Keck Seng Investments

Heller House Opportunity Fund, L.P.
Investment memo
April 7, 2016
Keck Seng Investments

Recent price: HK$5.75
Ticker: 184 HK
High quality real estate assets, fortress balance sheet, management with
a history of value creation, and an incredibly cheap valuation under any
metric. Reasonable market multiples would result in a stock
three times the current price.
Executive Summary of Valuation Discrepancy

Keck Seng (KS) owns the W San Francisco and the Sofitel in Midtown Manhattan, both exceptionally
well located, prime assets. In addition, it also owns 1.2 million square feet of hotels in Canada,
Vietnam, China and Japan, and residential and commercial properties in Macau and Singapore.
The current stock price implies the following:
A 24% cap rate; applying an 8.1% cap rate would result in a stock price 216% higher 1
Paying for the U.S. properties and getting all 1.2 million square feet outside of the U.S., net of
all liabilities, for free
A price to net asset value multiple of 0.3x (based on an asset by asset mark-to-market
valuation), implying a potential triple if the shares traded at NAV
A price to free cash flow of only 8.9x and a price to earnings multiple of 8.5x. 2
Typically, we only find these types of securities if (a) the assets are of poor quality (b) the assets have
substantial debt encumbering them or (c) the cash flows are declining. In KSs case, none of these
factors is true. In fact, the assets are of high quality, the balance sheet is fortress-like with a loan-tovalue ratio of only 2.5% 3, and free cash flows are growing at an attractive rate. 4 Furthermore, KSs
controlling shareholders have a history of value creation, growing book value consistently over the
1 The 8.1% cap rate is the result of dividing the companys 2015 NOI by a mark-to-market enterprise value,
which is derived by marking each individual asset to market, instead of using KSs historical cost valuation.
The median cap rate for listed hotel companies in the U.S. is currently around 7.6%.
2 The median P/E multiple for listed hotel companies in the U.S. is currently around 22x.
3 Net debt divided by our NAV estimate, as detailed further in this report.
4 Free cash flow grew 37% in 2013, declined 1% in 2014 and grew 18% in 2015.
1111 Brickell Ave, Suite 2135

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past fifteen years. As a result, KS qualifies as an attractive, growing, safe investment with enormous
potential upside.
In this report, we will walk through each asset owned by KS, and demonstrate the gap between the
current stock price and our estimate of intrinsic value. But first, below is a snapshot of Keck Sengs
book value per share as reported on a GAAP basis (blue bars) and its current share price. The stock
is cheap on that basis, with book value at HKD 10.1 and a stock price of HKD 5.75.
However, an asset by asset analysis reveals a substantially higher net asset value. This stems from
Keck Sengs accounting policies, which account for properties at cost, with the exception of a small
fraction of the portfolio which is marked to market every year. Marking KSs entire portfolio to
market would result in a net asset value 3x greater than the current share price.
Assets owned by KS
Before delving into an asset-by asset valuation, below is a bridge to net asset value showing the
various components of KSs NAV:

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U.S. Hotels
Keck Seng owns two hotels in the U.S.: the Sofitel NY in midtown Manhattan, and the W San Francisco
in SoMa. Both hotels are 100% owned by KS.
Sofitel NY
https://www.tripadvisor.com/Hotel_Review-g60763-d208454-Reviews-Sofitel_New_YorkNew_York_City_New_York.html
The Sofitel is KSs newest asset, having been acquired in August 2014. It is very well located, on West
44th Street between 5th and 6th Ave:

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Bryant Park
New York Public Library

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KS paid a 5.1% cap rate on 2013 NOI for the Sofitel. This is not a bargain purchase like other
acquisitions KS has made in the past. However, we believe that the superior location and quality of
this asset will allow the company to enjoy an adequate return over what it expects to be a long-term
holding period.
At the time of acquisition, KS financed part of the purchase through a mortgage, representing a
conservative 29% loan-to-value ratio on that property.
Summary financials and acquisition numbers for the Sofitel:

U.S. '000
Hotel revenue
Room
Food and beverage
Others
Hotel expenses
Room
Food and beverage
Others
Other operating expenses

Marketing and selling expenses
NOI
2011
2012
2013
6M
2013
6M
2014
$ 45,433
8,106
1,745
55,284
$46,686
8,424
1,596
56,706
$49,030
10,016
1,449
60,495
$ 22,200
4,792
684
27,676
$ 22,087
4,611
693
27,391
16,614
3,488
17,364
3,800
17,722
4,088
8,671
1,982
8,844
1,993
12,744
8,621
1,180
22,545
12,637
13,157
9,384
1,216
23,757
11,785
14,011
9,875
1,300
25,186
13,499
6,754
4,777
613
12,144
4,879
6,989
4,927
633
12,549
4,005
Because the Sofitel is now lumped together with the W San Francisco and reported in the U.S.
segment, we no longer have broken out financials post-acquisition. Here are the acquisition metrics
for the Sofitel:
Price paid (USD)
Rooms
$/key
$/square foot
Acquisition cap rate on 2013 NOI
$265,000,000
398
$665,829
$901
5.1%
RevPAR for this hotel was down 3.6% in 2015 versus the prior year, on higher occupancy (88.1% vs.
86.8%) and lower ADR ($366.30 vs. $385.70). KS is reportedly in negotiations with Sofitel to invest
in a renovation of the hotel, with the aim of increasing the daily rates charged by the hotel.
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W San Francisco
https://www.tripadvisor.com/Hotel_Review-g60713-d81669-Reviews-W_San_FranciscoSan_Francisco_California.html
The W San Francisco was acquired in 2009 from an overleveraged Starwood. The deal had been in
the works for a year, and after the market began recovering, Starwood tried to back out of it but the
sale and purchase agreement had already been signed.
The purchase price was $90 million, representing a 15.1% cap rate on 2008 NOI. Since then, NOI has
recovered and grown alongside RevPAR:
The hotel is very well located, in the SoMa (South of Market Street) section of San Francisco, across
the street from the Moscone Center, a 700,000 square foot convention center which frequently hosts
well-known events for the tech industry such as the Google I/O and Apple Developers Conference.
The center is undergoing a $500 million expansion that aims to increase meeting space by an
additional 305,000 square feet. The center is so popular and hotel space so constrained, that
Salesforce was exploring the option of renting a cruise ship to provide additional accommodations
for convention participants. 5
5
http://www.ktvu.com/news/4669886-story

