Jun 2020: Mandarin Oriental – The rarest of things

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Mandarin Oriental – The rarest of things

Jun 2020 ($1.57)


Mandarin Oriental (MO) is that rarest of things; a renowned luxury brand, but one with significant asset backing to boot. A quick look at the widening disconnect between the share price and asset value of MO will show you why we looked a little harder at it this spring. The magnitude of upside still on offer to equity investors is enormous. Simply put this is a company with $5.9bn of a recently revalued net assets that has a market cap of just $2bn aka a price/book of 0.33x. To paraphrase Mandarin Oriental’s regular FT advert: “we are fans”.

Fig 1: A massive Margin of Safety

 Source: Holland Advisors

We just can’t write fast enough

We first looked at MO during our Jardine Strategic work last summer (Holland Views – Jardine Strategic – Are you a value investor really? Nov 2019). In that note, we highlighted the sizable undervaluation of MO against its revalued property estate. In property/asset backed companies this is not unheard of. However, MO enjoys a lack of something important that almost all low price to NAV property companies have in abundance: Debt! When MO shares then fell off a cliff this spring, we looked a little harder alongside our studies of Marriot and Whitbread (the latter we have yet to write on but are happy to share our views). With the Keswick family owning 77% of the shares in MO via their Jardine holding company that does not leave a lot of share liquidity for everyone else. Indeed, that lack of liquidity could well be one of the reasons as to why the shares have been volatile (along with HK political disruption), but hey that is Mr Market working in our favour. We did this work a few weeks back but just cannot write up our ideas fast enough these days. We are also aware that more than a few clients will find this share too illiquid and thus we will keep our comments brief:

The main points
  • M Cap US$1.98bn + Net Debt 300m = EV of US$2.3bn
  • Enjoys a pre-eminent exclusive/niche brand with serious asset underpinnings
  • Had only 7 hotels in 2003, but now earns income from 33 hotels
  • It owns or has equity stake in 15 of those hotels. These 15 generated the majority of profits in 2019
  • Quite a few of those 33 hotels have been or are in various states of refurbishment so earnings are under-stated in recent years as suggested in Fig.2 below
  • Since 2014, the company had embarked on a significant expansion and refurbishment program – aka an investment cycle which is coming to a completion
  • New Pipeline for 20 hotels – notably all managed, i.e. with little equity interest, so less capital consuming than past expansion
  • The company has a stated intention to open three new MO branded hotels every year
  • The decision in 2017 to monetise the value of the massive HK Excelsior site possibly marks a new shift in management’s thinking towards a more asset-light model
Asset value/Earning power
  • MO has an accounting book value of US$4.1bn (which was partially marked to market last year, when it was revised upwards by an additional c.$3bn)
  • It also has a market adjusted book value is US$5.9bn as per Fig.1 (vs. a market capitalisation of $2bn).
  • Several key hotels have not been contributing to group profits of late due to refurbishments e.g. 2019 adj EBITDA was $155m (vs. c.$188m in 2018)
    • Last year’s decline was due to the closure of the famous Excelsior hotel in HK in 2019 (more on this later)
  • So underlying EBITDA margin is 188/1398 = say 13% margin vs. over 65% EBITDA margin for Marriot group. We note that Marriott’s ‘owned hotels’ EBIT margin is >18%. It looks to us that MO has been under-earnings since 2016.

Fig.2: Under-earning since 2016?

 Source: Mandarin Oriental

In the company’s own words, this has been a period of extensive renovation…

“The Group has significant capital expenditure commitments in relation to previously announced projects totalling $766 million. This includes $585 million for the redevelopment of The Excelsior site, the majority of which will be incurred from 2022 onwards. $42 million represents the Group’s 50% share of the Ritz, Madrid renovation costs, and $139 million has been committed to enlarge the hotel in Munich. These capital commitments will be incurred gradually over a number of years and will be financed using an appropriate mix of external debt and group cash reserves. While gearing is expected to increase in the years ahead, current gearing levels are low and the Group has capacity to increase net debt without compromising its ability to maintain robust debt service coverage ratios” – H1 2019 conf call transcript

…but it is coming to an end:

