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0655.HK - Hongkong Chinese Ltd


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Hongkong Chinese (655.HK) is a double discount play in real estate firm OUE Ltd (which is itself arguably cheap @ 0.3x BV).

 

The group is a holding company whose primary asset is an effective 34.35% 68.7% stake in OUE (listed in SG). This stake is held through their joint venture LAAPL. The group owns 50% of LAAPL The group has 50% voting rights and 94% economic interest in LAAPL.

 

OUE owns ultra prime properties in Singapore. They include One Raffles Place, Mandarin Orchard, OUE Bayfront, among others. Their real estate footprint spans roughly 3.6M sq ft (3M in SG, 0.6M in Shanghai)

 

A short write-up from 2011 can be found on VIC:

https://www.valueinvestorsclub.com/idea/Hong_Kong_Chinese/3087202519

 

The stock is now 50% below then, though things have not deteriorated much since then (if at all).

 

The biggest risk has been somewhat "mitigated". The group now discloses the balance sheet of LAAPL, so you can have a rough idea of the off-balance sheet leverage. (Note that the group doesn't guarantee any of LAAPL's debts)

 

OUE has leverage of roughly 43% debt to assets. Adding LAAPL's debt, it becomes 55%. Judge for yourself whether there's solvency risk.

 

On top of the JV stake in OUE, the group also owns directly (all in HKD):

- $140m in investment properties (SG, China, US)

- $400m in associate with a super clean balance sheet (SG real estate development)

- $100m in properties held for sale and development (Beijing and Japan)

- $2.5B unsecured loan due from OUE

 

The group has net debt of roughly $0, and very low overhead costs (41 employees).

 

The entire market cap of the group currently sits at ~$1.3B vs a BV of ~$10B.

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I have not analized OUE, but I once looked at a REIT which manager OUE bought a major stake.

 

Anyway, I just wanted to share this news. They recently sold an important asset at more than a 30% discount to BV, the US Bank Tower.

Are you confident that the values of other properties better reflect fair values?

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OUE's properties are recorded on the books at very low cap rates and probably warrant some discount. But they are undoubtedly prime and scarce - there is a deep market for their type of properties.

 

The recent sale of US Bank Tower to Silverstein was probably a good deal for the latter, but at the same time, OUE was able to strengthen their balance sheet.

 

I think the discount is so large right now that OUE's properties could be impaired by 50%+ and you still get the value of where OUE stock is trading at now.

 

But 655.HK adds even more discount to that. If you consider other assets on their balance sheet, you can make the case that you are getting OUE for free.     

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Interesting idea, thanks for posting

 

Looking at the last annual report, it appears that the loans provided by 0655 to Fortune Crane ("FCL", which appears to be the subsidiary of  LAAPL that owns OUE) are at 2.25% interest. Seems like a poor use of capital indeed.

 

I am not sure how all the pieces fit together here, but maximizing the per share value of 0655 seems very low on Stephen Riady's list of priorities.

 

 

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Interesting idea, thanks for posting

 

Looking at the last annual report, it appears that the loans provided by 0655 to Fortune Crane ("FCL", which appears to be the subsidiary of  LAAPL that owns OUE) are at 2.25% interest. Seems like a poor use of capital indeed.

 

I am not sure how all the pieces fit together here, but maximizing the per share value of 0655 seems very low on Stephen Riady's list of priorities.

 

Foreign Tuffett is right. While I have no insights into Hong Kong Chinese, you have to be really careful when dealing with OUE and it's affiliates. There have been some really questionable transactions that transfers the value from shareholders to management within the OUE-linked structure. There are some articles online that digs into the RPTs at First REIT, OUE Lippo healthcare REIT and the way they are structured and you would be surprised to see how they can get away with things like this.

 

I deal with their affiliates on a regular basis so I'm not sure how much I can share but you don't really want to be on the other side of them. OUE is not a long term hold since time is never on your side when you are going up against them

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Thanks for the insights, they're on point and very thoughtful.

