Bargain Alert (SAMPLE): Global Luxury Hotelier Available for a Steal
This is probably the cheapest luxury hotelier in the world
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This global hotelier boasts a portfolio of 1,500+ rooms across 7 luxury hotels around the world, has a net cash balance sheet, and is drowning in cash flow. The best part: investors today pay almost nothing for it all, and upside potential is enormous.
That company is Keck Seng Investments (0184.HK).
From 2020 to 2022, Keck Seng went through what can basically be summed up as a nuclear apocalypse for the hotel industry. The Covid-19 pandemic decimated the entire hospitality industry overnight, as occupancies plunged to 0%, sending many hoteliers to the graveyard. Those who survived came out with balance sheets teetering on the edge, or were forced to sell valuable assets for a song.
Keck Seng endured their fair brunt of pain, burning through more than HK$600 million in two years. Yet they emerged from that worst ever environment with all their assets in place, and balance sheet intact. Because they entered the pandemic fully prepared with a significant cash buffer, they were able to maintain a steady hand while their peers around them dropped out one by one.
Today, the company’s prospects (along with much of the hospitality industry) has turned, and they’re on pace to earn what they did pre-pandemic, or roughly HK$200M per year. This could be materially higher, since the competitive landscape has improved significantly.
Yet the market has totally ignored them, and it trades at a roughly HK$600M market cap. That’s 3x earnings. And even below where they traded at during the depths of the pandemic!
That’s far too cheap for a company with a net cash balance sheet, and whose management was able to navigate through the worst crisis with all their assets intact. Most other hotel companies that are in far worse shape have traded back to pre-pandemic levels. Yet here we have a pristine, unscathed hotel group trading well below that…
This is a bargain in plain sight.
Some may say: “But this is a Chinese company, and China is doing very bad right now!”
Yet save for one small hotel in Wuhan, China, Keck Seng’s hotel assets are located in the USA, Canada, Vietnam, and Japan. 99% of their hospitality revenues and earnings are generated from these countries. This is a global enterprise, trading at a ridiculous valuation.
The next excuse is likely: “They probably have crap hotels.”
Below is a list of their hotels (and star rating), you can judge for yourself whether they’re “crap”.
Sofitel New York (5-Star)
W San Francisco (5-Star)
Sheraton Saigon (5-Star)
Caravelle Hotel (5-Star)
Delta Hotels by Marriot (4-Star)
Holiday Inn Wuhan (4-Star)
Best Western Osaka (3-Star)
These hotels include 1,500+ rooms, and for the most part are situated in gateway cities in some of the most dynamic business and tourist hubs. Not garbage.
Of that hotel list, the Sheraton Saigon is probably their crown jewel, generating an enormous amount of free cash flow for the group (more than 1/3 of their normalized earnings). That’s thanks to their small casino with electronic games and slot machines, which makes up more than 1/2 of the revenues on the property. Furthermore, tight gambling laws/ regulations in Vietnam has basically ensured that the Sheraton Saigon runs an oligopoly-like operation with limited casinos in the city and country.
Behind that are their US hotels, Sofitel NY and W San Fran, which generated almost 1/3 of their normalized earnings (pre-pandemic). W San Francisco in particular was an asset well bought. In 2009, after the real estate bubble popped, Keck Seng swooped in and purchased the hotel from a highly-levered Starwood for US$90M, or US$220,000 per key, which worked out to a roughly 15% normalized cap rate. It was an absolute home run.
Unfortunately, their second purchase in the US, Sofitel New York did not work out nearly as well. In 2014, they paid roughly US$250M, or US$630,000 per key, which worked out to a roughly 5% cap rate. In hindsight this turned out to be a bit too steep, as the hotel required a rather expensive capital upgrade. However, the location is superb (just steps away from Times Square and Broadway), and should work out well with time.
The remaining 30% of earnings do not actually come from their other hotels, but another portfolio of assets which has not been mentioned yet.
That is: residential and commercial properties in Macau.
These residential properties alone generate roughly HK$70M per annum, but sit on the books at less than $HK300M. These properties are a legacy of their days as a property developer in Macau many decades ago, and represent 3 towers, or almost 300 apartments that they’ve been holding out to sell at the “right time”. This sale has been deferred, but should Macau residential property recover to pre-pandemic levels, it could be worth HK$800M, or more than the entire market cap of the company today.
Finally, management just recently announced the sale of their Ottawa hotel in Canada (Sheraton Ottawa) in November for HK$250M, which works out to 3x their cost. This was a fantastic sale, given the property generated very little cash flow, and strengthens their already strong balance sheet.
Post-sale, Keck Seng will have roughly HK$1.6B of cash and HK$1.4B of debt, for a net of HK$200M cash.
For this cash, 7 global hotel properties (1,500+ rooms), and a valuable portfolio of residential and commercial properties in Macau, the investor today pays only HK$600M. Normalized annual free cash flow is anywhere between HK$200M - HK$300M, book value is HK$3 billion (most of which is valued at cost), and these assets would probably command a market value of HK$7 billion+ to a private buyer.
What a steal.
(Disclosure: The author and funds under their management hold shares of Keck Seng Investments (0184.HK). We may hold, buy, and sell any securities mentioned on this blog at any time. The information contained herein should not be construed as investment advice or a recommendation to purchase or sell any specific security.)