SiS International Holdings (SiS) is a HK-listed investment company that operates through three segments: real estate investments, distribution of mobile & IT products and other investments. The majority of the company’s value today is derived from its attractive and sizeable portfolio of real estate assets, which management first started investing in after selling SiS’s IT services business to Jardine Matheson in 2010.

The company’s small cap status, limited trading liquidity and business evolution have resulted in its stock being both under-followed and undervalued. In fact, the majority of investors might not even be aware of SiS’s transformation over time from an IT services company to (essentially) a real estate investment company. Currently, the company’s shares trade at a >50% discount to a conservative estimate of its net asset value (see more below).

A quick side note here – generally, I avoid “discount to NAV” plays in the context of listed Asian real estate companies (especially small caps). There are often all sorts of accounting issues at play, exacerbated by a lack of intent on the part of the controlling shareholders to create and unlock value for minority shareholders. 

SiS, however, is an exception. The controlling shareholders (the Lim family) have an excellent track record creating value for all shareholders over time. Their playbook is relatively straightforward – incubate and develop businesses within the holding company and, when the time is right, spin them out. They did this most recently with the listing of SiS Mobile on the Hong Kong Stock Exchange and I predict a similar outcome for their real estate portfolio. Based on some back of the envelope numbers, I think the company could be worth at least 2x within the next 18-24 months.

Valuation Snapshot

The analysis above represents my conservative estimate of net asset value. I think there could be further upside to the value of the real estate portfolio, but I wouldn’t want to build my base case around it. Let’s do a quick review of the different segments and my approach to valuing them.

Real Estate
SiS’s real estate portfolio consists primarily of hotel properties in Japan and commercial properties in Hong Kong. They also own a few commercial and residential properties in Singapore, but these are not significant in comparison to their investments in the other two countries. The majority of the real estate investments in Japan were made opportunistically from 2012 through 2015, at relatively attractive valuations. In recent years, tourism has emerged as one of the few and consistent bright spots in Japan’s economy, so these look to be very sound investments indeed.

The fair value of the investment properties in Hong Kong, Japan and Singapore have been arrived at on the basis of valuations carried out by three independent companies (DTZ Debenham Tie Leung, CBRE KK and Knight Frank). In valuing the Japanese properties, the cap rates used ranged from 4.8% to 6.4%, which seems reasonable. In valuing the Hong Kong and Singapore properties, the key driver was price per square metre. Here, the valuers used market comparables and took into account other factors including location specifics, road frontage and so on. Overall, I would not be surprised if management has been conservative in how it has reported the value of these investments.

Distribution
SiS Mobile is one of the leading distributors of mobile phones in Hong Kong. Its customers include wholesale buyers, telecom services operators and chain retailers. The company currents acts as the distributor for a number of brands including Acer, Alcatel, Blackberry, Lenovo and Samsung.

The company was a wholly owned subsidiary of SiS until its listing on the HKEX in early 2015. After the spin-off, SiS retained a ~52% stake in SiS Mobile so the latter’s results are consolidated into the former’s financial statements. For simplicity, I have just taken the market value of this stake. A more rigorous approach would likely use a variety of valuation techniques to come up with a range, but the reality is that SiS Mobile contributes relatively little to the broader investment thesis.  

Other Investments
SiS has a number of other investments, including:

• A ~47% stake in SiS Distribution, a leading distributor of IT products in Thailand including computers, mobile phones, electronic gadgets and computer components. The company used to be a wholly owned subsidiary of SiS but was listed on the Stock Exchange of Thailand in 2004.
• A ~38% stake in ITCL, a provider of payment gateway services and one of the leading providers of ATMs in Bangladesh. In 2016, ITCL was listed on the Dhaka Stock Exchange and the Chittagong Stock Exchange.
• A separate portfolio of unlisted investments, listed equities and short-term investments.

To be conservative, I have taken the attributable book value of these investments as reported in SiS’s 2015 annual report (market value for the portfolio of listed equities and short-term investments). I have also attributed zero value to all of the company’s other investments and activities, including businesses such as SiS Asset Management.

Management
SiS is majority owned and run by the Lim family, who have an excellent track record creating value for all shareholders over time. They have proven to be opportunistic investors in the best sense of the term but they have also stuck to their circle of competence – primarily information technology, distribution and real estate.

As mentioned previously, their playbook is to incubate and develop businesses within the listed holding company and, when the time is right, spin them out to unlock value for shareholders. If a public market exit is not possible, SiS has typically sought to realize value in other ways (for example, via a trade sale).

Let’s look at some examples of value realisation over the last 10 years or so:

• 2004: Listed its wholly owned Thai subsidiary on the Stock Exchange of Thailand
• 2010: Sold its IT services business to Jardine Matheson for ~US$130m
• 2011: Acquired a minority stake in ITCL, a provider of gateway payment services in Bangladesh
• 2012-2014: Reinvested proceeds from sale into Japanese hotel properties
• 2015: Listed SiS Mobile, its HK distribution business, on the Hong Kong Stock Exchange
• 2016: ITCL was listed on the Dhaka Stock Exchange and Chittagong Stock Exchange

In my view, investing in SiS today is a bet on a similar outcome for their sizeable real estate portfolio (worth at least HKD 13 per share). I think the likely cycle for their real estate investments is approximately 5-7 years, which would results in a timeline of 2017-2019 based on when they first started investing in the sector.  

Other Shareholders
One other interesting data point is that Yeoman Capital Management, an investment firm based in Singapore, holds a ~4.7% stake in SiS (as of December 31, 2015). They are a respected value shop in Asia and their funds under management have yielded a CAGR of 12.55% over almost 19 years. For more about them, see their website.

Risks
In my view, the biggest risk relates to timing – in other words, how soon the value of SiS’s real estate investments can be realised. My bet is that this happens in the next 1-2 years, in which case ~2x returns to shareholders represents a very attractive time-adjusted rate of return. A spin-off into a publicly listed REIT structure would probably be the best case outcome, but this is subject to market conditions and investor appetite for (primarily) Japanese hotel real estate. I still think shareholders will do well over time with SiS, but other levers are relatively limited in the short term (for example, share buybacks are not possible given the public float is close to the minimum ~25% threshold).