Description

Guoco Group is a Hong Kong-listed investment holding company whose major asset is cash. This is very easy to buy, even though it is listed in Hong Kong. Malaysia’s Kwek family is the controlling entity; their interests include financial and real estate companies in Hong Kong, Malaysia and Singapore. They are one of the wealthiest families in Malaysia and are generally well respected. All references to “$” are to Hong Kong Dollars.

The investment case is simply that this well-run holding company trades for $60, yet sits on $77 per share of net cash, an additional $13 per share of publicly traded securities and $1 of other assets. The cash is mostly held in US$ & Euro-denominated short-term securities.

Source of Cash
In April 2001, Guoco agreed to sell its 71% stake in Dao Heng Bank, one of the largest and best run banks in Hong Kong, to Development Bank of Singapore (DBS). The agreed upon price of $60 was a significant premium to Dao Heng’s pre-announcement price of $38, and was 3.25x book value and approximately 20x earnings. To put this in perspective, Hong Kong banks for years seldom traded above 2x book, much less 12x earnings. This was a great deal negotiated by Guoco.

The company has been sitting in cash ever since, hesitant to buy assets at what management thought were/are high prices. In the meantime, the company bought back 25% of its issued shares outstanding in a tender offer at $52 in late 2001. The logic of a shareholder accepting a buyout at a 25% discount to net asset value (with most of the value in cash) is beyond comprehension, but the measure won approval from a bare majority (50.5%) of shareholders. The Government of Kuwait, which owns 22%, abstained from the vote.

Other Assets
Guoco owns two publicly-traded companies: 25% of Malaysia-listed Hong Leong Credit (HLC MK), and 61% of Singapore-listed GuocoLand (GUOL SP). The company also has other assets including Dao Heng-affiliated finance companies Dao Heng Securities and Dao Heng Insurance. Together, the latter two contribute $1.10 to Guoco’s current $91 NAV.

HLC owns 68% of Malaysia’s Hong Leong Bank (HLBK MK). HLBK is a well-run, conservative bank. Compared with Malaysian banks, it is the most cost efficient, leading to its top-of-class ROE of 15%. It is also the least leveraged in terms of loan-to-deposits and has a CAR of 17%, the second highest in the country. HLBK has a gross NPL figure of 12%, with cumulative provision cover of 63%, both more-or-less average. The company’s loan growth is expected to fall into negative territory this year, as management is not excited about margins. This compares with forecast loan growth of between 3% and 20% for its competitors. At a current P/E of 14x and P/B of over 1.5x, it is not undervalued, except versus its larger peers, which have average P/Es of 18x. Maybe the best I can say is that it is not expensive?

GuocoLand is a Singapore-listed property company with development interests in Singapore and China. China represents about 12% of gross asset value. Listed associates account for 25% of gross asset value. The company is fairly indebted and has seen some controversy involving related party property deals and asset swaps. I am not too hung up on these issues though since: 1) we are much further up the chain, 2) we have the government of Kuwait riding shotgun, and 3) most of the questionable related party transactions were value enhancing to Guoco. Finally, for what it is worth, on a P/NAV basis, GUOL seems fairly valued.

NAV
Guoco’s per-share NAV consists of: $77 net cash, $8 HLC, $5 GUOL, $.84 Dao Heng Insurance, and $.26 Dao Heng Securities. Guoco is effectively debt free, even though Guoco’s consolidated balance sheet shows $4.673bn of debt--$4.065bn relates to GuocoLand, which has been deconsolidated.

Major shareholders include Kwek, who owns 41% through Guoline (and whose parent is unlisted Hong Leong Malaysia), and the Government of Kuwait, which directly owns 22% and has board representation.

Catalyst

This company *literally* trades for 65 cents on the dollar. Anything having to do with a clarification of its intentions for its cash pile could prove to be a catalyst. For example, the company has applied for a banking license, So maybe they get back into the banking business. They could also announce another share buyback or special distribution. In the meantime, alot has to go wrong for value to impaired here.