the Taipa properties are considered.

 

They mainly generate cash from Vietnam and US, so it's a lot less correlated to China that it appears at first. 

 

Pre-Sofitel, I had Keck making about 80 cents in recurring FCF. 30% payout and 3% yield is 8$/share--about the current price. Post-Sofitel I have 1.22$/share. 30% payout and 3% yield is 12$/share.

 

The company is safe with 4.32/share in cash, greatly undervalued assets, and a 7.70/share price. It is well run. The IRR looks large.

[constala]

For me Keck is an asset conversion play: as time passes, Free Cash Flow growth and the timely sales of their legacy development Macau units will enable KECK to buy more hotels around the world, grow core Hotel Operating Earnings, hence div pay-out, which is, sadly or not, pretty much the only metrics understood by the limited HK investor base. The good news is that Keck management has proved to time their acquisitions and sales with impeccable market sense.The HK-Macau-Zhuhai bridge delayed delivery in 2016 is a sure catalyst and the latest communication is very clear about the exit plan.

 

Having said that the Macau property valuation exercise leaves quite a large bid/offer:

 

(i) the carrying book value of HKD 887m is split between Held For Sales (where you have the most valuable residential properties is my understanding) for 281m and Fixed Assets=investment properties for 606m. The "Held for sales" are not at Fair Market Value; only the fixed assets=commercial units are valued following a cap rate method by John Lang Lasalle (3-5%, 9-16.5$/sqft rent). 

 

(ii) the company discloses a "Macau assets" value of HKD 1716m in its June 2014 interim. (2013: 1604m, 2012: 1208m).

 

(iii) Feb 15 official Macau statistics board update: the average price of residential units  in Taipa amounted to MOP106,316 per square meter, as revealed in data released by the Statistics and Census Service (DSEC). For Macau, the average price per square meter of existing residential units was MOP85,219 and rose YoY 28.8%. The average price of office units and industrial units was set at MOP121,112 and MOP54,250 respectively per square meter, up 62.5% and 60.9% year-on-year. This is consistent with Savills Macau latest updates: US$1237/sqft for residential.

 

(iv) the current total Macau rent received by Keck is between 68m and 72m per annum.

 

Taking all those datapoints into account,and the property details and last unit sales given in the latest financials, to summarize, I would attach a Macau assets floor at HKD 1.7 bln (5/share) and potentially up to HKD 2.7 bln (8/share).

 

To get to the upper value of 2.7 bln I use HKD 60k/m2 for Ocean Gardens, Rose, Begonia, Sakura and Lily courts, and 80k for the Luxury lot W (Aster and Bamboo Court).

 

(v) however I fail to reconciliate the "outliar" here: http://www.century21.com.mo/properties_detail.php?id=392

This small 1,100 sqft Ocean Garden condo trades for HKD 38k/m2 ....I would appreciate your comments and colour on this?

[Laxputs]

Yeah I also saw that property trading at low prices. Not sure.

[TontineCapital]

I think there is some serious value in this stock. I submitted this to SumZero yesterday, it's similar to the VIC write-up, which is what I based it on but the information is updated and there is a bit more depth to it. I think its just a matter of time for this to close the gap to true NAV. Partial catalyst with Macau sales in 2017 and possibility for increasing dividends with full year Sofitel FCF. The only thing that hurts us is the possibility of interest rates increasing in the US impacting cap rate valuations.

 

Appreciate any comments you have.

Keck_SZ_Report_2015.06.30.pdf

[Golden Geezer]

This is a really good analysis - thanks! I held the stock for a year last year and sold it when the year end results were announced. I want to go back in, but am waiting for mid-year results.

 

A few thoughts/concerns:

 

1. The Vietnam hotels generate most of the cash. Following the anti-China results last year, a lot of tourists have avoided Vietnam of late (see http://vietnamtourism.gov.vn/english/index.php/items/8692) so I am not sure how good the figures will be this year. 

 

2. Macau RE numbers for May 2015 were down 12.6% compared to April 2015 and 21.5% compared to May 2014 (see http://macaubusinessdaily.com/Property/Macau-house-prices-down-126-pct). The owners don't seem to be in a rush to sell their Macau RE, so I wonder whether this will delay sales in Macau for another few years. 

 

All in all it's a great stock, but am not sure when the stock will re-rate.

