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.
High vacancy (15.9% in Hong Kong, 12.5% in the neighborhood of One Causeway Bay, and now 7.4% for Hongkong Land).
Additional supply coming online (3.7M square feet of Grade A office space, 1.1M square feet Hysan project in the same neighborhood).
Rent declined 33.2% since the 2019 peak, and another decline is expected this year of 6-10%.
The trajectory of Hong Kong (not in the article), Hong Kong lost its special status. This means more serious competition from other Chinese Cities with plenty of real estate development.
Real estate development is naturally riskier than already developed real estate (development risk and cashflow further out into the future, and more uncertain). Given that HongKong Land trades at $7.55B market cap with $32B of shareholder funds and low leverage ($5.4B of net debt). I think looking for the right appraisal value for a Hong Kong real estate development is not worth your time. The uncertainties are just too high to come up with a precise number.
My guess is that the number will be between $3.5B and $0.5B. Depending on how conservative you want to be and how certain the money will flow back in the pocket of shareholders.
As part of Jardine Matheson it can be a nice bonus. If you have any insight to share into HongKong Land this would be greatly appreciated.
I looked into it after reading your post and I tend to agree about the limited downside and potentially significant upside. I applied the following methodology for ballpark valuation estimate:
1. Own property (subsidiaries). I took the average of two methods: value per room based on precedent transactions and NOI/cap rate.
- I used only Paris and Jakarta since Barcelona looks like an outlier. Then I adjusted the value per room for RevPAR.
- I took their subsidiaries' revenue ex-Paris and assumed 70% Opex/Revenue ratio (didn't dig deep enough to check if this is a reasonable estimate for luxury hotels). Capitalized it at 10% (likely conservative cap rate).
$1.2bn EV.
2. Associates and JVs. I took their net income for 2022 (2023 net income was zero largely due to Singapore renovation for 6 months, according to the company) and put a 10x P/E on it.
$0.1bn EV.
3. Management business. 2023 net income * 15x P/E. Marriott trades at 24x, Hilton at 28x, so 15x seems conservative, especially given the pipeline.
$0.6bn EV.
4. One Causeway Bay. I looked up current rents in Causeway Bay area in RE broker reports. I used 60 HKD/sqft for offices and 818 HKD/sqft for commercial (not sure if the latter is adequate for this type of building, this is the rate for "high street retail" in Causeway Bay as per Cushman's Q1 2024 report). I applied above market average vacancy rates (20% for offices, 10% for commercial) and higher end of cap rates (5.0-5.25% as per CBRE). This gave me $1.9bn (surprisingly close to company's estimate of $2.0bn as of 31.12.2023; I hadn't seen their number before doing my valuation exercise). Then I applied a 30% discount to be on the safe side.
$1.3bn EV.
This gives me total EV of $3.2bn. Subtract remaining capex for Causeway Bay ($351mn), add back after-tax cash inflow from Paris sale ($177mn). Subtract $225mn net debt. We arrive at equity value of $2.8bn which is 33% above current market cap.
Normally I wouldn't consider an opportunity with such a limited upside, but in this case it may actually make sense because I believe my assumptions are mostly conservative and the downside is likely limited. The upside may come in the form of higher selling price for One Causeway Bay and growth of the hotel management business.
What I'm concerned about is capital allocation. What do you think is the likelihood of the company distributing cash to shareholders after the potential sale of Causeway Bay ? Given your knowledge of Jardine holding, do you think they would prefer to plow the cash back into this business or to use it in their other businesses?
Thanks for your feedback! I'm still on the fence, need to think about the case a bit more. Did you pull the trigger or are you sticking to the Jardine holding company only?
the problem in asia is always value extraction. businesses are worth a lot but the cash never reaches the pockets of minority shareholders. that’s why i prefer asian stocks with fat and sustainable dividends, eg asia commercial. at least I get a 15% yield and will recover my investment in 6 yrs regardless of where the stock goes.
HK’s office sector is impaired, and expectations are for an extended period of time (eg. 10 years) to absorb new supply. 2017 precedents reflect a different world with regard to HK, interest rates, office, etc. Office rents in HK are declining from peak levels which might not be reached again until the 2030/40s. A possible analogue is Fifth Avenue NYC retail rents.
I am curious to understand the level of management’s commitment to monetizing OCB. Have they set any quantitative targets for selling OCB or owned hotel assets? As a fellow shareholder of Jardine, I hope they continue expeditiously with the asset-light strategy.
