I wanted to compile my notes and seek feedback on Mandarin Oriental; a company I own indirectly through Jardine Matheson and an interesting prospect on its own.
While I don’t yet own the stock, my thesis boils down to two key points:
Mandarin owns the One Causeway Bay precinct which is likely worth more than the company’s current Enterprise Value ($2.4b) having recieved an offer of $3.8b for the site in 2017. For those unfamiliar, this site is being massively re-developed into retail and office- not a hotel as might be expected given the company.
Mandarin is transitioning to a capital light hotel management model by selling its owned hotels and maintaining management contracts with the purchasers.
Background
By way of brief introduction, Mandarin Oriental is a luxury hotel group with its roots in Hong Kong and Bangkok. Jardine originally bought the Causeway Bay site in question in 1841 and it would become the Excelsior Hotel.
Mandarin is globally recognisable today with a significant footprint throughout Asia, Europe, the US and the Middle East. Growth is healthy, with a long pipeline of 28 hotels and 16 residences launching in the the next five years- a significant boost to the current 38 hotels, nine residences and 23 exclusive homes already in operation. Importantly, these are pure management contracts with no building costs for Manadarin. An excellent, asset-light path to leverage the brand.
The stock trades on several exchanges but can be frustratingly illiquid. Despite a $2.2b market cap, the company’s main Singapore listing didn’t trade for most of last week. There is definitely room for inefficiency here.
Thinking about valuation
I will cut to the chase. I get to a sum-of-the-parts fair value of $6b.
This is comprised of:
One Causeway Bay at its 2017 offer price of $3.8b. This is where I’m most likely to be wrong and would appreciate any feedback. Commercial HK real estate got pretty frothy before the pandemic and is under pressure at present. The site is currently only held at $1.9b the balance sheet (valued off square footage) and will face some challenges, with several other mega projects to hit the rental market soon, including Hysan Development’s Caroline Hill.
Having said this, Mandarin has spent around $1b on the re-development and the result will be absolute, super-prime real estate. Looking at the plans, it seems reasonable for me to believe the completed project will be comfortably worth $3.8b+. While there is some excess capacity in the rental market may prove a great time to enter.
Management has previously said they will look to monetise the property after completion in 2025.
Owned Hotel real estate of $1.8b. Mandarin currently owns 13 of its hotel properties. Using the sale of its Paris site which will close this year (which valued the property at $1.65m per room) and the 2023 Revenue per Available Room (RevPAR) achieved at this hotel, I have collated a rough value of these holdings by comparing the RevPAR of the portfolio to the Paris hotel and taking a proportional value.
Similar recent sales of the MO Barcelona ($2m per room) and MO Jakarta ($320k per room in a related-party transaction with Astra) also helped for reference. Tokyo and Geneva are leasehold properties with expiries in 2040 and 2050, so I halved my estimate of their value. I believe these numbers are mostly conservative, for example it’s possible the New York stake is worth far more than my estimate, but I just comped it off the European properties to be safe.
And the hotel management unit worth $636m. I put a 12x EBITDA multiple on this segment’s 2023 result. This is a higher multiple than I would normally use for almost anything, but as noted above, this is a genuinely excellent business. Each new contract requires very little capital investment by Mandarin, simply the lending of its brand to the property.
This business should nearly double in the coming years on the existing pipeline alone. Below is just the Asian component of this as a taster.
Summing these three value drivers and subtracting net debt of $225m, we arrive at my $6b estimate, implying a P/NAV of .35x.
Given negligible debt and an apparent wide discount on quality assets, I believe Mandarin Oriental looks like a very resilient investment, hence the Buffettism in the title. Take care of the downside and the upside should work itself out.
But there is another element here too. Despite exposure to marked down HK property, MO trades in Singapore and has an extra layer of protection in the event of any future stand-offs the US/China/Taiwan sphere. While I believe this unlikely (and will hopefully write about it soon), it takes this risk mostly off the table.
So this is my current thinking. If anyone has a decent opinion on the valuation of One Causeway Bay I would love to hear it.
Best,
Guy
As always, this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.
Thanks mate, what you are saying makes perfect sense. Although I'm not trying to value it precisely, I just want to try and ascertain that it's high enough to give a margin of safety. Which isn't neccessarily easy either!
As you say, the discount needs to be quite large to account for difficulties in the HK market and to make it a relative bargain compared to the rest of the HK developers. Being Singapore listed is an advantage it has over many though.
I don't have any particular insights into HKL other than the current P/B is unsustainable. It will either have to close by the shares rising drastically or book being marked substantially down (maybe a little of both). I'm not as bearish on HK property as many though. Work From Home is something that has affected the island much less than other global finance hubs and tourism still has a decent recovery to come imo.
This is an interesting note from Third Avenue showing the P/NAV of HK property is at multi-decade lows by a wide margin. Maybe book values will get marked down further, but it will be pretty tough to lose money on a long-term hold imo.
https://assets-global.website-files.com/649326275bfdeddb91c61d12/6517122784e3e8aeaea1ea22_REIFX-Shareholder-Letter.pdf
Many are actually allocating capital nicely on top of big dividends too.
No, I'm waiting for now. Too many choices to deploy capital in Asia ATM!