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Jardine Matheson: An Under-the-Radar Asian Growth Story (Contest)

Jerry Zhao

Jerry Zhao

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Most people are familiar with Berkshire Hathaway (BRK.A)(BRK.B), Leucadia (LUK) or Loews (L), all outstanding conglomerates that have rewarded patient shareholders over the long haul. Each has done reasonably well over the last decade, compounding their book value at about 10% a year. But most people have never heard of what might be considered a Berkshire Hathaway in the Far East, Jardine Matheson (JMHLY). But in fact, it’s a leading conglomerate in Hong Kong and Southeast Asia, whose shares have outperformed all three of them — its ADR have gained over 3.5x since its debut in June 2004 for a CAGR of 21%.

But that’s just scratching the surface; it gets more interesting as you dig deeper. It’s a storied company based in Hong Kong, yet its history predates the city. It’s owned by a Scottish family, headquartered in Bermuda and listed in the London Stock Exchange even though it derives nearly all of its revenue from Asia.

So what’s the story about Jardine Matheson, and why is an interesting investment for value investors? In a nutshell, Jardine Matheson gives you an opportunity to tap into the growing prosperity of East and Southeast Asia at an attractive price, and without sacrificing on corporate governance. It has been growing at a rapid clip for the last decade, and, in my opinion, should be able to continue growing at a satisfactory rate for the foreseeable future.

Below, I’ll give you a brief review of its businesses and management.

Businesses

Jardine Matheson started as a trading company in 1832 in Hong Kong by a pair of Scotsmen — William Jardine and James Matheson. Jardine Matheson (PINK: JMHLY) has evolved from its original business of trading cotton and opium into a thriving holding company with interests in a number of businesses, most of which are publicly traded companies. The chart below gives you a glimpse of its subsidiaries, its ownership interest, and each subsidiary’s after-tax income and the market cap for some of them.



Controlled Subsidiaries

Since Jardine Matheson’s businesses span a number of different industries, it’s helpful to briefly review each of its major subsidiaries and their competitive positions.

Table 1: Controlled subsidiaries of Jardine Matheson

Business What It Does Competitive Position
Jardine Pacific Infrastructure services (e.g., Hong Kong Air Cargo Terminals, construction and shipping services, etc.) as well as franchisee of Pizza Hut and KFC in Hong Kong, Taiwan, and Vietnam Tends to enjoy sticky customers given the critical nature of these services
Jardine Motors Auto dealerships (for mostly luxury brands) in Hong Kong, mainland China, and UK. Enjoys scale advantage within its niche market since its markets (by geography or brands) are not big enough to support numerous competitors.
Jardine Lloyd Thompson A leading insurance broker, risk management advisor and employee benefits consultant, operating in 36 countries. Long history in the Far East.
Dairy Farm A leading retail group in Hong Kong and Southeast Asia, operating well-known local brands. Also owns IKEA stores in HK and Taiwan as well as 50% interest in the well-known Maxim’s restaurant chain. Well-established local chains enjoy great locations and reputations. Merchandising skills may be hard to replicate by foreign competitors.
Hong Kong Land Owns 5M sq. ft. of prime commercial real estate in HK’s central business district. Growing property business in Singapore and mainland China. Has owned the land in HK’s central district since HK’s beginning. Worked closely with Singapore government in the development of its central business district.
Mandarin Oriental A leading luxury hotel chain with 44 hotels (11,000 rooms) in operation or under development. Well-recognized and respected brand. Has won numerous awards.
Jardine Cycle & Carriage A Singapore blue-chip and leading player in automotive distribution Most important asset is 50.1% interest in Astra International (acquired in 2001 and 2005).
Astra International Dominant player in automotive distribution in Indonesia with exclusive distribution rights of Toyota and BMW, among others. Growing business in financial services, heavy equipment, agribusiness, etc. Enjoys tremendous scale advantage in automotive distribution. Also benefits from growing car ownership in the country.


Unconsolidated Interests

Since most of its interests in the unconsolidated businesses are fairly small, I’ll only highlight two of those that seem more interesting. One is its 21% interest in Rothschild Continuation, a Swiss-registered holding company for the business interests of the English and French Rothschilds, which it acquired through Jardine Strategic in 2005. It’s the largest outside shareholder (the other being Rabobank with 7.5% interest). Information on the Rothschild Continuation is hard to find. Its UK subsidiary, N.M. Rothschild & Sons, primarily an M&A adviser, reported a pretax profit of 83 million pounds with assets of 5.5 billion pounds.

The other is its 12.25% interest (through Jardine Strategic) in ACLEDA Bank in Cambodia. It’s one of a handful of major banks in Cambodia. It’s privately owned (majority owned by its employees) with credit rating of B/Stable by S&P, and has received government licenses for stock broking.

Past Performance

Jardine Matheson’s performance for the last decade has been tantalizing. As the chart below shows, both its book value per share and EPS have compounded at an annual rate of 20% or above, while its ROE has been fairly steady at around 10%.