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Moscone Center West
Moscone Center

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How much are the Sofitel NY and the W San Francisco worth? Based on recent comparable
acquisitions of hotels in the upper scale tier, but below full luxury hotels, we believe that an
appropriate valuation is a cap rate of 6.5% on 2015 NOI 67. We apportion this based on the room split,
resulting in HKD 4.76 per share for the W and HKD 4.69 per share for the Sofitel. This split is arbitrary,
since we dont have more granular NOI numbers for each hotel. The total should be roughly in line
with market values.
Below is a sensitivity analysis showing what these hotels might be worth using different cap rate
assumptions (values in HKD 000 except per share amounts):
2015 NOI
Cap rate
Value
Per share:
W San Francisco
Sofitel NY
Total
209,048
6.0%
3,484,133
HKD 5.2
5.1
10.2
6.5%
3,216,123
4.8
4.7
9.5
7.0%
2,986,400
4.4
4.4
8.8
7.5%
2,787,307
4.1
4.1
8.2
8.0%
2,613,100
3.9
3.8
7.7
This is a recent deal for various hotels in Manhattan at a 5.4% cap rate:
http://www.snl.com/Cache/1001206551.PDF?Y=&O=PDF&D=&FID=1001206551&T=&IID=4019891
7 JLLs Q4 2015 survey shows New York cap rates at 6.0% and San Francisco at 5.9%:
http://www.us.jll.com/united-states/en-us/Research/US-Investment-Outlook-Lodging-Q4-2015JLL.pdf?dccf6024-e4e8-4930-836f-4444ffd28396 Among the 14 major U.S. markets surveyed, Boston and
San Francisco are the only markets for which cap rates are not anticipated to increase according to the
majority of investors surveyed, as both markets benefit from robust demand dynamics as well as
exceptionally high barriers to entry. See p. 5.
6

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Vietnam Hotels
Caravelle
KS owns two adjacent hotels in Vietnam, the

Sheraton Saigon Hotel & Towers and the
Caravelle Hotel. Both were acquired before
2002. The Sheraton Saigon is 64.12% owned
by KS, while the ownership stake in the
Caravelle is 25%.
Sheraton Saigon
Caravelle
These hotels are unusually profitable due to a

combination of very low labor costs, low
capital expenditure requirements (historical
capex as a percentage of sales have been well
below 2%), and a high contribution from slot
machine revenues. As a result, these hotels
have very high EBITDA margins (33-36% for
the Sheraton, compared with margins in the
low 20s for the U.S. hotels, for instance) and
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generate substantial free cash flow to the group. Both hotels are well regarded and garner good
reviews from guests:
Sheraton
https://www.tripadvisor.com/Hotel_Review-g293925-d304523-ReviewsSheraton_Saigon_Hotel_Towers-Ho_Chi_Minh_City.html
Caravelle
https://www.tripadvisor.com/Hotel_Review-g293925-d306255-Reviews-Caravelle_SaigonHo_Chi_Minh_City.html
In the latest annual report, KS attributes the occupancy decline at the Caravelle to renovations, offset
by higher rates.
How do we value KSs Vietnam hotels? The only data point we were able to find on cap rates in this
market report pointed to a cap rate of 9% in mid-2014: 8
8
http://www.us.jll.com/united-states/en-us/Research/JLL_Hotel_Investor_Sentiment_Survey_June_2014.pdf
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10
For conservatism, we use the average of 10x free cash flow and a 9% cap rate for the Sheraton, which
is equivalent to a 11.2% cap rate on 2015 NOI.
This 11.2% cap rate equals a P/E multiple of 13x for the Sheraton; so we apply a similar multiple to
KSs share of profits from the Caravelle to arrive at the value of the Caravelle that accrues to KS.
The result is a contribution to net asset value of HKD 3.71 per share for the Sheraton and 0.45 per
share for the Caravelle. We believe this valuation is conservative given the high cap rate used.
Canada Hotels
KS owns two hotels in Canada: the International Plaza Hotel adjacent to the Toronto airport, and the
Sheraton Ottawa Hotel. The stake in the International Plaza is 25%, while the Sheraton is 50% owned
by KS.
The Toronto airport market is lousy, and the hotel loses money on a GAAP basis. Our understanding
is that KS is pursuing a rebranding of this hotel with a view to selling it (the hotel was branded
Doubletree by Hilton until 2013, but the flag was abandoned due to expensive renovation
requirements). We value this hotel at only $50,000 / key, or $48 per square foot, which we believe is
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11
appropriately conservative. At this valuation, this hotel contributes only 0.12 per share to net asset
value.
https://www.tripadvisor.com/Hotel_Review-g155019-d183783-ReviewsInternational_Plaza_Hotel_Toronto_Airport-Toronto_Ontario.html
Sheraton Ottawa
The Sheraton Ottawa is very well located, only a few blocks from tourist attractions such as
Parliament Hill:
Parliament Hill

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12
https://www.tripadvisor.com/Hotel_Review-g155004-d182988-Reviews-Sheraton_Ottawa_HotelOttawa_Ontario.html
Due to increased control over the subsidiary that owns the hotel, KS began breaking out results for
the Sheraton Ottawa in 2015. We estimate the value of this asset using an 8.3% cap rate on 2015 NOI,
which is equivalent to CAD 175,600 per key. We understand this valuation is appropriate for this
market 9. Using the current spot rate for the Canadian dollar, this translates into 0.36 per share.
http://www.colliershotels.com/2014/CHIR/Colliers-2014CHIR.pdf and http://cbrecanada.uberflip.com/i/661999-q1-2016-canadian-cap-rates-investment-insights?var=thankyouQ12016

9

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13
Best Western Hotel Fino Osaka

