Launched in 2006, the company targets strategic property investment and development opportunities in Macau - the Chinese gaming industry equivalent of Las Vegas - and Mainland China's western Pearl River Delta. Its portfolio mainly comprises a mix of well-positioned residential, retail and logistics property assets - areas of the market that have been clearly doing well. In fact, a sensational set of full-year results in March revealed underlying net asset value per share surged by an eye-catching 25 per cent to $4.95, or 299p. And following some chunky disposals priced on premiums to book value, the board followed up by paying out a 21.1p a share capital distribution to shareholders three weeks ago.
This means that if you bought the shares at 177p when I initiated coverage last autumn ('Far eastern delight', 6 Sep 2013), they have produced a total return of 46 per cent in little over eight months. Moreover, the total return is around 10 per cent if you followed my buy recommendation after the company's full-year results at 240p ('Land of opportunity', 5 Mar 2014).
Furthermore, Macau Property has just released a bumper set of numbers for the first quarter to the end of March 2014, during which time the company's net asset value increased by almost 6 per cent to $5.25, or 314p a share at current exchange rates. Deduct from that figure the 21p a share cash return post the March quarter end, and the spot net asset value is 293p. So, with the shares trading on a bid-offer spread of 240p to 242p, the current discount to book value is far too wide at 17 per cent. It also makes my previous target price range of 254p to 269p look conservative.
Value in the shares
Importantly, the board acknowledge the obvious value in the shares as they continue to make opportunistic purchases under a share buy-back programme. At the end of January, a further 760,000 shares were bought back at an average price of 206.1p. And last week the company bought back 1.6 per cent of the share capital (1.325m shares) at 235p a share. It's a sensible policy to adopt as not only were these purchases made at a hefty discount to book value, but they enhance net asset value per share on the outstanding 81.4m shares in issue. Expect further buy-backs in the future given the "board still holds the view that its share price does not accurately reflect the quality and positioning of its portfolio and potential for future growth". In turn, this can only underpin Macau Property's share price and deliver further increases in book value per share.
It's also worth noting that Macau has a relatively lowly-geared property portfolio, with a loan-to-value ratio of 21.4 per cent, so the gains in net asset value are largely coming through valuation uplifts rather than the result of financial gearing. In fact, the valuation gain on the portfolio was 6.7 per cent in the latest three-month period, so total loans of $110m (£66m) only represent 21 per cent of the $517m portfolio. Macau Property had free cash of $68m at the end of March, so the company has ample funds available to finance its operations and facilitate further property purchases in what is clearly a buoyant property market in the territory.
Potential for property gains
Admittedly, it is in the interest of local property agents to talk up the market, but it's still worth noting that the current guidance is for house prices to rise between 10 per cent and 20 per cent in Macau this year. Agents also forecast that price growth for upmarket homes in the city, in particular incomplete flats, could far outpace that of homes for the mass market. Upmarket homes refer to those priced above HK$20m (£1.2m), or costing over HK$13,000 per sq ft. Prices are expected to hold firm in the face of tight supply, particularly given strong local demand and the influx of foreign workers.
If the local agents are proved right in their forecasts, then this is very good news for Macau Property's portfolio. For example, the company's cornerstone investment is The Waterside, a 148,000 sq ft development of 59 luxury apartments, which accounts for half the value of the portfolio. Occupancy rates are around 90 per cent and average rental values continue to hit record levels. In fact, new monthly rentals secured rose by 3.5 per cent to HK$24.39 (£1.88) per sq ft in the latest three-month period and are 15 per cent higher than in March 2013.
The latest valuation equates to an average of $1,800 (£1,078) per sq ft, which means that the upmarket apartments are in the segment of the market where the highest growth rates in prices are predicted. Moreover, furnishing works have been undertaken at one of The Waterside's duplexes to tap into the ongoing and growing demand for furnished flats in Macau. The block was awarded the title of China/Macau Best Serviced Apartment Awards in 2013-14, highlighting its success as a luxury leased residential property.
Interestingly, analysts at broker Liberum forecast a further 8 per cent rise in Macau Property's net asset value to 316p a share in the three months to 30 June 2014, driven mainly by further capital value growth at three of its developments: The Waterside, One Central and The Green House.
The Green House is a 5,200 sq ft luxury private home offering unobstructed, breathtaking views of Macau from atop Penha Hill. Since its acquisition in late 2007, the property has seen its valuation appreciate more than fourfold to over $18m (£11m). Houses offering a combination of exclusivity and prime location are rare in Macau, with less than 50 houses in the Penha Hill area. The plan is to retain the property and divest only at an opportune time, once a sufficient premium is achieved.
It's also reasonable to expect further valuation gains from the remaining 10 apartments being sold at the One Central development. That's because at the time of the March 2013 results, four units were in the process of being sold at prices between 16 per cent and 30 per cent higher than their previous valuations, reflecting the exceptional demand for well-located units in Macau. The carrying value of these 10 units is $40m, accounting for 7 per cent of Macau Property's portfolio.
