The Fund holds shares of Cheung Kong Property (HKSE:01113), a large Hong Kong-based property developer and owner that was made independent of CK Hutchison Holdings in mid-2015. That 2015 separating transaction was essentially a spin-off, though with a number of more nuanced benefits, and was successful in creating shareholder value. We have continued to hold shares of Cheung Kong Property on the premise that it is clearly undervalued and it is controlled by exceptionally shrewd and dispassionate business operators. At the time of this writing, shares of Cheung Kong Property trade at an approximate 26% discount to stated book value. We are of the view that, due to certain accounting conventions and the evidence of significant conservatism in asset carrying values, book value materially understates a more realistic net asset value appraisal. In October, Cheung Kong Property and a JV partner announced the sale of a very large asset in Shanghai for approximately HKD 23 billion (50% attributable to Cheung Kong Property), a disposal value slightly higher than two times the value at which Cheung Kong Property had carried the property. Separately, it has been heavily rumored recently that Cheung Kong Property may be in the process of selling another large asset at a valuation that would represent a considerable premium to either book value or Third Avenue Management (Trades, Portfolio) valuation estimates.
Over long periods of time the company has demonstrated an ability to engage in thoughtful and inventive means of creating value, including the above mentioned spin-off, asset dispositions at extremely attractive prices and share buybacks at attractive prices. An outstandingly well-capitalized balance sheet, which will only be further fortified by asset dispositions, gives management tremendous flexibility in its effort to continue to build value. We suspect Cheung Kong Property management would place very little value on McKinsey's assertions of a low-return environment as it continues to produce outstanding results by using all means of value-creation at its disposal.
Therefore, to conclude the discussion as to whether we are in a low-return environment, we believe that statistical evidence, fundamental considerations and intuition all suggest that the Third Avenue International Value Fund should not be expected to behave like "the market". We are confident that our investment universe is sufficiently large that we will continue to be able to identify unusually attractive opportunities independent of whether McKinsey et al. prove prescient in their return forecasts. In our experience, more often than not there is a crisis creating opportunity somewhere and, conversely, we are under no obligation to invest in areas we deem unattractive. Were the minimization of tracking error part of our mandate, we would be unable to make such statements.
From the Third Avenue International Fund third quarter 2016 commentary.
