Banyan Tree Holdings Limited - Phillip Securities 2017-08-04: A New Era Through Partnerships

Banyan Tree Holdings Limited - Phillip Securities 2017-08-04: A New Era Through Partnerships BANYAN TREE HOLDINGS LIMITED B58.SI

Banyan Tree Holdings Limited - A New Era Through Partnerships

  • Banyan Tree Holdings Limited (BTH)'s strategic partnerships signed with China Vanke and AccorHotels offer divestment gains, new management fee income and fresh capital for Banyan Tree.
  • Potential 9c/share gain on disposal of China assets provide upside to dividends.
  • Pipeline of potential hotel openings with Accor can almost double Banyan Tree’s hotel network from the current 40 to 76.
  • Initiate coverage with BUY rating and S$0.77 target price, implying a 36% upside.



Company Background 

  • Banyan Tree Holdings Limited (BTH) is a developer and operator of premium resorts, hotels, residences and spas with a presence in 25 countries. The group’s properties include 40 hotels and resorts (with equity interest: 19, without equity interest: 21), 64 spas, 77 retail galleries and three golf courses as of FY16. 
  • The group’s primary business is centred on four brands, namely Banyan Tree, Angsana, Cassia and Dhawa. Additionally, the Group operates three integrated resorts in Asia, in particular, Laguna Phuket via its 65.8% owned subsidiary, Laguna Resorts Hotel & Hotels Public Company Limited (LRH TB). 
  • As at 1Q17, the Group has another 36 hotels and resorts either under development.


INVESTMENT MERITS 


Catalyst 1: Capital gains on divestment of assets into Banyan Tree China (BTC) 

  • Banyan Tree’s strategic partnership with China’s largest listed property developer, China Vanke is expected to generate significant gains for BTH from the disposal of Banyan Tree branded hotels and assets in China into a new entity, BTC. BTC will be jointly controlled by BTH and Vanke. 
  • Currently carried at cost, disposal of these assets will be at a market value to be confirmed by an independent valuer. We expect revaluation gains on disposal to be significant given the massive appreciation of Chinese land and property prices since the Group acquired these assets.
  • As of 31 December 2016, the net book value of these assets which are carried at cost, is S$163.7mn. We attempt to estimate the size of revaluation gains that BTH will be able to realise on divestment. 
  • Occupying a significant portion of the valuation are two plots of land BTH owns in Chengdu (land size 324mu or 215,784 sqm) and Lijiang (land size 283mu or 188,478 sqm). We expect the bulk of the revaluation gains on disposal to come from these two assets.

Disposing Laguna Chengdu will add S$16mn gain 

  • Currently, housing the Laguna Chengdu project is a plot of land sized around 324mu (215,784 sqm) in Wenjiang, Chengdu acquired in 2012. More recently in October 2016, two separate plots of land of sizes 28k sqm and 20k sqm were sold for RMB3,900 and RMB4,350/sqm respectively1 . These plots of land sit c.15km away from BTH’s Chengdu site.
  • We apply a 25% discount to the lower of the above two transacted selling prices in trying to determine the approximate market value of BTH’s Chengdu site. This is to account for the larger land plot (which typically transact at a lower price per plot) and the greater distance from the city centre. At RMB2,925/sqm, we arrive at an approximate land value of S$126mn, S$16mn or 15% higher than the S$110mn carried on the BTH’s book at cost (plus development costs incurred so far) 

Disposing Banyan Tree Lijiang will add S$50mn gain 

  • Banyan Tree Lijiang, a 125-key resort opened in 2006, makes up the remaining majority of the assets to be disposed into BTC. The resort sits on a 283 mu (or 188k sqm) plot of land which collectively makes up the bulk of the S$51mn of Property, Plant and Equipment held at cost for disposal into BTC. As a result of a lack of comparable prices of land in the vicinity, we estimate a growth rate consistent with the average rate of increase in property prices in Lijiang city. 
  • Lijiang has seen a near doubling of property prices in the decade following the opening of Banyan Tree Lijiang in 2006. We assume a disposal gain of c.S$50mn based on the assumption of doubling of property prices during the period.

Finalisation of market valuations of disposal assets could provide share price boost 

  • Our conservative estimates for the total revaluation gain for BTH add up to S$66mn, with the bulk of it coming from the Lijiang land and property. This brings the total valuation of the disposal group of Chinese assets to c.S$230mn. A divestment of 50% of this group of Chinese assets could then yield BTH cash proceeds of S$115mn. Any upside to our estimated total revaluation gains could be a catalyst for a further upgrade. 
  • We would not discount the possibility of a distribution of partial divestment proceeds as dividends given the ample cash on the balance sheet for development properties expenditure.


Catalyst 2: Management fees from partnerships with Vanke and AccorHotels (Accor) 

  • Partnership with Accor enables BTH to leverage on Accor’s strength to drive new hotels expansion especially in areas outside of Asia where BTH currently has lesser exposure to.

Key points of the strategic partnership with Accor 

  • The strategic partnership involves co-developing hotels and serviced residences under Banyan Tree brands over 12 years, and it is extendable.
  • Accor subscribed for S24 million mandatory convertible debenture in BTH. The debenture is convertible into a 5% stake of BTH at S$0.60 strike price, including an option to increase stake up to 10%.
  • BTH will undertake brand management activities.
  • Accor will undertake activities such as training, sales and marketing and technical assistance.

The strategic partnership between BTH and AccorHotels in April 2017. 

  • In April 2017, BTH and AccorHotels have signed a definitive agreement to collaborate by co-developing hotels and branded service residences under the four BTH brands in most gateway destinations around the world. 
  • Under the agreement which lasts for 12 years, Accor is excluded from co-developments rights in the China, Thailand, Vietnam and certain parts of Mexico and Maldives, where these locations are regarded as exclusive territories to BTH. BTH also gains access to Accor’s global reservations and sales network, as well as its loyalty programme, Le Club AccorHotels.

