Uni-Asia: Ships and property make for strange, but complementary bedfellows

An aerial view of Singapore’s portAn aerial view of Singapore’s port

Asset manager Uni-Asia has bolted together property and shipping, in a seeming mismatch that’s managed to pay out relatively steady dividends for several years.

Uni-Asia CEO and Chairman Michio Tanamoto told Shenton Wire recently that there’s one clear reason for the seemingly mismatched businesses: They generate cash flow.

The basic business model is to create investment opportunities with strong cash flow, either with direct investments or via asset management services, Tanamoto said.

Chief Financial Officer Lim Kai Ching expanded on the theme: “Our base for maritime assets is to provide recurring income, whereas for our property, we mainly buy or develop or sometimes invest in some development project and once they are completed, we sell them off, recycling the capital,” Lim told Shenton Wire.

“So the recurring income base, plus the capital return portion of the property, helps to build a very strong foundation for our profit level,” Lim added.

Brokerage KGI said in a note dated 14 March that Uni-Asia’s cash flow from operations has improved every year since 2014, allowing the company to increase dividends in 2018 to 7.0 Singapore cents.

Shipping headwinds

To be sure, some of the maritime assets are facing some serious headwinds.

In its 2018 earnings, Uni-Asia reported a US$9.2 million valuation loss, mainly for containerships and a disposed product tanker investment, and an impairment of US$3.0 million for a wholly owned containership investment.

That pushed the company to a fourth-quarter net loss, but brought the valuation of the containerships to a fairly low level, suggesting there’s little valuation downside left.

Uni-Asia owns 100 percent of one containership and 50 percent stakes in three others.

Even with the write-downs, Tanamoto still pointed to headwinds for the containterships, particularly the on-going trade war.

“That has had a big impact on the container market; that was the reason why we recognized certain valuation loss [on the container vessels],” Tanamoto said.

“The exports from China to the U.S., the cargo carried by container, I think is going to be reduced due to taxing by the U.S.,” Tanamoto said, noting that the demand for vessels is gradually declining due to the trade tensions.

He noted that Uni-Asia is in the business of chartering vessels, so the company is looking at signals from vessel operators, and not directly talking with exporters.

However, Tanamoto noted the bulk shipping portfolio was performing better; Uni-Asia has seven wholly owned and 11 jointly owned bulk carriers. He said the segment has many older vessels due for scrapping, which means supply is lower.

KGI said it expected Uni-Asia’s shipping segment would remain profitable, due to its long-term contracts.

“We believe UAG’s share price already reflects the weakness in the shipping sector,” KGI said. “Looking forward, the easing of trade tensions and increase in demand from new stimulus measures in China may reverse the decline over the last two quarters.”

The brokerage added that the stock was trading at an “attractive” 50 percent discount to its book value, and that downside risk appeared limited.

The stock ended Friday at S$1.22, down 1.61 percent; its dividend yield was at 5.12 percent, according to Bloomberg data.

Property investments

Around 57.4 percent of Uni-Asia’s assets allocated to maritime investment at the end of 2018, with another 21 percent in property investments.

Those real estate investments focused mainly on two markets with a long history of steady demand: Tokyo residential and Hong Kong commercial property, which is mainly office projects, and the developments are sold off upon completion.

Lim said that in Hong Kong, the government hasn’t been very focused on commercial property. In recent years, authorities there have been working to increase the availability of residential property.

Uni-Asia has a partnership with First Group to acquire Hong Kong land, either via government land sales or from an existing owner, for development, with one project completion expected each year through 2022. It has invested in six projects there so far.

For the Tokyo residential developments, Lim said Uni-Asia sources land near train stations and develops it into four to five storey apartment blocks, which it leases out before selling en bloc, or in their entirety, often to funds or high-net-worth individuals. Each apartment unit is generally a studio, aimed at a single person, and they tend to be popular with professionals, Lim said.

Tanamoto added that Uni-Asia tends to have six to nine of those projects a year, with a quick turnover within around a year; the sales price of each building tends to be around US$5 million to US$7 million, Tanamoto said.

In addition to the residential property, Uni-Asia also operates 16 hotels in Japan under the Vista Hotel brand, which has a total of around 2,667 rooms under management; it expects to have around 3,500 rooms by the end of 2020. The company leases hotels from the owners on long-term leases and doesn’t own the properties.

The hotels are aimed at Japanese business travelers, and about 53 percent of guests are from corporate clients, with more than 70 percent Japanese nationals.

Headwinds in Japan hotels

Looking ahead to the Olympics in 2020, Lim said that while inbound tourism was likely to increase, the segment was also becoming more competitive, with more players in the market.

Both Lim and Tanamoto were emphatic that Japan’s decision to impose regulation on Airbnb was a positive for Uni-Asia’s hotel operations.

However, the hotels face some accounting headwinds ahead: Due to changes to accounting standards, the leases for Uni-Asia’s hotels will need to treated as liabilities, instead of merely rental expenses, Lim said. The change will also cause an increase in interest expenses.

“It does not affect operations. it does not affect the risk and cash flow from these assets,” Lim said, adding the hotels would contribute to the bottom-line from 2021.

“Even with this lease accounting, based on our business plan, it’s going to be a good year in 2019,” Lim said.

KGI said that it expected core earnings for the hotels would be profitable.

In addition, the brokerage pointed to a boost from Japan hosting two of the world’s largest sporting events: the Rugby World Cup in 2019 and the Tokyo Olympics in 2020, which it expected would boost both occupancy and hotel rates over the next two years.

“We find this segment the most promising among Uni-Asia’s business segment in terms of contribution to the group’s bottom line beyond 2021,” KGI said.

The brokerage rates the stock at Buy with a S$2.07 target price.


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