Kwek Leng Beng: Winning at the Hotel Game - Commoncog Case Library
How Kwek Leng Beng picked the way he played the hotel game, built specifically around the way he was trained ... and won.
Note: This is Part 15 in a series of articles and cases on Asian Conglomerates. Read Part 14 here. You may read more about the Asian Conglomerate Series here, or view all the published cases here.
In the previous instalment we introduced you to the Singaporean tycoon Kwek Leng Beng and walked through his formative experiences in business. At the end of that piece, we said that we would see what Kwek does with his skills ‘very soon’.
That’s exactly what we’re going to do today. Kwek Leng Beng turns CDL from a regional concern into the largest ‘hotel-owned company’ over the course of the 90s. This case covers his activities from 1989, where he takes over from his father, to about 2021, when he closes the single most profitable project in his career. In the process he buys New York’s most famous hotel from a distressed Donald Trump — an episode you’ll have to read to believe.
This is probably the purest demonstration of tycoon skill in the entire Asian Conglomerate series. It is also a masterclass in capital expertise. Read the full case below before continuing with this essay.
My commentary follows.
Winning at the Hotel Game is probably my favourite case in this series. I’ve spent a lot of time talking about how tycoon skill must be understood within the context of the operating environment that Asian businesspeople find themselves in; more often than not that operating environment means some kind of government granted monopoly.
But here is a tycoon who was forced to become skilful when no government-granted monopoly was given to him. He cut his teeth in his 20s in the lending business, using his natural risk-aversion as fuel to learn about markets and about business. He had a hand in the takeover of CDL, the real estate arm of Hong Leong Group. And then he got into hotels, and fell in love. At age 49, he decided that he wanted to play and win at the global hotel game. And then he did.
Earlier in this series I wrote that tycoon skill may be evaluated on three fronts:
You would be hard pressed to conclude anything other than that Kwek is skilful. He thrives when the capital cycle turns, he wins in many markets where he is not naturally advantaged, and he has no need to hold on to special political capital, because he has no government-granted monopolies to speak of.
This is not part of the case, but folks from the region would know that when Kwek was called back by his father to Singapore from Malaysia, at the point of separation of the two countries, his cousin Quek Leng Chan went over to the Malaysian capital to take his place. From that point on Quek built up Hong Leong Group Malaysia, which split into a separate entity when the two countries went their own ways. The similarities are uncanny. Like Kwek Leng Beng, Quek Leng Chan was a trained lawyer. Like its Singaporean sibling, the Malaysian group maintains interests in construction materials, real estate, and finance. But then here the paths diverge, and things get interesting.
Unlike Kwek, his cousin managed to get a banking license in Malaysia (this is ‘Hong Leong Bank’). Unlike Kwek, his cousin had fruitful ‘working relationships’ with various Malaysian politicians — Malaysia has always had a more flexible relationship with corruption than Singapore. And unlike Kwek, Quek Leng Chan was deemed the flashier, more successful side of the family for much of the group’s earlier years.
And yet it was Kwek Leng Beng who built a global hotel empire on par with Hyatt and Hilton and Marriott. What a blessing in disguise, operating in straight-laced Singapore, with its zero tolerance for corruption and its bias against Kwek’s father. As a result of that bias, the son was forced to get good.
The other bit that I find notable in this case is how Kwek straddled two sides of the globe and played them counter-cyclically against each other. When he started on his empire building, he raised money in Hong Kong and deployed capital in the recession-stricken West; later, when Western economies recovered and the dotcom bubble got going, he raised money on the London Stock Exchange and deployed capital in an Asia reeling from the Asian Financial Crisis.
This also isn’t explicitly set out in the case, but the technicalities of Kwek’s actions matter: alert readers might notice that his initial war chest was around US$188 million, raised in Hong Kong dollars.
19 years later, in 1989, the group placed all six of its hotel properties into CDL Hotels: the aforementioned King’s Hotel, their first; Orchid Inn and Orchard Hotel in Singapore, the Grand Hyatt Taipei in Taiwan, the Manila Plaza Hotel in the Philippines, and Orchid Hotel Penang in Malaysia.
The Kweks then listed CDL Hotels on the Hong Kong stock exchange with an initial market capitalisation of HK$3 billion. CDL maintained ownership of 51% of the company; with this listing it raised a war chest of about HK$1.47 billion (around US$188 million).
This wasn’t that much money, all things considered. Kwek extended his reach by using debt in every single one of his deals — something that is a lot more doable when you have real estate as collateral. (Some of the details of these loans are laid out in the Millennium & Copthorne annual reports. For instance, the details of the rights issue for the Regal chain and the Seoul Hilton deal are outlined in the 1999 report, alongside the new banking facilities that M&C used to finance the deals; in 2000 the debt for many of his US hotels, including the ones in the Regal deal, was refinanced under a new five-year facility of US$550m.) By the time Kwek was playing on the world stage, he had a good sense for what ‘prudent use of debt’ looked like.
