Perennial Real Estate Holdings - DBS Research 2017-05-09: Hidden Gems Yet To Shine

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PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings - Hidden gems yet to shine

• 1Q17 results boosted by divestment and re-measurement gains.
• Achieved S$59m strata sales from AXA and TripleOne.
• Chengdu Healthcare Hub to open by 4Q17, Chengdu Xiehe Homes by 3Q17.
• Healthcare business (3,300 beds) is starting gradually.

Trades at 0.5x P/B; Maintain BUY. 

• We maintain our BUY rating on with TP of S$1.05 (based on 50% discount to RNAV) for Perennial Real Estate Holdings (PREH). The stock currently trades at 0.5x P/B, offers a massive upside (TP at 50% discount to RNAV) as it gradually realises its RNAV potential.

Where we differ. 

• Unlocking development value from strategically located landbank with partial exposure to healthcare. We are one of two brokers with coverage on PREH.
• PREH’s hidden gems lie in its vast integrated projects in strategic locations across the main transportation hubs in China though these have lengthy gestation periods. 
• Apart from property, PREH has built a portfolio of medical and healthcare services to leverage on rising healthcare demand in China and Singapore.

Potential Catalysts: 

• Strata/en bloc sales, divestment of assets, building recurring income through healthcare hub and business.
• 1Q17 results supported by divestment gains; Chengdu Healthcare Hub and healthcare business to commence this year.
• PREH posted strong 1Q17 results with a net profit of S$38.7m vs S$8.5m in 1Q16, boosted by divestment and re-measurement gains from partial sale of TripleOne Somerset. The key highlights from the results were: 
  1. PREH achieved S$59m strata sales from AXA and TripleOne Somerset, 
  2. some units at Chengdu Healthcare Hub were handed over for fit out, expected to open progressively from 4Q17; 
  3. Chengdu Xiehe Homes expected to commence operations by 3Q17; 
  4. healthcare business starting gradually (3,300 operating beds).

Strong 1Q17 results boosted by gains from the partial divestment of TripleOne Somerset

• Perennial Real Estate Holdings (PREH) posted strong 1Q17 results, recorded a net profit of S$38.7m vs S$8.5m in 1Q16. This was boosted by S$55.7m divestment gains from the sale of 20.2% stakes in TripleOne Somerset and the re-measurement gain from the retained 30% stake. Excluding the divestment and re-measurement gains, we estimate 1Q17 recorded a net loss of c.S$8m. 
• EBIT (excluding divestment and re-measurement gains) fell to S$5.2m vs S$16.7m in 1Q16, largely due to lower revenue (-31% y-o-y), higher interest expense (+43%) despite the de-consolidation of some borrowings of TripleOne Somerset and lower share of results from associate (excluding revaluation gains in 1Q16, -75% y-oy) due to one-off adjustment from a lease restructuring with Shenyang Red Star Macalline Furniture Mall. 
• 1Q17 revenue fell 31% y-o-y largely due to lower rental and management fees from TripleOne Somerset following the asset enhancement works.

Singapore and China remain as its two largest markets.

• Singapore contributed 50% and 91% in revenue and EBIT respectively, while China contributed 37% and 8% respectively in 1Q17.
• As at 1Q17, net debt-to-equity stood at 0.51x (vs 0.66x in 4Q16) with an average interest cost of 3.3% (vs 3.4% in Dec15). The improvement in the ratio is largely due to the debt de-consolidation of TripleOne Somerset.
• The majority of its borrowings will be due in 2017 (32% - largely in Singapore) and 2018 (23% - retail bonds and MTN in SGD). Management previously said that they were confident they could refinance 2017 debt at a lower cost of debt.

Updates on current property development / investments:

Singapore: 

• To-date, PREH has achieved total strata sales of S$59m (c. S$35m YTD2017). We understand that some sales were transacted at an average price of above S$2,700 psf for TripleOne Somerset, and average price of S$2,559 psf.
• The committed occupancy at CHIJMES has improved to 93.2% (from 90.3% in 4Q16). By net lettable area, 92.4% of tenants have commenced business.

China.

• Chengdu HSR Integrated Development. The Perennial International Health and Medical Hub has started to handover progressively some of the units to medical tenants for fit out. Management expects to commence operations progressively from 4Q17. All the towers at Plot D2 have topped out with 5 towers expected to complete façade cladding works by 2Q17. Chengdu Xiehe Home (Plot D2) has commenced marketing and expected to commence operations by 3Q17.
• Beijing and Xi’an North HSR Integrated Development. Construction works are progressing well for completion in 2019/2020 and 2018/2019 respectively.
• Healthcare business. Currently, PREH’s healthcare business has total operating beds of 3.3k via Aidigong (post and neo-natal care centre), Renshoutang (eldercare homes) and St. Stamford Modern Hospital, Guangzhou. Aidigong New AND Maternal and Child Health Centre. Shekou soft opened in late Mar17 with 136-bed facility has received good demand with waiting lists and reservations made until Jan18. Renshoutang’s Yixian Baoshan Eldercare and Retirement Home has officially commenced operations in Apr17. In Feb17, Renshoutang entered into a 45:45:10 public-private partnership (PPP) with Jointown Pharmaceutical Group Co, a Wuhan pharmaceutical group listed on Shanghai Exchange, and Wuhan Municipal Government to jointly operate the Wuhan Jiuzhoutong Xiehe Eldercare at Tower B of Wuhan Social Welfare Institution (next to Hankou HSR station).
• Jiuzhoutong Xiehe is expected to commence operations by end-2017.

Maintain BUY; TP S$1.05 

• We maintain our BUY rating with TP of S$1.05 based on 50% discount to RNAV. Our earnings estimates have yet to factor in the higher divestment and re-measurement gains recognised in 1Q17.
• We remain optimistic on PREH’s medium to long term development plans as these are slowly coming to fruition in China, despite potential near-term financial risks as it rides through the gestation period of its development projects. 
• We believe the strength of its stakeholders (79% owned by its four key sponsors including Wilmar’s Mr Kuok, OSIM’s Mr Ron Sim and CEO Mr Pua, and partners and key management team) play an integral role to execute and mitigate potential financial risks.
• Apart from real estate, PREH 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, 
  3. potential en-bloc sale / divestment of properties, 
  4. potential improvement in sentiment on the property market in China when project developments are near launch or completions, and 
  5. potential launch of Healthcare Fund.

Key Risks to Our View

• Negative changes to property rules in China and exposure to RMB currency fluctuations as PREH owns a large landbank in China. 
• Further deterioration in operating cashflows coupled with high interest cost may impact interest cover.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-09

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050