Pre-Thesis -Proj B2B

[Preliminary Investment Thesis on Project B2B]

*Background and Initial Thoughts*

This my first day attending the CS China Conference in SZ. I met four companies and saw a product demo presented by HOLT team. Among four companies, one company is in an industry with headwind, one company might have financial difficulties, and one company with high market expectation. The only company caught my eye is one currently with niche market dual brands and large amount investment portfolio.

Before due diligence, I guess is that this might be a multi-year price adjustment opportunity. So, instead of targeting a 12-months return of x%, opportunity might be better measured in IRR of X% in n years.

I had no idea about this company before the meeting. The company has dual sports brand operation. I’m not interested in this kind of business as it generally doesn’t have sustainable competitive advantage. However, the company has large amount of investment portfolio on its balance sheet. The amount is so significant that the company even regards investment as a business segment.

I haven’t took a deep dive into sports brands operation but as long as it’s not losing / burning huge amount of money / cash, the investment portfolio might create an investment opportunity as the market is not good at valuing the those investments leading to discount on investment reflected in company valuation (like Sotfbank).

So initially I want to build the investment thesis around the undervalued financial asset and free operating asset. Not sure how thesis will develop after more research being conducted.

Reasons why market discounts the financial assets in non-financial company

  • The control over financial asset: it’s difficult for minority shareholders to have a say in the Investment/Divestment/Reinvestment/Return of Capital (via dividend or share buyback) decision-making.
    • Potential sol: activism campaign
    • Focus area: background of ultimate owner and what is his current business main focus (you can regard fund management within the company as business unit OR you can think it as a way for someone who has corporate control to “make investment” with permanent capital partially from public    former, meanwhile building up relationship with external investment guys.
  • The investment skill: it’s difficult for the market to determine whether the manager is creating value or destroying value on those financial assets in the long run.
    • Focus area:
      1. Examine the asset quality
      2. Review the “business plan” of fund management and it’s track record

What about the operation of main business

  • Limited brand portfolio and still solving some supply chain problem. Recently brought in some senior managers.
  • Key in this thesis is that as long as this business unit breaks even and does not burn cash, self-sustaining operating asset might be easier to monitor. We will see this after reviewing their financials.


  • Value trap (what’s the catalyst and how long does it take to unlock the value)
  • Cash flow issue for this type of company (investment management business + non-cashcow, non-financial business)

Stabilization in Hotel

After the hotel opening, the next milestone for financial stakeholders is stabilization. The interval between opening and stabilization is called build-up period or ramp-up period.

The shorter the build-up/ramp-up period is, the higher return equity capital providers get and the lower risk to which debt capital providers are exposed.  This is because the hotel property is generally valued based on it’s stabilized performance. As the newly-built hotel does not have operation history, potential investors are less likely to buy in rosy pro forma provided by the seller. Once the hotel has enough traction, it’s easier for parties to communicate the valuation metric on forward-looking basis. The reason why the we derive the hotel valuation from a forward metric, for example net operating income (NOI) or net cash flow (NCF), is that it’s how the finance math works.

Recall a simple dividend discount model (DDM). The present value of a stock (PV) is dividend to be distributed next year (D) divided by cost of equity (r) minus terminal growth rate of that dividend (g).

PV = D / (r-g)

The DDM implies that the business has ready reached the steady state (or at least stabilizes next year from the point of time the business being valued)  so the performance of underlying operation should grow in tandem with industry and broad economy. From a value investing perspective, investor figures out the normalized earnings power for a company in steady state. The dividend just is a function of that earnings power (free cash flow is a reasonable estimate).

Due to aforementioned mathematical relationship, when considering investment timeline, investors tend to set the exit year 1 year before the estimated stabilization year. For example, if the construction and hotel pre-opening take 2 years and it takes another 3 years for the hotel to stabilize, the exit will be set at the end of Year 4.

If someone has hands-on experience in hotel operation, she/he might understand that it’s much more complicated to get hotel operation on track than just punching numbers in spreadsheet. That said, the stabilization for particular proposed hotel project is examined in the feasibility study well before the opening of hotel.

Few questions to answer when considering hotel stabilization:

  • What is the key metric for stabilization?
  • At what operational level, the hotel is considered stabilized?
  • How long does it take for a hotel to reach stabilization?