Equally striking is what ‘imprudent use of debt’ looks like. There were so many different parties that had blown up in the 90s-era recession, Kwek must’ve felt like he was feasting at a buffet table. This was also true when the tables were flipped during the Asian Financial Crisis. I think Kwek makes it look easy, but I do not believe it is actually easy to use debt as prudently as he did. The fact that the counter-parties are so numerous and so different from each other should give one pause: from Trump, to Macklowe; from Kalikow, to Century Group, to the now defunct chaebol Daewoo. All of these businesses looked successful and flashy and built beautiful buildings, and then they blew up in a downturn.
There is a related challenge. I once wrote, in my piece on The Capital Cycle, that the problem with operating well in a cyclical industry is ‘how [can one] be cash rich when everyone else is poor?’ It’s not enough to run your businesses prudently. It’s also important to pounce when everyone is suffering. Kwek gives us one instantiation of that pattern.
I’ll make a bit of an understatement here: his background in lending probably helped.
The final thing I want to point out is this bit from the very end of the case:
It is actually very clear that Kwek Leng Beng knows the game he plays, and has thought carefully about how to play it. In an interview on the eve of M&C’s listing, all the way back in 1996, Kwek said: “My advantage (over other hoteliers) is that I am not only a hotel person, but also a real-estate person and a financial person.”
The playbook that Kwek uses is fairly clear in retrospect. Buy properties at or below ‘true’ value, ideally from distressed sellers, acting counter-cyclically whenever possible. (Figuring out what ‘true’ value actually is is difficult, and demands that you have a good feel for the market). Make sure those assets are good businesses in their own right, and ensure each property generates enough cash so that you can hold them indefinitely. Improve the hotels if necessary, but always with a ROIC lens; this goes for building new hotels as well. Buy trophy assets that your counter-parties feel emotional about, because that gives you upside. Build and protect your reputation.
In an interview with Kwek’s biographer, former Hilton Group CEO Sir David Michels said: “Leng Beng’s unique. He has been in the business for more than 50 years. Very few people have been in this industry that long as an owner. The brands have been around longer, but never one individual. Hotels go on forever, but most owners go bankrupt. And in the hotel business, you make money from selling and buying not from operating. But he doesn’t sell much and has somehow still prospered (emphasis added).”
Peh Shing Huei writes that Kwek’s hotel business is “infamous in the industry for the frequent culling of its top executives, creating a revolving-door culture, and yet it somehow still works.” Michels adds: “He has defied every logic of the hotel business: you should sell hotels, you should be able to employ great employees, you should keep people loyal for years. Somehow Leng Beng has done everything you shouldn’t do, and he’s not only still there, but he’s still prosperous. Somehow he manages to balance the hole thing into the world’s biggest hotel-owned company. I have witnessed it but I can’t explain it. I haven’t been jealous of many people but if I’m jealous of one person – it is him because I don’t know how he bloody does it. It’s extraordinary.”
It is somewhat odd, isn’t, that a hotel management company can be ‘notorious’ for high executive turnover and yet still be regarded as successful. So I’m going to hazard a guess here: I suspect that Kwek’s hotel company is good but not great on the management side of the business. You’re probably not going to get an exemplary experience at one of their hotels, and you’re probably not going to have an exceptional experience from their points program (unlike, say, with Marriott Bonvoy, which is truly well executed). In Singapore, the vast majority of M&C’s brands are regarded as reasonable value for money, with a clear value proposition and solid positioning. But nothing to write home about.
I’ll caveat my opinion here with two exceptions: I’ve not experienced the luxury-end of the Millennium brand. This includes The Biltmore chain of hotels and (the appropriately named) Leng’s Collection, both of which better be exceptions. For the rest of the brands, however, personal experience and a cursory Google search tells me I’m not too far off the mark.
It would be odd if Kwek’s hotels are exceptionally well run. Nothing in the tycoon’s past would indicate that hospitality runs in the man’s blood (nor in the blood of his family’s conglomerate). His approach is a coherent business strategy, designed to produce profitable hotels in gateway cities around the world.
But the important thing is that Kwek Leng Beng chose to play the hotel game on his terms, based on his strengths. It would be even more illogical if he fought the established chains on their own turf.
The results, I think, speak for themselves.
Let’s end by discussing the core arc as applied to Kwek Leng Beng. As mentioned in our previous instalment, Kwek diverges quite significantly:
Kwek’s case is truly exceptional when compared against the rest of the tycoons we’ve examined in this series. It’s tempting to say that his story doesn’t line up — that it is so different that he should be excluded from the series altogether. This is true, except for the inconvenient fact that his father fits the template of an Asian business tycoon perfectly. Hong Leong would’ve looked like any of the other conglomerates we’ve examined together, had Kwek Hong Png not decided to settle in Singapore, or had Lee Kuan Yew not become its prime minister. But he did, and Singapore turned out to be the only uncorrupted government in the entire region, and his son had to get good, and so here we are.
We have one last tycoon to study, and then I’ll bring this entire series to a close.
This is Part 15 of The Asian Conglomerate Series. The next part is incoming.