KSs only hotel in Japan was acquired in 2011 for $20.7 million, or around $116k per key. At the time,
this was equivalent to a 7.5% cap rate on trailing twelve month NOI. The hotel was newly opened at
the time and is 96.46% owned by KS. It is very well located, close to the subway and walking distance
to Shinsaibashi, Osakas largest shopping area.
https://www.tripadvisor.com/Hotel_Review-g298566-d1798409-ReviewsBEST_WESTERN_Hotel_Fino_Osaka_Shinsaibashi-Osaka_Osaka_Prefecture_Kinki.html

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14
This has certainly been one of the better performing hotels for KS, with exceptional growth in daily
rates and a steady rise in occupancy. RevPAR growth year-over-year was 22% in 2013, 25% in 2014
and 35% in 2015:
This being a limited service hotel, the daily rates are quite modest (at year-end, the 11,763 daily
rate was equivalent to $98). The performance of this hotel is attributable to a soft Yen, increased
tourism in Japan, and a supply constrained market. These charts from Savills Japan 10 illustrates
where Osaka fits among other large cities in terms of occupancy and rates:
http://pdf.savills.asia/asia-pacific-research/japan-research/japan-hospitality/jp-hotel-spotlight-03-20161.pdf
10

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15

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16
How do we value this hotel? According to another report by JLL 11, hotel cap rates in Osaka are just
over 5%.
For conservatism, we apply a 7% cap rate instead, resulting in a value per KS share of 0.98, and
present here a sensitivity analysis table:
2015 NOI (HKD)

Cap rate
Value to KS
Per share:
11
24,284
5.0%
468,487
HKD 1.38
5.5%
425,897
1.25
6.0%
390,406
1.15
6.5%
360,375
1.06
7.0%
334,634
0.98
http://www.ap.jll.com/asia-pacific/en-gb/research/731/hotel-investor-sentiment-survey-15
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7.5%
312,325
0.92
17
Holiday Inn Wuhan Riverside

Like Japan, KS only owns one hotel in China. The Holiday Inn Wuhan Riverside was acquired prior to
2002 and is 41.26% owned by KS.
https://www.tripadvisor.com/Hotel_Review-g297437-d305965-ReviewsHoliday_Inn_Riverside_Wuhan-Wuhan_Hubei.html
The performance of this hotel has deteriorated significantly since 2010, with estimated NOI declining
from ~HKD 20 million to only 12.3 million in 2015. This cannot be attributed to foreign exchange
differences since the Yuan has barely moved against the HKD during that period (the five-year change
was only 1.2%). KS explains in its annual report that a decline in business-related travel has hurt the
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18
hotel. We value the Holiday Inn Wuhan Riverside at a conservative 10% cap rate on 2015 NOI, which
results in an estimated value of HKD 123 million ($50k/key) 12. This happens to be the book value
(segment assets less segment liabilities) for the hotel as well. We are told by management that the
value of this hotel, given its good location, exceeds book value, but for conservatism, this is what we
use. The total value per share is only 0.15.
Macau
KS owns a number of properties in Macau, and some of these are carried at values significantly below
their current worth. Macau is a short, 40-minute ferry ride from Hong Kong. Like Hong Kong, it is a
Special Administrative Region (SAR) of China, and the most densely populated region in the world 13.
It has been the subject of intense media coverage 14 recently due to the decline in gaming revenues
stemming from a Chinese government crackdown on corruption, which has driven away high rollers.
Despite this, Macau remains much larger than Las Vegas in terms of gaming revenues. It also sports
a very high $91,376 GDP per capita. 15
Its economy, however, is much less diversified. Las Vegas derived 64% of its resort revenue last year
from nongaming sources compared with less than 10% for Macau, and in 2015 it welcomed 42
million guests to Macaus 8 million visitors. 16 Recent efforts by the government to diversify Macaus
economy by creating nongaming, entertainment zones, should create long-term benefits.
Below is a schematic 17 of Macau and the surrounding areas showing existing and proposed
infrastructure, including the Hong Kong-Zhuhai-Macau bridge, all of which will likely vault Macau
into an even stronger and wealthier economy:
We were unable to find market cap rates for Wuhan hotels; 10% feels right and given that it coincides
with book value, we believe this is probably appropriately conservative.
13 https://www.wikiwand.com/en/Macau
14 http://www.bloomberg.com/news/articles/2015-07-28/gambling-mecca-macau-doubles-down-as-chinagrowth-slows
15 Las Vegas had 2014 GDP per capita of nearly the same level, at $94,521. See
http://cber.unlv.edu/CCEconData.html and
https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&m
et_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:MAC:HKG&ifdim=region&hl=en
&dl=en&ind=false
16 http://www.lvcva.com/stats-and-facts/
17 Extracted from http://mpofund.com/wp-content/uploads/2016/02/MPO-IR2016-web.pdf
12

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19
Luso Intl Bank Bld
Ocean Gardens

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20
Properties classified as investment properties (marked to market yearly by KS)

These are the only properties KS marks to market on its balance sheet. Here is a summary of the
properties in this group:
Luso International
Bank Building
Ocean Plaza, I and II

Ocean Tower
Total
Group's
Interest
Gross
floor
Gross
area
floor
(sqm) area (sf)
Floor
area,
group's
part
(sqm)
Floor
area, Floor area,
group's min interest
part (sf)
(sf)
Type
No. of
units
100.00% Office
40
2,812
30,264
2,812
30,264
70.61% Office
19
4,618
49,703
3,260
35,095
70.61% Comm
47
8,782
94,525
16,211 174,492
6,201
12,273
Value at 12/31/2015 (HKD 000)

Value at 12/31/2015 (USD 000)
$ / SF
HKD / SF
HKD / m2
Estimated minority interest, HKD 000
66,744
132,103
Address
1, 3 and 3A Rua do Dr.
Pedro Jose Lobo, Macau
14,608
Ocean Gardens, Macau
27,781
42,389 [A]
Ocean Gardens, Macau
778,000
100,321
$575
4,459 [B]
47,993
188,996 [A] x [B]
The locations of these properties are noted in the schematic above (the Ocean Plaza and Ocean Tower
are in the same location as the Ocean Gardens residential units, which we value below).
Because we value every other asset net of minority interests, we do not deduct the full minority
interest on KSs balance sheet so as to not double count. Therefore, for these assets we estimate what
minority interest should be, using the mark-to-market HKD per square feet valuation and multiplying
that by the square footage not owned by KS ([A] x [B] above).
The Luso International Bank Building above is very well located next to the main attractions in
Macau 18.
18
https://goo.gl/maps/BHqXbEBZuAB2

