• Real Estate

Business Overview:

Hong Kong Land (HKL) is a subsidiary company of Jardine Matheson Group(JM) which generates a majority (50-60%) of income through leasing out its superprime office and retail portfolio in Central, Hong Kong’s CBD. It also has significant commercial holdings in Singapore and mainland China, and participates in the development of residential properties in mainland China.

Investment Thesis:

HKL’s share price has come under an unprecedented three-pronged assault of increased US-China tensions; Covid-19 related uncertainty and social unrest from the Hong Kong protests. It is now firmly in deep value territory, trading at 0.48 P/B; with a dividend yield of 6% and adjusted P/E of 6.4. The market is pricing in a significant long-term decline in income which has not materialised, and is unlikely to materialise. While nominal profits have seen a 92% decline YoY, this is almost all down to property revaluations, with underlying profits increasing 4% YoY. We view the long-term prospects of Hong Kong as positive to neutral, with its’ competitive advantage of being a gateway to China unlikely to disappear, despite any reputational damage it may have suffered; and HKL’s positioning in the market as being poised to take advantage of this.


-An end to any of the short-term factors driving down price mentioned above would likely cause multiple expansion.

-The non-realisation of fears related to long-term decline in HKL-owned properties would likely cause multiple expansion (for retail, we view HKL’s extremely high-end luxury positioning as safe from e-commerce; while we view WFH fears over HKL’s office holdings as somewhat exaggerated given the cramped homes present in Hong Kong).


Downturn in the Chinese property market: On an average basis, Chinese residential developments account for 20% of HKL’s revenue. By conventional metrics, the Chinese residential market is in a bubble and long overdue for a correction. However, given the lack of alternative investments for Chinese investors and the heavy incentive for the government to prop up the property market, we feel any such crash is unlikely to happen barring the following scenario:

Liberalisation of China’s capital account: The greatest threat to HKL’s long term performance is if China’s tightly regulated capital accounts are liberalised. This will most likely cause a crash in the Chinese residential property market as investors flee to more attractive, Western assets; while Hong Kong’s role as an intermediary between China and the world will also largely become redundant, having a devastating effect on HKL’s property values and rental income. However, given the disastrous attempt in 2012, any attempt is unlikely to happen again in the next few years, and if it does happen there should be a gradual process of liberalisation which will give investors ample opportunity to exit HKL.

Jardine Matheson: Given JM’s majority control of shares and lack of desire to sell, there is no incentive for (JM appointed) management to take measures that would be beneficial to share price and minority investors, from reorganising as a REIT or share buybacks. This is the biggest barrier to price realisation.


In our bear case, we view HKL as a safe income generator that does not see price realisation. A-rated bonds currently yield an average of 1.62%, far below HKL’s 6% yield. Given the low payout ratio (38% of underlying profits); low gearing (16%); and stated commitment to dividend preservation, we feel this is a consevative baseline.

With a DCF analysis, we have an average price target of $7.21 (vs current price $3.77)

The following assumptions were made:

-Operating yields on investment properties/development properties are 2.8%/7%

-Perpetual asset writedowns recorded in 2020 on investment/developments are 5%/25%

-All scenarios assume 15% depressed income and asset valuations for the next 2 years due to Covid-related rent relief.

For scenario analysis, please view our detailed report.

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  • Consumer Goods

CIR group is an Italian mid-cap holding company with ownership in Sogefi, an automobile parts OEM and KOS, a healthcare group specialised in long-term care. Due to recent divestitures, the holding company is in a net cash position, with a net financial position of €400MM, worth more than 80% of the entire groups market cap.

Investment Thesis

We believe that the market is fundamentally misunderstanding the performance of CIR due to its reporting structure. Sogefi is a cyclical zombie company, which regularly makes losses that wipe out the profits from the healthy KOS group on consolidated statements, leading investors to think CIR as a group is regularly loss-making.