 

I also share both your concerns regarding quality of management. The OUE entity definitely has a lot of hair and is rather suboptimal, and therefore warrants a large discount. I wouldn't be surprised if there are / has been self-dealing within pockets of the entire complex.

 

That said, I think there is a price for everything (unless it's an outright fraud/ robbery). At what point does something become way too cheap to pass? There are things out there I wouldn't touch with a ten foot pole no matter how cheap it got, but from what I've gathered so far, I wouldn't throw this in that bucket. To be clear, I'm NOT defending the company - I think there is A LOT they leave to be desired.

 

The way I've approached this is to assume perpetually subpar OUE performance (whether through overpaying themselves/ self-dealing/ poor capital allocation), which might lead to little to no BV growth over time. The important thing for me isn't how fast OUE grows, but that it at least it stays afloat (at these levels some contraction over the next decade is okay too).

 

And then on the 0655 level, I like how the balance sheet / business has simplified over time. Its operations/ financial position is the most straightforward its been in a decade. IMO, this allows me enter into an asymmetric-like situation where downside risk is mitigated. I know it's not perfect, but I see several ways to win (and potentially big in certain scenarios) and low risk of permanent capital impairment.

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I think your reasoning is sound.

Still, have you looked at any other companies trading "cheaply"? In HK there seems to be quite a few, and some may have less potential, but also less risk.

Someone recently mentioned Lion Rock Group, for example. And a bit more murky, Asia Standard International. Shares are very "cheap" - the risk, in this one, is mostly about the bonds issued by Chinese companies that Asia Orient holds.

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Thanks for the insights, they're on point and very thoughtful.

 

I also share both your concerns regarding quality of management. The OUE entity definitely has a lot of hair and is rather suboptimal, and therefore warrants a large discount. I wouldn't be surprised if there are / has been self-dealing within pockets of the entire complex.

 

That said, I think there is a price for everything (unless it's an outright fraud/ robbery). At what point does something become way too cheap to pass? There are things out there I wouldn't touch with a ten foot pole no matter how cheap it got, but from what I've gathered so far, I wouldn't throw this in that bucket. To be clear, I'm NOT defending the company - I think there is A LOT they leave to be desired.

 

The way I've approached this is to assume perpetually subpar OUE performance (whether through overpaying themselves/ self-dealing/ poor capital allocation), which might lead to little to no BV growth over time. The important thing for me isn't how fast OUE grows, but that it at least it stays afloat (at these levels some contraction over the next decade is okay too).

 

And then on the 0655 level, I like how the balance sheet / business has simplified over time. Its operations/ financial position is the most straightforward its been in a decade. IMO, this allows me enter into an asymmetric-like situation where downside risk is mitigated. I know it's not perfect, but I see several ways to win (and potentially big in certain scenarios) and low risk of permanent capital impairment.

 

Well well, it appears that Hongkong Chinese is linked to the same Riady family that is involved in the OUE entities.

 

To be fair, I think you are right. HKC/OUE is too cheap and it is hard to envision a scenario where the share price drops below 0.3X book. That said, like what Elliot mentioned, I think it is impt to weigh this investment into HKC against other opportunities out there. There are lots of real estate companies listed on the Singapore exchange that are trading around 0.5X but does not come with any of the corp governance issues.

 

The people running these companies have a lot more patience than you have years. I have seen them drain companies out of every single cent and come out strong on the other side when all the creditors n equity holders surrender and the family swoop in to buy out their interests. This is the playbook for a lot of the Singapore listed Indonesians-linked companies and there are countless of examples on the SGX. Personally, I would not invest unless there is some sort of catalyst, e.g when the management starts buying shares in truck. Else, this is dead money. An investment into HKC 10 years ago, would have only yielded you a single digit return! Halcyon Agri, another Indonesia-family linked company that I can think of, has traded at P/B of 0.3X for years.

 

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I think you absolutely should weigh this against other investment opportunities out there. I can't speak to the opportunities in SG, but I've built up a large investment universe (that I can understand) in HK and the US over the years. These are the only two markets I'm intimately familiar with via real life experience.