No real knowledge about One Causeway Bay. This article however does sum up most of the common known risks. https://www.mingtiandi.com/real-estate/projects/mandarin-oriental-preps-leasing-of-hong-kongs-one-causeway-bay/
Which are in my mind:
High vacancy (15.9% in Hong Kong, 12.5% in the neighborhood of One Causeway Bay, and now 7.4% for Hongkong Land).
Additional supply coming online (3.7M square feet of Grade A office space, 1.1M square feet Hysan project in the same neighborhood).
Rent declined 33.2% since the 2019 peak, and another decline is expected this year of 6-10%.
The trajectory of Hong Kong (not in the article), Hong Kong lost its special status. This means more serious competition from other Chinese Cities with plenty of real estate development.
Real estate development is naturally riskier than already developed real estate (development risk and cashflow further out into the future, and more uncertain). Given that HongKong Land trades at $7.55B market cap with $32B of shareholder funds and low leverage ($5.4B of net debt). I think looking for the right appraisal value for a Hong Kong real estate development is not worth your time. The uncertainties are just too high to come up with a precise number.
My guess is that the number will be between $3.5B and $0.5B. Depending on how conservative you want to be and how certain the money will flow back in the pocket of shareholders.
As part of Jardine Matheson it can be a nice bonus. If you have any insight to share into HongKong Land this would be greatly appreciated.
Thanks for an interesting idea, Guy!
I looked into it after reading your post and I tend to agree about the limited downside and potentially significant upside. I applied the following methodology for ballpark valuation estimate:
1. Own property (subsidiaries). I took the average of two methods: value per room based on precedent transactions and NOI/cap rate.
- I used only Paris and Jakarta since Barcelona looks like an outlier. Then I adjusted the value per room for RevPAR.
- I took their subsidiaries' revenue ex-Paris and assumed 70% Opex/Revenue ratio (didn't dig deep enough to check if this is a reasonable estimate for luxury hotels). Capitalized it at 10% (likely conservative cap rate).
$1.2bn EV.
2. Associates and JVs. I took their net income for 2022 (2023 net income was zero largely due to Singapore renovation for 6 months, according to the company) and put a 10x P/E on it.
$0.1bn EV.
3. Management business. 2023 net income * 15x P/E. Marriott trades at 24x, Hilton at 28x, so 15x seems conservative, especially given the pipeline.
$0.6bn EV.
4. One Causeway Bay. I looked up current rents in Causeway Bay area in RE broker reports. I used 60 HKD/sqft for offices and 818 HKD/sqft for commercial (not sure if the latter is adequate for this type of building, this is the rate for "high street retail" in Causeway Bay as per Cushman's Q1 2024 report). I applied above market average vacancy rates (20% for offices, 10% for commercial) and higher end of cap rates (5.0-5.25% as per CBRE). This gave me $1.9bn (surprisingly close to company's estimate of $2.0bn as of 31.12.2023; I hadn't seen their number before doing my valuation exercise). Then I applied a 30% discount to be on the safe side.
$1.3bn EV.
This gives me total EV of $3.2bn. Subtract remaining capex for Causeway Bay ($351mn), add back after-tax cash inflow from Paris sale ($177mn). Subtract $225mn net debt. We arrive at equity value of $2.8bn which is 33% above current market cap.
Normally I wouldn't consider an opportunity with such a limited upside, but in this case it may actually make sense because I believe my assumptions are mostly conservative and the downside is likely limited. The upside may come in the form of higher selling price for One Causeway Bay and growth of the hotel management business.
What I'm concerned about is capital allocation. What do you think is the likelihood of the company distributing cash to shareholders after the potential sale of Causeway Bay ? Given your knowledge of Jardine holding, do you think they would prefer to plow the cash back into this business or to use it in their other businesses?
Thanks for your feedback! I'm still on the fence, need to think about the case a bit more. Did you pull the trigger or are you sticking to the Jardine holding company only?
the problem in asia is always value extraction. businesses are worth a lot but the cash never reaches the pockets of minority shareholders. that’s why i prefer asian stocks with fat and sustainable dividends, eg asia commercial. at least I get a 15% yield and will recover my investment in 6 yrs regardless of where the stock goes.
I share similar views with the other commenters.
HK’s office sector is impaired, and expectations are for an extended period of time (eg. 10 years) to absorb new supply. 2017 precedents reflect a different world with regard to HK, interest rates, office, etc. Office rents in HK are declining from peak levels which might not be reached again until the 2030/40s. A possible analogue is Fifth Avenue NYC retail rents.
I am curious to understand the level of management’s commitment to monetizing OCB. Have they set any quantitative targets for selling OCB or owned hotel assets? As a fellow shareholder of Jardine, I hope they continue expeditiously with the asset-light strategy.
a 👍 great article and idea!