Boosted by strong investment income
Tai Cheung was back in black with net profit of HK$3m for FY22. (FY21: net loss of HK$28m) This was led by investment income on financial assets primarily resulting from the distribution of US listed equity securities within an investment fund held by the company. The result was not a surprise to the market as the company has issued a profit alert earlier. Final DPS stayed unchanged at HK$0.12, taking the full-year DPS to HK$0.24. (FY21: HK$0.24)
Gross profit amounted to HK$3m which stemmed primarily from selling Ph 1 & 2 of the French Valley Airport Center, an industrial and commercial project in California. Construction works for Ph 3 is in progress with expected completion in 4Q22. On the other hand, Tai Cheung did not sell any luxury houses at Pulsa in Repulse Bay and Plunkett’s Road on the Peak.
Profit contribution from its 35%-owned Sheraton-Hong Kong Hotel was HK$19m, which came primarily from leasing the retail arcade to SOGO Department Store. Since Nov-21, the hotel portion has been under renovation which is scheduled to be completed in Oct-22. With budgeted capex of HK$400m, the renovation should enhance the hotel’s long-term competitive edge in attracting high-yielding travelers.
As of Mar-22, Tai Cheung’s net cash stood at HK$1.64bn, down slightly from Sep-21’s HK$1.83bn, mainly due to the payment of an interim dividend and construction expenses for the Ap Lei Chau project. For Ap Lei Chau luxury development, all piling works have been completed and excavation works had just commenced in mid-Jun.
With the pandemic-led restrictions gradually easing, the luxury market sentiment in Hong Kong has exhibited initial signs of improvement. Recently, a luxury house at 15 Shouson in Island South, developed by a consortium comprising Emperor International, Mingfa Group, CC Land and CSI Properties, was sold for HK$870m or HK$108,347psf.
Elsewhere, SEA Holdings acquired a luxury residential lot in Repulse Bay through a government tender for HK$1.188bn or HK$62,352psf in Feb-22. This should signal high values for The Pulsa nearby.
In the past six months, the share price of Tai Cheung has dropped 7%, slightly underperforming the broad market. Meanwhile, the stock is trading at 80% discount to our appraised NAV. Excluding its net cash holding, the remaining stub is trading at 91% discount. Investment value has re-emerged after the share price correction with signs of improving luxury market sentiment. Based on target discount of 75% to our Jun-2023 NAV estimate, we set our TP at HK$5.62, which suggests 25% upside potential from the current level. Upgrade to BUY.