Monitoring property transactions
It's worth noting recent property deals in Macau, too. For example, The Carat, an upmarket housing project in the NAPE area near the Macau Cultural Centre, pre-sold the first batch of all 210 flats on offer, priced at between $1,600 and $2,100 per sq ft, in only two days. Residencia Macau, located in the northern district near the future Hong Kong-Zhuhai-Macau Bridge, sold several units with prices averaging $1,300 per sq ft. Nova Park, a residential development in Taipa, recorded transactions averaging $1,400 per sq ft. Luxury development One Oasis, situated near the Cotai Strip, transacted at an average of $1,600 per sq ft at the end of March - nearly 40 per cent higher than last year.
These property transactions highlight the potential upside from another of Macau Property's developments. The Fountainside is a niche, low-density residential development totalling 80,000 sq ft also located in the prestigious historic Penha Hill district, housing a collection of 38 apartments and four villas. To date, 22 standard units - representing 35 per cent of the project's total gross floor area - have been pre-sold, and the remaining units are currently being marketed for sale.
Accounting for more than 20 per cent of the $73m carrying value of The Fountainside, the four villas feature amenities such as an attached garden and a private garage and are being marketed on an exclusive basis to high-net-worth individuals. It's worth flagging up that Liberum "conservatively does not forecast any Fountainside sales completing in the quarter to 30 June, with sales completions commencing from the first half of next year". In other words, there is scope for a positive surprise and one that could benefit Macau Property's valuation given the development accounts for 13 per cent of the company's total portfolio.
Prime retail development
Macau Property also has a flagship retail development at Senado Square, situated in the heart of Macau's vibrant shopping district and Unesco-listed historic centre. Despite delays in the planning process, the value of the property continues to benefit from strong demand for retail sites in Macau. The 70,000 sq ft development is at the advanced planning stage and is currently in the books at $100m. The acquisition cost was $16m and the development cost is around $21m, so the company has already made a significant paper profit to date even before work commences.
It's reasonable to assume additional valuation uplifts will be forthcoming because in recent deals a 930 sq ft prime-area shop in Senado Square along Rua do Dr Pedro Jose Lobo sold for HK$450m ($56m). Notable retail rental rates in the first quarter of this year include a ground-floor cosmetics shop leased out at HK$617 ($80) per sq ft per month, and a three-storey fashion retail unit leased out at a monthly rental rate of HK$488 ($63) per sq ft.
Once completed and leased, Macau Property's Senado Square development will be marketed for sale as a prime retail investment asset.
Strong economy
The investment case looks well underpinned by the robust economic growth forecast for Macau. According to The Economist Intelligence Unit (EIU), the territory is expected to continue growing at a double-digit pace in 2014, having expanded by 11.9 per cent in 2013. The EIU predicts that Macau's GDP will increase at an annual rate of 10.6 per cent this year, with an inflation rate of between 6 to 6.3 per cent.
The key driver behind this stellar growth is the gaming industry. Macau's accumulated gaming revenue in the first three months of 2014 hit $12.8bn, almost 20 per cent higher than a year ago. This reflected a gaming table shift from VIP clients to the growing mass market and the cluster effect of bigger casinos in Cotai, which have helped to draw substantially higher footfall. Furthermore, with substantial new casinos being opened next year - Galaxy Macau and Melco Crown's Studio City - analysts predict the Cotai projects will create over 12,000 hotel rooms and 1,800 gaming tables in the coming years.
That's not only positive for visitor numbers, but it should also lift retail sales as the territory's retailers' benefit from the discretionary spending power of the growing Chinese middle class. It's hardly a surprise, either, that the number of hotel guests continues to grow year on year: Macau's three-, four- and five-star hotels occupancy rates were more than 90 per cent in March.
All of these factors are positive for valuations in Macau's property market as well as being supportive of demand for rental property.
Attractive valuation
True, Macau Property's shares have made decent headway since I initiated coverage. But it has paid to stay on board as there have been multiple repeat buying opportunities in the interim. For example, I reiterated my buy advice when the price was 193p ('Blue sky territory', 24 Sep 2013), at 206p ('Hot property plays', 12 Nov 2013) and in my end of year round up at 210p ('Seeking income and safety at a reasonable price', 17 Dec 2013). Each of these updates was in response to a relentless flow of positive news. And anyone buying at these prices has also benefited from last month's 21p a share cash dividend.
Moreover, with the property boom in Macau showing little sign of slowing any time soon, it's fair to expect further valuation gains and substantial increases in Macau Property's net asset value. Analysts at Liberum predict book value per share will rise to 316p at the end of June before hitting 336p at the end of December. On that basis, the shares are trading on a thumping 28 per cent discount to prospective year-end book value.
That's not only an attractive entry point, but an anomalous valuation, too. In the circumstances, I have no hesitation in repeating my buy recommendation. In fact, I am raising my year-end target price to 290p. Offering 20 per cent share price upside, Macau Property's shares are still well worth buying at 242p.
Finally, I published eight articles last week and another today, all of which can be viewed on my home page. I am still working my way through a list of companies on my watchlist, including API (API) and a number of housebuilders.
■ Please note that my new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. I have published an article outlining the content: 'Secrets to successful stock picking'