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21
The other buildings, Ocean Plaza and Ocean Tower, are located in Taipa, a short drive south across
the bridge. Ocean Tower is where Keck Sengs corporate offices are located (on the 4th floor). Cotai,
adjacent to Taipa, is where most new casino developments are happening in Macau. Ocean Gardens
is a development made on reclaimed land in the late 1990s by the family that controls KS.
Since these properties are revalued yearly by independent appraisers using market rents and cap
rates, we take these valuations at face value, but verify them against other sources (below). Net of
minority interests, these properties contribute 2.29 per KS share.
It should be noted that the gross yield on valuation rents received by these properties divided by
property values is extraordinarily low at 3.6% in 2015 (in the three years prior to that the gross
yields on valuation were between 2-2.9%, while rents have nearly doubled).
This is unusual to those of us used to cap rates which is net operating income divided by property
values (i.e., rents received less expenses) of at least 6% or 7%.
We have been unable to find detailed real estate reports for Macau property (although there are short
ones 19) but we note that a London-listed fund (Macau Property Opportunities Fund, or MPO Fund)
19
http://pdf.savills.asia/asia-pacific-research/macau-research/mo-residential-09-2015.pdf
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22
with investments in Macau has its properties valued by Savills Macau and consistently uses similarly
low cap rates. 20
We trust these valuations because they are consistent with values we have observed in KSs
residential transactions, which are held for sale. To check those valuations, we use publicly available
statistics from DSEC, the statistics and census office of Macau. These statistics corroborate not cap
rates, but the implied $/square foot numbers. Because DSEC shows a lot of transactions over the
years at these $/square foot numbers, we are comfortable with the implied low cap rates because
that is how the market actually prices these assets in real arms-length transactions. We will go over
all of this in depth below.
Properties classified as held for sale (held at cost by KS)
KSs management built a number of buildings in Ocean Gardens, Taipa, in the late 1990s, with some
properties (Aster Court and Bamboo Court) having been completed in the mid-2000s. Over the years,
KS has harvested these investments by selling individual units for multiples of their cost. During this
period, Macau real estate values have skyrocketed, in conjunction with the vast growth of the gaming
industry in the region, low incremental supplies of housing, very low unemployment rates, and very
high GDP per capita.
Below is a photo of Ocean Gardens dated 2013 21. The author visited the properties in 2015 and can
attest they look substantially the same.
Keck Sengs valuers are Jones Lang LaSalle while MPO Fund uses Savills.
http://mpofund.com/investors/publications/financial-results/
21 More photos available at
https://www.dropbox.com/sh/5yeq9s8dvrctvw7/AAAdKsjVj68I2hpotHXZbkpga?dl=0
20

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23
As mentioned earlier, the preferred means of arriving in Macau is through a 40-minute ferry from
Hong Kong, or by plane. Macaus airport however is quite small, with a capacity for only 6 million
passengers per year and only one runway. It is operating near capacity, with 5.8 million passengers
in 2015 22.
Hong Kong International Airport, on the other hand, is also operating at capacity, but can process 68
million passengers per year. Its among the top three busiest airports in Asia 23. There are plans to
add a third runway to increase capacity 24.
Hong Kong and Macau authorities had an idea: wouldnt it be great if there were a bridge connecting
Hong Kongs airport directly to the gaming facilities in Macau? This thinking led to the Hong KongZhuhai-Macau bridge 25 project, which began in 2009. The entire link will be 31 miles long when
completed and significantly shorten travel time for tourists (who take the ferry) and freight through
the Pearl River delta (which takes the much longer way around, cutting travel time from 4.5 hours to
https://www.wikiwand.com/en/Macau_International_Airport
https://www.wikiwand.com/en/Hong_Kong_International_Airport
24 https://www.wikiwand.com/en/Hong_Kong_Airport's_Third_Runway and
http://www.scmp.com/news/hong-kong/economy/article/1888008/hong-kong-airport-third-runwayproposal-take-hk5-billion-loan
25 http://www.hzmb.hk/eng/
22
23

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24
40 minutes). The much larger Pearl River Delta Economic Zone is a major reason for the bridge as
well. 26 As can be expected with any massive and complex engineering project, this one is over budget
and delayed, with the latest projections pointing to a late 2018 opening. 27
Once the bridge does open for business, KSs management expects a new cyclical peak in Macau real
estate values, and they have therefore held off on selling more units in Ocean Gardens until the bridge
is completed. From the 2015 annual report:
The economic growth was reduced in 2015 as a result of significant decrease in Macaus gaming revenue.
Real GDP fell 17% in real terms in 2015 as compared to 2014. Tourism arrivals to Macau, however,
dropped only slightly to 30.7 million in 2015, as compared to 31.5 million in 2014. As several large-scale
hotel and entertainment projects as well as public construction works were still ongoing, unemployment
remained extremely low at 1.9% at the end of 2015.
Against this background, income from leasing of properties has grown to HK$90.9 million in 2015, an increase
of 28.8% as compared to HK$70.7 million in 2014.
There was no sale of properties in Macau during 2015, as it is the view of the directors that the
completion of the Hong Kong-Zhuhai-Macau Bridge will have a strong positive impact on the value of
residential properties in Macau. The directors therefore consider that the Group should continue to closely
monitor property market conditions, and to conduct sale of properties at a time and price that will optimize
profits for the group. In the meantime, properties held for sale in Macau are leased to maximize profits.
(Emphasis added.)
Because of the rise in property values in Macau, our estimated value for these properties is much
higher than the values reflected in KSs balance sheet, which are at cost. Our estimates are
corroborated in two ways. First, we show in the table below how KS has consistently harvested its
properties held for sale, every year selling at higher multiples of cost, primarily due to property
appreciation in Macau. Second, we can access Macaus statistics office records (DSEC) to look at
residential transactions in Taipa and estimate where the Ocean Gardens units should trade when
they are eventually sold.
https://www.wikiwand.com/en/Pearl_River_Delta_Economic_Zone
See http://www.scmp.com/content/search/zhuhai%20macau%20bridge and
https://www.wikiwand.com/en/Hong_Kong%E2%80%93Zhuhai%E2%80%93Macau_Bridge
26
27

