Company Update: Renovating Sheraton-Hong Kong Hotel
The renovation work on Tai Cheung’s 35%-owned Sheraton-Hong Kong Hotel in Tsim Sha Tsui commenced in Nov-21. With a budgeted capex of c.HK$400m, the refurbishment is targeted for completion in mid-2022. This should enhance the hotel’s competitiveness in attracting tourists once the border control measures are relaxed.
Foundation work for the Ap Lei Chau project commenced in Jun-21. The site was acquired through government tender for HK$1.33bn or HK$15,097psf in May 20. Scheduled for completion in early 2025, the site will be developed into a luxurious residential tower with GFA of 88,280sf.
Prior to the recent COVID resurgence, sentiment on the luxury residential market has improved along with local economic recovery. Since Nov 21, three apartment units at Mount Nicholson on The Peak were sold for HK$1.78bn or HK$137,600psf. With a combined market value estimated at HK$6.7bn, Tai Cheung’s two luxury home projects should yield a pre-tax profit of HK$3.9bn when fully sold. They should be the mainstay of the company’s earnings in the years ahead. However, the spread of the Omicron variant has delayed the border re-opening, which is crucial for the company’s luxury home sales with the return of affluent Mainland buyers.
As of Sep-21, net cash fell slightly to HK$1.83bn from Mar-21’s HK$1.91bn. Nevertheless, the company remains financially strong to fund the hotel renovation and pursue value-accretive acquisitions when the opportunity knocks.
In the previous three months, Tai Cheung’s share prices rose 1% outperforming the broad market by 8ppt. The stock is now trading at 78% discount to our current assessed NAV. Stripping out the net cash holding, the remaining stub is trading at a deep discount of 90%. The recent spread of the Omicron variant has delayed the long-awaited border re-opening. We do not foresee any near-term catalyst to narrow the company’s discount to NAV. Downgraded to HOLD with TP of HK$5.55, derived from assigning a 75% discount to our Dec-22 NAV estimate.