This will never work (Vol 1, No 25)
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.
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.
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.
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).
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.
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.
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.
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.
Time to put the chips down. Yes, those ones too.
This will never work.