Normally, we're not keen on shares in overseas property companies - location, location, location is best understood locally. But it may be worth making an exception for Macau Property Opportunities, a $278m (£172m) fund that owns property developments in an infamous gambling colony off the South China coast.
- Macau continues to boom
- Shares trade far below net asset value
- Strong track record
- Softening housing market in Hong Kong
- Only occasional dividends
Yes, it's speculative - quite literally, as the gaming sector remains the backbone of Macau's economy. There are no regular dividends, disclosure can be patchy and it's based on the other side of the globe. Yet the Chinese love to gamble and casino-style gambling is very popular in the Middle Kingdom - but Macau is the only place that the Chinese are allowed to do it legally. That makes the former Portuguese trading outpost a safe long-term bet on China's emerging wealth. Macau's per capita income was over $51,000 in 2010 - among the highest in the world - with an extraordinary growth rate of 26 per cent, thanks to the rampant expansion of the casino trade.
So why gain exposure through Macau Property Opportunities? The basic reason is that the shares are going cheap, on a 36 per discount to book value (adjusted to revalue trading properties, which are normally held at cost, up to realisable value). There are subtler reasons, too. The fund has been around since 2006 and has a good track record - topping five-year performance league tables until the recent share price plunge. It is run by two Brits at specialist fund manager Sniper Capital, so it knows that UK shareholders want their dividends - it returned $17.9m of cash last year after selling a housing development; although its cash flows are too lumpy for regular payouts.
MACAU PROPERTY OPPORTUNITIES FUND (MPO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 110p | MARKET VALUE: | £113m | |
| TOUCH: | 107-112p | 12-MONTH HIGH: | 137p | LOW: 107p |
| DIVIDEND YIELD: | nil | TRADING PROPERTIES: | $79.3m | |
| DISCOUNT TO NAV: | 36% | |||
| INVESTMENT PROPERTIES: | $195m | NET DEBT: | 27% | |
| Year to 30 Jun | Net asset value (¢) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 281 | -17.8 | -16.9 | nil |
| 2009 | 225 | -15.2 | -14.5 | nil |
| 2010 | 250 | 47.6 | 45.4 | nil |
| 2011 | 272 | 36.5 | 34.8 | nil |
| Dec 2011* | 278 | -1.2 | 1.2 | nil |
| % change | +2 | – | – | – |
Normal market size: 2,000 Matched bargain trading Beta: 0.2 *Half-year figures £1=$1.61 | ||||
Investors have sold off the fund's shares over the past nine months because of fears that the reversal in Hong Kong house prices will infect neighbouring Macau. This certainly looks a risk, with over three-quarters of the fund's assets in the residential sector. Housing transaction volumes in Macau fell last year and will probably fall again this year.
Yet there are reasons to be sanguine. Macau's house prices haven't turned yet. And the dip in transactions is the result of government cooling measures to stop flat-flipping - a new stamp duty rate of 20 per cent was introduced last year for properties sold within a year. The Macau government can just as easily turn the taps back on if sentiment turns overly bearish. With 85 per cent of its revenue coming from a hefty gambling tax, it hasn't run a deficit for years.
Moreover, the longer-term fundamentals of Macau's housing market are strong. Flats in Macau cost only a third of their Hong Kong equivalents, although a bridge is currently under construction that will bring the islands within half an hour's drive of each other. Four out of five Macanese own their own home, but household debt is fairly low, with average mortgage payments of 21 per cent of income. So it's easy to imagine they will happily trade up to larger or more expensive homes over time. There's also little danger of oversupply on a pair of islands just 12 times the size of Hyde Park.
