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MPO Fund – a safe long-term bet on China’s emerging wealth

By the Investors' Chronicle
Macau Property Opportunities Fund (MPO) – BUY

Macau Property Going Cheap 

Bull points
  • Macau continues to boom
  • Shares trade far below net asset value
  • Strong track record
Bear Points
  • Softening housing markets in Hong Kong
  • Only occasional dividends
Normally, we’re not keen on shares in overseas property companies – the concept of ‘location, location, location’ is best understood locally. But it may be worth making an exception for Macau Property Opportunities, a $278m (£172m) fund that owns property developments in an infamous gambling colony off the South China coast.

Yes, it’s speculative – quite literally, as the gaming sector remains the backbone of Macau’s economy. There are no regular dividends, disclosure can be patchy and it’s based on the other side of the globe. Yet the Chinese love to gamble and casino-style gambling is very popular in the Middle Kingdom – but Macau is the only place that the Chinese are allowed to do it legally.

That makes the former Portuguese trading outpost a safe long-term bet on China’s emerging wealth. Macau’s per capita income exceeded $51,000 in 2010 – among the highest in the world – with an extraordinary growth rate of 26 per cent, thanks to the rampant expansion of the casino trade.

So why gain exposure through Macau Property Opportunities? The basic reason is that the shares are going cheap, on a 36 per cent discount to book value (adjusted to revalue trading properties, which are normally held at cost, up to realisable value).

There are subtler reasons too. The fund has been around since 2006 and has a good track record – topping five-year performance league tables until the recent share price plunge. It is run by two Brits at specialist fund manager Sniper Capital, so it knows that UK shareholders want their dividends – it returned $17.9m of cash last year after selling a housing development; although its cash flows are too lumpy for regular payouts.

Investors have sold off the fund’s shares over the past nine months because of fears that the reversal in Hong Kong house prices will infect neighbouring Macau. This certainly looks a risk, with over three-quarters of the fund’s assets in the residential sector. Housing transaction volumes in Macau fell last year and will probably fall again this year.

Yet there are reasons to be sanguine. Macau’s house prices haven’t turned yet. And the dip in transaction is the result of government cooling measures to stop flat-flipping – a new stamp duty rate of 20 per cent was introduced last year for properties sold within a year.

The Macau government can just as easily turn the taps back on if sentiment turns overly bearish. With 85 per cent of its revenue coming from a hefty gambling tax, if hasn’t run a deficit for years.

Moreover, the longer-term fundamentals of Macau’s housing market are strong. Flats in Macau cost only a third of their Hong Kong equivalents, although a bridge is currently under construction that will bring the islands within half an hour’s drive of each other. Four out of five Macanese own their own home, but household debt is fairly low, with average mortgage payment of 21 per cent of income. So it’s easy to imagine they will happily trade up to larger or more expensive homes over time. There’s also little danger of oversupply on a pair of islands just 12 times the size of Hyde Park.

That leaves the discount of net assets looking a bit steep. Of course, the shares could continue to decline – much depends on sentiment towards China, which varies from month to month. But 110p looks a useful entry price for a medium-term investment in a company with little debt, a good track record and exposure to a booming geographical niche. Buy.

IC Tip Rating
  • Tip style: Speculative
  • Risk rating: High
  • Timescale: Long Term

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