[Packer16]

Nice analysis.  I have looked at this but its cap rate by my calc of NOI is 7.6% at today's price.  Cheap but not super cheap.  The deltas for my NOI calc include backing out HK$137m of mark-to-market price changes, this is based upon revaluing the properties in each year, removing the taxes (they are real cost here - you are not going to get taxes back from the gov't of Vietnam for example; NOI in the US backs out taxes because the property can be put into a structure that pays no taxes).  With these adjustments the NOI is HK$375 m.  In addition these is based on consolidated NOI.  Keck Seng has MIs of 25% of profits and 16% of BV so if you make 20% adjustment to the consolidated NOI you get HK$300m. 

 

In reviewing the NAV build-up, my number a pretty close to yours except for the Macau properties and the W hotel in San Francisco.  For the SF hotel I would use a number closer to $500k per key (the VIC write-up used $400k per key) based upon removing the Mandarin Oriental hotel (a luxury hotel) and its price being an outlier.  The biggest delta for me is the Macau properties.  They have a Book value of US$100m but the in the NAV build-up they have a value of almost US$430m.  The question in my mind where are we in the boom/bust cycle of Macau real estate.  If you look at the historical data you provided and we are in a pause on the way up then the values are valid.  However if we go back to 2012 pricing we are closer to US$215m and if we go back to 2010 pricing then we are closer to BV.  In my adjusted approach I go back to the 2012 pricing so US$215m.  Also, in using the NAV approach, to estimate the value of a holding company like this a 20% discount is typically observed for holding companies.  Applying these changes gives me an NAV of $14.24 per share.  IMO opinion the biggest risk to NAV is Macau.  If we are at the top of bubble on the way down then I think there will be declines in the share price as the NAV will be shrinking.

 

Some other cheaper names (bigger discounts to NAV and higher NOI cap rates) you may want to look at are Shun Ho Resources, Asia Standard, Lai Sun Garment, Century City, Great Eagle and CSI.

 

Packer

[bizaro86]

No position, but I'd say that if you're going to remove the Mandarin Oriental as being luxury (which is reasonable) then you should scale the W up for the fact that it's a nicer hotel/brand than either of the Best Western or the Westin Market (which just de-branded off the Westin name to go independent). It wouldn't surprise me if the new owner's wouldn't invest $$ required on changeover to keep the brand, as the property is staying as an SPG hotel.

[thefatbaboon]

Nice write up.  Quite impressed with how this family operate.  Backtracking and getting out of Japan quickly just before the devaluation started .Picking up W SF during the crisis.  And I know they paid up for Sofitel but I'm glad they put some of the balance sheet to work - and the asset, while fully priced, is prime. As Packer points out Macau is the swing factor here and at the moment one has to assume the skew is negative but waiting a few extra years with these guys doesn't frighten me.

 

For those who like these kinds of things I've owned Nanyang (0212) for many years.  A NAV discount play - a smaller Keck or Shun Ho - but one of the only ones with a tradition of share repurchase nearly every year for the past decade, with shares outstanding declining from 45m to 35m. 

[TontineCapital]

Thanks for the feedback. Even if my valuation is high, there is plenty of room to to earn a good return. Their other investment vehicle Keck Seng Berhad also bought a NY hotel. If these guys are moving money offshore we could have a US hotel REIT before you know it. That would certainly bridge the valuation gap.

 

Packer - I will take a look at that NOI number and those other discounted NAV plays you suggested. Thanks!

[thepupil]

Not sure if you care (and I doubt they would care, or maybe you work for them) but the name tontine capital is kind of already taken by Jeff Gendell.

[Laxputs]

H2 2015

Macau leasing looks surprisingly good considering the challenging operating environment for many companies there lately.

Canada, Japan look good.

China losses cut in 1/2 and not that material.

Vietnam had 23% margins which is comparable to 2013 and 2014 full years. H1 2014 they rang in 31% margins.

 

They continue to wait for the HK-Zhuhai-Macau bridge now slated for 2017 to sell their grossly undervalued Macau properties.

 

Some questions:

1.Based on room rates and occupancy levels, the US operations look good. But the revenue has doubled since PYP due to Sofitel however the income has not budged. The occupancy rate for Sofitel was 85%, so I would think it would be positively contributing.

2. How are margins so high in Vietnam? Are slot machines jacking up the margins to the 20-25% range in combination with hotel operations?

 

Valuation

If US only contributes 50m profit a year, I'm getting approximately 13.80HKD/share in Aug 2017 when the Macau properties are sold. If one or two properties are sold at 6x BV then maybe the market rerates them before the rest are sold.