 

Just real quick regarding Lion Rock and ASI. I like the former, but I haven't yet been able to get a good handle on the longevity and drivers of their core business. I own a tiny position in ASI - the possibility of outcomes there is very wide. They've basically levered their balance sheet quite aggressively to buy a very concentrated basket of high yield CN real estate company bonds. If the bonds hold water, ASI will probably outperform every other property company in HK. If not, there is a real possibility the equity holders of ASI get wiped out or massively diluted.

 

Back to 655. 10 years ago the company was very different. On top of their property business, they were also involved in money lending and securities broking. The balance sheet was levered to finance those operations.

 

Today they've basically streamlined their business to only manage their properties and hold the OUE stake. Consequently, the leverage was un-winded and you now have a very simple and clean balance sheet. They spent the past 10 years doing this, and it wasn't kind to the shareholders then. BV basically stagnated for a decade.

 

I think shareholders today are in far better shape. They basically have a new canvas to paint on. To be very clear, I'm not making a case for OUE stock, this is about 655. I don't know how OUE compares relative to other SG real estate companies. All I know is 655 trades at 0.1x book and pays a roughly 3% - 4% annual divvy.     

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Well, if you are familiar with HK, maybe you know TK Group?

Its not a bargain, but I would say its trading at quite an attractive price. They make molds and plastic components, have factories in China. They have mostly international customers (car makers, apple, phillips, amazon, google...), although they are now looking to expand in the domestic market. The reason being raising protectionism and the decrease of international trade.

They have a solid balanace sheet, with close to no debt (they have some debt they use to hedge foreign currency exposure), give back to shareholders via dividends... I also like the management team quite a bit (self made guys, the chairman and the ceo). Additionally, the companys operating performance is good and quite consistent, and ROCE is usually at or above 20%.

 

Again, protectionism and a decrease in international trade (china - us conflict included) is probably the biggest risk.

 

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Yes I'm familiar with TK group, but I can't figure out their moat to retain customers long term besides perhaps being a low-cost manufacturer. They'll also have to shell out some cash in the near future to expand their production footprint outside of China to keep production costs low. This is quite similar to Lung Kee (0255.HK) who also manufactures moulds, except Lung Kee deals in mould steel and industrial end markets vs mould plastic and consumer end markets for TK. I have no idea which industry sub-sector is more attractive, but Lung Kee has a stronger balance sheet and pays a more generous dividend (at the expense of growth). 

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I think you absolutely should weigh this against other investment opportunities out there. I can't speak to the opportunities in SG, but I've built up a large investment universe (that I can understand) in HK and the US over the years. These are the only two markets I'm intimately familiar with via real life experience.

 

Just real quick regarding Lion Rock and ASI. I like the former, but I haven't yet been able to get a good handle on the longevity and drivers of their core business. I own a tiny position in ASI - the possibility of outcomes there is very wide. They've basically levered their balance sheet quite aggressively to buy a very concentrated basket of high yield CN real estate company bonds. If the bonds hold water, ASI will probably outperform every other property company in HK. If not, there is a real possibility the equity holders of ASI get wiped out or massively diluted.

 

Back to 655. 10 years ago the company was very different. On top of their property business, they were also involved in money lending and securities broking. The balance sheet was levered to finance those operations.

 

Today they've basically streamlined their business to only manage their properties and hold the OUE stake. Consequently, the leverage was un-winded and you now have a very simple and clean balance sheet. They spent the past 10 years doing this, and it wasn't kind to the shareholders then. BV basically stagnated for a decade.

 

I think shareholders today are in far better shape. They basically have a new canvas to paint on. To be very clear, I'm not making a case for OUE stock, this is about 655. I don't know how OUE compares relative to other SG real estate companies. All I know is 655 trades at 0.1x book and pays a roughly 3% - 4% annual divvy.   

 

Yeap and apologies for my focus on OUE. I just saw that as Riady-linked vehicles and transposed most of the governance issues from OUE to 655. Now, I agree you won't fare too badly (as per my last post) investing at 0.1X BV

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