Emperor International, 英皇國際 (163.HK) - Recommend BUY

12-month target price is $2.0, +67% from current price of $1.2


The Chairman (whom you probably know) is buying a lot of shares from the open market (more than 10 occasions) at around $1.2, and the CB that he issued to Emperor Int'l has a conversion price of $1.2; both of these actions mean that the Chairman is highly confident that the shares should be worth much more than $1.2 (i.e. if he doesn't think he's going to earn at least 20-25% annual return on his capital, he won't do it in the first place).



NAV is the best metric to value Emperor Int'l given that a) it's a property development company and b) the Company's portfolio is relatively young, i.e. many projects will be completed in 2011-2013 time frame.

• NAV of Emperor Int'l is conservatively estimated to be $3.3 (while $3.8 is more realistic), and the underlying property assets in Hong Kong, Beijing, Shanghai and Xiamen are of good quality

• Applying a 40% discount to NAV (big property developers trade at 10-15% discount while smaller ones trade at 30-40% discount) leads to $2.0, which is my target price.

• Many small-cap property stocks have rebounded in the past 6 months and the extent is much larger than Emperor Int'l so this is a "laggard play" as well, i.e. most of these stocks are already above their Aug 2008 price level, but Emperor Int'l is still only half of its Aug 2008 price level (see chart below).

Emperor Int'l has a FYE of March, and first-half FY 2010 results (i.e. April 2009 to Sept 2009) will be announced in Dec 2009.

• The results should be very strong due to a) solid rental income, b) significant rebound of the property market since March 2009 (there will be a significant upward revaluation of properties that flows through P&L), and c) HK$143m in profits from 2 pieces of property in Causeway Bay that was sold.

• Emperor Int'l would likely resume dividend payments upon announcing the upcoming results (there was no dividend payment for previous year).

• I would expect investors to be positively surprised when the announcement comes out.

Due to its relatively small market cap, Emperor Int'l is not covered by investment banks. The only institution that covers Emperor Int'l is a small investment house called 3V Capital. I think that minimal coverage is a good thing because if a stock is well-covered, then it tends to be more efficiently priced and hence more difficult for investors to achieve above average risk-adjusted return. I believe that Emperor Int'l is NOT efficiently priced, and in time, its stock price will converge to its "true" fundamental value.


So overall, my recommendation is to buy at current price and hold for at least 6 months. For those that are concerned about a possible correction in the stock market, I would suggest a phase-in approach, where you buy some every month for next 3-4 months such that you average out your entry price.