Sunday, March 18, 2007

Wheeling & Dealing

Fancy owning a slice of Times Square HK, Wheelock Place Singapore? And with the up market Lane Crawford thrown in for "free"? MOS tells you how...

Wheelock and Company Limited (0020.HK) (Public, HKG:0020) (Wheelock) is the holding company of Hong Kong tycoon Pao Yue-Kong. Its actual structure of the organization is undoubtedly complex and does not make for weekend reading. Essentially, Wheelock derives most of its earnings from Wheelock Properties Limited (0049.HK) (Public, HKG:0049)(74% subsidiary) (Wheelock Properties HK) and The Wharf (Holdings) Limited (0004.HK) (Public, HKG:0004) (49% associate). To complicate matters, Wheelock HK in turn holds a 76% stake in Wheelock Properties (Singapore) Ltd. (Public, SIN:M35) The latter is the developer of condominium projects in Singapore such as The Cosmopolitan, The Sea View and Ardmore II and Orchard View. It also owns Scotts Shopping Centre and The Ascott Singapore along Orchard Road which were 99% and 86% leased respectively (as of Sept 06). For Singapore readers, it may be noteworthy to learn that the familiar Orchard Road landmark will be demolished and redeveloped into a residential and commercial complex in the first half of 2007. Of course, Wheelock Singapore also owns Wheelock Place which was 93% leased up.

Let's turn our attention to Wheelock Properties HK. It is also a property development and holding company. One of its residential development in Homantin, Parc Palais (700 apartments) was 94% sold in September 2006. Two other property assets under its wing, Wheelock House and Fitfort also enjoyed good occupancies of 87% and 95% respectively.

As for Wharf, it wholly owns Harbour City - a retail, office and hospitality development in Tsim Sha Tsui. Harbour City has continued to perform strongly. Occupancy in the retail component is largely fully occupied (99%). Hence, Wharf was able to step up rents on new leases and renewal. The office component also remained strong, with average occupancy of 95% while the three hotels at Harbour City had a consolidated occupancy of 90%.

Wharf also owns Times Square. Both the retail and office components are robust - with occupancy of nearly 100% and 93% respectively. In addition, Wharf is performing asset enhancing works in Basement 2 to capture shopper traffic from the MTR.

Besides the above properties, Wharf also holds 68% of Modern Terminals which manages container ports in HK and China (Taicang, Shenzhen and Shekou) and a 73% stake of i-CABLE, a multimedia (pay TV and internet) operator.

Other than Wheelock Properties HK and Wharf, Wheelock also wholly owns Lane Crawford House and several development properties. For example, Bellagio is a development in Sham Tseng while Sorrento is a project in Kowloon. Virtually all units of the Sorrento have been sold by September 2006.

From the long description above, it is clear that Wheelock provides investors with exposure to numerous property assets in South Asia's two major financial hubs of Hong Kong and Singapore. While property prices in nearly all sectors have run up considerably in Singapore, MOS remain sanguine about prices in Hong Kong. For example, office landlords in Central, HK should have the upper hand in leasing negotiations as there is hardly any vacancy in the financial district. Granted that rising rents will eject certain companies into fringe areas such as Northpoint or even Kowloon where there is plenty of contiguous space coming up, we continue to see demand for Central office space from the finance, insurance and banking sector. We also expect HK and Singapore to the key beneficiaries of increasing tourist flows from the region, especially with the advent of budget air travel. While MOS is dim about retail prospects in Singapore, visitors from China should provide support to the retail and hospitality sectors in HK.

So what's valuation picture looking like? Wheelock's NAV on its 30 September 2006 books is HK$22.09. However, as Wharf is a 49% associate, adjustments are required to apportion Wheelock's share to reflect economic reality. This share is at least worth HK$5.00. Capitalizing the rentals of Lane Crawford at 6% suggests that this asset adds another HK$1.00. Hence, the adjusted NAV of Wheelock is at least approximately HK$28. So, the market price of HK$17 offers a 39% discount to adjusted NAV. Depending on how much "conglomerate discount" you want to apply (MOS sniggers at this), it appears that there is sufficient room for price appreciation to bridge the divergence between price and value.

No adjustment was made for debt because the group has sufficient cash balance to square out its loans. With its gearing pared down, proceeds from sales of the remaining units of Parc Palais and Bellagio (expected to be received in 31 Mar 07) will effectively accrue to its balance sheet. Its low gearing leaves Mr. Pao with flexibility to lever up when the opportunity arises. With this growing cash balance, it also means the group has the option to offer shareholders a fat dividend payout.

A vital catalyst to unlock the value of this group would be the injection of its assets into a REIT. Management had indeed indicated that it was studying this route in April 2006. Whilst we understand that several REITs are in the making in HK, sentiment in the capital market towards REITs remains lukewarm there. Hence, MOS rates this driver as a low probability event. But, interested investors ought to keep their ears on to the ground to ascertain this possibility.

Through its various portfolios, Third Avenue Management holds sizable chunks of Wheelock. As recently as the last reporting quarter, Third Avenue has increased its holdings through Third Avenue Value Fund and Third Avenue Real Estate Value Fund. As you would be aware, the funds are piloted by Martin Whitman and Michael Winer respectively.

It would not be right for MOS to sign off without clarifying how Lane Crawford, as touted in the first paragraph, can be obtained for "free". Well, by simply taking the apportioned shares of the market capitalizations of Wheelock Properties HK and Wharf, one will come up with a value of about HK$22 for each Wheelock share. With Wheelock trading below this, isn't Mr. Market offering a slice of the directly held asset, Lane Crawford, for "free"?



Blogger another value investor said...

Nice analysis of Wheelock. I have considered purchasing shares last summer at ~$13 but unfortunately was unable to due to personal reasons.

Unfortunately, I must point out that the chairman of Wheelock is Mr. Peter K.C. Woo, the son-in-law of Mr. Pao Yue-Kong who passed away several years ago.

10:58 AM  
Blogger Mr Market said...

Hi Another Value Investor,

Thanks for your comments.

Wheelock was bought by the legendary shipping magnate Pao Yue-Kong in 1985. Yes, the reins of the business have since been handled over to his son-in-law Peter Woo. Having helmed the group since 1986, Mr Woo is an experienced hand in the property business. He also continues to hold a large stake in the company. Mr Woo is an influential businessman. For example, he chairs the Environment and Conservation Fund Committee in Hong Kong and hence, should be well placed to raise issues to Beijing's attention should deteriorating environmental conditions affect his business interests.

We look forward to your support at this site and to having more of your comments/views.

12:17 PM  

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