“Other events of note included the re-opening of our flagship Hyde Park hotel in London after a comprehensive refurbishment, the re-opening of the River Wing at the historic Bangkok hotel following renovation, a completed rooms renovation in Tokyo, and good progress on the renovation of the Madrid hotel which is on track to open in late summer 2020. The redevelopment of The Excelsior site into a commercial building commenced in May and is currently in the demolition phase. The new commercial building is expected to be completed in 2025” – 2019 annual report

Excelsior Hong Kong
  • The company announced that it would sell the famed Excelsior Hotel in 2017
    • This is arguably the best property site in Hong Kong
    • Upon putting the property on the market, it got 5 bids but declined each. Media speculation at the time was that this hotel site alone was worth >US$3bn
  • MO then decided to redevelop the site itself. The property is currently being demolished and the 5y capex for development is $650m
    • But CFO states that MO do not want to be real estate landlords and expect to get new bids once site is cleared and development prospects are more obvious to all.

“we expect new bidders to emerge…our preference is not to be a long-term holder of CRE…the prospects of higher yield are still ok” – CFO on the FY19 results call

  • The change of use of the site forced a $3bn upward revaluation of audited asset value in Dec 2019 again as shown in Fig.1. This forced the accounting book value to close the gap on the adjusted book value.

Asset heavy to asset light

Having just spent quite a bit of time studying the business model and compounding prospects of Marriott and having in the past watched IHG turn itself from an asset heavy business into an asset light one the contrast with businesses like MO or indeed Whitbread (Premier Inn’s owner) with their freehold asset ownership models is notable. One of the reasons Marriott talks of being able to charge the brand royalty fees (in essence that is what its net revenues are) it does, is thanks to the premium nature of its pricing. This is illustrated by its premium RevPar rates. Judging a hotel brand on such yardsticks ranks Mandarin Oriental very highly indeed as shown in Fig.3[1]. Specifically, Mandarin Oriental has an average RevPar of $279 which is comparable to say Marriott’s Ritz-Carlton (i.e. its ‘luxury segment’) but considerably above Marriott’s global average of $132.

Given MO’s premium pricing and brand cachet, it is surely not a stretch to say it would be a suitable business to adopt an asset-light royalty type model.

Fig 3: Revenue and Fees per average room varies, a lot

Source: Marriott, Mandarin Oriental

Asset heavy past vs. future…?

We find ourselves wondering if the interesting (read ‘larger amounts of’) money is made in the asset heavy to asset light conversions by businesses when the transition is considered unlikely by markets. MO raised equity capital in 2015 to help it develop and acquire premium sites in London and Madrid and pay down debt related to the $382m Paris site acquisition in 2013. Does this go against grain of the franchise-esq approach others are pursuing? Seemingly so. Or, maybe it was a necessary part of the investment needed to properly establish a global brand of sufficient scale that owns and runs its main hotels globally to ensure high standards are always maintained.

On this point we could reflect that equity investors are often in a rush to make money. Owner managers with far longer timeframes and larger cheque books tend to make slower more considered moves perhaps understanding just how much needs to be invested to build something lasting. The scale and all-in cost of the investments being made by MO in its recently opened hotels (e.g. London and Madrid) are we suggest either evidence of this fact or vanity projects. As per our commentary on Jardine Strategic we would really like to spend time with the managers of these businesses to find out more about them. But for now, we believe the former to be true (i.e. they are astute investments to build a lasting brand). Indeed, we will go further. For a hotel brand that only had 6 sites in 2002 to now be considered a global premium brand is an impressive feat and not one likely achieved by cutting corners. Building lasting value takes time and effort. This was something we learned from watching Johan Rupert, at Richemont (Holland Views – Richemont – Building goodwill, not buying it – July 2016).

Fig.4: Mandarin on strategy

  • To be recognised as the world’s best luxury hotel group
  • Brand is the Group’s most powerful asset      Source: Mandarin Oriental

