We note that Regal International has several positive factors to promote its future development. First, average hotel room revenue (RevPAR) is expected to rise 5-10% year-on-year this year, which is expected to accelerate profit recovery under operating leverage. Second, as the company's real estate development business accounts for more profits, the total net profit has the opportunity to pick up sharply.
With the completion of the nine belly luxury project by Palibao Holdings, a joint venture in which Palibao [0617 HK] and the tycoons each own 50 per cent, the project is expected to generate a pre-tax profit of HK $3 billion (equivalent to 48 per cent of the company's market capitalization) in 2018, which will become a key growth driver of the company in fiscal 18. Third, Regal International began to buy back shares at the beginning of this month, accounting for 0.5% of the outstanding shares so far this month. Currently, Regal International has an adjusted book value of HK $19.16 per share, equivalent to a price-to-book ratio of 0.37 times.
Hotel business: the expansion of the hotel portfolio + the rebound of room revenue. Regal International holds a 74.6 per cent stake in the Regal Industrial Trust [1881.HK], which also owns eight hotels through the latter. Of the eight hotels, the new iclub Hotel in Ma Tau Wai (owned by P&RHoldings) was licensed in May 2017, and the Regal property Trust had the opportunity to buy the hotel from P&RHoldings (the two sides signed a letter of intent). The company has two other Hong Kong hotels under development-Mong Kok (completed in 2018 with 288 rooms) and Sheung Wan (completed in 2019 with 98 rooms). Skycity is a new project awarded by the Airport Authority in February 2017 at a cost of HK $2.189 billion and will be a comprehensive development of hotels (expected to have 1200 rooms), offices and retail stores.
It is estimated that the construction of the hotel project will be completed within 4 years. Management expects average hotel room revenue in fiscal 17 to grow by 5-10% year-on-year due to a rebound in the number of visitors.
As a large-scale luxury property project with low land cost, Jiumao is expected to drive profit growth from 18 years. If all the units are sold (349485 sq ft, involving 136 apartments and 24 luxury apartments), the total pre-tax profit of the project is expected to reach HK $3 billion (profits earned by PriceR Holdings, a 50 per cent joint venture between Balibao and Regal International). The project will be launched when it is completed in 2018. The project is located on site No. 578 of Sha Tin Town lot, which was acquired by the company in September 2013 at a price of HK $6800 per square foot. The most recently sold site is Sha Tin Town lot No. 614, which was acquired by long Real Estate at a price of HK $8001 per square foot. Most of the land in the area is sold at prices ranging from HK $8000 to HK $10000 per square foot. The latest primary and second-hand transactions in the region are worth more than HK $30000 per square foot. For Regal International to acquire land at a low land price, as well as the increase in the average selling price of luxury property market, are good for Regal International.
Other real estate projects will gradually contribute profits in the next two years.
The presale value of the Sham Shui Po project developed by the company in cooperation with the URA will exceed HK $700 million and is expected to be accounted for during the 17 or 18 fiscal year.
Two integrated projects in Chengdu and Tianjin are under development. The two projects will be completed in phases from fiscal year 17, with a total pre-sale value of HK $2.2 billion. The total profit attributable to Regal International is estimated at HK $300 million.
The company's residential units available for sale include 14 units at Regal Bay in Stanley and 23 units in Yuet Ting, Yuen long. Total sales are likely to reach HK $1.6 billion.
Recently, Regal International acquired an urban renewal site on Queen's Road West for a total cost of HK $500 million, which the company intends to use for commercial / residential development.
Other potential acquisition targets nearby are also under consideration.
Huge potential value of hotel assets: at present, Regal International's hotel assets account for 55% of the total assets, and the real estate development business accounts for 22.6% of the total business. Regal's book value per share is HK $12.9, but according to the company, if the hotel assets are priced at market value, the fair value will increase to HK $19.16. Although the management of Regal International declined to comment on any potential sale of hotel assets, we believe that the value of the company has great potential to be released, given that many mainland investors are still looking for quality real estate assets in Hong Kong.
Sound financial position: on the basis of consolidated statements, Regal International's net debt / equity ratio reached 72%, which at first glance may be a little high. However, about 62.3% of the company's debt is at the level of tycoon industrial trusts. As a result, Regal's actual debt is much lower, which is why companies have room to buy back shares. Once the company records strong cash flow from property sales, the situation will continue to improve.
Risk factors: weak tourism in Hong Kong; house price risk; interest rate hike.