Such a growth rate compares favorably to several conglomerates more familiar to U.S. investors:

Table 2: Book value growth and PB for U.S. conglomerates (2002-2011)

CAGR in Book Value Per Share (2002 - 2011) Average P/B
BRK.A 10.2% 1.5
LUK 12.4% 1.5
L 9.8% 1.0
But the critical questions for investors are: 1) Where did the growth come from? 2) Will the growth rate continue in the future?

● Where did the growth come from?

I don’t pretend to know the answer. Here is my best guess: Its book value growth was driven by two things: retained earning (or ROE) and acquisitions and asset appreciation. Let me explain. Since its ROE is fairly stable at around 10%, we can assume that each year it earns 10% on its book value, 25-30% of which is paid out as dividend, so its book value will increase by 7.5% by year-end. Compounding in this fashion over a 10-year period, the book value will grow by about 8.5% a year, well below the 20% or more reported above. The rest of the growth, I imagine, came from asset appreciation perhaps as a result of economic growth and currency appreciation (vs. the U.S. dollar). Acquisitions may be another source, but goodwill and intangibles only account for 15% of its book value, suggesting a small impact from acquisitions.

● Will the high growth rate continue?

The future growth prospect of the business depends on its future ROE and asset appreciation. ROE often reflects the competitive position or moat of the underlying business. Will the moat of its underlying businesses deteriorate in the future? That doesn’t seem very likely, given that the businesses (as listed in Table 1 above) often enjoy strong brand and/or scale advantage and they operate in industries less prone to technological disruptions. Will the economies and currencies of the East and Southeast Asia continue to grow faster than the U.S.? No one knows for sure, but it’s hard to see a drastic and permanent slowdown. So my guess is that the future growth may be slower than what we saw before, but still respectable and very likely at a double-digit rate.

Is the Management Capable?

Are management interests aligned with shareholders? I would say yes, since the management and board owns more than 134 million shares (about 37% of outstanding shares). The company has been run as a family business, having gone through several generations with smooth transitions (which is a rarity for family-controlled businesses in Asia), so future raucous transitions are less likely. Although, I’m a bit unhappy with the board compensation: Each board member was paid on average more than $1 million in 2011, which seems excessive.

Is management skilled at capital allocation? This is the critical question for holding companies. I think the management track record has been generally good. They tend to stay with well-established industries and tried-and-true businesses.

Let me give you a couple of examples (although I’m guilty of cherry picking). First, Astra International. The company bought into Astra in 2001 and 2005, which has since produced a total return of 3,600% and 500%, respectively.

Second, ACLEDA Bank. Since it’s not listed, it’s hard to estimate Jardine Matheson’s return on this investment. But take a look at the following chart, which shows the bank’s EPS and ROA from 2007 to 2011. Even WFC and USB pale in comparison! Its first-quarter numbers for 2012 are even more impressive: annualized ROA of 3.9% and annualized net income growth of 28%.



Lastly, Wang Fu Jing Development. Hong Kong Land, one of Jardine Matheson’s subsidiaries, is developing a premier retail site at Wang Fu Jing in the heart of Beijing’s central business district. That is not surprising. What is surprising is the way they acquired the land. Most developers buy long-term leases on their sites from the government. But HKL acquired their site through tender, buying directly from individual owners of the land, so now they actually own the land (yes, contrary to general belief, there are a small number of people who own the land that their grandparents purchased before the communist rule). They were also disciplined buyers: By dealing directly with small land owners, they can put more pressure on the price and end up paying a reasonable $1552 per square foot, roughly their initial asking price.

● What sets Jardine Matheson’s management apart from the also-runs?

The single most important source of competitive strength for the holding company may be history. The company has been doing business in the region for several generations and well over a hundred years. Dairy Farm and Jardine Cycle & Carriage as well the holding company each had an operating history of over 100 years. They were responsible for installing the first elevator in China (at the beginning of the 20th century), and they have been in close contact with the Rothschilds for over one and a half centuries. That kind of history and family ownership gives the company a long-term perspective that many of its competitors lack. With history, you gain an incredible amount of local knowledge, strong reputation, and long-lasting relationships, all of which contribute to the continued success of the company. With deep knowledge of the local market, they can identify great opportunities well ahead of the herd. They went into Indonesia and Virtnam well before CIVETS became a catchy name, and are doing the same in Cambodia. Their reputation and connections open more doors more easily than less well-connected competitors (e.g., their involvement in the development of Singapore’s central business district and their stake in Rothschild Continuation).

Are the shares cheap?

That’s a tough question. As of the end of April, the ADR trades just over 12x earning and 1.1x book value, in line with its historical valuation since 2004. However, compared to the conglomerates in Table 2 above, it seems to trade at a modest discount, given its higher growth profile. Using the market cap of the underlying businesses, the estimated value per share is at least $72, more than 40% above its current price.

Table 3: Valuation based on market cap of underlying businesses



Whichever method we use, the share seems at least modestly undervalued. With expected double-digit growth in its book value, investors who buy in today can reasonably expect at least a double-digit return in the next 5 to 10 years, although I believe a mid-to-high-teen return should be quite likely. With its capable and trusted management and its collection of well-positioned businesses, I think these shares are a great value. What do you think?