Fig.5: A less asset-heavy future

Machine generated alternative text: Expanding the Mandarin Oriental portfolio, and maintaining our iuxury standards, remains a key focus over the coming years. The Group holds equity interests in around half of its 33 hotels, while the remainder are managed on behalf of third-party owners. Our planned future expansion is largely expected to come from new management agreements, although the Group’s strong balance sheet remains well-placed to fund selective investment opportunities in strategic destinations that have long-term asset value growth potential. Our target is to consistently grow the overall Mandarin Oriental portfolio by an average of three new properties each year. The Group’s current pipeline of 20 properties, in addition to our demonstrated desire and willingness to rebrand existing hotels, gives me confidence that we are on a sustainable growth trajectory. In addition to new management fees, earnings growth will also come from the branding and management of residential developments. As 12 of the Group’s pipeline projects incorporate a residential component, the Group expects to receive significant branding fees. Residences are attractive to guests and developers and are complementary to hotels, so will continue to play an important role ¡n the Group’s growth. Nonetheless, owned assets remain at the heart of our portfolio and will continue to generate the majority of the Group’s earnings for the foreseeable future, so it is crucial that we continue to re-invest and drive profitability ¡n these properties. Renovations in Bangkok and Madrid are ongoing, and several more renovations, some major and some minor in nature, are expected ¡n the coming years. These continued investments are crucial to sustain our market leading position. Source: Mandarin Oriental

Seeing Jardine’s wider business expertise and hearing MO outline that much of their future expansion will be ‘managed’ rather than ‘owned’ suggests to us, a far less asset intensive future than its recent past (“our future growth is most likely to come from management agreements” CEO Analyst conference call).

IHG and Marriot have shown the way to create enormous value from such a starting combination of assets and brand in this sector. With that door wide open the only bet investors have to make is to assume that one day Jardine and MO might choose to walk through it. Our best guess is that such a route (or similar) might be pursued, but only when the company assesses the brands global position and the profitability and prestige of their best sites to be fully established. Fig.4 & 5 suggest these observations are not just a figment of our imagination.

Different timescales

If investors attracted to the value on offer are looking for a catch, the only ones we can really see are different timescales and lack of any voting power. If you are in rush to make a profit in this investment or are intent on telling the managers/controllers of this business how they should optimally monetise these properties and brands we think you may well become disappointed.

Alternatively, if you are just happy to invest alongside the Keswick family allowing them to decide the speed and manner of how the business should profitably evolve this may result in some compelling longer-term compounding. Whilst this compounding is hard to see currently in the businesses profitability it is evident in the other tangible and intangible places:

  1. In the revalued property NAV which is up five fold since 2004(11.5% cagr)
  2. In the quality and global reach of the brand that Mandarin Oriental has built

“Sometimes what you can’t measure matter more” Charlie Munger

There is also a danger of being crowded out by the Keswick’s in a purchase of minority stakes. On this point we note the long track record of Jardine related companies and their actions towards minority investors. As yet we can find no suggestion of any similar action in the past whatsoever. The 2015 rights issue to enable the purchase of the London and Madrid sites was offered to all investors just with Jardine underwriting it.

We include some useful slides for context and to back up some of our claim in the Appendix below.

Buy Mandarin Oriental

Andrew Hollingworth & Mark Power

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as advisors to.

Appendix: A few tables to back up our thesis

Machine generated alternative text: 2019 2018 restated Per share Per share US$m US$ US$m US$ Shareholders’ funds/net assets at amortised cost 4,113 3.26 1,233 0.98 Add: surplus for fair market value of freehold and leasehold land and buildings 1,823 1.44 4,594 3.64 Adjusted shareholders’ funds/net assets 5,936 4.70 5,827 4.62

Machine generated alternative text: The Group opened four new hotels in 2019 in Dubai, Doha, Beijing and Lake Como. The Group also continues to build its development pipeline with seven new management contracts signed and announced in 2019, including six new hotels and one standalone Rcsirkn ces project. New Mandarin Oriental hotels were announced in Istanbul, Nanjing, Lake Lucerne, Dallas and Tel Aviv and the Group took over management of Emirates Palace in Abu Dhabi at the beginning of 2020.

