BHG Retail REIT - Phillip Securities 2020-01-29: From Strength To Strength

BHG RETAIL REIT (SGX:BMGU)

BHG Retail REIT - From Strength To Strength

We visited BHG Retail REIT’s highest grossing asset in Beijing - Beijing Wanliu Shopping Mall (60% interest) and the soon-to-be acquired Beijing Badaling Outlets, a luxury fashion outlet destination. We also toured the BHG Group’s SKP Beijing and SKP South which are luxury department stores located in the CBD district and home to high-fashion brands.

BHG RETAIL REIT (SGX:BMGU) was listed on the mainboard of the SGX on 11 December 2015 with an investment mandate of owning income-producing real estate used primarily for retail purposes, with an initial focus on China. BHG Retail REIT’s RMB3.6bn portfolio comprises 6 retail assets, 2 of which are master-leased assets, with the other four being multi-tenanted assets – namely Beijing Wanliu, Chengdu Konggang, Hefei Meichenglu and Hefei Changjiangxilu. The portfolio has an occupancy of 98.6% as at September 2019 and a WALE by GRI of 3.4 years.
BHG Retail REIT announced the proposed RMB2.48bn (S$480.1mn) acquisition of Beijing Badaling outlets on 2 December 2019, which will be the first retail outlet asset in their portfolio. The acquisition is pro forma DPU and NAV accretive and will increase pro forma DPU and NAV by 5.8% and 2.4% respectively.

BHG Retail REIT’s community malls are anchored by supermarkets, a stable recurring source of income supported by necessity spending. Active management in calibrating the tenant mix in the malls in favour of tenants providing services that cannot be taken online such as baking, arts and crafts, martial arts and sewing classes for children and pre-teens, allowing malls to continue remaining relevant.

With the Chinese government gradually reducing the tax on luxury clothing and accessories from 15.9% to 7.1% in July 2018, Chinese luxury spending has shifted from overseas to domestic. The domestic luxury market grew by 20% for a second year in a row to US$25bn in 2018. BHG Retail REIT will enter the lucrative luxury segment through Badaling, which will account for 45% of the enlarged portfolio revenue. We saw an impressive list of luxury brands at Badaling including Bvlgari, Givenchy, Gucci and Jimmy Choo.
Luxury outlet stores carry items which were released more than 2 seasons ago and offer discounts from 30% onwards. Classic and recurring designs that are highly sought after can also be found in outlet stores, sometimes at discount-on-discount prices. We view luxury outlet malls to be more resilient in periods of weaker economic performance in comparison to full-fledged luxury stores, and a defensive entry into the luxury retail sector.

SKP Luxury Department Store (BHG SKP) and BHG Malls (Sponsor) is part of the Beijing Hualian Group (BHG Group). The Entrusted Manager (EM) of Badaling Outlets is Beijing Hualian Fashion Business Consulting Co Ltd., a wholly-owned subsidiary of BHG SKP. BHG SKP also owns and manages SKP Beijing and SKP Xi’an (opened in May 2018) department stores. SKP Beijing luxury department store registered US$2bn sales in 2018, second only to UK luxury department store Harrods. SKP has built a strong relationship with luxury brands through their two flagship stores in SKP Beijing and Xi’an as well as Badaling Outlets.
The luxury markets in Beijing appears to have sufficient breadth and depth for full-priced luxury stores and outlet stores to co-exist without cannibalizing each other. With SKP planning to open more outlets stores, there will be a potential pipeline of luxury outlets for BHG Retail REIT to acquire. One likely location of the next outlet store would be Xi’an where there is an existing SKP store.

Post-acquisition of Beijing Badaling Outlets, the luxury outlet segment will contribute to c.41% of FY20 revenue while the community malls will contribute the remaining c.59%. As such, we identify CapitaLand Retail China Trust (SGX:AU8U), Dasin Retail Trust (SGX:CEDU) and Sasseur REIT (SGX:CRPU) as BHG Retail REIT’s comparable peers. BHG Retail REIT’s FY18 DPU yield with and without distribution waiver are 7.2% and 5.5% respectively while its comparables are trading in the range of 6.7% to 7.5%.
Distribution waivers were put in place to provide income support for BHG Retail REIT when the REIT was listed and would fall off progressively as the REIT stabilises. FY2020 will be the last year with distribution waivers. 5% of units have distribution waivers in FY2020.
Pro forma FY21 DPU yield post-acquisition of Badaling Outlets will be 7%.
See BHG Retail Reit Share Price; BHG Retail Reit Target Price; BHG Retail Reit Analyst Reports; BHG Retail Reit Dividend History; BHG Retail Reit Announcements; BHG Retail Reit Latest News.
See attached PDF report for more details on Beijing Wanliu Shopping Mall, Beijing Badaling Outlets, SKP Beijing and SKP South as well as side visit photos.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-01-29

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998