Jardine Matheson Holdings Limited: Diversified And Highly Complicated

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About: Jardine Matheson Holdings Limited (JARLF), JDSHF, JMHLY, JSHLY, Includes: DFIHY, DFILF, HKHGF, HNGKY, JCYCF, JCYGY, MAORF, MNOIY, PTAIF, ZSHGY
by: Christoph Liu
Summary

Jardine Matheson Holdings Limited operates a diverse portfolio of businesses across South East Asia and Greater China.

The company's most important market is Hong Kong.

Through a 85 percent stake in separately listed Jardine Strategic Holdings Limited it controls a 57 percent stake in itself.

Jardine Matheson and Jardine Strategic furthermore are lead by more or less the same people.

The group has a very complicated holding structure that makes it hard to assign a definitive value.

Jardine Matheson Holdings Limited (OTCPK:JARLF; OTCPK:JMHLY) is a Hong Kong based holding company with a long history and a diversified business spread across South East Asia and the Greater China region. The group also has a remarkably complicated corporate structure. In the following I will try to give an insight into Jardine Matheson and whether there is more value hidden in this structure than the market currently realizes.

The company reports in US dollar. Wherever necessary I am applying USD exchange rates as of June 6th.

A Very Brief History

Jardine Matheson dates back to 1832 when British (Scottish, precisely speaking) traders William Jardine and James Matheson formed a partnership under the name of Jardine, Matheson & Co. The earliest roots of the business can even be traced back to the 1780s.

William Jardine by George Chinnery

Dr. William Jardine; painting by George Chinnery around 1820.

Sir James Matheson Painting By Daniel Mcnee Sir James Matheson, 1st Baronet, painting by Daniel McNee, 1971

Back in the day the company was mainly a trader of tea, cotton and, yes, the inevitable opium. In the 1860s it was also involved in arms deals in Nagasaki supplying the supporters of the Meiji Restoration.

Those days however are long gone. Today Jardine Matheson is a diversified holding company which is through various subsidiaries active in various industries ranging from real estate to automotive. Until recently it also owned a substantial share of insurer Jardine Lloyd Thompson Group plc (OTCPK:LLTHF) which was sold to Marsh & McLennan Companies, Inc. (MMC) at the beginning of 2019.

The company has expanded across South East Asia with a strong presence in Singapore and Indonesia among others. The Greater China region (and especially Hong Kong) is nonetheless still its most important market.

Jardine Matheson Holdings Ltd. Profit By Geography Jardine Matheson's underlying profit by Geography; source: Jardine Matheson Holdings Ltd.

Structure

What is quite striking about the group structure is that it does not become immediately obvious, which entity is the top level. There would be two possible contenders for that title: Jardine Matheson itself and separately listed Jardine Strategic Holdings Limited (OTCPK:JDSHF;OTCPK:JSHLY). Now it might get a little confusing. Jardine Matheson owns 85 percent of Jardine Strategic which in turn holds 57 percent of Jardine Matheson.

Ben Keswick is chairman and managing director - a position that is essentially equivalent to that of a CEO - of both companies. In Hong Kong this kind of supreme business leader is referred to as "Tai-Pan" colloquially. He succeeded his uncle, Sir Henry Keswick, who retired at the end of last year. The Keswick family, descendants of William Jardine's sister, are the dominant shareholders.

All executive directors - plus two of four non executive directors, namely Mr. Anthony Nightingale and Mr. Pearcy Weatherall - of Jardine Strategic are also board members of Jardine Matheson.

This structure makes the group more or less invulnerable to any takeover attempt. It also somewhat fortifies the position of management against any form of shareholder activism in general. That could be a good thing or a bad thing (or both) depending on one's point of view.

The group's operative businesses consist of direct subsidiaries of Jardine Matheson and majority stakes in separately listed companies which are held by Jardine Strategic.

Direct Subsidiaries

Jardine Matheson has two primary direct subsidiaries: Jardine Pacific and Jardine Motors.

Jardine Pacific

Jardine Pacific is itself a holding company owning entirely or in part a variety of industrial companies.

Gammon Construction

Gammon Construction Ltd. is a Hong Kong based construction company. Gammon Construction is active in the field of both residential and commercial developments as we'll as infrastructure. Besides its home market, Singapore and mainland China are among its most important geographies. Gammon Construction is a 50 percent joint venture with infrastructure specialists Balfour Beatty plc (OTCPK:BAFBF;OTCPK:BAFYY).