Machine generated alternative text: Net Debt ____________ _____ US$m 2019 2018 ______________ ___________________ rei Net debt 300 285 Adjusted shareholders’ funds0 5,936 5,827 Gearing 5% 5% Adjusted net asset value per share (US $) 4.70 4.62 Hedging ratio on gross debt 47% 44% Average tenor on debt 4.2 years 0.8 years Cash 271 247 Undrawn committed debt facilities 249 78 ‘ WegIted avngt interest rete on groes borrowings was 24% (24% fri 2018) E8ITDA Interest cøer. Including the Groups alien of associates and joint venteres, was 83 tImes (10.7 times ii 2018) • Includes the market value of die Group’s ownership merest in its freehold wd leasehold properties li

Machine generated alternative text:

Machine generated alternative text: Financial Review Cash Flow Statement —.xihiActivities L—. — OperatingActiviues EBITDA from subsidiaries and non-cash ¡temsl* 132 160 Dividends and interest from associates and JVs 6 8 Working capital movement (3) 18 Net interest and other financing charges paid (16) (14) Taxpaid (6) (19) Total 113 153

Machine generated alternative text: Cash Flow Statement — lnvesti Activities 1 2019 2018 Investing activities Net capital expenditure on existing properties (42) (53) Capex for redevelopment of The Excelsior r’ (15) - Payment on Munich expansion (I) - Net advance to associates and joint ventures* (13) (8) Others (9) (8) Total (80) (69)

Machine generated alternative text: Sum n1r’ Cash Flow Statement use 2019 2018 . . . _______________ Operating Activities 113 153 Investing Activities (80) (69) Financing Activities Net drawdown of borrowings 34 28 DMdends paid (38) (38) Others (7) (7) Net increase in cash 22 67 Opening cash balance 1st January 247 184 Effect of exchange rate changes 2 (4) Closing cash balance 31st December 271 247

Machine generated alternative text: At 31st December 2019, the Group’s net assets were denominated in the following currencies: Adjusted Net assets net assets* US$m % US$m Hong Kong dollar 2,762 67 3,863 65 Euro 517 12 702 12 United Kingdom sterling 230 6 434 7 United States dollar 354 8 414 7 Singapore dollar 64 2 237 4 Thaibaht 26 1 99 2 Swissfranc 89 2 89 1 Indonesian rupiah 20 1 40 1 Others 51 1 58 1 4,113 100 5,936 100 * See supplementary inlormation section above.Source: Mandarin Oriental


Extracts form Mandarin Oriental accounts – Year end 2005+2010


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  1. https://doc.irasia.com/listco/sg/mandarin/cpresent/pre200305.pdf
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Privacy Notice

This is the privacy notice of Holland Advisors London Ltd our company number is 07431314. Our registered office is at 7 York Road, Woking, Surrey, GU22 7XH.



This notice describes how we collect, store, transfer and use personal data. It tells you about your privacy rights and how the law protects you.

In the context of the law and this notice, ‘personal data’ is information that clearly identifies you as an individual or which could be used to identify you if combined with other information. Acting in any way on personal data is referred to as ‘processing’.

This notice applies to personal data collected through our website www.hollandadvisors.co.uk.

Except as set out below, we do not share, or sell, or disclose to a third party, any information collected through our website.


Data Protection Officer

We have appointed a data protection officer (‘DPO’) who is responsible for ensuring that our privacy policy is followed. If you have any questions about how we process your personal data, including any requests to exercise your legal rights, please contact our DPO, Claire Brunt at  claire@hollandadvisors.co.uk.


Personal data we process

1. How we obtain personal data

The information we process about you includes information:

  • you have directly provided to us
  • that we gather from third party databases and service providers
  • as a result of monitoring how you use our website or our services

2. Types of personal data we collect directly

When you use our website, you may provide personal data by submission of data by our Sign Up or Contact Us forms. This can be categorised into the following groups:

  • personal identifiers, such as your first and last names
  • contact information, such as your email address and your telephone number for communication
  • records of communication between us including messages sent through our website, email messages and telephone conversations
  • marketing preferences that tell us what types of marketing you would like to receive

3. Types of personal data we collect from your use of our services

By using our website and our services, we process:

  • technical information about the hardware and the software you use to access our website and use our services, including your Internet Protocol (IP) address, your browser type and version and your device’s operating system
  • usage information, including the frequency you use our services, the pages of our website that you visit, whether you receive messages from us and whether you reply to those messages
  • your preferences to receive marketing from us; how you wish to communicate with us; and responses and actions in relation to your use of our services.

4. Our use of aggregated information

We may aggregate anonymous information such as statistical or demographic data for any purpose. Anonymous information is that which does not identify you as an individual. Aggregated information may be derived from your personal data but is not considered as such in law because it does not reveal your identity.

For example, we may aggregate usage information to assess whether a feature of our website is useful.

