Oriental Watch: Deep Value at its Finest

Oriental Watch is a luxury watch retailer that owns stores in China, Hong Kong, Macau and Taiwan. The company’s stock is currently selling for HK$1.05 and my estimate of liquidation value is around HK$2.50-$3.00. Any company selling for 35-40% of liquidation value is bound to have its fair share of problems and Oriental Watch is no different. They were profitable as recently as 2014 but there are significant headwinds facing the Asian luxury watch segment. Thankfully the management team has already been making moves to cut expenses and return to profitability.

One note: they are listed on the Hong Kong Stock Exchange (symbol: 0398) and on the American pink sheets (ORWHF). Unless otherwise stated, all numbers in this write-up will be in Hong Kong Dollars (HK$). The conversion is currently HK$1.00 to US$0.13.

Business overview

While the majority of their stores are in China (68 out of 87), these stores are smaller and less important to the story than the thirteen locations in Hong Kong. The company’s two operating segments are Hong Kong and then China, Taiwan and Macau combined as one. For simplicity I’m going to refer to this second segment as China since only six stores total exist in Taiwan and Macau and they are all through joint ventures. The thirteen Hong Kong stores make up around 70% of revenue and are still profitable as opposed to the China stores dragging down the results.
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Macro Enterprises: Below Liquidation Value and Profitable

Macro Enterprises is profitable, selling for below liquidation value, still run by its founder who has significant stock ownership and there is an impending catalyst that could significantly increase revenue. Macro is based in Canada and its main listing is the TSX Venture Exchange under the symbol MCR (C$2.15); they’re also listed on the American pink sheets under MCESF ($1.60). Unless noted, all numbers in this write-up are in Canadian dollars.

Business overview

Macro builds and maintains pipelines for the oil and gas industry in Western Canada. Not surprisingly due to the oil collapse, very few (if any) new pipelines are being built today. Their revenue has declined from a high of C$212 million in 2013 to a projected C$130-140 million for full year 2015. Because no new pipelines are being constructed, almost all of their current revenue is maintenance and integrity work on existing pipelines under master service agreements (MSAs). The silver lining here is that maintenance work is required by law on active pipelines which means they’re able to maintain pricing power even during a downturn. As proof of this, towards yearend 2014 one of their MSAs came to an end and was extended for three years at similar terms. Management has stated they expect gross margins to remain fairly close to where they were in 2012/13 (~22% vs 26% at the peak). This has been proven true through the first several quarters of the downturn.
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Consolidated-Tomoka: No Downside, Unknown Upside

Consolidated-Tomoka (CTO, $53.25) is a diversified real estate company based in Daytona Beach, FL where most of its operations are. CTO owns quite a few different assets which I’ll get into below, but their two main assets are 10,500 acres of raw land in Daytona Beach and 43 income-producing properties (mostly single-tenant retail buildings and multi-tenant office buildings). Management’s stated goal is to sell off the 10,500 acres of land and use the proceeds to purchase more income-producing properties. It is extremely difficult as an outside investor (especially one who hasn’t been to Daytona in years) to accurately estimate what their land is worth, but even the most conservative assumptions put the value of the company above what the market is valuing it at today.
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Navigator Holdings (NVGS)

Navigator Holdings (NVGS, $19.13) is in the liquefied petroleum gas (LPG) shipping industry. The liquids they ship are by-products of oil and gas production and refining. Their stock appears fairly valued based on the current industry dynamics, but the LPG shipping industry is expanding rapidly over the next few years. I believe the market is underestimating how much cash Navigator will generate in 2017 forward which creates a significant opportunity for investors willing to hold NVGS that long.

Business overview

Navigator operates a fleet of 28 liquefied gas carriers (plus 10 more ships to be delivered through 2017). A liquefied gas carrier is a generic term for a vessel that carries LPGs (such as propane and butane), petrochemical gases (such as ethylene, propylene and butadiene) and ammonia. Collectively I’ll refer to these liquefied gases as natural gas liquids (NGLs). Navigator currently only owns medium-sized (i.e. handysize) vessels, though they are getting into larger ships in the future. Handysize vessels are great because they can handle both medium and long distance routes and are able to access all ports unlike very large gas carriers (VLGCs). Both the liquefied gas carrier industry as a whole and the handysize niche within it are very fragmented. Navigator’s 26% market share in the handysize market is far ahead of their second largest competitor, Ultragas, with 10% of the market.
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Khan Resources (KRI)

Khan Resources (KRI, $0.43) is a small mining company based in Canada with a market cap of $32 million. Two months ago the company was awarded over $100 million in an international arbitration case. At this point you’re probably tempted to stop reading, open your online broker and start buying shares. While that isn’t the worst idea in the world, this investment certainly isn’t for everybody.

To summarize how Khan got to this point, in 1995 they entered into a joint venture (JV) to develop a uranium mine in Mongolia. The JV consisted of Khan as a 58% owner, a Mongolian state owned company owning 21% and a company majority owned by the Russian government with the other 21%. Importantly, Khan owned 100% of the corresponding exploration license and, through the JV, owned 58% of the mining license. In 2010, the governments of Mongolia and Russia decided to develop the mine themselves and expropriated Khan. Along with this, Mongolia cancelled Khan’s mining and exploration licenses.
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LGI Homes (LGIH)

LGI Homes (LGIH, $16.69) is a little known homebuilder that is a good example of the baby being thrown out with the bathwater. LGI derives around 60% of its revenue from Texas and anything related to oil has been crushed in the past nine months. Since touching $21 last July, LGI is down 20% despite great results and very positive guidance for 2015. Homebuilding is a fairly crappy industry (commodity, high debt loads and heavily dependent on the economy) but LGI is both one of the fastest growing and cheapest homebuilders out there. LGI is in a great position to soar over the next few years as the housing recovery continues and mortgages are easier to get.

Business overview
LGI was founded in 2003 and IPOed in November of 2013 so they just released their first full year of results being a public company. They specialize in building move-in ready homes for first-time buyers (mainly young renters looking to buy) and their average sales price is $166k which is substantially less than the next closest public homebuilder (AVHI in the $250s). Maintaining a growing inventory of move-in ready homes is, in my eyes, much riskier than many builders that only construct homes after receipt of a signed contract and deposit. In good times (like right now) they are able to immediately sell homes though, so it cuts both ways.
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Hornbeck Offshore Services (HOS)

According to Baron Rothschild, the key to making money is to “buy when there’s blood in the streets.” This quote, and more importantly the concept of contrarian investing, has been immortalized by Warren Buffett and many investors following him. Well right now, there’s a whole lot of blood in the streets of the oil industry and Hornbeck Offshore Services (HOS, $19.58) is the best combination of downside protection and long-term upside I’ve seen.

Business overview
Hornbeck manages offshore vessels (OSVs) that supply drilling rigs. 75% of their revenue is domestic (primarily Gulf of Mexico) with the rest mostly in Mexico and Brazil. The beautiful thing about operating supply vessels in the Gulf of Mexico (GoM) is the Jones Act which creates a significant barrier to entry. Essentially, vessels that transport merchandise and passengers in US waters must be owned and managed by US citizens and the vessels must have been built in the US. Foreign vessels can’t just show up and start taking work away from Hornbeck and the other operators. This has obviously created an oligopoly in the GoM and Hornbeck is either the #1 or #2 vessel operator in the Gulf depending on how you measure.
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