No Bubbles in Macau 

11/25/2009 12:01 am EST

Focus: GLOBAL

Andrew McHattie

Editor, Investment Trust Newsletter

This London fund trades at a discount to the value of its Macau assets, which in turn trail the residential real estate boom in Hong Kong, writes Andrew McHattie in Investment Trust Newsletter.

Macau Property Opportunities (LSE: MPO) is most definitely a specialist fund, both by geography and by sector. Collins Stewart has issued a note on the fund, suggesting it is “beginning to gain traction.”

Since its launch in 2006, the fund has returned a compound growth rate of 12.2% in net asset value, which stacks up very well against relevant indices. Over the same period, the MSCI Far East ex-Japan total return index has increased by an annualised 7.9%, while the UK property sector has delivered an annualised compound NAV total return of -16% (all sterling adjusted).

All properties in the portfolio have been the subject of upward revaluations, and in many cases, these have been significant. The trust is managed by Sniper Capital, founded by Tom Ashworth and Martin Tacon and with a team of 20 dedicated professionals. The property portfolio is well balanced in terms of the stage of development. While there is some exposure to the retail and logistics sector, there is a strong bias towards residential property.

Most notably, the company has a significant investment in the prestigious One Central development, which currently represents 67% of [net asset value], where it has just taken delivery of 59 units. Given a supply/demand imbalance for ultra-high quality developments in Macau, the [Collins Stewart] note says there is undoubted potential for material upward revaluations of this investment.

In recent months, Hong Kong property prices have outperformed, and consequently Macau prices now stand close to a 60% discount to their neighbors; the manager expects this to narrow as international and mainland capital flows into Macau. Notably, there has been a significant increase in transactions recently.

Collins Stewart suggest the current discount represents a compelling opportunity. The broker explains that although there has been a strong recovery this year, the shares at 95 pence still trade on a discount of 30% to the end-June NAV of 136p (and they would expect the NAV to have made good progress since then). [Shares closed at 105 pence in London Monday—Editor.]

The board is continuing to assess measures to address the current rating, including a potential move from [London’s Alternative Investment Market] to the main [London Stock Exchange] and/or a dual listing in Hong Kong. In addition, Collins Stewart take comfort that the managers are now one of the largest investors in the fund, holding 4.5% of the shares, and indeed, have been increasing their investment in recent months.

Collins Stewart concludes: “We are now entering a key phase in the development of both Macau and the company. Having just completed its largest investment and with a number of its projects in the advanced stages of the planning process, we believe it is well positioned for a re-acceleration of growth in the region. We initiate coverage with a Buy recommendation."

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