Luks Group (Vietnam Holdings) Company Limited

Luks (‘Group’) is engaged primarily in the following businesses a) cement (24% of net assets) b) property investment (48%) and c) hotel operations (22%) among others.

The investment property portfolio generates most of the group’s profits currently (via rental income) followed by the cement business. The hotels segment is loss-making.

The group holds several properties in Vietnam, Hong Kong, and China – but the queen jewel is the Saigon Trade Centre located in the central business district of Ho Chi Minh. The pandemic hasn’t significantly affected this property with an occupancy rate of 81% (vs 82% in 2019), which was offset by a 7% rental increase.

It operates the cement business out of central Vietnam and sells domestically as well as to nearby countries – Philippines, Bangladesh, and China. The pandemic has depressed the construction industry as infrastructure and transportation projects are suspended.

It operates one hotel in Hong Kong – ‘Pentahotel Tuen Mun’, which began operations in 2017 and has been loss-making due to the civil unrest in Hong Kong apart from the pandemic.

The group reported TTM sales of $600m (2019: $650m) and net profits of $140m (2019: $155m).

The fair value of investment properties is $1.17b of which the Vietnam commercial properties constituted $854m. This was valued using rental values at a discount rate of 13%, which seems sufficiently conservative.

The financial position is strong with net cash of $402m. The net current asset value is $132m, and net tangible asset value is $2.45b. Just adding in the fair value of investment properties to net current assets sums to $1.30b.

The stock is selling at $638m ($1.27/share), which is less than half of realizable asset value (with the cement and hotel business thrown in for free) or 5x 2019 earnings.

Management paid consistent dividends of $50-60m in the recent past but cut the interim dividend by two-thirds, which may have depressed the share price. However, they spent $3.3m repurchasing shares at $1.22/share in September.

At the current price, shareholders seem to be getting a discounted ticket to the office property market in Vietnam, which benefits from the US-China trade dispute and the growth of Ho Chi Minh; the cement business in Vietnam, which will benefit from the local government’s public spending on infrastructure, and residential construction growth; and the bonus of a Hong Kong hotel that may benefit as stability is restored there.