Let's make this easy. You can buy Hong Kong Shanghai Hotels (OTC:HKSHF) for $2 billion. The stock is trading at $1.39 and has a net asset value of about $2.80. That's the thesis. Now the research.
The Peninsula Hotels are arguably the nicest group of hotels in the world. Time and time again the group has won awards. Rooms average about $700 a night but can cost in the thousands of dollars. The flagship in Hong Kong has a fleet of Bentleys that pick up customers at the airport.
The group dates back to 1866 and is controlled by the Kadoorie family who own over 50% of the stock. The best thing about this stock is also the worst thing. Because it's tightly controlled, it is well run. However, there is 0% chance of an activist shareholder getting involved. In Hong Kong dollars, the stock has ranged from about $5 to $15. It takes 7.7 Hong Kong dollars to buy one American dollar. I've listed the pink sheet HKSHF but will write of its finances in Hong Kong dollars.
The group owns some of its hotels outright and smaller percentages in other locations. As an example it owns 20% of the Peninsula Beverly Hills. The company has been growing and is expanding across Asia and Europe. Another great thing about the stock is that the share count has remained almost the same at 1.5 billion for many years.
In addition to the hotels, the group owns high rises, residential property, and a few country clubs. One of its most interesting holdings is the Peak Tram in Hong Kong. The tram takes you to Victoria Peak, the highest point on the island. The Peak Tram is to Hong Kong what the trolleys are to San Francisco.
The Annual Report pegs the Net Asset Value of the stock at 23.37 Hong Kong dollars. In 2004, it was 10.23. Investing legend Charles de Valux of International Value Advisors (MUTF:IVWAX)(MUTF:IVIOX) pegs it around $21 in a recent interview in Value Investor Insight. The stock trades at about 11 Hong Kong dollars [45:HK], so about a 50% discount. So the American listing trades at $1.39 and is half off NAV.
When the economy tanked in 2009, so did the hotel business. de Valux used a worst-case scenario of 9 Hong Kong dollars per share. The great thing about the market collapse in 2009 is that we have a fresh worst-case scenario.
There is no doubt the stock is undervalued. The question is will the price respond with the NAV? The challenge is that it's closely held. An investor has two choices. Hold for a short while and hope that it goes up a little or invest long term and watch new Peninsulas sprout up around the world. Either way, it's a value investor's dream come true.
Disclosure: I am long HKSHF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.