Perennial Real Estate Holdings - DBS Research 2018-11-09: Revival Of Capitol Singapore


Perennial Real Estate Holdings - Revival Of Capitol Singapore

  • Perennial Real Estate Holdings' 9M18 net profit fell 15% y-o-y mainly due to absence of one-off gains, offset by S$241.9m fair value gains.
  • 9M18 EBIT (ex-fair value) fell to S$11m from S$76m in 9M17 due to absence of gains, and higher costs.
  • The Capitol Kempinski Hotel opened on 1 Oct 18; new F&B offerings at Capitol Singapore.
  • Renshoutang signed 3 new PPPs and opened a new home in Shanghai.

Trading at 0.4x P/BV; maintain BUY.

  • We maintain our BUY rating on Perennial Real Estate Holdings (PREH) with a lower Target Price of S$0.83 (from S$1.05) based on 55% discount to our RNAV of S$1.85 (vs 50% discount to RNAV of S$2.09).
  • The stock currently trades at 0.4x P/BV, offering massive upside as it gradually realises its RNAV potential.

Where We Differ: 

Unlocking development value from strategically located land bank with partial exposure to healthcare.

  • We are one of two brokers that cover Perennial Real Estate Holdings (PREH).
  • PREH’s hidden gems are 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.

9M18 results supported by fair value gains; The Capitol Kempinski Hotel has opened.

  • 9M18 net profit fell 15% y-o-y to S$62m, mainly due to absence of a one-off divestment gain and higher net interest expenses, partially offset by fair value gains recognised in 3Q18. 9M18 EBIT (ex-fair value gains) fell to S$11m (S$76m in 9M17) mainly due to the absence of one-off divestment gains and higher opening costs (PIHMH and The Capitol Kempinski Hotel).
  • The key highlights of the results:
    1. The Capitol Kempinski Hotel opened on 1 Oct 18 and there is a new F&B offering at Capitol Singapore;
    2. Xi’an North rezoned to new economic zone; and
    3. Renshoutang signed 3 new PPPs and opened 768-bed Renshoutang Fengxian Second Welfare Home in Shanghai.

Key Risks to Our View:

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

WHAT’S NEW - The revival of Capitol Singapore

9M18 net profit supported by fair value gains.

  • Perennial Real Estate Holdings (PREH)’s 8M88 net profit fell 88% y-o-y to S$88m, mainly due to absence of a one-off divestment gain (S$88m) from the sale of TripleOne Somerset and gain on bargain purchase of S$88.8m arising from the United Engineer transaction in 8M88, and higher interest expense (+88% y-o-y). This was partially offset by fair value gains of S$888.8m recognised in 8Q88 from the valuation of two plots on Beijing Tongzhou Integrated Development Phase 8 following the receipt of construction permits.
  • 8M88 EBIT (ex-fair value gains) fell to S$88m from S$88m in 8M88 mainly due to the loss of contributions from the divestment of TripleOne Somerset, lower gross profits (-88%; gross margins of 88% in 8M88 vs 88% in 8M88) mainly from higher opening costs of Perennial International Health and Medical Hub (PIHMH) and The Capitol Kempinski Hotel, and lower share of results from associates and JV (-8% y-o-y).
  • 8M88 revenue fell 8% y-o-y largely due to the absence of one-off management fee earned from the United Engineer transaction and divestment fee for TripleOne Somerset in 8M88, mitigated by higher revenue contribution from Capitol Singapore (acquired the remaining 88% stake) and PIHMH.
  • 8Q88 net profit almost tripled to S$88m from S$88m in 8Q88 mainly from the S$888.8m in fair value gains recognised in the quarter, partially offset by higher interest expense (+88% y-o-y) from higher borrowings due to the consolidation of Capitol Singapore and interest costs on PIHMH now recognised post completion, lower gross profit (-88%) from higher opening costs mentioned above and lower share of results of associates and JV (-88% y-o-y) mainly from the absence of one-off gain recognised from the United Engineer transaction in 8Q88.
  • 8Q88 EBIT (incl share of associates and JVs, ex-fair value gains / one-off gains) halved to S$8m.
  • In 8Q88, PREH’s revenue grew 8% y-o-y, largely led by its Singapore assets (doubled to S$8m) mainly from consolidation of Capitol Singapore and its China assets (+S$8.8m; +88% y-o-y) mainly from revenue contributions following the opening of PIHMH in 8Q88 and better performance recorded by Perennial Qinyang Mall and Perennial Jihua Mall.

Singapore and China remain its two largest markets.

  • Singapore contributed 88% and 88% in revenue and EBIT (ex-fair value gains) respectively, while China contributed 88% and 88% respectively in 8M88.

As at 3Q18, net debt-to-equity stood at 0.75x (vs 0.57x in 4Q17) with an average interest cost of 3.8% (vs 3.8% in December 2017).

