Could Stanley's Ho's family misfortunes add up to big profits for city's traders?

PUBLISHED : Sunday, 30 January, 2011, 12:00am
UPDATED : Sunday, 30 January, 2011, 12:00am

In this trading-obsessed town, almost anyone with a stockbroking account has to be asking: should I buy SJM Holdings?

Since January 25, when 89-year-old Macau casino billionaire Stanley Ho Hung-sun accused five of his 17 children and two of his four wives of 'fraudulently misappropriating' the private company that controls most of his wealth, SJM's shares have fallen 5 per cent. They could slip further as the battle for control intensifies. And the stock is already cheap compared with SJM's Macau rivals.

'A scandal presents an opportunity for assets to be mispriced,' said Thomas Holland, a Hong Kong-based partner of US$1 billion hedge fund Cube Capital.

SJM, founded in 2002 as Ho's licensed casino operator after he lost his four-decade monopoly on gambling in Macau, is in rude financial health.

The firm, which controls 20 of Macau's 33 casinos including the Grand Lisboa, booked more casino revenue than the Las Vegas Strip in the first six months of last year. Yet its shares, at HK$13, are trading at 13.5 times forecast earnings for 2011. SJM's rival Macau casino operators - Sands China, Wynn Macau, Galaxy Entertainment and Melco International - are valued at between 18 and 25 times expected earnings.

JP Morgan expects SJM, valued at HK$71 billion, to report HK$10 billion of net cash and a 296 per cent increase in net profits, to HK$3.6 billion, for 2010.

But Claude Tiramani, managing partner of Paris-based hedge fund Lutetia Emerging Opportunities, says family feuds are 'always a situation to avoid'. Tiramani, who has invested in emerging markets including China for two decades, fears the Hong Kong exchange could suspend SJM's stock for months or years to protect investors from price swings caused by the inheritance spat.

'There is a real cost if the market goes up and your money is trapped in a company which is not trading,' he said.

On January 27, Stanley Ho launched a lawsuit accusing daughters Daisy, Pansy, Maisy and Josie, son Lawrence, their mother Lucina Laam King-ying and third wife Ina Chan Un Chan (also known as Chan Yuen-chun) of 'improperly and/or illegally' seizing Lanceford, which ultimately controls SJM.

If the case were to go to trial and 'a witness said something damaging to the share price', that could be grounds for stock suspension, Tiramani said.

And as Danny Holder, Asia chief executive of stockbroker IND-X Securities, said: 'I would not think we have heard the last of this story.'

Family feuds at Hong Kong companies can drag on for years.

A battle for the spoils of late tycoon Teddy Wang Teh-huei's property empire Chinachem has been rumbling through Hong Kong's courts since 1997.

The three Kwok brothers who control Sun Hung Kai Properties have been fighting for boardroom control since May 2008. Investors have shrugged off the spat. Sun Hung Kai's shares, which fell to HK$51 in the months after the brawl erupted, have recovered to HK$132, nearly where they were before the fight.

But an inheritance feud is more serious for SJM than it is for SHK. As real estate investors have tenants on long-term leases, their share prices follow property prices and rents.

SJM is a harder business to run. It must deal with Beijing's shifting policies on allowing mainland gamers into Macau, while fighting competition from American-run rivals. Thus, 'politics within the management structure' could rock SJM, says Johnson Lam, a Hong Kong-based analyst at hedge fund The Pacific Group.

Most of SJM's directors are faithful lieutenants of Stanley Ho, without links to any faction in the tycoon's sprawling family. The company has announced its day-to-day operations are unaffected by the dynastic power struggle.

But with Stanley Ho having lost control, SJM's management, led by capable chief executive Ambrose So Shu-fai, may not know which Ho family member should be calling the shots. They could become paralysed.

The golden touch

JP Morgan expects SJM to report a 2010 profit 296 per cent higher than in 2009, in Hong Kong dollars this would be: $3.6b