Tai Cheung - Sheraton-Hong Kong Hotel sees solid earnings recovery
- Beneficiary of a resurgence of luxury demand following policy relaxation
- Sheraton-Hong Kong Hotel’s earnings to rebound on RevPAR recovery
- Solid balance sheet strength supports consistent dividends
- Maintain BUY with HK$4.44TP
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The French Valley Airport Center in US continues to sell well, which should support of the company’s development earnings in the near term. Construction work for Ph 4 has commenced with targeted completion by end-2024.
Pre-sale consent for the Ap Lei Chau development pending approval. Tai Cheung is applying for pre-sale consent for its upmarket residential project in Ap Lei Chau. Construction works are now underway. Upon expected completion in late 2025, this project will offer 38 mid-to-large sized luxurious apartments with total GFA of 88,280sf. In May-20, the company secured the site at a land premium of HK$1.33bn or c.HK$15,097psf. Including financing cost and construction cost, we estimate all-in development cost at c.HK$24,600psf on saleable area basis.
Sheraton-Hong Kong Hotel stages solid post-pandemic recovery. Following the completion of extensive renovation, the 35%-owned Sheraton-Hong Kong Hotel in Tsim Sha Tsui is well placed to capture the revival in tourism, and hence the demand for hotel accommodation after the lifting of travel restrictions. Thanks to the return of Mainland tourists, which now account for the majority of hotel guests, RevPAR for Sheraton-Hong Kong Hotel has gradually returned to pre-COVID levels. On the other hand, F&B income recovery has lagged and is below the pre-COVID level. Re-letting of the retail arcade within the hotel led by the departure of SOGO Department in mid-23, is in progress. Overall, we forecast profit contributions from Sheraton-Hong Kong Hotel to surge more than five-fold in FY24, followed by 34% growth in FY25.
Net cash position remains strong. We estimate Tai Cheung’s current net cash holding will reduce slightly to HKD1.1-1.2bn, from Sep-23’s HKD1.26bn, due to dividend payment and construction expenses for Ap Lei Chau project. Solid balance sheet strength supports the company’s consistent dividends.
Attractively valued. The stock is trading at an 84% discount to our assessed current NAV. Excluding its net cash holding, the remaining stub is trading at 93% discount. The removal of property curbs should facilitate the sales of its luxury homes. Aided by higher RevPAR led by the return of Mainland Chinese tourists, profit contribution from Sheraton-Hong Kong Hotel should continue to improve. Based on target discount of 79% (1SD below its 10-year average) to our Jun-25 NAV estimate, we set our TP at HK$4.44.
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