Bund Center Investment - RHB Invest 2017-04-11: Crown Jewel On The Bund

Bund Center Investment - RHB Invest 2017-04-11: Crown Jewel On The Bund BUND CENTER INVESTMENT LTD BTE.SI

Bund Center Investment - Crown Jewel On The Bund

  • Bund Center Investment (BCI) is a deep-value asset play with multiple catalysts for a re-rating. 
  • Listed via introduction in 2010, it owns prime real estate in Shanghai and Ningbo, which are only reflected at a fraction of market value in its books. 
  • Adjusting for a valuation surplus of SGD1.5bn ( > 2x its market cap), BCI is trading at a 70% discount to its RNAV. 
  • Catalysts include higher dividend payouts and potential privatisation by its major shareholder. 
  • Initiate coverage with BUY and TP of SGD1.04 (33% upside), based on a 60% discount to its RNAV.

Company Background 

  • Bund Center Investment (BCI) was spun off from AFP Land (since re-named Sinarmas Land) and listed on the Singapore Exchange in 2010. It currently owns the Bund Center office tower, Westin Bund Center Shanghai hotel in Shanghai, and the Golden Center Shopping mall in Ningbo, China.
  • The Bund Center is the realisation of a vision set in the early 1990s by Mr. Frankle Widjaja. 
  • Consisting of a 50-storey office tower and a hotel comprising two 26-storey towers along with various entertainment and leisure facilities, the award-winning buildings have grown to become the preferred choice among national and multinational corporations.

Bund Center Office Tower. 

  • With its iconic crown rooftop, the Bund Center helped shape the Bund skyline and is now an iconic landmark on the Shanghai Bund. The award- winning Bund center offers full added services and facilities for their tenants including shuttle bus services, concierge services, laundry services and more.
  • Coupled with its strategic position in the bustling city, Bund center offers Super Grade A quality. Hence the office tower has maintained a consistent occupancy rate of above 90%, and continues to command premium rental rates. Tenants include Deloitte Touche Tohmatsu, Clifford Chance, Herbat Smith, CMA, Mitsubishi, as well as the Norwegian and South African Consulates.

The Westin Bund Center Hotel. 

  • Comprising two 26-storey towers, the 570-room hotel is Westin’s flagship hotel in China. Managed by Starwood hotels & Resorts, the hotel offers world-class dining and entertainment services, with the latest advancement in technology and personal comfort. 
  • In addition, Banyan Tree Spa, located within the Hotel, offers spa treatments inspired by the ancient Chinese tradition of healing.

Preferred choice for national and multinational corporations. 

  • Located 45 minutes from Pudong International Airport and 20 minutes from Hongqiao International Airport, BCI’s hotel is well equipped to host high-profile events such as fashion shows for international brands, product launches and international blockbuster movie premieres.

Golden Center, Ningbo. 

  • The Golden Center complex, comprising a 6-storey Golden Center retail complex, a 32-storey Financial Center office tower and a 52-storey luxury residential tower is centrally located in the Central Business District area of Ningbo.
  • The group currently owns the Golden center retail complex, offering a wide variety of shopping options ranging from mid-end to luxury goods. Due to its strategic location and established branding, the group has been able to maintain a high average occupancy rate of over 90% in the last eight years. 

Investment Merits 

Prime real estate on the Bund. 

  • BCI was created out of a demerger exercise when Sinarmas Land (formerly known as AFP Land) spun off its commercial assets in China into a separate listing on SGX. BCI was listed on the Singapore Exchange on 30 Jun 2010 by introduction.
  • BCI currently has two commercial real estate assets under its fold. Its flagship asset is its namesake office-cum-hotel development in Shanghai, comprising a 43-storey office tower (Bund Center Office Tower) with 1.4m sf of gross floor area, and a 570-key hotel (Westin Bund Center Shanghai) managed by Starwood.
  • Due to the prime location of the property, both the hotel and office buildings have consistently achieved high occupancies and rates. BCI also owns a 6-storey retail complex in Ningbo.

Valuation surplus > 2x market capitalisation! 

  • BCI adopts a conservative accounting policy of valuing its properties at cost less accumulated depreciation. Over the years since inception, the market value of its real estate assets has appreciated significantly, with a carrying value of CNY9,612m as of end-2015. Based on the current SGD/CNY exchange rate 4.94, this implies a market value of SGD1,946m.
  • Yet these assets are currently carried in BCI’s books at a mere SGD407m, implying a valuation surplus of SGD1,538m (SGD2.03 per share). Imputing this surplus into its valuation, BCI’s RNAV stands at SGD2.58 per share, compared to its current share price of SGD0.78 per share. The stock is thus trading at a deep discount of 70% to its RNAV.