Disclosure: I own shares of JMHLY and may buy more in the near future.

Rating: 3.4/5 (22 votes)

Comments

robertcray
Robertcray - 1 year ago
I've owned Jardine Strategic for over 6 years, and it has done very well. I bought Strategic instead of Matheson because it seemed slightly cheaper. The stock actually trades in Singapore, priced in US dollars (I don't know about London listing). Matheson owns about 82 % of Strategic (and Strategic owns a smaller share of Matheson); there has been speculation that Matheson would like to buy out the public's 18 %, but probably not at current prices.

Much of the growth for the last couple of years has come from their share of Astra. Much of the book value growth comes from their annual revaluation of real estate (most of it held through Hong Long Land) per IFRS rules; this does not occur under US GAAP, where land and buildings are carried at purchase price. Also the Hong Kong grocery market is evidently a tight oligopoly, including Dairy Farm. It's a great way to invest in Asia but when China slips (or crashes) they will certainly be affected.

The controlling family is the Keswicks. The late Maggie Keswick some years ago wrote a beautifully illustrated book, 'Chinese Gardens.' which I highly recommend along with the stock.
haoafu
Haoafu - 1 year ago


Interesting story and nice article. I can't find SEC filing for it, and it's not surprising for a pink street ADR. Is there any way to get more detailed financial information online?

Looks like the value mostly depends on the real estate valuation and growing Indonesia automotive demand. More details/insight on these would be appreciated.

sjzhao2003
Sjzhao2003 - 1 year ago
Robertcray and Haoafu, Thanks for your comments and the clarifications.

I think Jardine Strategic will perform just well as Jardine Matheson. The reason I decided to write about Jardine Matheson is a general bias toward the parent companies. They seem to have a bit more flexibility in their capital allocation. But that is less important here given that Strategic accounts for the bulk of the parent's earning.

Yes, a lot of book value growth came from real estate appreciation and Astra, and that may well change in the future. I don't have any particular insight on the future of real estate over the region, but they tend to own the best real restate in their markets. Nor do I have any particular number for the growth potential for Astra or indonesia, but these background numbers may be helpful: car sales is up from 355,000 in 2003 to estimated 1 million in 2012 (CAGR = 12%), with Toyota leading the market with 35% share. Car ownership was around 8% by 2009, compared to 35% in Malaysia, 38% in S. Korea, 30% in Taiwan, and 17% in Thailand. With a billion plus population and growing, the growth potential for the overall market is attractive. But the competitive dynamic is something to keep an eye on.

I should make it clearer that buying Jardine Matheson (or Strategic) is really a bet on the long-term Asian growth story and more importantly on the management's capital allocation skills. I think the odds of supar growth for the region and Jardine companies are low OVER THE LONG RUN. And short-term uncertainties appear priced into the shares.

Three things worry me about the region's long-term prospect, though they are basically unknowables. First, political stability: look no further than the Bo Xilai scandal in China. Second, economic transition from low-level manufacturing to high-value knowledge economy, from infrastructure focus to consumption-driven, and from cheap stuff to global brands. Not many countries have made it through these transitions. Third, demographic shift. These countries have been beneficiaries of the demographic dividend. How will they fare with a declining labor force?

Sorry for the winded response.
sjzhao2003
Sjzhao2003 - 1 year ago
Forgot to add that you'll find Jardine's financial reports at their website: _http://www.jardines.com/investors/financial-reports.html

haoafu
Haoafu - 1 year ago


Thanks, Sjzhao. These are very helpful.

Looks like it has done quite some acquisitons in recent years, and I think(along with other heavy capital expenditure) that's part of what's driving the EPS growth as well.

Overall it seems to have quality assets with long term potential. Personally I'll keep an eye on it as I'm not familiar with Indonesia regulatory enviroment and I don't find the current market price very attractive.
elkarlo
Elkarlo - 11 months ago
I think especially as for developing areas go, Jardine is a great stock. As it owns a stake in Astra, which is a path to expansion in the Indonesian market. Which I think is going to be a huge place for growth.

As well as owning real estate, which is also always a great return.

With Jardine Motors, the Chinese auto market still has a huge potential for growth. Same potentially with Indonesia.

I think as stocks go, this is like an ETF, but as one stock.
nickwittt
Nickwittt - 5 months ago
Hello,

thanks for the instructive article and comments.

with regards to the book value calculation, should there not be a deduction from the respective number of shares outstanding for the crossholdings? Might that lead to higher discount?

Is it correct that Jardine Strategic pays significantly less in dividends? Should in this case its book value grow more quickly than that of the parent co?

Over a year Jardine Matheson lost about 10%, J Strategic about 5%. Is there a relative value argument in favor of the parent?

Is any of you aware of a sound comparison between big Asian conglomerates such as Cheung Kong / Hutchison Whampoa, Jardine Matheson / Jardine S, Swire Pacific, possibly Keppel?

thanks / regards

Nick Witt

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