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25
Macau property appreciation Ocean Gardens

HK$000 unless noted
Properties held for sale
Square footage
HKD / SF (remaining cost)
$ / SF (remaining cost)
Rental inc from properties
Rental yield on cost
Rental yield on sales price
Rent in $ / SF
Cost of props sold during yr
Proceeds sale of properties
Multiple of cost
Units
Ocean Ind. Centre, Phase II
Ocean Park
Heng Fa Chuen (HK)
Poplar Court
Rose Court
Begonia Court
Orchid Court
Lotus Court
Sakura Court
Syringa Court
Kapok Court
Lily Court
Dahlia Court
Cattleya Court
Magnolia Court
Beijing Riviera
Aster Court (Lot W)
Bamboo Court (Lot W)
Total
Gross floor area (sq ft)
Ocean Ind. Centre, Phase II
Ocean Park
Heng Fa Chuen (HK)
Poplar Court
Rose Court
Begonia Court
Orchid Court
Lotus Court
Sakura Court
Syringa Court
Kapok Court
Lily Court
Dahlia Court
Cattleya Court
Magnolia Court
Beijing Riviera
Aster Court (Lot W)
Bamboo Court (Lot W)
Total
Number of units sold
Square footage sold
Avg size of unit(s) sold
Avg size of remaining units
Cost / SF
Sale price / SF
2002
2003
2004
2005
2006
2007
268,169 305,326 238,833 207,428 335,671 331,842
1,050,903 1,090,948 987,145 315,754 502,599 497,325
255
280
242
657
668
667
$ 33
$ 36
$31
$85
$86
$86
(95,014) (136,762) (55,988) (34,298) (19,538)

151,988 223,033 162,330 180,201 98,587
1.6x
2.9x
5.3x
5.0x
3
6
2
4
3
19
36
1
42
4
3
37
7
2008
332,767
478,790
695
$90
2009
2010
324,278 306,190
473,271 456,446
685
671
$88
$86
(4,687) (15,377)
25,160 82,053
5.4x
5.3x
(8,489) (18,088)
47,695 106,339
5.6x
5.9x
2011
2012
303,384 283,527
452,739 426,790
670
664
$86
$86
36,044
12.7%
1.7%
$11
(2,806) (19,857)
17,191 129,597
6.1x
6.5x
2013
2014
280,658 280,658
423,083 423,083
663
663
$ 86
$ 86
42,756 54,666
15.2%
19.5%
1.5%
$ 13
$ 17
(2,869)
24,686
8.6x
2015
280,658
423,083
663
$ 86
62,616
22.3%
$ 19
3
6
2
4
3
19
36
3
6
2
2
3
4
36
3
5
2
3
5
2
3
5
2
3
5
2
3
5
3
5
3
5
3
5
3
5
3
5
3
5
3
4
19
3
4
4
3
4
2
3
4
2
3
4
2
3
4
2
3
4
2
3
4
2
3
4
2
3
4
2
3
4
2
42
42
42
42
42
37
36
32
31
24
23
23
23
32
29
29
29
29
29
28
28
28
28
28
28
107
40
40
172
40
40
170
40
40
165
40
40
162
40
40
157
40
40
156
40
40
149
40
40
148
40
40
148
40
40
148
22,921 22,921 22,921 22,921 22,921

12,438 12,438 12,438 10,550 10,550
1,812
1,812
1,812
1,812
1,812
5,576
5,576
2,374
11,121 11,121 11,121 11,121 11,121
50,103 50,103 10,548 10,548 10,548
94,932 94,932 94,932 50,103 10,548
1,792
155,694 155,694 155,694 155,694 155,694
4,120
3,090
1,030
68,981 60,993 58,996 53,005 53,005
9,414
2,108
63,935
1,503
608,909 606,782 616,309
113,200
113,200
1,050,903 1,090,948 987,145 315,754 502,599
22,921
10,550
1,812
22,921
10,550
1,812
22,921
10,550
22,921
10,550
22,921
10,550
22,921
10,550
22,921
10,550
22,921
10,550
22,921
10,550
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
11,121
10,548
5,274
155,694
137,159
133,452 118,624
114,917
88,968
85,261
85,261
85,261
53,005
53,005
51,008
51,008
51,008
51,008
51,008
113,200
113,200
497,325
113,200
113,200
478,790
113,200 113,200
113,200 113,200
423,083 423,083
113,200
113,200
423,083
2
5,274
2,637
2,925
$114
$612
5
18,535
3,707
2,902
$107
$571
197
1
33
2
47
1
195
198
364
394
328
18
66
221
25,393 103,803 671,391
1,411
1,573
3,038
2,769
3,010
2,951
$ 694
$69
$7
$1,131
$201
$35
15
39,555
2,637
2,922
$64
$320
53,005
51,008
113,200 113,200
113,200 113,200
473,271 456,446
3
5,519
1,840
2,921
$198
$ 1,114
5
16,825
3,365
2,907
$138
$812
113,200 113,200
113,200 113,200
452,739 426,790
1
3,707
3,707
2,902
$97
$597
7
25,949
3,707
2,864
$99
$644
1
3,707
3,707
2,859
$100
$859
The table above shows how KS has harvested its Ocean Gardens development over the years. Note
how the multiple of cost has risen over time as property prices have increased (note that cost / square
foot was likely distorted until 2004, when a large number of units were monetized in Beijing; since
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26
then, sales have been primarily in Macau). Only recently has KS started disclosing rental incomes for
this group of properties held for sale. The yield on cost in 2015 was 22.3% compared with cap rates
for sold properties in 2012-2013 of 1.5-1.7%. We can also compare $/SF for sold properties with
transactions in DSEC (below) to further buttress our valuation.
Its important to note that it was only in 2002 that Macau ended the monopoly system for gaming
licenses, opening up the opportunity for the arrival of Wynn Resorts, Las Vegas Sands, Galaxy
Entertainment, among others. 28 At this point it is likely that KSs management began throttling back
on property sales given the expected further development of Macau.
DSEC
Macaus government-run statistics database is a very useful source of data on the economy and on
real estate transactions. 29 The database reports numbers in HKD/square meter so we will use this
metric going forward.
As can be seen in the table above, KS marks its remaining units at HKD 663 per square feet or HKD
7,140 per square meter. A full 90% of these units (by area) are properties in Ocean Gardens, Taipa.
The remaining 10% are split in two properties. The first, Ocean Industrial Centre, Phase II, is an
industrial property in Macau. We value this at $250 / SF, which we feel is appropriately conservative,
although we do not have direct comps 30. Ocean Park is a residential property in Singapore. Recent
transactions at Ocean Park seem to have been around $900-1,200 per square feet 31. We convert the
lower end from Singapore dollars to arrive at $667 / SF for this piece.
The remaining 90% of units, in Ocean Gardens in Macau, can be compared with the DSEC database
for transactions in Jardins do Oceano, Taipa (Ocean Gardens). Below we chart these transactions.
https://www.wikiwand.com/en/Gambling_in_Macau
http://www.dsec.gov.mo/TimeSeriesDatabase.aspx?lang=en-US
30 If were wrong, it does not materially affect our thesis.
31 http://www.propertyguru.com.sg/project/ocean-park-293 and
https://www.dropbox.com/s/5zjty7r2v56rpil/Ocean%20Park%20transactions.PNG?dl=0
28
29

