The Hongkong and Shanghai Hotels (HSH) is primarily an owner-operator of upmarket hotels. These hotels are so upmarket, guests at its flagship property, The Peninsula in Hong Kong, are driven around in a fleet of 14 Rolls-Royce limousines - at least the ones who don't mind paying HK$800 ($103) an hour are.

Then again, HSH is not in the backpacker market, especially in Hong Kong where it refuses to compete on price with the Special Administrative Region's other five-star hotels. In 1999, The Peninsula achieved an average room rate of HK$2,834, against which the Hong Kong five-star sector achieved HK$1,590. That the hotel was typically half-empty was by-the-by.

ôWhen you have a premium brand name like Peninsula, you can't manage on a short-term basis," says Rodney Smyth, chief financial officer and director of finance and corporate services at HSH. "We made a decision a year and a half ago that we weren't going to chase occupancy at the expense of yield. We cycled down in occupancy terms."

There are currently five Peninsulas û Hong Kong, Manila, Bangkok, New York and Beverly Hills û and a sixth is scheduled to open next year in Chicago. HSH also has The Kowloon Hotel in Hong Kong, The Palace Hotel in Beijing and Quail Lodge Resort in Carmel, California in its portfolio. In addition, the group has residential and commercial investment properties in Hong Kong, Vietnam, Thailand and the US as well as a residential property development in Sydney.

For 1999, HSH recorded a net profit of HK$575 million on revenues of HK$3.61 billion, compared with a net loss of HK$1.82 billion and turnover of HK$2.14 billion the previous year. Operating profit was, however, down 18% from 1998 at HK$636 million. Net borrowings at end-1999 stood at HK$6.42 billion, down from HK$6.70 billion a year earlier and interest cover was 1.5 times, compared with 3.7 times in 1998.

The company has a HK$1.3 billion convertible bond maturing in January 2001 that will have to be repaid. This will not pose a problem, however, as HSH has recently agreed a five-year syndicated loan facility of more than HK$2.0 billion with HSBC, Standard Chartered, Bank of China and BNP.

HSH did consider going to the bond markets for the money, but decided against it. ôA credit rating doesnÆt seem to do much for your debt-raising capacity unless youÆre one of a very, very small number of very large names,ö says Smyth. "WeÆre not big enough to be relevant in say the US or European markets. As long as weÆre essentially operating in this market, the informal rating attached to reputation and name is just as important as that awarded by a third party rating agency.

ôThe top five to 10 companies in Hong Kong have already borrowed all they want to borrow. The bottom tier of companies in Hong Kong would love to borrow, but the banks donÆt want to lend to them, and the companies like us in the middle tier are the ones the banks want to lend to because we have logical and valid needs for funding and are still highly creditworthy. WeÆve found the pricing weÆve got on a straight syndicated loan is actually superior to our all-up cost of going out to the bond market,ö he adds.

Non-core asset sell-off on cards

In order to reduce its overall debt burden, HSH is trying to sell its non-core assets, which, loosely defined, comprise pretty much everything apart from the Peninsula hotels, The Palace Hotel, Quail Lodge and the Repulse Bay luxury apartment complex in Hong Kong. The Kowloon Hotel is the only four star hotel in HSHÆs portfolio and the only one of its hotels for sale.

ôNobody has come in yet [for The Kowloon Hotel] and offered us a price that we regard as being other than firesale. WeÆve got no cashflow reasons and no balance sheet ratio reasons to firesale any assets, but if we can sell non-core assets and achieve at least book value, we will look,ö says Smyth.

To date, HSH has agreed the sale of its Sutton serviced apartments building in New York as well as a site in Phuket, Thailand. The pace of disposals might pick up a bit if plans for Peninsulas in Tokyo and San Francisco are accelerated. As things stand, neither city is likely to be hosting a Peninsula within the next five years.

Equity fund-raisings are also off the cards for the foreseeable future. HSH's share price at just over HK$4.00 isnÆt too far from the HK$3.15 low recorded during the Asian financial crisis and a far cry from the HK$16.00 seen in 1996. ItÆs also well down from the stockÆs 1999 best of HK$7.70. Morgan Stanley Dean Witter analyst Rob Hart says the shares are trading at a discount of more than 50% to net asset value (NAV).

One key reason for this weakness is that the stock was dropped from the Hang Seng Index in November last year. This caused investor interest to dry up and led the Hong Kong government, at the time one of HSHÆs biggest shareholders, to sell its holding.

A recovery in the share price shouldnÆt be too far off. Most of the analysts still covering HSHÆs shares have buy recommendations on the stock. ôHSH has the most potential of any company in Asia because it has so much room to improve,ö says Hart.

Some critics argue HSH chairman and majority shareholder Michael Kadoorie isnÆt concerned about maximizing shareholder returns, settling instead for the prestige associated with owning the Peninsula hotels. Smyth disagrees with such talk.

ôI think there is a danger in any family-controlled company that people internally develop a perception that criteria rather than commerciality apply; that hasnÆt been my experience ... We are not really going for broke for growth for itÆs own sake, but thereÆs clearly somewhere between 20 and 30 cities in the world where you could put a Peninsula effectively. As long as that potentialÆs there, thatÆs a natural incentive for running the company so it is economically efficient,ö he says.