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Advice on Henderson Investment comes from careful study

Sometime around New Year's Day, New York-based Third Avenue Management  paid US$22.8 million for more than 12 million shares in Henderson Investment, a listed unit of tycoon Lee Shau-kee's flagship property firm.

As they explained in an extremely forthright quarterly report  last month, the managers did this in part because 'it seems to be an attractive pre-arbitrage opportunity'.

Were they lucky, then, that late last month parent company Henderson Land Development made a HK$2.11 billion bid to buy most property, hotel and security assets from its subsidiary, immediately boosting its share price by 6.45 per cent for the day?

Not if the firm's  history is any indication. Its diversified Value Fund, run by the company's 82-year-old founder and co-chief investment officer Martin Whitman, averaged a 13.5 per cent average annual return over the past decade, compared  with 8.42 per cent for the Standard & Poor's 500.

Third Avenue's four funds - with a combined US$24 billion under management - are not available to people who don't have US addresses, but the firm does provide advice for private clients, including ones oversees.

More broadly, with their heavy exposure to Hong Kong-listed companies, detailed disclosures and clearly enunciated reasons for stock picks, Third Avenue's quarterly reports provide a bountiful resource for both smart money retail investors as well as rival fund managers. It also helps that the funds tend to make only a few purchases a quarter and then hold them for the long term.

'I always read them for ideas,' said a Hong Kong-based fund manager overseeing more than US$1 billion in assets.

Third Avenue's Real Estate Value Fund had invested 12.9 per cent of its US$3.38 billion in assets at the end of January in locally listed developers.

'Hong Kong has companies with substantial discounts relative to net asset value, a highly regulated market, and reports in English,' said Michael Winer, who has been the property fund's portfolio manager  since its inception in September 1998. At the end of January, it had returned an annual average of 20.77 per cent since its inception, compared with 17.99 per cent for the Bloomberg Real Estate Operating Co Index over that time.

Mr Winer's and Mr Whitman's investment in Henderson Investment highlights the philosophy of the firm: 'safe and cheap.' As the reports have detailed repeatedly, that means well-managed companies with strong finances and a sustainable business. Plus, that stock needs to trade at less than the firm thinks it's worth,  in part based on how much its underlying assets might fetch if sold separately.

In the quarterly report for the US$10.2 billion Value Fund, Mr Whitman wrote that at 'US$1.88' (HK$14.69) apiece, the nine million Henderson Investment shares it bought were at an 18.7 per cent discount to  the amount Henderson Land offered to privatise the entire unit last year. The property manager, whose fund bought 3.2 million shares, said that even without the privatisation offer, the price was 'substantially cheaper than' what the firm considers to be the company's net asset value. (He wouldn't disclose what that figure was).

The report also disclosed that in the three months through January, the real estate fund increased its stakes in Henderson Land, Wharf Holding  and Wheelock and Co.

Besides these, the Value Fund bought a new stake in Hang Lung Group and boosted its holdings in Cheung Kong.

'Hang Lung Group Common was acquired at a 28 per cent discount from the market price of [its 50.6 per cent stake in] Hang Lung Properties Common ... without attributing any value to [its] small amount of other assets, net debt,' Mr Whitman wrote .

To many Hong Kong investors, the reason for Hang Lung's price discrepancy is simple: a double discount for being a holding company and one that is controlled by an individual, Ronny Chan Kai-chun.

But to Third Avenue's thinking, that is erroneous. And this underscores the firm's other  philosophy.  'We typically invest in companies that we think managements' interests are aligned with ours,' said Mr Winer. 'In Hong Kong, in most cases management would be the majority shareholder. Obviously, there have been cases of controlling shareholders that are less than friendly to minority investors, but so far we haven't had to deal with that.'

Despite the market's more than three-year bull run, Mr Winer - who last visited  with his team six months ago -  said Hong Kong was still 'a great place to invest. It doesn't look like a bubble to us. Valuations don't seem out of line compared to what is going on in the rest of the world'. On the other hand, he allowed that while he was looking at 'several good companies in which we would like to invest, we are  waiting for the prices to come down'.

What unites nearly all the fund's Hong Kong-listed developers is a deep presence on the mainland. But the fund doesn't own shares in an actual mainland builder. 'We would consider [doing so],' said Mr Winer. 'That we haven't yet is a function of prices and relative attractiveness.'

He cited last week's initial public offering of Guangdong-based Country Garden, which was priced at about 21.3 times forecast earnings, and then shot up 35 per cent on its trading debut on Friday, to close at HK$7.27. The five firms that make up the Hang Seng Property Index - four  have a strong mainland presence - go for 17.35 times forward earnings.

In the meantime, Mr Winer is pleased with  Henderson Investment.  Its share price has increased 11 per cent over what he paid, to close at HK$16.32 on Friday, in part because the company said it would pay out a special dividend of up to HK$5 a share if the asset sale goes ahead. 'It appears to be a reasonable proposal,' he said.

Hong Kong has companies with substantial

discounts relative

to net asset value

Michael Winer, Third Avenue's property portfolio manager



Third Avenue  report sets pace   for investors