|Shares Out. (in M):||379||P/E||9.0x||0.0x|
|Market Cap (in $M):||4,354||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
All $ in HKD unless otherwise noted
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.
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.
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:
Chong Yip Shopping Center
Western Harbor Center
Tai Po Project:
3. China Properties:
Chong Hing Finance Center, Shanghai
The Grand Riviera, Foshan
I believe the above properties combined is worth at least $7 per share.
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.
Controlling family refuses or unable to unlock value
If the Company cannot sell the Bank, the stock price will decline in the short term