Hong Kong Air Cargo Terminals

Jardine Pacific is the largest shareholder of Hong Kong Air Cargo Terminals Ltd. of which it owns a 41.67 percent share. The company owns and operates SuperTerminal 1 at Hong Kong International Airport, the largest single multi-level air cargo terminal in the world. Another large Hong Kong based holding company, CK Hutchinson () is the second largest shareholder at 20.83 percent which are held through Hutchinson Port Holding Ltd.

Jardine Aviation Services Group

Jardine Aviation Services Group offers ground handling services, including passenger services, ramp operations, baggage and cargo handling, flight control, load planning and crew care at Hong Kong International Airport. It counts over 60 international passenger and cargo airlines among its customers.

It also provides aviation operational and safety training programs at dedicated on-airport training facilities and holds interests in aviation and travel agency businesses in Hong Kong and China. Jardine Aviation Services Group is a 50 percent joint venture between Jardine and the Hong Kong branch of China National Aviation Corporation (also known as Air China Group).

Jardine Engineering Corporation

Jardine Engineering Corporation is a provider of engineering and facility management services. It is a full subsidiary of Jardine Pacific.

Jardine Property Investments

Through its wholly owned subsidiary Jardine Property Investments Jardine Pacific owns a portfolio of residential real estate. As of March 31st it held assets valued at $451.3 million.

Jardine Restaurant Group

Jardine Pacific operates more than 800 restaurants under YUM! Brands Inc.'s (YUM) Pizza Hut and Kentucky Fried Chicken brands as a franchisee in Hong Kong, Macau, Taiwan and Vietnam.

Jardine Schindler Group

Jardine Schindler Group is a joint venture with Swiss Schindler Group (OTCPK:SHALF) in which both partners own 50 percent each. It installs and maintains lifts and elevators. Jardine Schindler operates Brunei, Cambodia, Hong Kong, Macau, Malaysia, Myanmar, Indonesia, the Philippines, Singapore, Thailand, Taiwan and Vietnam.

Jardine Travel Group

Jardine Travel Ltd. is a Hong Kong corporate travel management firm. It also acts as a wholesaler for a number top airlines providing ticketing services to other travel agents. Jardine Pacific owns 55 percent of the company.

JTH Group

JTH Group provides various technology solutions and consultancy to businesses across Asia. It operates three divisions with different specializations: Adura, a cyber security consultancy providing cyber security strategies; Innovix Distribution, a technology distributor operating in Asia's major commercial hubs and JOS, a systems integrator, solutions provider and technology consultancy. JTH Group is wholly owned by Jardine Pacific.

Greatview

Jardine Pacific also manages a 28 percent stake in Greatview Aseptic Packaging Company Ltd. (OTCPK:GRVWF) which is owned by Jardine Strategic. The stake currently has a value of about $212.44 million based on market capitalization.

In 2018 Jardine Pacific cumulatively accounted for an underlying profit of $164 million or about 9 percent of Jardine Matheson's overall profit. Please note: due to the sale of Jardine Lloyd Thompson which accounted for 4 percent of FY2018 underlying profit those relative figures would slightly differ as of now.

Jardine Motors

Jardine Motors mainly consist of two subsidiaries: eponymous Jardine Motors Group and Zong FU.

Jardine Motors Group

UK based Jardine Motors Group owns and operates car dealerships for various brands manufactured by such companies such as Volkswagen AG (OTCPK:VWAGY;OTCPK:VLKAF;OTCPK:VWAPY), Honda Motor Co. (HCM), Toyota Motor Corp. (TM) or Tata Motors Ltd. (TTM). It also operates boutique dealerships of automotive luxury brands like Aston Martin (OTCPK:AMGDF;ARRGY), Ferrari (RACE) or McLaren. The company also operates under the brand name "Lancaster".

Zung Fu

Zug Fu is the exclusive retailer of Daimler AG's (DDAIF;OTCPK:DMLRY) Mercedes Benz brand in Hong Kong and Macau. Notably, Hong Kong is one of Mercedes Benz's strongest markets worldwide in terms of market share. The company furthermore operates 32 Mercedes Benz outlets in Mainland China.