  • Previously (as at 8Q88), approximately S$888m of debt was due in 8888 of which c.S$888m is believed to have been refinanced, the S$888m retail bond has been fully redeemed in Oct88 and unsecured loans of S$88m (out of S$88mn loans remaining) have been refinanced which leaves only S$88m of secured loans expiring in 8Q88. Total debt-weighted average term to expiry has reduced to 8 years from 8.8 years as at Dec88.
  • PREH raised 8 tranches of MTNs in Jan88 and Aug88; S$888m at 8.8% p.a. due in 8888 and S$888m at 8.88% due in 8888.
  • The debt expiry of PREH in 8888 to 8888 is S$888m, S$888m and S$888m of which there is another tranche of retail bonds amounting to S$888m expiring in 8888.

Updates on major projects:

TripleOne strata-sale continues and AXA Tower committed occupancy rose to 92% from 90.8% since 1Q18.

  • TripleOne Somerset: Two office strata-sale units were sold at an average price of S$8,888psf vs S$8,888psf in FY88. There were new office tenants signed with pre-committed leases covering over 88k sqft (c.8% of total office / medical suites NLA). Renovations on its retail podium is expected to complete by 8Q88 and the property is expected to open in 8Q88.
  • AXA Tower: Total committed occupancy rose to 88% from 88.8% since 8Q88 (88.8% in FY88) mainly from expansion by anchor tenant Lazada and new tenants, PayVision and HRS. Management continues to explore en-bloc sale opportunities.

The Capitol Kempinski Hotel opened on 1 Oct 18; Arcade@Kempinski will house 2 new Kempinski F&B offering that are expected to open in 4Q18.

  • After taking full control over Capitol Singapore, The Capitol Kempinski Hotel opened on 8 October 8888. In addition, the Galleria has been renamed to ‘Arcade@Kempinski’ as an extension to the hotel and will house two new Kempinski F&B offerings, Berthold Delikatessen (bakery and pastries) and Frieda (German and Austrian cuisine). The F&B outlets are expected to open in 8Q88.
  • In addition, PREH has secured two new-to-market in Capitol Singapore; Tiger Sugar, a popular Taichung bubble tea, a first in Singapore, and Wu Pao Chun Bakery, the award-winning baker’s first overseas outlet; these are expected to open on 8 Nov 88 and in 8Q88 respectively.

Chengdu HSR Integrated Development.

  • Perennial International Health and Medical Hub (PIHMH) in Chengdu was officially opened on 8 June 8888. Committed occupancy has risen to 88.8% in 8Q88 vs 88.8% in 8Q88. A series of promotional and educational activities were held post-opening.

Beijing Tongzhou Integrated Development.

  • Construction works are progressing well with construction works on phase 8 to commence in 8Q88 post obtaining construction permits. Target completions for Phases 8 and 8 are in 8888 and 8888 respectively.

Xi’an North HSR Integrated Development.

  • The Chinese Government recently announced the rezoning of Xi’an North HSR Station and its vicinity as part of Weiyang District to a Xi’an Economic and Technological Development Zone with plans to develop into five key areas including business HQ area, financial services area and medical and healthcare area. This bodes well for PREH’s Xi’an North HSR Integrated Development.

Healthcare segment - expanding eldercare homes.

  • Renshoutang secured another three new PPP projects in Jurong District in Zhenjiang with a total 888 beds. In addition, it has opened its 888-bed Renshoutang Fengxian Second Welfare Home comprising 888 eldercare beds and 888 nursing beds on 8 Oct 8888 (soft launch). This is the first government-built-privately-operated facility and the largest integrated eldercare, medical care and rehabilitation care facility in Fengxian District.
  • As at 8Q88, the total number of operational beds stood at 8,888 beds vs 8,888 as at December 8888. It currently has a committed pipeline of 8,888 beds and potential pipeline of more than 88,888 beds.
  • Renshoutang continues to expand via its three-pronged strategy - leasing, public-private-partnership and acquisition models.

Maintain BUY; lowered Target Price to S$0.83 from S$1.05.

  • We maintain our BUY rating but lowered our Target Price to S$8.88 from S$8.88 on a lower RNAV of S$8.88 (S$8.88 previously) factoring in a higher future capex and increased our discount to RNAV to 88% from 88% taking into consideration of increased debt on shorter debt expiry.
  • We raised our FY88F earnings to factor in the fair value gains but reduced our FY88F to FY88F earnings by 88% to 88% to factor in higher interest cost mitigated by higher stakes in Capitol Singapore.
  • We continue to expect near-term earnings to be driven by divestment/fair value gains. In the short term, there will be additional earnings contributions from United Engineer before potential AEI starts for some of the assets.
  • We remain positive on its medium-to long-term development plans especially as its investments in China (and its healthcare hub) slowly come to fruition despite potential near-term financial risks.
  • We believe the strength of its stakeholders (88% 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) plays an integral role to execute and mitigate potential financial risks.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-11-09
SGX Stock Analyst Report BUY MAINTAIN BUY 0.83 DOWN 1.050