Importantly, under Italian financial laws, CIR group will not be liable for any of Sogefi's losses in the case of insolvency. Meanwhile, KOS is a well-run rapidly expanding long-term care provider with a significant defensible moat, which we believe will continue to do well from the secular tailwinds created by an aging population in Italy.


The utilisation of the significant cash pile at the holding company, whether as buybacks, dividends (both of which are suspended as a condition of Italian government Covid assistance), or acquisitions should lead to increased scrutiny of the company and better understanding from the markets

The continued performance of KOS will eventually outweigh the negative performance of Sogefi. If Sogefi goes bankrupt, or CIR wholly acquires KOS the simplified ownership and financial reporting will lead to better understanding from the markets. Management has been focusing on simplifying company structure in recent years, with several divestitures and the elimination of an overly complicated corporate structure.


Mismanagement. Although the CEO Monica Mondardini is competent and independent, CIR is the family holding company of the DeBenedetti family, who control the board and have 30% ownership, bringing with it obvious perils over minority shareholder protection.

Continued investment in Sogefi. Despite promises made by management and IR against further investment, the implication of CIR investing much of its cash in Sogefi in an attempt to turn it around would be so disastrous that it forms one of the biggest risks.


We have assigned a value of € 0 to Sogefi, as we do not feel it has the capability to turn the business around.

Our DCF for KOS suggests a value of € 0.33 /share, or € 427MM

When combined with a value of the cash position, we arrive at a roughly 30% margin of safety.

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  • Real Estate

Urban Logistics REIT plc. (SHED) is a high-quality micro-cap being ignored by the market due to unpriced structural shifts in the warehousing industry which SHED is poised to capitalise on. Since listing in 2017, SHED has aggressively expanded by more than 500%(by acquisition cost) and is likely to grow to a size where institutional investors start coverage in the medium-term future. They raise capital on a nearly 6-month cadence, with the most recent raise in September 2020 and the capital raised in March fully deployed.

Investment Thesis:

SHED specialises in mid-box(20,000<200,000sq ft.) warehouses located in densely populated urban areas in the United Kingdom. The growth of e-commerce and demand for next-day/same-day delivery services has led to a shift in the warehousing industry from big-box, >200,00sq.ft warehouses located on arterial motorways to the smaller, mid-box warehouses that SHED specialises in. Besides a structural difference on the demand-side, we believe there is also an unrealised difference on the supply side. Whereas big-box warehouses essentially have an unlimited potential supply, area in urban areas is very limited, and in some places supply is even decreasing due to councils preferring to zone land for residential use rather than industrial. National supply in this subsector has fallen 36% since 2012. Management has stated that they prefer acquiring properties in the Midlands and SE of England in part due to these areas trend of zoning conversion. By controlling much of supply-constrained market, it is likely SHED will be able to have much higher rental yield growth than its competitors. Tenants for this type of warehouse are extremely sticky. The average tenant in their properties has been in place for more than a decade. Due to the smaller size and usage patterns of the warehouses, capital investment by the tenant in each warehouse can often be higher than the empty value of the warehouse. This means the rent savings of any potential relocation would have to high enough to negate the capital expenditure related to it. This alleviates one of SHED’s big issues, its’ below average WAULT of 5.1 years to break. Tenant mix is sufficiently diverse, and 89% of tenants have been rated as low/moderate risk. Management has a stated policy of leasing to tenants within non-cyclical industries. All but one tenants have paid rent on time through the Covid-19 crisis. Management is the strongest point of SHED’s offering. The CEO Richard Moffitt is extremely well-connected in the industry and through his contacts has acquired all properties in the portfolio off-market, at rates of 30-70% of replacement cost of building the warehouse. SHED is likely to be able to outperform competitors on the acquisition front for the foreseeable future. There is no suggestion of Moffitt leaving, but for the sake of conservatism we have assumed that he does so, and SHED consequently can no longer make value accretive purchases. Risks:

- Overestimation of the demand boom from e-commerce

- Shift in government policy that increases supply dramatically.


Our custom DDM suggests a fair value price of £2.08.

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