Key benefits for BTH from the Accor strategic partnership 

  • Leverage on Accor’s strength to drive new hotels expansion in new markets, namely Africa, the Middle East and US. 
  • Two to three new property launches per year along with asset light strategy to boost BTH’s EBITDA in the longer term.
  • Expand clientele by leveraging on Accor’s globally recognised loyalty programme, Le Club AccorHotels.

Leverage on Accor’s strengths in other global markets for expansion while remaining independent. 

  • The collaboration will allow BTH to tap on Accor’s strengths and experience and further expand globally, especially in areas outside of Asia where it currently has lesser exposure to. This is in particular to Europe, Africa, the Middle East and the US where Accor has a strong presence and massive network (73% of rooms are located in areas outside of Asia Pacific). 
  • At the same time, BTH will be able to continue functioning as an independent company.

Accelerate expansion into other global markets in line with BTH’s avant-garde strategy.

  • This is in line with BTH’s strategy where the Group continues to favour venturing into markets which are untapped and has the potential to grow exponentially. 
  • New markets are challenging to break into, as sufficient scale is required for operations to turn profitable which otherwise require large amount of resources or time. We view the collaboration to benefit BTH as new markets pose significant barriers to entry, in the form of scale and experience to operate in these markets. For instance, BTH’s latest entry into Cuba via the opening of one out of four new hotels took a few years before materialising.

The partnership is aligned with Accor’s strategy to scale up luxury and upscale segment.

  • One of Accor’s primary strategies moving forward is to scale up its luxury and upscale segment as seen from a flurry of acquisitions made in this sector during the past one year, notably FRHI Hotels and Resorts which owns a series of luxury brands such as Fairmont, Raffles and Swissôtel. We observed that luxury and upscale hospitality assets made up 12% of Accor’s portfolio as at 31 December 2016, which is significantly lower compared to its peer average of 31%. 
  • Apart from being able to yield higher profitability compared to other more economical hotels, luxury and upscale hotels are less susceptible from disruption driven by shared economy platforms like Airbnb. This is because the clientele for higher end product offerings are less likely to be swayed by price points, and are drawn towards product attributes like a full-service experience which shared economy platforms are unable to offer. 
  • We view that BTH’s range of brands especially, Banyan Tree and Angsana, will be accretive to Accor’s luxury and upscale segment.

Three to five new property launches per year with asset light strategy to boost BTH’s EBITDA and EBITDA margin in the longer term. 

  • Inferring from the frequency of new hotel offerings after Accor’s acquisitions, we project BTH to add three to five new properties into its portfolio annually. We view this as a realistic estimate considering that Accor has introduced as many as 30 new hotels from brands acquired by Accor in the past one year.
  • Additionally, with Accor’s focus towards “experiential” hospitality which partly involves scaling up its luxury segment, we see our estimates as leaning towards the conservative side. We are expecting each new property to contribute S$0.33 million per year to BTH’s revenue, and subsequently S$0.23 million to its EBITDA. This translates to a 0.4% increase in its EBITDA with the addition of each new property based on FY16 EBITDA of S$51.7 million. 
  • We are expecting that the Group’s longer term EBITDA margin to increase to as much as 70%, since there are lower costs associated for BTH as it transitions into an asset light strategy. However, as the group is more likely to explore greenfield developments as compared to the acquisition of an existing property, we expect the earliest revenue contribution to come in at least three years later in FY20.

BTH gains access to a globally recognised loyalty programme, Le Club Accorhotels. 

  • Accor has been investing substantially to beef up its loyalty programme, called Le Club AccorHotels, notably via the acquisition of a majority stake in a concierge and loyalty services provider, John Paul (the Company is valued at US$150 million). 
  • According to The Centre for Hospitality Research, the key benefits of loyalty programmes augment revenue, stay frequency and guests spending. Above all, loyalty programmes provide valuable data on guests which can be used by hotel operators to create targeted campaigns for their guests. While BTH has an existing loyalty programme, it is not as established when compared to LCA. 
  • The strategic partnership allows BTH to tap on Accor’s globally recognised loyalty programme, Le Club AccorHotels, which otherwise BTH has to invest a significant amount of resources to grow.


Capital injection from strategic partners to reduce gearing and interest costs.

  • The strategic partnerships will see a potential S$50mn capital injection each from Vanke and Accor for a respective 10% stake in BTH. 
  • We foresee BTH utilising the cash to reduce the debt load and lowering finance costs going forward. Assuming a 4% cost of debt, Interest cost savings of up to S$4m/year can increase FY18e NPAT by c.48% (or EPS impact of 23%).


VALUATION 


Initiating coverage with BUY rating and target price of S$0.77 

  • We initiate coverage on BTH with a BUY rating and an SOTP-derived target price of S$0.77. This implies a 36% upside and a FY18e P/NAV of 0.91. 
  • Our SOTP incorporates a 20% discount on PPE for the owned hotel business, 30% discount on RNAV for development properties, and 10x EV/EBITDA for the fee-based segment.
  • BTH’s strategic partnerships signed with China Vanke and AccorHotels offer divestment gains, new management fee income and fresh capital for BTH. The partnerships with one of the world’s largest hotel operator and China’s largest developer mark the start of a new era of growth globally for BTH.






Dehong Tan Phillip Securities | Peter Ng Phillip Securities | http://www.poems.com.sg/ 2017-08-04
Phillip Securities SGX Stock Analyst Report BUY Initiate BUY 0.77 Same 0.77



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