Earlier this week I presented Mandarin Oriental as a low risk, special situation way to buy Hong Kong real estate. In contrast, today I will summarise my view of Hysan Development, a HK-listed developer with no special situation element at all. Despite a high-quality portfolio centred around one of the city’s best retail districts (Causeway Bay), Hysan is simply table-pounding cheap. In my view, it has been caught out as a relative small cap in a sector where even the largest bluechips are currently uninvestable.
Thanks for highlighting Hysan, and Mandarin Oriental in an earlier post. Of the two, Hysan would certainly appeal to me more, not least because its share price is trading at nearly a 20 year low, and the substantial discount to its NAV should narrow when outlook turns rosier.
MO, by virtue of its Jardine's parentage, is a much "sleepier" company and unlike Hysan, do not have a history of rewarding its shareholders with a decent DPS. Yes, the discount to its RNAV is there but does that have a realistic chance of being realised? I think not. Even when there was a massive offer for the excelsior hotel site a few years ago, which far exceeded MO's entire market cap at that time, Jardine refused to sell and determined that they were more keen on its own empire building. I would not be the first to take issue with corp governance issue there.
Apart from Hysan, perhaps you could take a look at Tai Cheung too. The latter is a smaller company, trades at similar sized discount, pays a decent dividend as well, but one thing that sets it apart is that it has no debt and in fact its net cash position roughly equates to 2/3 of its current mkt cap. Michael Fritzell has written up a good write up on the company here https://www.asiancenturystocks.com/p/tai-cheung-88-hk. Of the three, i favour TC most and MO least.
Hi Toh, thanks for the feedback. I agree with your conclusions about the two companies. Maybe Mandarin will be more shareholder focused this time, as they have said they are not a long-term holder after completion of OCB. It's interesting to note that Hysan's strong div yield is mostly a result of the share price dropping like a stone recently.
Thanks, I will have a look at Tai Cheung. There are quite a few HK real estate companies on my watchlist atm.
I unfortunately had the unpleasant experience of owning Hysan slightly longer, with a high teens entry price. I take a much less optimistic view on management. Hysan has also developed a habit of poor capital allocation, mostly funded by debt and pref equity.
The Caroline Hill Road project was as close as possible to the Lee family igniting money on fire. They funded that project with 100% debt, which will need to be refinanced in coming years. By my rough estimate, unleveraged yield on cost will be sub 4%, well below Hysan’s current cost of debt.
Hysan’s foray into the healthcare business has also been a disaster, from what I can gather that business is generating negative margins. Hysan’s speculative Mainland office purchased from CKH has had close to zero occupancy for years. Oops. Hysan’s residential apartments, Bamboo Grove has also had laughably low occupancy, despite its prime location.
Hysan has also been caught off guard because some of its pref shares are converting from fixed to floating, which wil likely cause another dividend cut. Oops. They alluded to this during the last semi-annual webcast. As far as I can gather, management does not show much self awareness and analysts do not hold them to account.
My only reason for still owning the stock is hope that the Lee Family might be forced into selling some assets, and change its behavior, as negative leverage of higher interest rates has made prior mistakes too obvious to ignore. I agree that there is value here, but is it trapped value or a value trap? I am close to 50/50.
Thanks for highlighting Hysan, and Mandarin Oriental in an earlier post. Of the two, Hysan would certainly appeal to me more, not least because its share price is trading at nearly a 20 year low, and the substantial discount to its NAV should narrow when outlook turns rosier.
MO, by virtue of its Jardine's parentage, is a much "sleepier" company and unlike Hysan, do not have a history of rewarding its shareholders with a decent DPS. Yes, the discount to its RNAV is there but does that have a realistic chance of being realised? I think not. Even when there was a massive offer for the excelsior hotel site a few years ago, which far exceeded MO's entire market cap at that time, Jardine refused to sell and determined that they were more keen on its own empire building. I would not be the first to take issue with corp governance issue there.
Apart from Hysan, perhaps you could take a look at Tai Cheung too. The latter is a smaller company, trades at similar sized discount, pays a decent dividend as well, but one thing that sets it apart is that it has no debt and in fact its net cash position roughly equates to 2/3 of its current mkt cap. Michael Fritzell has written up a good write up on the company here https://www.asiancenturystocks.com/p/tai-cheung-88-hk. Of the three, i favour TC most and MO least.
Hi Toh, thanks for the feedback. I agree with your conclusions about the two companies. Maybe Mandarin will be more shareholder focused this time, as they have said they are not a long-term holder after completion of OCB. It's interesting to note that Hysan's strong div yield is mostly a result of the share price dropping like a stone recently.
Thanks, I will have a look at Tai Cheung. There are quite a few HK real estate companies on my watchlist atm.
very interested in reading about further HK RE!
I would recommend this excellent piece by Wubbe Bos:
https://open.substack.com/pub/bosinvest/p/ck-asset-how-i-would-play-a-recovery?utm_source=share&utm_medium=android&r=9ma06
I unfortunately had the unpleasant experience of owning Hysan slightly longer, with a high teens entry price. I take a much less optimistic view on management. Hysan has also developed a habit of poor capital allocation, mostly funded by debt and pref equity.
The Caroline Hill Road project was as close as possible to the Lee family igniting money on fire. They funded that project with 100% debt, which will need to be refinanced in coming years. By my rough estimate, unleveraged yield on cost will be sub 4%, well below Hysan’s current cost of debt.
Hysan’s foray into the healthcare business has also been a disaster, from what I can gather that business is generating negative margins. Hysan’s speculative Mainland office purchased from CKH has had close to zero occupancy for years. Oops. Hysan’s residential apartments, Bamboo Grove has also had laughably low occupancy, despite its prime location.
Hysan has also been caught off guard because some of its pref shares are converting from fixed to floating, which wil likely cause another dividend cut. Oops. They alluded to this during the last semi-annual webcast. As far as I can gather, management does not show much self awareness and analysts do not hold them to account.
My only reason for still owning the stock is hope that the Lee Family might be forced into selling some assets, and change its behavior, as negative leverage of higher interest rates has made prior mistakes too obvious to ignore. I agree that there is value here, but is it trapped value or a value trap? I am close to 50/50.
Sounds interesting, might tip my toe.