Occupancy as the key metric to determine stabilization

There are two key metrics for hotel room department, Average Daily Rate (ADR) and Occupancy. Occupancy is a better metric to determine stabilization because the ADR has no upper bound and that new hotel generally can charge higher on guests compared to its competitive incumbents.

Methods to estimate stabilized occupancy level and time to reach stabilization

1. Widely-adopted 3-Year Build-up Assumption

  • The assumption is supported in the empirical study, Hotel Occupancy: Is the Tree-Year Stabilization Assumption Justified?.  I think this is a standalone approach as it defines a hotel reaches stabilization when the occupancy level did not increase by 1 percentage point from previous year. While the hotels tested in the study are located in United State, I think it generally holds.
  • Other notes:
    • Luxury, upper upscale, and independent hotel stabilize more slowly than upscale hotels
    • Hotel size and service level is less correlated to the length of build-up period
    • Location and market matter
    • Brand matters. Another study, How Fast Do New Hotels Ramp Up Performance, finds that branded hotels (no matter it’s brand-managed or franchisee-managed) were able to stabilize the occupancy level faster than independent hotels which supports the convention thoughts that hotel brands add value to the property by bringing in brand recognition / global reservation system / hotel loyalty program.
    • [A case study of build-up pattern of two Taiwan hotels is shown below]

2. Penetration analysis

3. Pro-forma provided by hotel operator 

[A Case Study on Build-up Pattern]

*Taipei Marriott Hotel vs Grand Mayfull Hotel Taipei*

I choose Taipei Marriott Hotel vs Grand Mayfull Taipei as my case study for the following reasons:

  • Both are 5-star hotels (probably upper-upscale)
  • Close to each other (roughly 500m) and close to my place (shown on bottom left)
  • Interval between two hotel opening is roughly 6 months
    • Taipei Marriott Hotel opened on September 28, 2015
    • Grand Mayfull Hotel Taipei opened on April 2, 2016


Grand Mayfull Hotel Taipei | Taipei Marriott Hotel









Grand Mayfull Hotel Taipei

The hotel did a 3-months trial run (charging guests with invoice issued) before the hotel grand opening on April 2, 2016. The operation during the trial run was recorded. The occupancy during trial was between 0.29% to 4.18% while occupancy in grand opening month (almost a full month) was 1.78%. The occupancy climbed to 39.5% in November 2016 and appeared to gradually stabilize onwards. The latest data available as of writing is post shows the trialing twelve month occupancy in June 2018 was 47.4% and it has been 27 months (2 years and a quarter) since the grand opening. For comparison, the average occupancy for international hotel in Taipei area was 72.8% in 2017. Observing from the pattern, if there’s no initiatives on sales and marketing or other activities, it seems the hotel is reaching stabilization with an unfavorable occupancy level.

Grand Mayfull Hotel Taipei Occupancy

Taipei Marriott Hotel

The hotel did a 2 months trial run (August and September 2015) before grand opening on September 28, 2015. The occupancy in trial run were 3.8% in August and 21.0% in September. The chart shows that the occupancy has been increasing since trial run with higher average level and fluctuation compared to that of Grand Mayfuull Hotel Tapei. From the pattern and time elapsed, the property might be about to stabilize with market comparable occupancy level.


To mitigate the age influence from opening timing, the grand opening month is defined as Month 1 (M-1). In the mean time,  trailing twelve months is selected the metric in the comparison to smooth fluctuation resulting from seasonality. 圖片8

The chart above supports the idea that international brand can add value to the hotel by bringing in brand recognition / global reservation system / hotel loyalty program. Value-add reflects in time to reach stabilization and the stabilized operating level.

Since the opening month,  gap in occupancy between two hotels has been more 10 percentage points. It seems that Taipei Marriott Hotel follows a 3-Year stabilization pattern. On the other hand, it seems Grand Mayfull Hotel Taipei stabilizes slower or reaches at a lower stabilized occupancy.

In addition to aforementioned factors, other reasons why Grand Mayfull Hotel Taipei underperformed include:

  • Experience level: Taipei Marriott Hotel is franchisee-managed and the franchisee has experience in hospitality business while the owner/operator is a new entrant to this trade.
  • Different focus on market segment: MICE (Meeting, Incentive, Convention and Exhibition / Event) is one of focused market segments for Taipei Marriott Hotel. MICE might can bring in large amount guests with longer length of stay.


Data from Taiwan Tourism Bureau