Asia Standard Hotel Group Limited

Asia Standard Hotel (‘Group’) owns and operates five hotels ('Empire') in Hong Kong. It is also engaged in four residential property development projects in Vancouver via joint ventures.

The group also owns a substantial portfolio of listed non-investment grade debt – mostly lent to property developers in China.

Since the value of this group is based on its tangible assets, we begin with the balance sheet (all figures are as at March 31, 2020 as the latest interim report isn’t released yet):

The net tangible assets are reported as $3.52b.

This includes gross borrowings of $6.79b with interest rates of 1.49% to 3.82% - of which, $1.10b was due within one year.

To offset this, there were listed debt investments of $6.22b and cash of $331m. The debt was valued at 81 cents of face value and rated at ‘B’ or below (non-investment grade). These had interest rates of 7.75% to 15.50% with maturities before June 2025 and were mostly US$ denominated ($5.80b).

The above market values were depressed after the onset of the pandemic and hence, represent conservative valuations under current conditions.

The five hotel properties are held under long-term leases of 50+ years. These are reported at $2.81b. The market value of these properties, however, are disclosed as $11.67b – valued by independent appraisers using discounted cash flows.

Therefore, the revised net tangible asset value is $12.38b.

The hotels segment generated losses in 2020 due to the social unrest and pandemic. (It generated $117m in pre-tax profits in 2019.)

The debt investments generated all the profits via interest income resulting in total net income of $383m in 2020.

The stock is currently selling for $995m (assuming full dilution of convertible notes and options), which is absurd in relation to net asset value, and 2.6x depressed earnings. It is likely the market is pricing in default of the borrowings.

Even if the debt portfolio is valued at zero, the gearing would only amount to around 50% of asset value, which appears conservative.

Management paid paltry dividends of $12m-$20m/year in the recent past yielding less than 2% at market, and cut the dividend entirely this year.

Considering the conservative market valuation of the debt portfolio, and the likelihood of the hotels returning to profitability (due to vaccines and political stability), this stock appears to provide a substantial margin of safety in case of further adverse developments impacting the group.