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27
The chart shows the dramatic rise, and recent fall, of property prices in Macau 32. The fall has been
strongly correlated with the decline in gaming revenues, although the number of visitors to Macau
has remained very stable 33. We feel our valuation is conservative, as it sits at a 35% discount to recent
transactions and a 54% discount to the peak. At $552 / SF, it also has an implied cap rate of 3.5%. By
Technically, these numbers are in MOP / square meters, but since the Macau Pataca is pegged to the HKD
and the ratio is very close to 1:1, we simplify the presentation and show the chart in HKD.
33 We share a number of other statistics in useful charts here:
https://www.dropbox.com/s/9955i16h8018ddl/Macau%20statistics%20-%20PUBLIC.pdf?dl=0
32

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28
comparison, MPO Fund marks its Waterside residential properties at a cap rate of 2.4% and $1,408
/ SF. 34
At cost, these properties held for sale are only 0.60 per KS share. At our valuation, they would be
worth 3.75 per share, a multiple of 6.3x cost.
Given the supply and demand characteristics of residential housing in Taipa, it is very likely that the
completion of the Hong Kong-Zhuhai-Macau bridge will indeed lead to a rise in values for the Ocean
Gardens properties. Below is a sensitivity analysis table (we keep the industrial and Singapore
properties at their current valuations, and only apply the HKD / sqm values below to Ocean Gardens):
Sensitivity analysis on Ocean Gardens valuations

HKD / sqm
46,100
50,000
60,000
80,000
100,000
Total value (group's part)
1,277,212 1,376,889 1,632,470 2,143,632 2,654,795
Per share
3.75
4.05
4.80
6.30
7.80
Remaining NAV items
The only remaining NAV items are cash (4.19 per share), other assets on the balance sheet (0.47
per share) and all liabilities and minority interests not already deducted, at -7.74 per share.
Our total NAV estimate therefore stands at HKD 18.19 per share, and as we have hopefully
demonstrated along the way, we believe this is based on current market valuations.
Calculation of free cash flow
Our bridge from net income to free cash flow is presented below. A few items should be noted.
KS has substantial non-controlling interests due to partial ownership of many properties. The
overall split is about 70.3% of net income accruing to shareholders of KS, so we use this split
for free cash flow as well. While an asset-by-asset free cash flow estimate would be more
accurate, we have performed the exercise and the outcome isnt materially different.
The hotel industry uses 4% of sales as an estimate of capital expenditures. We use this across
all sales figures. Again, this is likely off, as it overestimates capex (since a large portion of sales
come from non-hotel properties), but the result shouldnt be materially off.
We deduct non-recurring items such as the increase in mark-to-market in property values,

interest income on bank balances, and losses from trading securities (although this last item
is immaterial).
Waterside is located in Macau proper (and has extensive high end shopping on the ground floor), is much
newer more attractive than Ocean Gardens, and probably deserves a to be valued at a large premium.
34

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29
Free cash flow bridge (2015) 35

Total net income
(+) D&A
(-) Increase in fair value
(-) Other revenue
(+) Other losses
= FFO
% attrib to shareholders
FFO to shareholders
FFO per share 36
Capex % of revenues
(-) Capex
= FCF
FCF to shareholders
FCF per share
FCF yield
325,756
130,112
(35,000)
(33,885)
2,738
389,721
70.3%
273,933
0.81
4.0%
(77,583)
312,138
219,400
0.64
11.2%
We note that this calculation of free cash flow results in free cash flow per share of 0.40, 0.55, 0.55 in
2012, 2013 and 2014, respectively.
Calculation of cap rate and leverage
Cap rates are one favored way of calculating real estate values. Hopefully we have demonstrated
though our sum of the parts analysis above that our NAV estimate of over HKD 18 per share is
conservative.
On a consolidated basis, we can also calculate an implied cap rate by dividing EBITDA by enterprise
value 37.
http://www.keckseng.com.hk/Files/Announcement/2015/LTN20150924472.pdf
FFO is funds from operations, another metric used to value publicly traded real estate. KS trades at a P/FFO
multiple of 7.1x, which is also quite undervalued. The flaw in this metric is that it does not consider leverage,
or the amount of debt the company carries. This isnt a problem for KS, with its very underleveraged balance
sheet.
37 EBITDA is earnings before interest, taxes, depreciation and amortization, and is equivalent to the net
operating income of a property; enterprise value is the market cap of a company, plus debt and less cash,
which is equivalent to the value of a property.
35
36

