Description

All $ in HKD unless otherwise noted

Summary:

Liu Chong Hing Investment Limited (the Company, HK: 0194) is a holding company based in Hong Kong. The company owns 50.2% of publically traded Chong Hing Bank Limited (the Bank, HK:1111) and various properties in Hong Kong and China. At current prices, the Company has a market value of $4.3 billion and the Bank $8.7 billion so we are basically getting the various properties for free. The Company is controlled by the founding family (more than 60% of shares). I think multiple catalysts could occur to unlock value.

Company history

Chong Hing Bank was founded by Mr. Liu Bao Shan in 1948. Mr. Liu was a shrewd businessman and built his early fortune by trading properties and gold. Unfortunately, in 1961 someone started a rumor that he was in illegal drug business and the government was going to deport him. The Bank suffered a run and Mr. Liu died of anxiety. Eventually both HSBC and Standard Chartered came to aid and Chong Hing Bank survived. Mr. Liu's seven sons and three daughters took over the business after his death. They expanded into properties and other businesses, formed Liu Chong Hing Investment Limited in 1970. The Company went public in 1972 and spun off the Bank in 1994.

Main Assets:

1. Chong Hing Bank

The Bank has 50 branches and has its roots in community banking. HK is a very tough banking market with fierce competition. The big banks such as HSBC, Standard Chartered, and ICBC have scale advantages and lower funding costs. For smaller banks getting acquired by big banks might be a better option than competing against them.

Big Chinese banks acquire small HK banks as the first step to get into international markets. Big foreign banks acquire small HK banks to get exposures to China. Some of the historical transactions:

12/2010: ICBC (Industrial & Commercial Bank of China) bought the 30% share of ICBC Asia (ICBC's HK subsidiary, publically traded) it did not own. It paid 2.14x book

10/2008: China Merchants Bank acquired Wing Lung Bank Ltd, 2.91x book

From what I heard, the Company is willing to sell its stake in the Bank and has been talking to potential buyers for a while. Price seems to be the issue.

When asked during earning call, current CEO of the Bank, Mr. Liu Hui Min said the management has been "active" but need to make sure price is fair for shareholders. By the way, Mr. Liu is the first CEO who is not a member of the controlling family. He took the position late last year. Also the Company increased its stake in the Bank to slightly over 50% last Nov.

There are very few small HK banks left as acquisition target. Admittedly the Bank's ROE is lower then its peers, but at 1.4-1.8x book, the Bank could be sold for $23 - $30 per share.

Others major shareholders of the Bank include:COSCO (Hong Kong) Group Limited (20%) and The Bank of Tokyo-Mitsubishi UFJ (9.66%)

2. HK Properties

 Chong Hing Square:

• 20-story retail/commercial building located in the heart of Mongkok, Kowloon. 182,000 square feet, 100% occupancy at 12/31/2013. Annual revenue of $88.4 million

 Chong Yip Shopping Center

• Western part of Hong Kong island, 54,000 square feet, 96% occupancy at 12/31/2012. Rental revenue of $19.2 million

Western Harbor Center

• 28-story sea-view grade A office building, gross floor area of 140,000 square. The company is re-considering the use of this property. The property has been vacated since the third quarter of 2012. The company plans to renovate this into a new hotel  

Fairview Court

• deluxe apartment block located in Repulse Bay. rental revenue 6.4 million, 60% occupancy 

Chatham Gate:

• Two blocks of 32-story residential building on top of a 2-story commercial complex. Construction of this property has been completed. The company owns 10% equity interest

Tai Po Project:

• 262,000 square feet of land in Tai Po, New Territories, HK. 

3. China Properties:

Chong Hing Finance Center, Shanghai 

• 36-story grade A commercial building, prime location in Shanghai's financial district. 516,000 square feet of office and commercial space. The company has invested more than RMB $1.2 billion in this property. Total rental revenue in 2012 was HKD $139.6 million 

The Grand Riviera, Foshan

• Large-scale development project in Foshan, Guangdong. The company tried to sell this project for RMB $1.7 billion early this year. The deal did not close due to Chinese government pressing the real estate sector in the last several months. The Company purchased original land for RMB $476 million

Budget Hotels

• The Company also owns several budget hotels in Shanghai, Guangzhou and Beijing

I believe the above properties combined is worth at least $7 per share.

Catalysts: 

Why such a bargain? There are several reasons: holding company discount, family controlled discount, Chinese real estate related discount. Among them, I think the fact that the Company is controlled by insiders carries the most weight. There are several positive signs that the controlling family will act to unlock value. 

First, the controlling family is willing to sell its stake in the Bank, which is founded by the family and owned for a very long time. From what I gather, the family has been talking to potential buyers for a while, it wants to sell at 2-3x book, which is a bit high in my opinion.

Second, the Company tried to sell its Foshan real estate development project. Although the deal did not close due to temporary issues(most likely financing), at least it was an indication that the Company is willing to sell some very hands-on assets 

Third, the second generation of the controlling family is getting old. Most of them are above 70. Keep in mind the original founder had seven sons and three daughters, which means lots of grandchildren. It becomes more and more difficult to align interests within the family and most of the third and fourth generations have their own careers (lawyers, doctors, and so on). In fact in 2011 one of the third generation who happens to be a fund manager tried to accumulate shares within the family to pursue his own agenda, he had to back down eventually but as the second generation gets older and older, the activist will have a better chance of succeeding.

Risks:

Controlling family refuses or unable to unlock value

If the Company cannot sell the Bank, the stock price will decline in the short term

Currency risk

Catalyst