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0032.HK - Cross Harbour Holdings


misterkrusty
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Anyone looked at this?  It's a Hong Kong based/traded company that owns concessions on two tunnels as well as a couple other auto-related businesses.  Although the concessions will eventually expire, one can easily get to a fair value of about 3x the current ~10 HKD per share.  Currently, half the market cap is in net cash & securities, with an EV/FCF of just over 2x (note: I'm referring to look-thru FCF ... one need to look at the financials for each tunnel to figure it out).  In other words, it's dirt cheap.

 

The "catch", if you will, is that the company is controlled by a Chinese tycoon and pays out only a skimpy dividend (= a mid-teens % of the FCF referenced above).  For reference, the average payout across all HK-listed stocks is over 46%, and for tunnel operators specifically the payout is much higher - north of 75% if I recall correctly. 

 

Until recently, Cross Harbour used its FCF to pay down debt, which make me happy.  But now that the debt is gone, cash is piling up and management's investment returns have been pretty weak.  They'll probably do a single digit IRR on their investments in the tunnels.  They've also got a portfolio of HK/Singapore/US securities that hasn't shown much of a return either.  And then there's the yacht ... that's right, management feels they need a yacht.  I feel otherwise.  Every few years they trade in the company yacht for a bigger, better version.  The current one cost roughly USD 17 million, I think. 

 

I know some smart HK-based investors who are trying to persuade mgmt to return more cash to shareholders.  Note that there is no dividend tax in HK, so this might not be such a tough sell. 

 

Also, for what it's worth, the net cash & securities per share should exceed the current price in about 2 years' time.  If nothing else, this might be a catalyst for the shares.  I did a bloomberg screen for HK-listed stocks trading at/below net cash & securities and found only 16 (out of the 1,600 companies listed on the HK stock exchange).  All were much smaller than Cross Harbour and many were losing money.

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  • 1 year later...
  • 2 weeks later...

At the first Sohn/Hearts and Minds conference in Sydney, Australia last Friday, David Prescott from Lanyon Asset Management gave this as his tip. (No presentation available) Basic thesis was that you get the tunnel for nothing with seven years of concession remaining. Last years of infrastructure concessions tend to see massive free cash flow and ramped up toll charges. At a 10% DCF Lanyon project the 50% of tunnel holding to be worth HK$9.42/share. Add this to cash, equity investments and subsidiaries less liabilities of K$10.70 a share gives projected target of K$19.20 a share.

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  • 2 years later...

At the first Sohn/Hearts and Minds conference in Sydney, Australia last Friday, David Prescott from Lanyon Asset Management gave this as his tip. (No presentation available) Basic thesis was that you get the tunnel for nothing with seven years of concession remaining. Last years of infrastructure concessions tend to see massive free cash flow and ramped up toll charges. At a 10% DCF Lanyon project the 50% of tunnel holding to be worth HK$9.42/share. Add this to cash, equity investments and subsidiaries less liabilities of K$10.70 a share gives projected target of K$19.20 a share.

 

Thanks  Scunny Bunny, very insightful.

Was wondering if anyone is still following this given the recent decline in stock price.

 

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  • 2 months later...

At the first Sohn/Hearts and Minds conference in Sydney, Australia last Friday, David Prescott from Lanyon Asset Management gave this as his tip. (No presentation available) Basic thesis was that you get the tunnel for nothing with seven years of concession remaining. Last years of infrastructure concessions tend to see massive free cash flow and ramped up toll charges. At a 10% DCF Lanyon project the 50% of tunnel holding to be worth HK$9.42/share. Add this to cash, equity investments and subsidiaries less liabilities of K$10.70 a share gives projected target of K$19.20 a share.

 

Interesting development:

https://www.afr.com/business/banking-and-finance/lanyon-goes-activist-on-cheapest-infrastructure-company-in-the-world-20190625-p5213z

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  • 10 months later...
  • 3 months later...

Interim results released:

 

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0821/2020082100480.pdf

 

Pretty solid across the board - resilient earnings, cash continues to relentlessly pile up.

 

One significant development the market has totally missed (because not yet reflected at cut-off date for the period): they're sitting on/ have likely monetized massive gains in Evergrande Health (the "Tesla of China"). They did not sell a single share as of June 30 (valued at $563M). It's basically triple that for the good part of July until now and up 25X from their cost! This is a completely speculative holding, and management has gotten heat in the past regarding their investment here. But there is no doubt tremendous value has been minted as a result of its speculative surge, putting their investment performance easily in the top 10% quartile globally YTD.   

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I took a quick look.

 

So they currently trade at about 0.44 book, right? For that you seem to get:

 

- Holding business owned by a CEO who doesn't seem to care much for shareholders. A (big) holding discount seems warranted.

- Very low dividend, and they're not buying back shares.

- A massive chinese Tesla position. I am neutral on Tesla but a lot of their recent outperformance vs. the Hang Seng index is correlated to this position. I'd say it's fair to assume they won't create a lot of alpha on average?

- 3 years left of toll CF, which is impaired by Covid for the time being.

- A failed attempt from Prescott/Kennan to get on the board and make some changes.

- A lot of HK exposure, which is a bit more risky.

 

Is 0.44 book the right price for this? I'd say it's probably still a bit cheap, but I feel like if you're going to buy in HK there are tons of other opportunities. Curious to hear where I'm wrong.

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Your points aren't wrong, but I think it's a matter of seeing the glass half empty or full.

 

Right now (assuming partial Chinese Tesla position monetization), you're paying for just the cash and getting everything else for free. That includes:

 

- A fairly liquid investment portfolio: $4B +/-

- 3 years toll CF: $1.5B +/-

- HK driving school monopoly: $140M EBIT, slap a 3x multiple = $400M

- HK toll payment system monopoly: $16M EBIT, slap a 3x multiple = $50M

 

So that's $6B free value, or more than 1.5x the current market cap.

 

Regarding the concentrated CN Tesla position, they've sold down shares in the past to balance the portfolio, so it's very likely they do the same now. I agree their investment operations (minus the speculative home runs) leave much to be desired, but the investment portfolio today is far different (and more "balanced") than the "unsophisticated" stock picking shop of the past.

 

I should also point out that despite what some have deemed an abysmal investment track record, they've compounded BV at 10%-12% a year over the past decade with very little leverage. Not too shabby at all.

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  • 3 weeks later...

For those who may not be aware, this $14 / share offer is not a privatization of the company.

 

It is a way for the chairman to boost his stake to much as 75% of the entire company if there are enough sellers. To buy 100%, he would have to make another formal privatization offer later. The hurdle for privatization is high in Hong Kong. It must be approved by at least 75% of the votes of disinterested shareholders (i.e. the shares not owned by insiders), and no more than 10% of the total disinterested shareholders can vote against it.

 

I highlight this because IMO, if the chairman is able to soak up a lot of shares here, post-buyout offer there is a good chance remaining shareholders could see a fat dividend, better share supply-demand dynamic, etc going forward because of natural incentives.

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  • 5 months later...

2020 is in the books, and what a year it's been. BV surged ~24% driven largely by resilient tunnel cash flows, Evergrande Vehicle (unsurprisingly), and a substantial gain in one of their private funds.

 

Some additional notes:

- Surprisingly, they did not sell a single share of Evergrande Vehicle. That looks prescient right now, as prices are almost 2x the 31 Dec 2020 book close price...

- Cash continues to pile up and now stands at $2.6B

- Tunnel, driving school, and electronic toll collection businesses remain resilient and cash generative amidst pandemic.

 

Like them or not, there's some serious value generation percolating.

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