LAI Sun Development is due to be re-rated, as substantial profit growth in the next two years is expected to replace the company's persistant underperformance. The stock has been sluggish due to investor concern over heavy earnings per share (EPS) dilution from the conversion of convertible bonds and warrants. The company's 1.2 billion preference shares will be redeemed by the end of the 1994 financial year, meaning no preference share dividend has to be paid from 1995 onwards. This will increase the profit attributable to ordinary shareholders, but the EPS will be diluted through the exercise of warrants and convertible bonds. Despite anticipated declines in EPS in the 1995 financial year, the stock is trading at a low P/E ratio and at a deep discount to its fully diluted NAV of $3.20 per share. Property development will continue to be the main focus for the company's growth in 1994. A total gross floor area of 322,837 square feet is expected to be completed in 1994, generating a pre-tax profit of $771 million. Lai Sun's largest project is the luxury residential development at 37 Repulse Bay Road, which has been fully pre-sold at $5,430 per square foot (psf). With a total development cost of $2,050 psf and gross floor area of 200,276 sq ft, pre-tax profit should be extremely attractive at $677 million for the whole project. However, due to the delayed payment scheme offered to flat buyers, some profit will be deferred to 1995. It is estimated that 70 per cent of the profit from the Repulse Bay project will be booked in 1994, and the remainder will be booked in 1995. Glynhill International, its 54 per cent-owned subsidiary, is forecast to remain in the red for the 1994 financial year due to the slump in the Canadian hotel industry. Brokerage Schroders Asia Securities expects Glynhill to not break even before 1995. Lai Sun recently led a consortium to acquire the five-star, 218-room Ritz Carlton Hotel in Central for a total consideration of $1,127 million. The Ritz Carlton is not expected to contribute positively to the group's earnings in the short-term due to itshigh set-up and interest costs. The company will have a net debt of $1.6 billion by the end of 1993. However, Ritz Carlton acquisition and the anticipated redemption of preference shares will raise Lai Sun's net debt to $3.2 billion, or 27 per cent of its shareholders' fund of $11.8 billion by the end of 1993. Future capital expenditure is likely to be substantial due to investment in China and rising costs for land-bank replenishment in Hong Kong. Schroders Securities does not rule out the possibility of Lai Sun making a cash call, most likely in the form of convertible bonds.