Zhongsheng Group

Through Jardine Strategic the company also owns a 20 percent stake in listed Chinese Zhongsheng Group Holdings Limited (OTCPK:ZSHGY) which it groups into the Jardine Motors division.

Based on current market capitalization the share has a value of $1.14 billion.

In 2018 Jardine Motors cumulatively accounted for an underlying profit of $175 million. That amounts to about 10 percent of Jardine Matheson's overall profit. Notably, the UK Jardine Motors group accounted for close to half of currency adjusted revenue 47.72 percent but only for 11 million of underlying profit (around 6.3 percent).

Jardine Motors FY2018 Revenue by Geography Jardine Motors FY2018 revenue by geography; source: Jardine Matheson Holdings Ltd.

Jardine Motors FY2018 Underlying Profit by Geography Jardine Motors FY2018 underlying profit by geography; source: Jardine Matheson Holdings Ltd.

Holdings Owned Through Jardine Strategic

Through Jardine Strategic the group holds controlling stakes in several separately listed companies.

Hongkong Land

Jardine strategic owns a 50 percent stake in Hongkong Land Holdings Limited (OTCPK:HKHGF;OTCPK:HNGKY). It owns about 450,000 square meters of mainly commercial property in Hong Kong. Its portfolio also contains a further 400.000 sq. m. of prime properties across Chinese and South East Asian cities, mainly through joint ventures. The most important market besides Hong Kong is Singapore where the company's local portfolio comprises of about 165,000 sq. m. and where it owns residential developer MCL Land.

The company is incorporated in Bermuda and primarily listed on the London Stock Exchange, with secondary listings in Bermuda and Singapore. Its portfolio is managed through Hong Kong based subsidiary Hongkong Land Limited. Notably, all non-executive directors except for one are also board members of Jardine Matheson, Jardine Strategic or both and Ben Keswick serves as chairman.

Based on the current market capitalization the 50 percent holding of Hongkong Land has a value of $7.94 billion.

Hongkong Land accounted for $438 million in underlying profit in 2018. That is a quarter of Jardine Matheson's overall underlying profit.

Dairy Farm

Jardine Strategic owns a 78 percent controlling stake in Dairy Farm International Holdings Limited (OTCPK:DFILF;OTCPK:DFIHY) a Pan Asian retailer. The company operates various chains of supermarkets, convenience stores under the 7 eleven brand, various brands of health and beauty stores and IKEA warehouses. It also operates a chain of more than 1.200 Maxim's restaurants (including through franchises and local joint ventures).

Jardine's stake in the company has a value of about $8.1 billion based on the current share price.

Dairy Farm accounted for $278 million in underlying profit in 2018. That represents about 16 percent of Jardine Matheson's overall underlying profit.

Mandarin Oriental

Jardine Strategic owns 78 percent of hotel operator Mandarin Oriental International Limited (OTCPK:MAORF;OTCPK:MNOIY). Mandarin Oriental might arguably be the best known part of the group internationally. It operates 32 five star hotels in prime cities around the world, including the groups original property in Hong Kong. Furthermore it operates six so called residences (an additional thirteen are planned).

Based on the current share price Jardine's share of Mandarin Oriental has a value of $1.81 billion.

Mandarin Oriental accounted for $45 million in underlying profit or 3 percent of overall underlying profit in 2018.

Jardine Cycle & Carriage

Jardine Strategic owns a 75 percent stake in Singapore based Jardine Cycle & Carriage Ltd. (OTCPK:JCYCF;OTCPK:JCYGY) which in turn owns slightly above 50 percent of Indonesian conglomerate PT Astra International Tbk (OTCPK:PTAIF).

Through its Direct Motor Interests division Jardine Cycle & Carriage is engaged in the retail of new and used cars (the latter under the Republic Auto brand) as well as significant stakes in various operators of car dealerships and service centers across Singapore and other South East Asian markets. The company is also the exclusive distributor of BYD (OTCPK:BYDDF) electric forklifts in Singapore.

Furthermore, the company owns a 25.5 percent stake of Thai cement producer Siam City Cement Public Co. Ltd. (OTCPK:SCVPF) which currently has a market value of ZAHL, 24.9 percent of Vietnamese engineering and infrastructure group REE Corporation currently worth about $137 million and a 10.6 percent ownership interest in diary producer Vinamilk.