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30
Implied cap rate (2015)

Total net income
(+) D&A
(+) Taxes
(+) Interest expense
(-) Increase in fair value
(-) Other revenue
(+) Other losses
= EBITDA
Current stock price
Shares outstanding
Market cap
(+) Total debt
(-) Cash
(+) Minority interests
= Enterprise value
Implied cap rate
Estimated NAV
Cap rate at est. NAV
325,756
130,112
96,417
34,105
(35,000)
(33,885)
2,738
520,243 [A]
HKD 5.75
340,200
1,956,150
1,942,625
(1,790,706)
96,784
2,204,853 [B]
23.6% [A] / [B]
18.2
8.1%
The cap rate implied by the current share price is 23.6%, which represents a dramatic undervaluation
relative to real-world real estate transactions. As noted on the first page, the median cap rate for hotel
companies listed in the U.S. is 7.6%, with luxury hotels being valued towards 6% cap rates and limited
service hotels at around 9-10%. Since we have valued KS on an asset by asset basis, our target price
of HKD 18.2 already incorporates individual cap rates for each property. On a consolidated basis, our
target price would represent a cap rate of 8.1% for the whole company, which is another way to
determine that 18.2 is indeed a reasonable target price.
A similar calculation would have resulted in cap rates of 66%, 57% and 17% in 2012, 2013 and 2014,
respectively, using the HKD 5.75 stock price noted above. The reason for the higher numbers was
due to a lower enterprise value, since KS took a mortgage to purchase the Sofitel NY, enlarging
enterprise value but growing EBITDA modestly, given the tight cap rate at which that acquisition was
made.
It should also be noted how solid KSs balance sheet is. The estimated NAV of 18.2 per share can be
compared with total debt per share of 5.7 for an LTV of 31%; however, including cash we arrive at
net debt per share of 0.4 for an LTV of 2.5%.

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31
Source of mispricing
It is always important to understand why a security is undervalued, so here we list some reasons we
believe KS trades at such a wide discount to intrinsic value:
No analyst coverage As far as we are aware, there are no sell-side analysts who cover KS.
Securities without sell-side coverage tend to fall through the cracks and frequently trade at
low valuations.
Small cap status The current market cap of KS, at HKD 5.75 per share, is $252 million, quite
small by U.S. standards, and too small for most institutional investors to take a position.
Limited float The controlling family owns 74.82% of the shares outstanding, which means
that there is only about $63 million of free float available. It is our understanding that the
listing rules in Hong Kong require that at least 25% of the shares remain freely traded, so this
may preclude further stock buybacks 38.
Lack of awareness by investment community We believe this idea was completely unknown
to the majority, if not all, western market participants, until it was posted in an excellent
write-up, to which we are indebted for the idea 39.
Misperception regarding take under risk One common objection to this investment idea is
that the controlling shareholders could take the company private through a lowball bid,
depriving minority shareholders of the full value of their shares. Hong Kong law allows 10%
of the minority to block any such attempt, making it very difficult for such a take under
attempt to succeed 40.
Unfocused investor relations effort KS does not employ IR professionals or prepare investor
presentations, hold conference calls, or conduct roadshows. Despite this, the company does
hold annual meetings and is responsive to shareholders through email and phone calls.
Cyclicality of the hotel business
The data below is from Smith Travel Research and the U.S. Department of Labor. Over time, ADR and
RevPAR have done well compared to CPI, but one can note the cycles of rising ADR/RevPAR leading
to a rise in supply, resulting in a down cycle, and so forth.
If this chart holds, we should be bracing for an increase in supply and another downturn. We are
already witnessing this in markets like New York (see links under the Risks section below). Supply
https://www.hkex.com.hk/eng/listing/listreq_pro/listreq/equities.htm although the company does have a
stock buyback authorization
http://www.keckseng.com.hk/Files/Announcement/2015/LTN20150424436.pdf
39 https://valueinvestorsclub.com/idea/Keck_Seng_Investments/114379
40 http://www.scmp.com/comment/insight-opinion/article/1436426/new-companies-law-will-boost-hongkongs-competitiveness
38

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32
appears constrained in Vietnam, which is the other large contributor to KSs profitability, but this
cannot be expected to last forever.
US Lodging Industry Trends: 1992 - 2015
240
220
Data indexed, 1992=100, except rooms added

Rooms added
(gross), RHS
160,000
140,000
RevPAR
200
ADR
180
CPI
160
120,000
100,000
80,000
140
60,000
120
40,000
100
20,000
80
Occupancy
Risks, uncertainties, and why this may not work out
One risk to the hotel industry is Airbnb. In 2015 Airbnb booked 80 million room nights and
$1 billion in revenues 41. Hilton Worldwide mentioned in their Q4 2015 conference call that
they still do not see any material impact from it and that they believe Airbnb is a real
business that will be around for a very long time, but they will coexist with hotels. On the one
hand, Airbnb increases supply, probably mostly in high ADR markets 42. On the other hand,
https://www.youtube.com/watch?v=1Bj_QwX7hGk
Sotherly Hotels 2015 Q4 conference call: While we dont disagree that Airbnb presents a new alternative to
the traditional hotel model, we have not seen any disruption in our markets to-date. We believe the negative
Airbnb effect will be experienced primarily in the top-five high rate gateway markets where a low-cost
alternative is an attractive option. LaSalle Hotels Q4 2015 conference call: So its hard to say exactly whats
going on there. There is not the greatest data out. But what I would tell you is that, its almost like any new
supply. While our customers are not necessarily the customers that would be staying at a no-frills limited
service hotel, to the extent that you add no frills limited service hotels to market, that supply takes from
41
42