However, if we combine or connect aggregated information with your personal data so that it can identify you in any way, we treat the combined information as personal data, and it will be used in accordance with this privacy notice.

5. The bases on which we process information about you

The law requires us to determine under which of six defined bases we process different categories of your personal data, and to notify you of the basis for each category.

If a basis on which we process your personal data is no longer relevant then we shall immediately stop processing your data.

If the basis changes then if required by law we shall notify you of the change and of any new basis under which we have determined that we can continue to process your information.

6. Information we process with your consent

Through certain actions when there is no contractual relationship between us, such as when you browse our website or ask us to provide you more information about our business, you provide your consent to us to process information that may be personal data.

Wherever possible, we aim to obtain your explicit consent to process this information, for example, we ask you to agree to our use of non-essential cookies when you access our website.

We continue to process your information on this basis until you withdraw your consent or it can be reasonably assumed that your consent no longer exists.

You may withdraw your consent at any time by instructing us  claire@hollandadvisors.co.uk.

7. Information we process for the purposes of legitimate interests

We may process information on the basis there is a legitimate interest, either to you or to us, of doing so.

Where we process your information on this basis, we do after having given careful consideration to:

  • whether the same objective could be achieved through other means
  • whether processing (or not processing) might cause you harm
  • whether you would expect us to process your data, and whether you would, in the round, consider it reasonable to do so

For example, we may process your data on this basis for the purposes of:

  • improving our services
  • record-keeping for the proper and necessary administration of our business
  • responding to unsolicited communication from you to which we believe you would expect a response
  • preventing fraudulent use of our services
  • exercising our legal rights, including to detect and prevent fraud and to protect our intellectual property
  • insuring against or obtaining professional advice that is required to manage business risk
  • protecting your interests where we believe we have a duty to do so


How and when we process your personal data

8. Your personal data is not shared

We do not share or disclose to a third party, any information collected through our website.


Use of information we collect through automated systems

9. Cookies

Cookies are small text files that are placed on your computer’s hard drive by your web browser when you visit a website that uses them. They allow information gathered on one web page to be stored until it is needed for use at a later date.

They are commonly used to provide you with a personalised experience while you browse a website, for example, allowing your preferences to be remembered.

They can also provide core functionality such as security, network management, and accessibility; record how you interact with the website so that the owner can understand how to improve the experience of other visitors.

Some cookies may last for a defined period of time, such as one visit (known as a session), one day or until you close your browser. Others last indefinitely until you delete them.

Your web browser should allow you to delete any cookie you choose. It should also allow you to prevent or limit their use. Your web browser may support a plug-in or add-on that helps you manage which cookies you wish to allow to operate.

The law requires you to give explicit consent for use of any cookies that are not strictly necessary for the operation of a website.

10. Personal identifiers from your browsing activity

Requests by your web browser to our servers for web pages and other content on our website are recorded.

We record information such as your geographical location, your Internet service provider and your IP address. We also record information about the software you are using to browse our website, such as the type of computer or device and the screen resolution.

We use this information in aggregate to assess the popularity of the webpages on our website and how we perform in providing content to you.


Other matters

11. Your rights

The law requires us to tell you about your rights and our obligations to you in regard to the processing and control of your personal data.

We do this now, by requesting that you read the information provided at  http://www.knowyourprivacyrights.org

12. Communicating with us

When you contact us, whether by telephone, through our website or by email, we collect the data you have given to us in order to reply with the information you need.

We record your request and our reply in order to increase the efficiency of our business. We may keep personally identifiable information associated with your message, such as your name and email address so as to be able to track our communications with you to provide a high quality service.

13. Complaining

If you are not happy with our privacy policy, or if you have any complaint, then you should tell us.

When we receive a complaint, we record the information you have given to us on the basis of consent. We use that information to resolve your complaint.

14. Retention period

Except as otherwise mentioned in this privacy notice, we keep your personal data only for as long as required by us to provide you with the services you have requested.

15. Compliance with the law

Our privacy policy complies with the law in the United Kingdom, specifically with the Data Protection Act 2018 (the ‘Act’) accordingly incorporating the EU General Data Protection Regulation (‘GDPR’) and the Privacy and Electronic Communications Regulations (‘PECR’).

16. Review of this privacy policy

We shall update this privacy notice from time to time as necessary.