Description

I am recommending a long in Genting Hong Kong, a Hong Kong conglomerate focused on leisure, hospitality and entertainment assets and currently trading at a significant discount to net asset value and book value. Genting’s value is comprised of cruise and gaming businesses and development assets levered to favorable long-term trends in inter-Asian tourism, minority stakes in publicly traded hospitality companies, and net cash.

At current prices, investors are only paying for Genting’s publicly traded stakes and net cash, and receiving the rest of Genting’s core business and development assets for free (two cruise-line businesses, new vessels in development, undeveloped Macau land, a casino in the Philippines, etc., which I will collectively call “StubCo”).

While nearly all family-controlled Asian conglomerates trade at a meaningful discount to NAV, Genting trades at a significantly larger discount than nearly all holding companies I have encountered (>50% discount to NAV).

Sell-side analysts justify the large discount to NAV due to the fact that most of the Company’s assets are already publicly listed, providing alternate pathways for investors to gain exposure to the Company’s assets (Genting HK has a 13.3% stake in Norwegian Cruise Lines in the US, a 45% stake in Travellers International Hotel Group in the Philippines, and a 6.6% stake in Star Entertainment Group in Australia). For example, one analyst writes that “55% is a fair discount level for a holding company with most of its assets being listed, in our view”.

Rather than penalizing the stock for having so much value residing in publicly-listed stakes, I view the public stakes as presenting a unique arbitrage opportunity. Investors can short these stakes out and re-create “StubCo” and net cash at an even greater discount than would be available from just buying Genting HK outright, providing significantly augmented returns if Genting’s discount to intrinsic value ever improves.

While I do not foresee any imminent catalyst to close the discount to intrinsic value, I believe the undervaluation is significantly compelling at these levels.

Genting Hong Kong is just one of three listed subsidiary within the broader Genting complex (the others are Genting Berbad and Genting Singapore). Because Genting Hong Kong is the largest personal holding of the Group’s Chairman, Lim Kok Thay, I believe it offers the best opportunity for alignment with the controlling family’s interests. 

Catalyst

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