Proven cash flows and solid balance sheet. 

  • BCI’s assets have proven cash-generating ability, generating annual cash flows of c.SGD70m, and consistently achieving EBITDA margins of above 45%. The group has used its strong cash flows to pare down debts and pay healthy dividends. 
  • BCI is currently in a net cash position of SGD61m, despite paying SGD153m in cumulative dividends over the past three years and fully repaying all its debts.

Steady growth driven by strength of Shanghai’s economy. 

  • BCI’s performance has primarily been driven by its hotel and office properties in Shanghai. We have modelled a 4% annual growth in hotel revenue over FY17F-18F, supported by growth in tourist arrivals to Shanghai. From 2009-2015, Shanghai saw a CAGR of 3.5% in tourist arrivals while occupancy hovered around the 70% range.
  • Westin Bund Center outperformed its peers with an occupancy rate of 83% due to its prime location and popularity with tourists. The opening of Disneyland Shanghai on 16 Jun 2016 brought a further boost to the local hotel industry, with visitor arrivals on track to reach 10m by its first anniversary.
  • In the office sector, a short term bump in supply in Shanghai had affected leasing rates, but otherwise demand for office space remains buoyant, underpinned by an economic growth rate of 6.8% in 2016.

Potential privatisation candidate. 

  • Since its listing in 2010, major shareholder, Flambo Bund Centre, which is linked to the Widjaja family, has raised its stake to 84% from 74%. 
  • As BCI is cash-rich and does not need to tap the capital market for new funds, we think the stock may eventually be privatised by its major shareholder, given the sharp disparity between its private market value versus its public valuation.


RNAV valuation approach. 

  • We value BCI based on an RNAV approach, adding the valuation surplus of its real estate assets to its book value. BCI’s investment properties, held at cost, are sitting on a surplus of SGD1,538m if marked to market. Accounting for the surplus, our RNAV for BCI stands at SGD2.58 per share. At the current share price of SGD0.78, the stock is trading at a steep discount of 70% to its RNAV.
  • The discount is significantly larger than its peers, which are trading at an average 20% discount to their respective book values. Most of BCI’s peers also adopt fair market valuation for their investment properties, hence we believe book value is a good proxy for RNAV.

Track record of generous dividends. 

  • We believe the sharp discount that BCI is trading at currently is unjustified, given its solid balance sheet and cash-generative assets. 
  • BCI has also shown its willingness to reward shareholders with generous dividends. While its dividend payouts have been lumpy, the group has paid out cumulative dividends of SGD153m over the past three years, or SGD51m pa (average DPS of 6.7cents) representing an attractive yield of 8.7% at the current price.

Under-the-radar gem. 

  • Part of the reason for the discount, we think, is due to the low trading liquidity of the stock, with a free float of only 16%. BCI’s listing by introduction also renders the stock less known to the market, without the usual fanfare associated with an IPO. 
  • Lastly, we believe its conservative accounting policy of recording assets at cost masks the deep value of its assets.
  • We believe the stock can re-rate as the group continues to pile on cash and pay healthy dividends. 
  • We see scope for dividends to be maintained at a high level given the free cash yield of 9%. Our TP of SGD1.04 is based on a 60% discount to its RNAV, with an upside of 33%.


Latest results. 

  • BCI reported EBITDA of SGD68.3m in 2016, a 5% decline from SGD71.2m in 2015. This was primarily due to translation effect from a weaker CNY against the SGD, and lower leasing income at its office and rental properties due to increased supply of office space in Shanghai.

Balance sheet/cash flow. 

  • BCI is in a net cash position of SGD61m (~11% of its market cap). The group generates EBITDA of c.SGD70m from its rental income and hotel profits.


  • Its ROE hovers around 6-7%, higher than asset yields of 3-4% due to its policy of recording investment properties and hotels at historical cost less depreciation.


  • The group’s dividend payout is lumpy, but over the past three years, it has paid a total of SGD153m in dividends (SGD0.19 per share).


  • Frankle Widjaja is the executive chairman and CEO of BCI.

Key Risks 

Policy and regulatory changes. 

  • BCI’s assets are based in China, rendering it susceptible to changes in the tax regime and property regulations, that may have an unfavourable impact on its businesses.

Forex risk. 

  • BCI’s earnings and cash flows are generated in CNY. However, its reporting currency and dividends are paid in SGD. A sustained depreciation in the CNY against the SGD would affect its reported earnings and dividends.

Goh Han Peng RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-11
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