 

If the US contributes closer to 100m profit a year which I had originally estimated, then  the shares may be worth closer to 15$/share.

 

Both valuations assume the Chinese hotel operations break even, Vietnam does about 156m. I have the property lease at 90m but it may not be that accurate. I've backed out about 32% NCI in the above.

 

 

[carlo]

(v) however I fail to reconciliate the "outliar" here: http://www.century21.com.mo/properties_detail.php?id=392

This small 1,100 sqft Ocean Garden condo trades for HKD 38k/m2 ....I would appreciate your comments and colour on this?

Real estate listings in Macau (and certainly in China) are not always very reliable. Ie. agents would use them to lure potential buyers. FWIW, other datapoints I found suggested much higher prices.

 

But the revenue has doubled since PYP due to Sofitel however the income has not budged. The occupancy rate for Sofitel was 85%, so I would think it would be positively contributing.

There's a remarkable increase in wage expense, from 147m to 262m. During the period, they've added approximately 340 new staff, presumably from Sofitel. An increase in the average salary per headcount is therefore to be expected. I wonder though if there might have been severances, bonuses, etc somehow related to the acquisition. That might partly explain the missing HK$ ~30m in contribution from Sofitel. Just a working hypothesis.

 

The other thing that might not be obvious to someone casually browsing this thread is that Macau/China, by the most conservative NAV estimates above, accounts for ~$4 out of ~$14 in per-share terms. It's unusually well-diversified compared to many other cheap holding co's trading in HK.

[KJP]

Here's a recent, asset-by-asset look at Keck Seng:  https://www.scribd.com/doc/310386678/Keck-Seng-Investments-Heller-House-Investment-Memo-4-7-16

 

Short version:  There appears to be a huge disconnect between the market values of and cash flows produced by the company's assets, on the one hand, and the current market price of its shares, on the other hand. 

[ccplz]

Seems like this stock is perpetually undervalued..?

[KJP]

http://www.hkexnews.hk/listedco/listconews/sehk/2018/0309/LTN20180309956.pdf

 

Also, the HK-Zhuhai-Macau bridge will actually open this year, supposedly!

[Laxputs]

Wonder how Keck Seng will do through his crisis. Youtube presentation from late 2019 of this fund's interest (English slideshow, Spanish narration).

 

[manuelbean]

I've talked to Alejandro (the guy in the video) several times. He's a great guy. There are several young Spanish money managers that own Keck Seng.

I just don't understand why they bought the rest of the Canadian hotel a month ago for such a "high" price when they could've waited and buy it for less.

These guys have proven to be good capital allocators (probably not on the last Japan deal... still can't figure what happened there) so I would expect them to enter into some M&A deals.

[misterkrusty]

The major catalyst here is the sale of the Macau apartments, which has felt like waiting for Godot.  The first mention of selling these came in the 2013 annual (filed april '13):

"Further, with the estimated completion of the Hong Kong-Zhuhai-Macau Bridge in 2016/2017, significant improvement in access to Macau from China via high-speed trains, and general improvement in infrastructure in Macau itself with the construction of the light rail trains, property values in general are expected to hold steady and increase in line with economic growth. ... Against this background, and with an objective to enhance shareholders’ value, the Group has decided to continue its policy of adopting a flexible approach towards pricing and marketing of its properties held for sale in Macau."

 

The HKZM Bridge finally opened around year-end 2018.  But in Sept'19 the 2019 Interim Report (filed Sept'19) they said they were deferring any sales "to a later time in order to capture the benefits to be accrued with the opening of the HKZM Bridge and the anticipated opening of the Macau light-rail transit system later this year."

 

Phase 1 of the light-rail opened in Dec'19.  But in the 2019 annual they said they were deferring any sales "to a later time in order to capture the benefits to be accrued with the opening of the Hong Kong-Zhuhai-Macau Bridge and the newly opened Macau light-rail transit system in December 2019"

 

I imagine we'll need to wait for COVID19 to pass, and that's fine.  But afterwards, are they really going to begin sales, or will we later learn they're waiting for more light-rail to be built (or some other delay)?  So far, only the blue line from Taipa Ferry Terminal to Ocean is in operation.  The connection from Ocean to Barra on the Macau Peninsula is slated to be finished in 2022/23.  The light green and yellow lines connecting Seac Pai Van to Lotus Bridge on the mainland has begun construction and that's all we know so far. 

 

https://www.travelchinaguide.com/images/map/macau/light-rail.jpg

 

Has anyone been in contact with mgmt recently?