Mandarin Oriental

[weijian]

On point (iii), it seems the new development is largely a office building. A most likely scenario and I cannot imagine any other plausible alternative is that the new development is sold to HongKong Land for HongKong Land to own and manage.

(a) If its going to have good prospects as office building, it makes sense to keep in the the family by selling to HKL;
(b) If its going to have poor prospects as a office building, it would look stupid to have rejected the high bids years ago, thus it can only be deemed to be a office building w good prospects.

Hi Choon,

For context (data taken from HKL's AR):
2017 (put up for sale): Grade A office vacancy = 1.7%
2018 (redevelopment decision): Grade A office vacancy = 1.8%
Today (end 2022): Grade A office vacancy = 8.8%

On hindsight, It would be better to have sold it for 3.8bil USD (or 3usd per share) in 2017! With ~600mil estimated redevelopment costs, we talking about a selling price of ~4.4bil USD just to match back to previous "high water mark". Of course, the Taipans couldn't have predicted the twin devastations of civil unrest and covid zero that happened after 2018 to where we are now.

Back in 2017, 5 bids from a mixture of HK and Mainland China developers were received. Fast forward to now, the latter has lost its animal spirits. So it is unclear where the ready/willing buyers will be in 2025. While parent JMH has been divesting assets recently, it is holding its Greater China/SEA assets pretty firmly. So unless things materially improve in that part of the world in 2-3 years time, your guess has some pretty good odds.

[Choon]

On point (iii), it seems the new development is largely a office building. A most likely scenario and I cannot imagine any other plausible alternative is that the new development is sold to HongKong Land for HongKong Land to own and manage.

(a) If its going to have good prospects as office building, it makes sense to keep in the the family by selling to HKL;
(b) If its going to have poor prospects as a office building, it would look stupid to have rejected the high bids years ago, thus it can only be deemed to be a office building w good prospects.

Hi Choon,

For context (data taken from HKL's AR):
2017 (put up for sale): Grade A office vacancy = 1.7%
2018 (redevelopment decision): Grade A office vacancy = 1.8%
Today (end 2022): Grade A office vacancy = 8.8%

On hindsight, It would be better to have sold it for 3.8bil USD (or 3usd per share) in 2017! With ~600mil estimated redevelopment costs, we talking about a selling price of ~4.4bil USD just to match back to previous "high water mark". Of course, the Taipans couldn't have predicted the twin devastations of civil unrest and covid zero that happened after 2018 to where we are now.

Back in 2017, 5 bids from a mixture of HK and Mainland China developers were received. Fast forward to now, the latter has lost its animal spirits. So it is unclear where the ready/willing buyers will be in 2025. While parent JMH has been divesting assets recently, it is holding its Greater China/SEA assets pretty firmly. So unless things materially improve in that part of the world in 2-3 years time, your guess has some pretty good odds.

HKL may then have a lot on its plate in 3 years time then, because its Shanghai giant project will also be coming alive then. HKL investors better to take note.

[weijian]

The alternative would be the current HK leaders putting their act together - position HK firmly back in the intersection of Mainland China and the West (by demonstrating characteristics from both worlds) and dispelling the notion that it will become the suburb of Shenzhen. 

Hong Kong’s Property Recovery Is as Chaotic as Its Reopening

Sun Hung Kai Properties Ltd. recently bought a prime commercial site, which will eventually house “the second tallest landmark building in Kowloon,” for HK$4.73 billion ($603 million), far short of the HK$7.3 billion to HK$12 billion range the land was expected to fetch. So why is the city’s biggest builder so cautious despite robust demand for its apartments?

This sale underscores the business elites’ skepticism toward Hong Kong’s economic recovery, and by extension, its property rebound.

https://www.bloomberg.com/opinion/articl...estate-lag

[Choon]

"The alternative would be the current HK leaders putting their act together - position HK firmly back in the intersection of Mainland China and the West (by demonstrating characteristics from both worlds) and dispelling the notion that it will become the suburb of Shenzhen."  

And perhaps, thinking about it more broadly, also this current generation of HongKongers putting their act together. There is quite a prevalent view that the previous generation is much more hungry and forced by poorer circumstances to have sharper survival and entreprenurial instincts.

[weijian]

The assets: Mandarin Oriental Washington was sold in 2022 for gross proceeds of 139mil (carrying BV was 90.8mil), realizing an after-tax gain of 47mil (51% gain). In a way, the sales of this single hotel demonstrated that its current NAV of 2.61usd has the capability to be revalued upwards. Of course, it is not practical for MOI to sell most its hotels, as a critical mass of marquee "locations" is needed for it to develop its budding management business.

The balance sheet: Ending FY22, MOI has net debt of 375mil, with another 500mil development costs for Excelsior Hotel, that will potentially bring the net debt to close to 900mil. Using FY18/19 as a guide, MOI will generate ~70-100mil annually in FCF. Even as FCF improves with the focus on the management business and the end of its expensive refurbishment of its European hotels (Madrid/London/Munich), the next 3 years will not generate enough internal cash to fund the redevelopment without getting into extremely high net debt. Granted that there are still 470mil of debt facilities available which is enough to cover the entire development costs on paper, but will funding costs get too prohibitive in the future? What will the Jardines do? JMH has just divested more businesses at the parent level in 2023, will it be ready to fund a rights issue, just maybe if it decides to go that route?