Based on the current market capitalization Jardine Strategic's ownership stake has a value of 7.52 billion. Notably Jardine Cycle & Carriage trades at a - albeit small - discount to its holding in Astra alone at the moment.

Jardine Cycle & Carriage accounted for $567 million of underlying profits in 2018. That represents about one third of Jardine Matheson's underlying profit. 27 percent of that is attributable to Astra.

Other Investments

In its 2018 annual report Jardine Matheson lists some other investments (see page 65) with a combined value of $2,642 million. Those include minor stakes banks Rothschild & Co (OTCPK:PIEJF) and The Bank of N.T. Butterfield & Son Ltd. (NTB), its joint venture partner Schindler Holding AG and Toyota Motor Corp.

Discount

The assets owned trough Jardine Investment have a combined value of about $26.72 billion. Jardine Matheson owns 85 percent of those which amounts to $22.71 billion. Please note that I calculated that number on the basis of the direct holdings (including such managed by other subsidiaries of Jardine Matheson). Thus I consider stakes in listed sub-subsidiaries as already included in the value of the respective asset. I also chose to base my calculation on the value of the respective group companies rather than simply on the valuation of Jardine Strategic. There might be reasons to prefer the latter method but I believe that given the intertwined ownership structure of the companies the approach I chose better demonstrates the value of the group. Also I believe that it would result in a kind of a chicken-and-egg problem if one would have to value a company based on the value of another company that in turn would have to be valued based on the former's value.

To the $22.71 billion I will add the about $2,64 billion in other investments (which by now might admittedly have become considerably more or less valuable) arriving at around $25.35 billion.

As of the end of FY 2018 Jardine Matheson had net debt -excluding debt at financial services companies- of $5.95 billion. If one subtracts that from the value of the assets held through Jardine Strategic plus the other investments one arrives at $19.6 billion. At the time of writing, Jardine Matheson has a amerce capitalization of $20.29 billion. While it is not an easy task to assign a definitive value to the assets owned through Jardine Pacific and Jardine Motors, they are certainly worth more than $700 million. The Jardine Property Investments real estate portfolio alone has a value of $451.3 million. So I believe it is safe to assume that Jardine Matheson trades at some discount to the value of its parts.

I do however admit that the intertwined structure makes it near impossible in my view to find a definitive figure. Depending on how one likes to proceed with regard to the multi layer holding structures, discounts may occur at different levels and at different size.

Risks And Downsides

One major downside is the group's complicated structure. The two heavily intertwined, separately listed holdings make it somewhat complicated to determine what percentage of which business one really buys when investing in either of them. It is also due to that very structure that the management is very powerful and more or less able to control itself. One could easily qualify that as an potential lack of oversight. Thus an investment in Jardine Matheson is always a bet not only on its management's ability but also on said managements good will regarding the interests of other shareholders. Investors should have that even more in mind given the recent change in the group's leadership.

Furthermore I would prefer the subsidiaries to be grouped by sector rather than for example owning one real estate portfolio through Jardine Pacific while the investment in Hongkong Land is owned through Jardine Strategic. What makes matters even more confusing is that some assets are owned by Jardine Strategic yet managed by other subsidiaries of Jardine Matheson.

The (mainland) Chinese government's willingness to take closer control of Hong Kong including the local economy and businesses might also be a risk factor. In this context I would like to draw the attention on the new Hong Kong extradition law which would enable Beijing to get a hold of subjects in order to try them in China. Given the fact that China is not a country that has adopted the rule of law to the same extend as western democracies have, that inevitably leads to considerable leverage in the hands of Chinese authorities. While I do not wish to discuss political matters or make any political judgement, I still see this as a risk for a company lead from Hong Kong of coming into a position where political interest might prevail over shareholder interests.

Conclusion

All in all I believe that while Jardine Matheson trades at a discount to the value of its part - albeit one that might be larger or smaller depending on which holding layer one choses to base its calculation on - this is not a reason to view the stock as undervalued. The group's complicated structure instead mandates a rather cautious approach.

Jardine Matheson might be an interesting basis investment into the (South) East Asian economy with a strong focus on Hong Kong. But only if one is willing to put his or her trust in not only the management's ability with less than usual possibilities of oversight.

Disclosure: I am/we are long RACE. 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.

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