Value Traps 2? A broken clock

This will never work (Vol 1, No 25)
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Photo by Andrew Seaman on Unsplash

We’ve been talking about potential value traps for a few days now.

Truth be told, I’m struggling with this one. When you see this post, I’ve already re-written this three times. Not sure if it is a good sign when I keep going back and forth on an idea.

Let’s get on with it. The company in question is Shun Tak. Shun Tak is a property-transportation-gaming conglomerate in Hong Kong. It runs the ferry service between Hong Kong and Macau and also owns an indirect 6% stake in SJM, one of the casino operators in Macau.

So why this one is so hard.

There’s no “Wow” factor…

For anyone that has lived in an apartment managed by Shun Tak or taken their ferries, you know that their service is only so-so. There’s no “Wow” factor. It’s okay but you won’t confuse it with a Four Seasons or Ritz Carlton. Shun Tak is more like Warren Buffett’s cigar butt idea where you hope the valuation is so cheap that there is just one or two last puffs left.

So, why do we want to look at this?

…and it’s always been cheap…

First and foremost, Shun Tak is among the cheapest company in the mid-cap space. On a price-to-book basis, even counting its recent rally, it is only trading at 0.40x PB. Further, since its 6% stake in SJM is not marked-to-market, its book value is actually understated. If one were to strip out the MV of Shun Tak’s 6% stake in SJM from both its MV and BV, the remaining property-hotel-transport stub only trades around 0.25x PB.

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This might look very attractive BUT (there is always a but) the problem is that it has always looked cheap. Going back six years, the only time that Shun Tak’s non-gaming stub had traded in excess of 0.3x was at the end of 2012.

Taking a different look at this parent-child relationship, we can see that Shun Tak’s stake in SJM had accounted for around 26% of its own market cap since 2015. The current ratio of 34% is actually slightly elevated and reflects recent hopes that SJM’s operations is finally turning the corner.

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But if you look at the blue bars above, we can see that the market value attributed to Shun Tak’s property-transport stake has increased in recent years.

Is this valid?

Transport and hotels are very steady…

The ferry and hotel businesses are very steady. In fact, over the past six years, these two businesses have consistently contributed around HK$3.3bn of revenues.

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Operating profit-wise, they are both pretty low margin and the hotel side even made a loss in 2016. That said, they still churn out around HK$300-350mn a year in segmental profits. If one were to include some HK$405mn in gross rental income, Shun Tak’s recurrent income provides decent cover for its dividend (2017 at HK$365mn).

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Considering that Shun Tak’s balance sheet is fairly lowly geared (end 2017 at only 8%), it is all the more surprising that Shun Tak has had such an inconsistent dividend stream.

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Inconsistent dividend stream

In the last six years, Shun Tak has suspended its dividends two times (2013 and 2016). It has cut dividends three times (2013, 2015 and 2016) and also declared a special dividend once.

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Had Shun Tak’s dividend been more stable, one would at least be able to argue that investors are paid a 3.2% dividend to be patient. With Shun Tak’s dividend history, this is far from certain.

The elephant in the room – Property

But what we really haven’t begun to talk about is the elephant in the room – Property. By segmental assets, property is the biggest category by far at HK$33bn. The next two largest asset contributors are transport at HK$4.8bn and hospitality at HK$3.8bn.

Yes, I know that transport and hospitality are both depreciating assets whereas property is revalued annually hence it may not be an apples-for-apples comparison. Be that as it may, what is also clear is that over the past six years, property has also been the main source of new investments.

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And this is where things get hard again.

If one were to look at Shun Tak’s main property exposure, we note several new property projects are in gateway cities like Singapore, Shanghai (Qiantan) and Beijing. Even in non-Tier One cities, the projects are in Macau and Henquin Zhuhai which plays well on the Greater Bay theme.

So geographically, there is little not to like.

But (and there is always a BUT), what makes these hard is that the projects are primarily mixed-used commercial developments. Unlike residential projects, the payback period for retail, office, serviced apartments and hotels are much longer.

And for deep value plays, monetisation is the key to shrinking their holding company discounts.

The trouble is, we have no idea when this might happen and we are also getting pretty late in the property cycle.

But then again, we can always take the comfort that even a broken clock is right twice a day and this clock has been off for quite a long time already.

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Photo by Sascha Israel on Unsplash

Time to put the chips down. Yes, those ones too.

This will never work.

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Postcards from the supermarket – Which is more expensive? Buy-side Vs. Sell-side

Greetings from the produce section of your local supermarket. As I was meeting an old friend for lunch today, I came across some novelty melons. When I thought about how much they costs, the question of value came to mind. In this case, I would argue that their value could be totally different if one were to take a sell-side versus a buy-side perspective. Answer key at the bottom of the post, no peaking.

Greetings from the Produce section of your local supermarket.

Yesterday afternoon, my daughter said she was hungry. So, I made her a strawberry jam sandwich. She was still hungry, so I asked her to go to the supermarket next door to buy some fruit. She came back with a melon and said we got the most expensive one.

I freaked out!

Why?

Because I thought she got one of those Japanese musk melon that costs hundreds of dollars. What a relief it was when I found out that it only costs HK$60 (around US$7.50).

The biggest watermelon I have ever seen

That brings us to today. As I was getting ready to meet an old friend for lunch, I passed by a high end supermarket in the centre of town and I saw the biggest watermelon in my life. If you can see the label below, it was called a Japanese Jumbo Watermelon. What was even bigger was the price tag. I won’t reveal it yet, but it costs an arm and a leg.

FullSizeRender 4Given the previous day’s experience, I proceeded to check out the prices of some of the other types of melons.

Here is one of a Korean musk melon.

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Then, some Japanese varieties. Here is a Japan Shizuoka Melon.

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And here is a Japan Heart Shape Melon.

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Which one is most expensive?

This got me thinking…would my kids be able to guess which one is more expensive? If I asked you to rank them from the cheapest to the most expensive, my guess is that 95% of you would get it right. The answer is at the end of this post but try not to jump to the end just yet.

When we think about price, most of us probably approach this question from the “Buy” side perspective (i.e. the consumer perspective).

Buy side Vs. Sell side – Value can be very different

But as I wondered who would fork out such a huge sum for these novelty produce, I started to think about which one is more expensive from seller’s perspective.

I guess there’s probably the odd fellow who shells out thousands of dollars for a heart shaped melon to impress a new girlfriend but in most cases, these fruits probably just sit there. At the end, when they start to spoil and the owner or the staff probably crack the melons open and eat it themselves so it doesn’t go to waste.

So from the seller’s perspective, these novelty melons’ value is really just as a sales gimmick. From a marketing perspective, they help to draw in the crowds but in terms of their actual sales value, in most cases, it is zero (i.e they don’t sell). Conversely, although the regular fruits sells for much cheaper, their higher volume means they offer much greater value to the seller.

So if one had to rank the fruits from cheapest to most expensive, it does really depend on whose perspective you take. Now you can scroll to the bottom to reveal the actual prices of the melons. Did you get it right?

Buy side perspective – From cheapest to most expensive

Sell side perspective – From cheapest to most expensive

 

 

 

 

 

Answer – Actual price of the produce

  • Korean Musk Melon – HK$80 (around US$10)
  • Japan Shizuoka Melon – HK$498 (around US$64)
  • Japan Heart Shaped Melon – HK$1,388 (around US$180)
  • Japan Jumbo Watermelon – HK$2,988 (around US$385)