Mandarin Oriental (M04) – Potential Asset Sale to Unlock Value?

Mandarin Oriental (M04) – Potential Asset Sale to Unlock Value?
Price: USD$1.97
Market Cap: USD$2,484.1M
Shares outstanding: 1,257,798,986 shares
PE: 52X~
PB: 2.2X~
Yield: 2.03%
52W High: US$2.15
52W Low: US$1.22

Introduction
Mandarin Oriental Hotel Group is a luxury international hotel investment and management group that operates 29 hotels and 8 residences in 19 countries and territories, with a pipeline of 11 hotels and 5 residences over the next five years.

The group owns 10 of the hotels while the rest are under management contracts

Revenue breakdown in 2016 as follow, Hong Kong (37%), Europe (30%), Rest of Asia (18%) and America (15%)

Business Model
Mandarin Oriental operates under 2 business model
As at FY16, 67% of hotel rooms were owned while remaining rooms are under management contract

1) Hotel owner: Takes an equity stake in the development and operates them independently, taking on all development cost, CAPEX, wages ETC.

2) Management Contracts: Only involved in managing the hotel and bears no development cost or CAPEX. Mandarin Oriental will receive a fixed based fee for its services and an incentive fee depending on the performance of the hotel.

Business strategies & Recent Development
– Expansion with Asset Light Model
In addition to existing portfolio of 29 hotels and 8 residences, management has announced that another 11 hotels and 5 residences are expected to be completed over the next 5 years, which will add a total of 2,644 rooms, increasing total room count by 34%

These upcoming projects over the next five years will all be under management contract model, enabling quick expansion under a more asset-light model and mitigating risk exposure, downside however is that profit growth is limited as compared to hotel owned model.

– 3 European Hotel under renovations Mandarin Oriental is in the midst of renovating its London Hotel which is due for completion by mid-2018; historical trends show that Revpar has increased post completion of renovation.
Renovation for Madrid Hotel is scheduled to commence in early 2018 while Munich Hotel is expected to construct an extension of the property in 2020

-Potential Asset Sale to Unlock Value? Mandarin Oriental announced the possible sale of The Excelsior Hotel, located on a prime commercial waterfront site in Causeway Bay, HK on 4 June 2017.

The Excelsior is the ONLY hotel which is not branded “Mandarin Oriental” in the portfolio and is a four-star hotel compared to the rest of the hotels which are all five-stars. The Excelsior is also being held on Mandarin Oriental’s book at HISTORICAL COST.

The Hong Kong Buildings Department has in 2015, approved The Excelsior to be rezoned into a commercial building with a GFA of 63,500sqm. (683,500 sqft)

Proceeds from a potential sale of the property are mouthwatering. As a commercial property, we can take reference from the recent sale of the Murray Road commercial plot in Central to Henderson Land by the HK government for an eye-popping HK23.28B (US$3B), this translate to a valuation of HK$50,064 psf.

Applying the same metrics to The Excelsior would imply potential proceeds of HK$34B (US$4b), compared to the current market cap of Mandarin Oriental @ US$2.5B.
This means an investor buying Mandarin Oriental now will be getting The Excelsior property at a discount and the REST of the business FOR FREE!

We should however note that the Murray Road valuation is at the upper range, taking into account 3 other commercial transactions that have closed over the last two years. If we used the lower end of the valuation range @ HK$20,749 PSF, this would yield a valuation of HK$14.18B (US$1.8B), which is roughly 72% of Mandarin Oriental’s current market cap.

Key Risk
Macro Risk – Luxury hotel segment is highly sensitive to consumption spending patterns and hinges on consumers’ willingness to spend on luxury experiences
Execution Risk – Delays in renovations or new hotel openings will crimp growth and affect Revpar
Unforeseen Events – Exposed to one-off events like natural disasters, diseases outbreak, terrorist attack etc.
Oversupply of hotels – High competition from new luxury hotels could cap Revpar growth and lower occupancy rate
Currency Risk – Mandarin Oriental operates globally and is therefore exposed to various currency risks

Shareholders
Jardine Matheson 77.29%
Schroders PLC – 1.68%
GAMCO – 1.15%

Financials
FY16 Revenue USD$597.4M
FY16 Net Profit USD$57.3M

1HFY17 Revenue USD$286.7M
1HFY17 Net Profit USD$15.2M

Cash & Bank USD$182.6M
Total Borrowings USD$479.9M

Mandarin Oriental is current trading @ 2.2X~ PB, below its Hong Kong peers at 6X, Rest of Asia peers at 3X and American peers at 7X

Conclusion
With the announcement made on the potential sale and the group’s statement that they believe they will be able to ride on the current strong commercial property valuations, it is plausible that the company may take the chance to divest and focus on their “core” Mandarin Oriental branded portfolio and five star hotels.

An investment case based on the potential sale is indeed very attractive but we need to take into account the fact that the Jardine Group rarely disposes assets.

The last time Mandarin Oriental sold something was a 50% stake in Mandarin Oriental, Macau back in 2009 which was valued at HK$1.6B (US205M)

Therefore, investors buying into Mandarin Oriental should be prepared to hold out for the long term while waiting for further announcement of the potential deal and keep in view the possibility that no sale may occur.

Disclaimer: THIS IS STRICTLY FOR GENERAL INFORMATION PURPOSES & should not be construed as a solicitation or offer to buy or sell any securities. Thank you!

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