[ghchua]

Hi weijian,

Do take note that the adjusted NAV of MOI as at 31 December 2022 is US$3.87, which provides an idea of the market value of their assets. Personally, I will use the adjusted NAV as a guide of its value, rather than the reported NAV value of US$2.61.

[weijian]

Hi weijian,

Do take note that the adjusted NAV of MOI as at 31 December 2022 is US$3.87, which provides an idea of the market value of their assets. Personally, I will use the adjusted NAV as a guide of its value, rather than the reported NAV value of US$2.61.

hi ghchua,

Thanks. If we were to translate the 50% premium showed from the sale of MO Washington, the reported NAV of US$2.61 translates to ~US$3.90. This is not very far from the adjusted NAV of US$3.87. This shows that the adjusted NAV is realistic, although it is impossible for MOI to liquidate its entire (or even more than a handful of its) hotel portfolio.

Since it is impossible for MOI to liquidate most of its hotel portfolio, personally I prefer to anchor to the reported NAV rather than adjusted NAV, while knowing that this reported NAV is still practising relatively conservative accounting.

Out of the 7 mgt contracts lost in the last 10 years, 4 of them came from the United States (the other 3 were at Bermuda, Macau and Chiang Mai). From Wiki, out of the 4 lost contracts in the US, 2 of them were lost to Hilton (Waldorf Astoria) and 1 to Four Seasons - These are formidable competitors who have a longer history, more branding power and much larger scale.

In North America, besides 3 partially owned hotels (New York, Boston and Miami), there are currently no existing managed hotels in that part of the world.  Is this good evidence that the MO brand is not competitive enough as a luxury hospitality brand in the all important US market?

Most of the new management contracts are coming from the EMEA/AP region. Parent JMH has been espousing on their focus on China and SEA in the last few years. Is it possible for more sales of hotels (eg. MO Miami or Boston) in the "too-competitive" North America region?

[ghchua]

Hi weijian,

The adjusted NAV number is useful when there is a takeover offer, not only for sale of assets or liquidation. I am not saying that JMH will launch an offer for MOIL anytime soon, but what I am trying to say is that I will always use the adjusted NAV numbers to have a rough guide on the value of a company. For example, if you just take Isetan Singapore NAV number without including the current valuation of Wisma Atria Podium Block, you are going to have a big difference in the adjusted NAV and reported NAV numbers.

I think we should not look at regional numbers too closely, but rather look at the overall picture of MOIL hotel management agreements with third parties. The overall number had been increasing throughout the years, and it proves that the brand is able to generate more cash flow without massive capital investment. With Covid recovery in Asia, I do expect them to perform better this coming FY, and I don't think it is their plan to exit any markets completely soon at this moment as cycles can be different across markets. Case in point, during Covid, the Western markets recovered earlier than East Asia. So, it still best to be diversified.

[weijian]

I think we should not look at regional numbers too closely, but rather look at the overall picture of MOIL hotel management agreements with third parties. The overall number had been increasing throughout the years, and it proves that the brand is able to generate more cash flow without massive capital investment. With Covid recovery in Asia, I do expect them to perform better this coming FY, and I don't think it is their plan to exit any markets completely soon at this moment as cycles can be different across markets. Case in point, during Covid, the Western markets recovered earlier than East Asia. So, it still best to be diversified.

hi ghchua,

Thanks for your additional insights. We are in sync that the future is only looking bright for MOI (not exactly a secret) - a recovery of its all important HK/Tokyo hotels, a focus on new management contracts/branding and its European hotels (which were previously in various stages of renovation/restoration/recovery from fire outbreaks etc) firing all cylinders. The shift from good consumption to experiential consumption is welcomed too. The only thing that could derail the expected good prospects is a prolonged recession as luxury hospitality is notoriously sensitive to economic conditions. Nonetheless, the margin of safety comes from its hotel portfolio which is conservatively valued on the balance sheet.

I also agree that the hotel brand needs an array of lodging worldwide to provide fodder for mindshare to the traveler. For example, someone from the US, having enjoyed MO hospitality locally, will more readily choose a MO hotel when they travel to Europe/AP for business or holiday.

[weijian]

Traditionally, the Jardines promote from within their group (those with finance/MBA background). They last did with an external hire at DFI some time ago as the company was losing its relevance and needed a turnaround.

Now the Jardines have bought in another external hire to helm Mandarin Oriental. And this external hire does not have the traditional background of their typical promote-from-within.

MANDARIN ORIENTAL ANNOUNCES LEADERSHIP TRANSITION WITH LAURENT KLEITMAN TO SUCCEED JAMES RILEY AS GROUP CHIEF EXECUTIVE

– Laurent Kleitman has been appointed as Group Chief Executive of Mandarin Oriental International Limited with effect from 1st September 2023. He will succeed James Riley who has been the Group Chief Executive of Mandarin Oriental since 2016 and will be stepping down.

Laurent was most recently the President and Chief Executive of Parfums Christian Dior, the largest luxury fashion beauty business of LVMH. He was responsible for the business globally, managing the luxury brand’s perfume, make-up, and skincare categories. Prior to joining LVMH in 2019, Laurent was President of the Consumer Beauty division of Coty, a NYSE listed leading beauty company with a portfolio of well-known brands across fragrance, colour cosmetics, and skin and body care. Prior to that, he spent 25 years at Unilever and held global and regional leadership roles covering the UK, Europe, and Asia, across its personal care, home care, and food businesses

https://links.sgx.com/FileOpen/MOIL.ashx...eID=757618