Perennial Real Estate Holdings - DBS Research 2016-11-09: Plans gradually unfolding

Perennial Real Estate Holdings - DBS Vickers 2016-11-09: Plans gradually unfolding PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Plans gradually unfolding

  • 9M16 net profit fell 44% due to higher expenses, and absence of acquisition fee recognised in 2Q15, offset by fair value gains.
  • Revenue supported by higher rental revenue from China and strata sales in Singapore.
  • Chengdu Medical Hub to commence operations by 2017.
  • Maintain BUY as we like its medium to long-term development plans.


What’s New 


9M16 results supported by contributions from strata sales

  • Perennial Real Estate Holdings (PREH)’s 9M16 net profit fell 44% to S$9.5m. 
  • The lower net profit was mainly due to marginally lower revenue (-0.7%) coupled with higher cost of sales (+19%), higher operating expenses (+15%), higher interest expenses (+10%) and the absence of acquisition fee (AXA Tower) recognised in 2Q15, offset by more than doubled the share of income from associates and JVs to S$19m. 
  • The higher share of earnings from associates and JVs were mainly due to fair value gain of S$7.5m from the reclassification of Chengdu Plot D2 to investment property. Excluding the fair value gain, PREH recorded a net profit of only S$2m in 9M16.

Singapore and China remain as its two largest markets.

  • Singapore contributes 56% and 48% in revenue and EBIT respectively, while China contributes 25% and 47% respectively. Profits from Singapore were largely from rental revenues from CHIJMES and TripleOne Somerset, and strata sales from TripleOne Somerset and AXA Tower, while earnings from China were largely from rental income of Perennial Jihua Mall, Foshan, Perennial Qingyang Mall, Chengdu, Shengyang Longemont Integrated Development (office and malls).
  • 9M16 revenue was largely supported by higher revenue from China (+14%) largely recorded by Perennial Qingyang Mall, Chengdu, Singapore (+7.3%) supported mainly from strata sales of office units at TripleOne Somerset, offset by lower rental income as expired leases were not renewed due to asset enhancement works. Revenue growth was also dragged by lower revenue from management businesses due to the absence of one-off acquisition fee of AXA Tower that was recorded in 2Q15.
  • 9M16 EBIT was mainly underpinned by contributions from China, mainly from fair value gain of S$7.5m recognised in 1Q16, higher contributions from operational malls, higher share of results from Shenyang Longemont Integrated Development and newly acquired medical and healthcare business.
  • 3Q16 net profit was S$0.4m vs S4.8m in 3Q15. While revenue grew 53% y-o-y to S$35m largely contributed by strata sales of TripleOne Somerset, net profit was weighed down by lower GP margin (-13ppts y-o-y), lower other income (-91%) and higher finance costs (+14%).
  • In 9M16, PREH has increased total borrowings by 28% to S$2.4b. It raised S$125m of 3-year fixed rate notes at 4.90% and S$280m of 4-year retail bonds at 4.55% p.a. Net gearing has increased to 0.63x from 0.45x in Dec 15 at an average interest rate of 3.3% (Dec 15: 3%). Management remains comfortable with its gearing level that is below 1x.
  • Majority of its borrowings will be expiring in 2017 (28%) and 2018 (47%). The debt expiring in 2017 is mostly in relation to the retail assets in China (Perennial Qingyang Mall and Perennial Foshan Mall) and CHIJMES.


Updates on current property development / investments:


Singapore: 

  1. TripleOne Somerset was officially launched in August 2016 with a few units sold at an average price of S$2,600 per square foot (psf). Renovation works have been completed for 2 floors.
  2. AXA Tower: The main construction works for AXA Tower was awarded in 3Q16 with total development cost not more than S$150m (S$146 psf). Strata sales have commenced with a few units transacted at an average price of above S$2,550 psf. Two largest anchor tenants - AXA Insurance and BOC Aviation - at AXA Tower take up a total of 16% NLA and have renewed their leases.

China.

  1. Perennial Jihua Mall, Foshan and Perennial Qingyang Mall, Chengdu: Both the malls have achieved close to 100% committed occupancy.
  2. Shenyang Longemont Integrated Development: Both the shopping mall and furniture mall have achieved committed occupancy of above 90%. The office towers’ committed occupancy has increased from 54% to 60%.
  3. Chengdu HSR Integrated Development: Perennial International Health and Medical Hub has secured 57.7% committed occupancy. Construction works are progressing well. Management expects to receive TOP by 1H17 and commence operations progressively in 2H17. Chengdu Xiehe Home (Plot D2) is expected to begin marketing activities by end of 2016 and commence operations in 2Q17 with an initial bed capacity of about 1,050 beds.
  4. Beijing Tongzhou Integrated Development: Management expects to receive construction permits for phase 1 and 2 by year-end and has secured RMB6.4b (S$1.3b) loans to finance the development costs.
  5. Xi’an North HSR Integrated Development: Foundation works on Plot 4 has completed and expect to commence operations on Plot 4 and 5 by 2018 and 2019 respectively.
  6. Zhuhai Hengzin Integrated Development: The main construction works has been awarded and total development cost is not expected to exceed RMB2.6b. All four permits have been obtained. Management targets to commence the hotel operations in 2Q2020.
  7. St. Stamford Modern Hospital, Guangzhou (40% JV with China Boai Medical): Expect renovation works and retrofitting of the new extension block to complete by 4Q16.


Our View

  • We maintain our BUY rating and remain optimistic on its medium to long term development plans especially now that it is slowly coming to fruition in China. (TP: $1.32)
  • Apart from real estate, it offers partial exposure to the growing healthcare sector in China. 
  • Key catalysts include 
    1. better-than-expected strata sales, 
    2. the successful opening and execution of Perennial International Health and Medical Hub in Chengdu, and 
    3. potential improvement in sentiment on the property market in China when project developments are near launch or completions.




Derek Tan DBS Vickers | Rachel Tan DBS Vickers | http://www.dbsvickers.com/ 2016-11-09
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.320 Same 1.320




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