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33
there are many things Airbnb cannot do, such as host conferences, offer superb room service,
and deliver a consistent, branded, superior guest experience that only hotels can deliver. We
believe there is no doubt Airbnb is sucking dollars from the hotel industry. So while the risk
may not yet be material, perhaps the operative word is yet and its certainly a risk were
firmly focused on.
New York is undergoing supply additions and the market is soft 43. On the other hand, land
values are high enough that alternative uses are already being sought by some hotel owners,
such as conversions into retail (for street level), time share and residential.
Vietnam concentration: around 46% of the profits to shareholders of KS come from its
properties in Vietnam, depending on how one allocates corporate overhead; another 31%
comes from the U.S. and 16% from Macau, deducting the mark-to-market gain in fair value.
So while in terms of net asset value the company is weighted towards the U.S., in terms of
profits it is weighted towards Vietnam.
Currency risk: the Vietnamese dong has been a depreciating currency against the U.S. dollar
for many years 44, which stimulates tourism and makes goods and services cheaper, but
doesnt bode well for the transfer of profits to KS. The currency however is considered
cheap 45 and KS management transfers all cash from Vietnam to banks in Hong Kong and
Macau as soon as practicable to avoid currency risks.
Further currency risk: KS reports in HKD and while the HKD is pegged to the U.S. dollar, there
have been speculations about the peg being broken 46. By all accounts, the HKD is among the
most undervalued currencies in the world; that coupled with capital flows into Hong Kong
should be reflected in a higher value for the HKD against the U.S. dollar should the peg break.
If that happens, an unhedged investment in KS will rise in value since the shares are
denominated in HKD, while net asset value and profitability would decline given a
whatever the closest competition is, who ends up bringing down rates, creating availability and then everyone
ultimately becomes more price sensitive.
43 See http://www.nytimes.com/2015/03/04/realestate/commercial/hotel-market-staggers-in-new-yorkcity.html also http://www.bloomberg.com/news/articles/2015-02-20/nyc-hotel-glut-leading-to-slowdownin-room-rate-increases and https://commercialobserver.com/2016/02/hersha-hospitality-says-supply-glutweakens-growth-in-nyc-room-revenues/
44 http://www.xe.com/currencycharts/?from=VND&to=USD&view=10Y
45 http://www.economist.com/content/big-mac-index
46 http://blogs.wsj.com/briefly/2016/01/25/hong-kongs-dollar-peg-next-in-the-firing-line-the-numbers/
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34
predominance of non-HKD assets owned by KS. This risk can be hedged by a short position
in the HKD.
This stock may never re-rate to a more appropriate cap rate and may remain cheap.
Factors mitigating risks
It is simply too cheap Assuming the current level of free cash flows can continue and grows
and given the companys solid balance sheet, there is little reason to imagine why free cash
flows would decline over a long enough period of time (excluding short term declines due to
currency movements or hotel industry cyclicality), then the stock is already very cheap,
trading at a double digit free cash flow yield.
Low risk business and low risk balance sheet This security is the archetypal sleep well at
night investment with low business risk and low balance sheet risk.
Further reading
The companys annual reports can be accessed at http://www.keckseng.com.hk/Eng/Reports.htm

and a list of all announcements at http://www.keckseng.com.hk/Eng/Announcement.htm.
Catalysts
The completion of the Hong Kong-Zhuhai-Macau Bridge may lead to further divestments of
property in Macau. Should all properties be divested we expect at least HKD 3 per share to
show up on the companys balance sheet (our estimated value of 3.75 per share less the
0.60 at which the assets are currently valued), and possibly more; there is a possibility that
the entire current market cap of KS may materialize on the balance sheet once these assets
are sold.
More value-creating activities by management such as new developments in Macau or other
property acquisitions or divestments.

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35
Important Legal Disclaimer

All information provided herein is for informational purposes only and should not be deemed as a
recommendation to buy or sell any security mentioned.
Heller House may currently or in the future buy, sell, cover or otherwise change the form of its investment in
the companies discussed in this memo for any reason. Heller House hereby disclaims any duty to provide any
updates or changes to the information contained here including, without limitation, the manner or type of any
Heller House investment.
Past performance is not necessarily indicative of future results. All investments involve risk including the loss
of principal. It should not be assumed that any of the securities transactions or holdings discussed herein were
or will prove to be proitable, or that the investment recommendations or decisions we make in the future will
be proitable or will equal the investment performance of the securities discussed herein. Speciic companies
or securities discussed in this memo are meant to demonstrate Heller Houses investment style and the types
of industries and instruments in which we invest and are not selected based on past performance.
The analyses and conclusions of Heller House contained in this memo are based on publicly available
information. Heller House recognizes that there may be conidential or otherwise non-public information in
the possession of the companies discussed in this memo that could lead these companies to disagree with Heller
Houses conclusions.
The analyses provided include certain statements, assumptions, estimates and projections prepared with
respect to, among other things, the historical and anticipated operating performance of the companies. Such
statements, assumptions, estimates, and projections relect various assumptions by Heller House concerning
anticipated results that are inherently subject to signiicant economic, competitive, and other uncertainties and
contingencies and have been included solely for illustrative purposes. No representations, express or implied,
are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with
respect to any other materials herein.
This document is conidential and may not be distributed without the express written consent of Heller House
and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment
product.

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Executive Summary of Valuation Discrepancy

1111 Brickell Ave, Suite 2135

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New York Public Library

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Summary financials and acquisition numbers for the Sofitel:

Other operating expenses

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Moscone Center West

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KS owns two adjacent hotels in Vietnam, the

These hotels are unusually profitable due to a

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1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

http://www.colliershotels.com/2014/CHIR/Colliers-2014CHIR.pdf and http://cbrecanada.uberflip.com/i/661999-q1-2016-canadian-cap-rates-investment-insights?var=thankyouQ12016

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

Best Western Hotel Fino Osaka

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

2015 NOI (HKD)

Heller House Opportunity Fund, L.P.

Holiday Inn Wuhan Riverside

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

Luso Intl Bank Bld

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

Properties classified as investment properties (marked to market yearly by KS)

Ocean Plaza, I and II

Value at 12/31/2015 (HKD 000)

Ocean Gardens, Macau

Ocean Gardens, Macau

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

1111 Brickell Ave, Suite 2135

Heller House Opportunity Fund, L.P.

Macau property appreciation Ocean Gardens

(95,014) (136,762) (55,988) (34,298) (19,538)