The Kuok-family controlled hotel chain suffered from a selldown last year because of the protests in Hong Kong. Its portfolio of properties contributes to a strong balance sheet; its well-recognised brand makes it a favourite of travellers.
SINGAPORE (Jan 23): Hong Kong-listed Shangri-La Asia is recognised by travellers for its posh hotels but overlooked by investors as shown from its undervalued share price. The company, part of the Kuok family’s empire, owns and manages hotels under four brands: Shangri-La Hotels and Resorts, Kerry Hotels, Hotel Jen and Traders Hotels. Its largest geography by assets and revenue is China, with around 40%, followed by Singapore and Hong Kong at around 10% each.
Based on Shangri-La’s share price and fundamentals over the past 15 years, it appears to be significantly undervalued given the negative price growth and positive value growth. Chart 1 shows the 1-year, 3-year, 5-year, 10-year and 15year CAGR for Shangri-La’s share price against its weighted value. The weighted value comprised of revenue, adjusted net profits, retained earnings, operating cash flow and free cash flow in order of increasing weight. It is important to note that the adjusted net profits has grown at an average rate of 9.4%, which led to growing dividends for the investor since its dividend policy is tied to recurring operating profits. Secondly, ShangriLa has generated consistent, positive operating cash flow for the past 15 years, but only turned free cash flow positive in FY2017. This trend is seen to continue.
Yields-wise, Shangri-La’s earnings yield, dividend yield, operating cash flow yield and free cash flow yield are 6.1%, 2.6%, 12.6% and 3.2% respectively; and is collectively more attractive than the Hong Kong risk-free-rate of 1.6%. Shangri-La’s liquidity and solvency is rather decent, with a current ratio of 1.1 times, and debt to equity ratio of 81.6%. Retained earnings have also grown at a steady rate of 5.3% for the past five years, suggesting stronger balance sheet strength.
Perhaps the most attractive investment feature of Shangri-La is its P/B, which is only at 0.62 times. The company is also trading at the lower bound of its historical price to book (see Chart 2), further justifying that it is cheap and undervalued. Shangri-La also trades at a huge 33% and 67% discount to its P/E and P/B respectively compared to regional peers.
Luxury focus a deepening moat
Looking ahead, Shangri-La will focus on its high-end luxury brand, which is Shangri-La Hotels and Resorts. Its entire hotel development pipeline up until 2022 will be its luxury brand, and none of its mid-scale brands, Hotel Jen and Traders Hotels.
Though the focus on luxury might weigh down on the company’s margins over the long run, there is also the effect of deepening its moat as Shangri-La’s already strong brand identity enjoys a further boost. The company’s pipeline also looks promising given that it has secured hotel locations in mixed-use developments mostly next to tourist attractions and economic zones such as the Shangri-La Hotels in Melbourne and Bahrain, both set to open in 2022.
Analysts have a target price of HK$10.90 ($1.89) for Shangri-La over the next 12 months, representing an attractive 30.5% upside from its current trading price of HK$8.35. The political instability in Hong Kong has adversely impacted the share price of Shangri-La, and perhaps, unfairly so, given that the majority of Shangri-La’s revenue and assets derive from China; versus 10% from Hong Kong.
We think the intrinsic value of the company is HK$9.90, which is roughly 18.6% above the current trading price. No matter how great a company is, it must be bought at the right price; and no matter how unattractive a company may seem based on sentiments, if its downside is limited with decent prospects, it may very well be a great bargain. Shangri-La is one such company.
