Last week Geoinvesting highlighted a terrific piece on Nam Tai Property Inc. (NYSE:NTP) by Maarten Pieters. The write-up was timely (a $50 million repurchase program, 1/7 of the market cap, and far more of the free-float, starts next week). The commentary is thorough and accurate. Typically we’d reserved comment as the write-up speaks for itself, but we think we bring some additive knowledge to the investment case.
Nam Tai is a company that we’ve known for several years. When we say known, we’ve visited the company’s properties in Wuxi and Shenzhen, met with CEO M.K. Koo in Hong Kong, and hired our own real estate consultants to walk us through regulatory issues in China, construction costs, tax considerations on land/property sales, views on residential and office demand in Shenzhen, the impact of the development of Qianhai (a special zone in Shenzhen with a largely western-style regime for partnering with Hong Kong), etc. It’s our view that NTP is a significantly undervalued company.
In addition to the few brief comments that we’ll make below, it’s also worth mentioning that since Geoinvesting’s publication last week, two extremely bullish events have occurred. One, NTP established a $750 million credit facility with China Construction Bank – the 2nd largest bank in the world by assets. Second, the highest recorded land sale in China occurred earlier this week at $4.6 billion (31 billion Yuan). This is for the rights to build commercial and residential developments near the upcoming convention center. This is a great location – near the new convention center, but not so close to Qianhai where prices have also been through the roof.
Having been to NTP’s properties we have high conviction that these are exactly what is claimed in the company’s press releases and in their valuation analyses available on their website.
For those unfamiliar with Shenzhen, it’s the closest major mainland China city to Hong Kong – 42 minutes by car, 50 minutes by ferry (we’ve gone to Shenzhen both ways – ferry is great). Shenzhen was literally a town (with dirt roads) with a population of 30,000 in 1979 and today boast a population of 11 million (and 18 million in the entire metropolitan area). The genesis of this transformation was the zoning of Shenzhen as a Special Economic Zone (“SEZ”) in 1980. Qianhai, is the most special of economic zone, with unique legal, tax, regulatory, HR, communications, and other differentiators. The 1st, 2nd, and 3rd rules of real estate are location, location and location, and NTP through skill or luck owns over a city block, near 5 highways, 4km from Qianhai – again, we have been there.
Stepping back for a moment, the majority of NTP’s value is in Gushu. Imagine buying (or leasing from the state) land in Shenzhen 23 years ago in an industrial zone, when the city’s population was roughly 3 million. Prices have simply exploded and NTP’s real estate is in the right place.
On NTP’s website they have valuation analyses from Jones Lang Lasalle, DTZ (in conjunction with Cushman and Wakefield), and Savillis. The DTZ report suggests the land today is work almost 2 billion Yuan ($290 million) – the other analysis come to similar (or higher) figures. This implies that they land value on NTP’s balance sheet is understated by over $250 million. Simply using land plus cash gets us to a per share value of $14-$15 (versus current $9.49).
However, this is the wrong analysis. In footnote 8, on page 12, of the DTZ analysis it says that “The development value of the property of Project One as if completed as at the Valuation Date is RMG 6,729.19 million.” This is over $1 billion USD. This is for project one. Project two has yet to receive government approval, but we expect will, and is identical in scope/scale. In sum, these two projects should have a market value in excess of $2 billion. We are confident that construction costs will be well below $1 billion. This implies a value in excess of $1 billion or more than $25 a share.
Project three is not quite in downtown Shenzhen, and DTZ values the raw land slightly under $60 million. It suggests in footnote 9, page 15 that fully developed it’s worth in excess of $235 million. Again, there will be construction costs, but we’re confident the truth is somewhere in the middle - $135 million implies $4 per share. Remember, all of the real estate is on the books for $36 million – or $1 a share.
We should see something of a validation to our thoughts on valuation when the Wuxi property (1 hour from Shanghai by bullet train) is sold for $20-$40 million by year-end (this is the least interesting of their properties).
CEO M.K. Koo owns 17% of the company (and has exercised options early to own more). Peter Kellogg, a US billionaire (of Spear, Leeds Kellogg fame) has been on the NTP board since June 2000 and owns 19%. This is a story that makes sense – Shenzhen has exploded, and whether due to luck or skill, NTP is in the right place at the right time.
A final thought: in China one can’t own property, it’s leased from the government (on 50 or 70 year leases). However, it’s widely assumed that property “owners” will be auto-renewed by the government if they apply (or if they pay a modest fee). All the analyses that we’ve seen suggest there is no residual value to NTP’s properties (no one wants to assume auto-renewal). The numbers are even more compelling if the deals are renewed (as we expect they will be, many years from today). That being said, with an already cheap stock, good actors on the management team (hustling to repurchase stock ASAP), and a terrific location, we think this could be a big winner in front of the catalyst of a repurchase program.
