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[Case Study] How We Made A 44% Gain on An Undervalued Hong Kong Conglomerate

Ho Khinwai
Ho Khinwai

We didn’t blindly “hope” that our investment in this Hong Kong stock would return 44%.

In fact, using our Conservative Net Asset Valuation (CNAV) method, we knew the odds were stacked in our favor.

Unlike the previous Nico Steel Case Study, this time, we are able to provide full evidence.

Entry Price: 1000 shares at HK$29.10 on 31 May 2017
We bought another 1000 shares at HK$26.95 on 28 Jun 2018… and sold when it delisted with a cash offer of HK$38.80

We hope by showing you these “proofs”, and by sharing our entire thought process, you will be able to become a better investor.

So… in this case study, we will cover:

  • How we discovered the stock
  • Why we bought it
  • Why we held on
  • Why we sold it.

Let’s go.

How Did We Come to Learn About Hopewell Holdings?

Hopewell Holdings had appeared as a potential stock pick in our proprietary Conservative Net Asset Valuation (CNAV) screener mid-2017.

The CNAV is a valuation method – much like the Deep Value method (or Net-Net) that Warren Buffett’s teacher, Benjamin Graham, espoused.

However, unlike Net-Net stocks which many times can be lousy stocks, we tightened the formula to make it more conservative and in the process, eliminate the “quality” issue.

Some things we modified include discounting receivables and inventory by 50%, and considering cash flows and profitability trends in our criteria.

Going back to Hopewell, we saw that the stock was trading at a ridiculous 70% below our estimated CNAV value!

We also saw that it checked off all of our quantitative and qualitative criteria on the first-cut.

However, this does not mean we should invest immediately.

We continued to investigate further.

Why We Bought

Looking at the business itself, we see that Hopewell Holdings has multiple business operations – including a toll road business, property development and investments, hotels, a restaurant, a catering service, and a power plant business.

Hopewell’s golden goose, however, was its highly cash-generative toll road business, which was very stable and had been growing in revenue and earnings (and ultimately, operating cash flows).

Hopewell’s other huge revenue segment comes from its investment properties and property development business. However, the property development segment is very cyclical and depends on when projects are completed.

Further, the business’s revenue was dependent on the good sales of those developed projects as well. An important point to consider for those who think that property developers “sure win”.

We see this happening in the figure below as property development revenues decreased from HK$4,131,000 (2015) to HK$880,000 (2016).

Because of the cyclical nature of the business, we chose to look past income statement numbers and solely focus on the value of its assets.

Ultimately, the three pull factors for us were:

  • One – it had a lucrative cash cow in its toll segment.
  • Two – its properties gave us a “buffer” in the event the toll business wasn’t doing as well, and,
  • Three – we were presented with an opportunity to buy the stock below our CNAV value. Its properties were valued at HK$32.96 per share. Yet the stock was only trading at $25. This essentially meant that we could buy the company at a price below the value of its properties, and then get the toll segment profits for “free”. And, we only paid 70 cents on the dollar!

Ultimately, our reason to invest was clear. As Alvin mentioned to our Dr Wealth members in 2017 when he first bought the stock…

When the FY2017 results were out, we bought more shares because we saw that the company’s cash coffers could cover all of their total liabilities, and then some.

This indicated that if we invested in Hopewell, we would get their investment properties for virtually nothing!

Why We Held

In January 2018, we saw that Hopewell was selling its 66.67% stake in Hopewell Highway Infrastructure (HHI) for HK$9,865,379,217.60 to Shenzhen Investments.

Doing this meant that they would lose their stable cash cow business and only rely on their rental from hotels and investment properties, along with periodic boosts from the development properties.

At this point, we were waiting for the sale to go through and for Hopewell to announce updates to its near-term growth plans before deciding whether to keep or to sell.

This is because getting rid of the toll business might not be a bad thing – it allows management to focus on developing its property portfolio, as well as investing in new ones.

On 30 May 2018, the sale went through and a special dividend of HK$2 per share was announced.

At this juncture, we re-evaluated our original investment thesis based on the CNAV criteria and saw that everything was still looking pretty healthy; Operating cash flows, which is the lifeblood for a business to continue operations remained strong and positive, and the company’s cash reserves were still able to pay off its debts even when FY2018 results were released.

Moreover, they now possessed the additional cash to invest in new properties or development projects – which would grow revenues, profits and unlock their Net Asset Valuation in the future.

Thus, we decided to hold and pay close attention to any new information that came up.

Why We Sold

On 4 December 2018, Hopewell announced that they would file for the company to be delisted and privatized with a finalized cash offer of HK$38.80.

An EGM was held and shareholders approved the motion to delist the company on 22 March 2019. We felt that some of the value had been unlocked and it would be wise to cash out.

At this exit offer price, we had made a tidy 44% gain on our investment (capital gains + dividends collected).

A Rational & Methodical Process

You may have noticed that our investment decision overall was made rather easily.

We calculated the company’s true net worth based on its good assets.

Then we checked up on its share price and made the call to buy it when we saw that it was trading at a discount to its true value.

We held on to our positions and we doubled down when prices declined from the start of 2018, as we saw that the business and its numbers were still intact. If the market wanted to hand us a bargain, we weren’t going to say no. (As an aside, would you ever say no to your breakfast being half its original price? No? Then why say no when the stock you want becomes half price?)

And we sold when we saw the value unlock… which was the delisting incident.

Our process is both rational and methodical.

No complicated charts.

No looking at the news and figuring out what Trump and China will do next.

The strategy we used in this whole process is part of a larger all-encompassing methodology known as Factor-Based Investing.

It is an approach to investing that enables you to find underpriced stocks such as Hopewell – all while ensuring you cover your risks and protect your portfolio from tragic losses.

If you want to learn more about the Factor-based investing methodology, you can join our intro-course here for free. We’ll teach real live examples of how to apply our methods on stocks you choose. So make sure to come with a stock in mind!

We only open it up for a limited number of persons so make sure you secure your seat now!