Hong Kong and Shanghai Hotels (HKSE:00045, Financial) owns what is arguably the nicest hotel chain in the world: Peninsula. The stock trades at an enormous discount to NAV and is owned by IVA Funds.
Hong Kong has 1.56 billion shares and trades at a market cap of 12.04 billion Hong Kong dollars ($1.55 billion). As of the latest six months, Hong Kong claimed its net asset value per share was HK$25.28. The stock trades for HK$7.71. No doubt it trades at a massive discount to NAV. It takes 13 cents to buy one Hong Kong dollar. The trailing dividend is 19 cents and the stock yields 2.46%.
The company owns or manages hotels in: Hong Kong, Shanghai, Beijing, Bangkok, Manila, Paris, New York, Chicago and Beverly Hills. Some of this land is owned freehold, meaning the dirt is owned too, and some of the land is not, meaning you cannot own the dirt in China. Major office properties are owned in Paris, Ho Chi Minh City and Hong Kong. Two major residential towers are owned in Hong Kong as well. Two country clubs are owned in Thailand and Carmel, California. If you’ve ever been to Hong Kong, one of the top tourist attractions is to take the Peak Tram to the top of Victoria Peak. Hong Kong Shanghai even owns that.
In the first half of 2016, underlying profit was HK$152 million. This was down from HK$265 million in 2016 due to renovations in Chicago and Beijing. Underlying profit excludes changes in the value of real estate. In Hong Kong accounting, top line also takes in changes in real estate. Had there not been renovations, Ebitda would have been down 4%. The dividend was cut from five cents to four cents.
The balance sheet is strong. There is HK$2.709 billion in cash and HK$908 million in accounts receivables. This is to HK$1,276 billion in accounts payables and HK$6.558 billion in debt. No problem there.
In the latest quarter, the 300 rooms in Hong Kong were 65% occupied, averaged HK$2976 Â per room, and occupancy dropped 2% from the same time last year. Of the 1,913 rooms in Asia, occupancy was 65% and up 10% from the same time last year, and the average revenue per room was HK$1790. In the U.S. and Europe, occupancy was 72% and down 2% from the same time last year. The company owns 100% of its hotels, except Beverly Hills (20%), Shanghai (50%), Beijing (76.6%), Bangkok (75%) and Manila (74%).
I’ve been to the Peninsula in Hong Kong. It’s amazing, arguably one of the nicest hotels in the world. They pick you up at the airport in a Bentley and violinists play during lunch. It s quite a sight. I’d recommend a visit if you are ever in Hong Kong.
IVA Funds owns 8.77% of shares outstanding. Their thesis is pretty simple: it’s an awesome company trading at a huge discount to NAV. Safe and cheap, as Martin Whitman would say. The founding family owns something like 75%. Michael Kadoorie owns 53.473%. This is the problem with the stock. As Martin Whitman of Third Avenue would say, you’re looking for resource conversion. This could be a spin-off, special dividend or an M&A transaction. You have to be extremely patient to own a company like this. There might not be any special event for a long time. Having said that, human nature will probably eventually win out. Some heir will get tired of seeing their stock holdings trading at such a massive discount to NAV and will want to do something to drive the stock higher.
Disclosure: We own shares of Hong Kong and Shanghai Hotels.
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