Description

Pacific Century Premium Developments (PCPD) is a Hong Kong-listed property developer and a publicly listed 62%-owned subsidiary of Richard Li's PCCW.

This was a very confusing story for quite a while but is considerably easier to understand now that its main development project is winding down. The company was originally formed to hold the real estate development assets of PCCW and currently has two main assets--Pacific Century Place in Beijing and the BelAir development in Hong Kong--along with one free option. At the current price you get the Beijing asset for virtually nothing as well.

Pacific Century Place is located in Beijing. It is a 1.7mn square foot residential/office/retail park completed in 1999. It is centrally located and is fully occupied. Rents have been trending up and tenants include multinationals such as Nokia. The residences are supposedly high-end, though I have not seen them personally. NOI is projected to be about 153mn HK$ equivalent in 2007 and growing 5-7% per year. The company is in the middle of a multi-year refurbishment which should help support rental growth. Cap rates in Beijing for similar properties run between 4-5% (sometimes lower), but at 4.5%, the property value is roughly HK$3.4bn.

BelAir is a luxury residence development adjacent to the Cyberport development on Hong Kong Island. Cyberport is a government owned and developed IT-focused community development with hotels, retail, and entertainment facilities with capacity for at least 100 high tech companies and 10,000 professionals. PCCW/PCPD was granted the right to develop the adjacent land (i.e. BelAir) with a revenue sharing model whose complexity scared away many potential investors. The model called for a revenue split, after recouping construction costs, of roughly 35% for PCPD with the rest going to government. PCPD's share was further diluted by its having to repay an interest-free loan to its parent PCCW from its 35% share before receiving funds itself. All funds are held in escrow until the completion of each phase at which time revenues are shared according to the formula. A phase is not completed until the last unit is sold. As of March 7% of the previous phase remained unsold, but upon completion, PCPD will have enough cash to have fully paid its debt to the parent company, meaning 35% of all future revenues will flow directly to PCPD. As a result the value becomes much more apparent, especially as data points continue to drift in that confirm significant potential value in PCPD's residual interest.

The last remaining phase of BelAir consists of 729 luxury units. This represents about 20% of the original project and construction is expected to be completed by next June. 500 of the units have been pre-sold at an average price in excess of HK$10,000 per sq ft. With 1.15mn square feet in this last phase revenues could reach nearly HK$13bn, of which over $4.5bn would accrue to PCPD.

PCPD also has some development properties in Beijing with a book value of $500mn.

In terms of the free option, PCPD has right of first refusal to develop PCCW's vacant telephone exchange properties. Some Street estimates put the value of the first such development undertaken by PCPD at HK$300mn. There are 80 total potential sites, so this could obviously have some value in the future.

To sum up--

BelAir              4.5bn (will be cash by end of 2008)

Pacific Cent      3.4

Other               .8

Cash                2.6

Convert            (2.4)  @ face

NAV                9bn

Mkt Cap          5.8bn, a discount of 35%

By the end of 2008 PCPD would have roughly $5.8bn in net cash and other assets, implying almost zero value for Pacific Century Place. The alternative of course is that they could spend the money on something stupid, but management has done a good job allocating capital here and elsewhere.

Catalyst