Description

Regal Hotels (78 HK) is a HK based hotel management company.  Regal owns 72% of Regal REIT (1881 HK), an HK hotel REIT, a stake which is worth almost Regal’s entire market cap.  In addition, Regal Hotel’s owns other assets including high end houses, hotel projects in China, and net cash on the balance sheet.  By shorting out Regal Hotels’ stake in Regal REIT, an investor can get these valuable assets for almost nothing.

Regal REIT

IPO’d by Regal Hotels in March 2007, Regal REIT is a REIT owning 5 luxury (4 and 5 star) hotels in HK.   Regal Hotels currently holds 71.7% ownership of the publicly listed REIT.  Regal’s 5 hotels comprise 3,348 rooms in HK (or 7% of total supply in 2005).  As part of the 2007 REIT IPO, the 5 hotels the comprise Regal REIT were valued at HKD 15.9bln by an independent assessor.  In my SOTP, I have valued them based on Regal REIT’s market cap.

Regalia Bay

The Regalia Bay is a luxury residential development in the Stanley neighborhood in Hong Kong.  Currently, the company has 35 properties remaining to sell with a total gross area of 162,200 square feet.  I have valued this at the average sales price of HKD 12,000 PSF (recent prices 15-20,000 PSF).  Due to the strong HK luxury real estate market, the company expects to continue selling houses at increasing prices. 

Beijing Property

Regal owns 29.5% of a mega development project in the Central Business District of Beijing.  Located in a prime location (Dongsanhua Rd), the project will be a mega Grade A office tower, luxury apartments, and a 6 star hotel, on 4,630,000 sq ft of gross floor area.  I have valued this asset at appraised at value of HKD 2.2bln

Chengdu Project

On October 31, 2007, the company acquired a development site in Chengdu for RMB 213.1mln.  The company has entered into a JV to develop this site into a 5-star hotel and related commercial areas.  I have valued this asset at cost.  

Net Cash

At Dec 31 07, the company had HKD 1.4bln of cash and equivalents.  However, of this, 1.0bln was pledged to secure lease guarantees for the hotel properties of Regal REIT.

RISKS

The company plans to develop 10-20 hotels in mainland China over the next 5 years with the plan to sell the hotels to Regal REIT after the operations have stabilized.  These investments may well go poorly. 

Regal is 50% owned by Paliburg Holding LTD (617 HK), which is 52% owned by Century City International (335 HK).  Regal’s Chairman, Mr Lo. Is the ultimate shareholder of the three listed companies, owning 89% of Century City.  There is always the risk that mgmt somehow transfers value from Regal Hotels to their other companies.

Some exogenous shock to HK tourism (SARS, China downturn, terrorism etc) could materially hurt traffic at Regal’s HK hotels.  Granted, if you short out Regal REIT, you are mitigating much of this risk.

Regalia Bay sales could go poorly.

Structuring the Stub

Regal Hotels has 10,333 shares out and Regal REIT has 3,116 shares out.  Thus there are 0.29 REIT shares per Regal shares and Regal owns 71.7% of Regal REIT.  Thus, short 0.22 Regal REIT shares for every Regal Hotels share if you want to isolate the stub. 

Catalyst