Perennial Real Estate Holdings Limited - DBS Research 2016-09-14: Acquiring 49.9% stake in Renshoutang

Perennial Real Estate Holdings Limited (PREH SP) - DBS Vickers 2016-09-14: Acquiring 49.9% stake in Renshoutang PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings Limited (PREH SP) - Acquiring 49.9% stake in Renshoutang

  • Strategic 49.9% stake in Renshoutang (RST), the largest Integrated Eldercare Services Operator in Shanghai.
  • Synergies abound as PREH is able to offer a holistic suite of healthcare products and services, offering significant growth in the medium term.
  • BUY maintained , TP S$1.32.

What’s New 

Strategic acquisition to expand its healthcare segment in eldercare homes. 

  • Perennial announced that it has entered into an Investment Agreement to acquire 49.9% of Shanghai Renshoutang (Shanghai RST), one of the pioneer and largest private eldercare operators in Shanghai with retirement, nursing and rehabilitation homes, hospital, daycare centres, pharmacies and traditional Chinese medicine (TCM). 
  • Shanghai RST is Perennial’s JV partner to set up and manage Chengdu Xiehe International Eldercare Retirement Home at its Chengdu Medical Hub via an MOU signed on 14 January 2016 for a 40:40:20 JV together with Shanghai Summit Property Development.

Details of the transaction:

  • Acquisition price of RMB735.5m (S$148m) which translates to 12.9x of Shanghai RST’s FY15 EBITDA.
  • Estimated EBITDA of RMB114m (S$22m is estimated to form an increasing portion of its recurring income base.
  • Transaction is expected to complete by 1Q2017
  • Post the acquisition, Perennial with be the largest single shareholder of Renshoutang, followed by the fonder, Dr Feng Qiang
  • Acquisition to be financed by internal funds and external borrowings and based on pro-forma impact on net profits is estimated to be c.13.2% while its EPS will increase by 22%.

Access to Shanghai RST network and potential pipeline of Eldercare facilities. 

  • Post the acquisition, this will give them access to Shanghai RST’s 11 eldercare facilities with over 2,400 beds and four pharmacies, each with a dedicated TCM clinic. Shanghai RST currently operates under two renowned eldercare brandnames, namely Yixian Eldercare and Retirement Home (low-tomiddle income) and Xiehe Eldercare and Retirement Home (middle-to-higher income) and pharmacies under Shanghai Renshoutang Medicine. Shanghai RST also has a committed pipeline of over 5,700 beds and pipeline under negotiation of 16k beds in locations in Yangtze River Delta Region in the next few years.
  • We believe this is a strategic acquisition to expand its healthcare segment via eldercare homes to benefit from an ageing population in China. We remain positive on Perennial’s long-term healthcare plans in China. However, execution remains a risk. Catalysts include the opening of ParkwayHealth Chengdu Hospital in 2H2017 which will mark the opening of its Chengdu Medical Hub.
  • Perennial currently trades at an P/NAV of 0.5x with potential uplift in earnings and NAV coming from the completion of strata sale of office units in AXA and TripleOne Somerset while the ramp-up of the operations at its various China integrated developments will be a catalyst for upside to share price.

Derek Tan DBS Vickers | Rachel Tan DBS Vickers | 2016-09-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.32 Same 1.320