Reverse Engineering Martin Whitman’s Wheelock Position: Part I

Martin Whitman is a legendary value investor and manager of the Third Avenue Value Fund (TAVFX). While his fund has suffered in 2008, his long-track record and expertise in distress investing make it worthwhile to try to figure out why he holds the investments he does.

In his 2009 Second Quarter Shareholder letter he lists several Hong Kong Stocks currently owned by the fund and their respective Net Asset Values (NAVs). In this column we attempt to reverse engineer his Wheelock Group position.

Please note, it will not be a perfect glimpse into his buying behavior since the position is not new.

Wheelock & Co Reported NAV

Wheelock and Company Limited (referred throughout the article as Wheelock Group) is a listed investment holding company headquartered in Hong Kong. The company is led by Chairman and owner of 59% of Wheelock’s common, Peter Woo. Wheelock Group’s holdings can be broken down into three main operating companies:

  1. Wharf Holdings Limited (50.02% owned by Wheelock Group)
  2. Wheelock Properties (74% owned by Wheelock Group)
  3. The Wheelock Company and Other Operating Assets (100% owned by Wheelock Group)

As shown in Third Ave’s 2Q letter, the reported NAV/share for the Wheelock Group is $28.91 (HK$). The diagram below illustrates the holdings of Wheelock Group and includes the negative value of the unassigned Corporate Items.

(CTRL+Click to Enlarge and open in new window)


The current stock price is trading at a 48% discount to the reported NAV of Wheelock Group. Since book value does not always equal the intrinsic value of a company, it warrants further review. In international accounting (IAS/IFRS) real estate properties are revalued each accounting period to reflect the current market value, not the original recorded cost. This allows an investor to be confident in the reported balance sheet value of the investment properties. Further, note 12d to the year end financial statements reads:

12 d) Properties revaluation
The Group’s investment properties were revalued as at 31 December 2008 by Knight Frank Petty Limited and CB Richard Ellis (Pte) Ltd, independent firms of property consultants, who have appropriate qualifications and experience in the valuation of properties in the relevant locations, on an open market value basis, after taking into consideration the net rental income allowing for reversionary potential and the redevelopment potential of the properties where appropriate.

Adjusted NAV Valuation

In his book Value Investing: A Balanced Approach, Martin Whitman provides an example of how he values Toyoda Automatic Loom Works Ltd.

He shows an illustration of an adjusted balance sheet. He uses 6X and 8x multiples of operating income to determine the operating assets value. He then adds the market value of the Toyota Motor Common and Marketable Securities on the balance sheet to arrive at the adjusted NAV.

We attempt to do the same for Wheelock group.


For simplicity purposes, we have assigned a $0 value to many other items that likely have a higher true worth. In addition, due to the ownership structure of Wharf and Wheelock Properties, the assets below are reported at 100% and the minority interest is removed at the end. We use the same minority interest percentage reported in the 12/31/2008 balance sheet as an estimate. A more precise value would involve finding an adjusted NAV for Wharf and taking 50.02%, finding an adjusted NAV for Wheelock Properties and taking 74%, and finding the remaining adjusted NAV of Wheelock Group and adding them all together.

Close End Fund Valuation

Since both Wharf Holdings LTD (WARFF.PK) and Wheelock Properties (WLKPF.PK) are publicly traded securities, and account for over 90% of Wheelock Group’s reported NAV, Wheelock Group could be valued as a Closed End Fund. The diagram below determines Wharf Holdings’ and Wheelock Properties market value based on the most recent stock price and uses reported NAV for the Corporate Items and The Company and Its Other Subsidiaries.


According to the above diagram, Wheelock group trades at an 18% discount. If an investor assumes that the liabilities of the Corporate Items (which represent net debt of the Company and its wholly-owned subsidiaries.) will not increase any time soon, there is an arbitrage opportunity there for him or her.

Since Wharf Holdings and Wheelock Properties both appear to be trading at a discount to reported NAV, an investor may be better off simply holding Wheelock Group. 

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