BHG Retail REIT - Phillip Securities 2021-02-08: Harnessing The Mighty Chinese Consumer


BHG Retail REIT - Harnessing The Mighty Chinese Consumer

  • Retail sales in the 5 cities where BHG Retail REIT operates - Beijing, Chengdu, Hefei, Dalian, Xining - grew by a 8.3% CAGR in the past decade, reaching RMB3,080bn in 2020.
  • Substantial M&A ROFR pipeline from sponsor that could expand its portfolio by 3.2x.

About BHG Retail REIT

  • BHG Retail REIT (SGX:BMGU) was listed on SGX on 11 December 2015 at S$0.80 per unit. It has six retail properties spread out in five cities in China: Beijing, Chengdu, Dalian, Hefei and Xining, four of which are multi-tenanted and two are master-leased.

Sponsor Beijing Hualian Department Store Co. Ltd

  • Beijing Hualian Department Store Co. Ltd (000882.SZ) is part of the Beijing Hualian Group, which has interests in two publicly listed companies and several holding companies. An established Chinese home-grown retail-property operator, Beijing Hualian Department Store was one of the first companies to manage retail properties in China, with a focus on the ownership and management of community retail properties.

BHG Retail REIT's Assets

  • BHG Retail REIT has 6 malls valued at RMB3,706mn or S$761mn:
    • Beijing Wanliu. This is the largest mall in its portfolio, in which BHG Retail REIT holds 60.0%. Situated in Haidian, one of the largest urban districts in Beijing by population, residents have one of the highest per-capita disposable income in Beijing. The mall is surrounded by high-end residential communities.
    • Chengdu Konggang. Located in Shuangliu County in Chengdu, Sichuan Province, the mall is served by the Shuangliu Railway Station and Shuangliu International Airport, capturing tourists. It serves as the heart of the community, providing quality shopping and experiential lifestyle services to the city’s growing middle and upper-middle families and young professionals living in high-density residential projects nearby.
    • Hefei Mengchenglu. Located in Hefei’s North First Ring retail hub comprising several mature residential districts, high-quality office projects and commercial facilities, the mall is frequented by families and professionals for retail goods and services. The mall underwent supermarket resizing and asset enhancement initiative (AEI) in 2019.
    • Hefei Changjiangxilu. A newly-acquired mall in April 2019, this is located in Shushan district in Hefei, one of the four central districts of Hefei. It is a new urban area where high-tech firms are based. Shushan is also developing into a new urban centre with high-end communities, cultural and sports centres, 5-star hotels and serviced apartments.
    • Xining Huayuan. This property has been enjoying 100% occupancy since IPO. It is a 4- storey retail hub located in the Ximen-Dashizi area, a traditional core retail hub in Xining. Master lessee is the Beijing Hualian Hypermarket. The mall is well-connected by major roads and bus lines and is frequented by residents living and working in the area.
    • Dalian Jinsanjiao. This is the smallest property by valuation. It is BHG Retail REIT’s other property with 100% occupancy since IPO. The mall is situated in the middle of several residential estates in Dalian. It is popular with middle-income families and professionals residing in the area.

Investment Highlights

1. Stable portfolio with quality assets and performance

  • BHG Retail REIT's committed occupancy remained healthy at 96.7% in FY19. The latest reported figure is 91.5% on 30 September 2020, still healthy. Lower occupancy rate of 78.4% was recorded at Hefei Mengchenglu due to ongoing tenancy rejuvenation.
  • NPI grew at a CAGR of 5.8% from FY16 to FY19. 1HFY20 NPI fell 34.5% y-o-y mainly due to COVID-19 measures at the start of the year. Its two malls in Hefei were temporarily closed from 7 February 2020 to 10 March 2020 while other malls remained open daily. Revenue from Hefei Changjiangxilu mall started in 1HFY19.
  • More than 65% of GRI and 80% of NLA are derived from the experiential segment, which typically requires consumers to visit the malls. Experiential offerings include pony and horse-riding training for children, an Amazing Art Space at Beijing Hualian mall and a flea market for children at Chengdu Konggang.
  • Rental renewals in FY20 were 80%, in line with pre-Covid figures. BHG Retail REIT had also provided rental rebates to certain tenants and all instalments were paid by end-FY20.
  • Defensive lease structure. About 95% of its leases are structured on the higher of fixed rents or percentage of gross turnover. This allows BHG Retail REIT to benefit from upside while downside is capped by fixed rents. In FY19, more than 90% of its GRI was derived from base rents. Less than 10% was from variable rental income. Furthermore, more than 90% of its leases come with built-in rental escalation, allowing for organic growth.
  • BHG Retail REIT has been enhancing its assets continuously. It is on the constant lookout for opportunities to enhance its malls. It completed AEI at Hefei Mengchenglu in 2QFY19. Other new introductions included a container-style food lane outside its Chengdu Konggang mall, which has enhanced the mall’s attractiveness and visibility to nearby communities.

2. Tapping China’s economic fundamentals

  • Disposable income and the expenditure of urban residents in China have been steadily increasing in the past decade, at CAGRs of 7.4% and 5.7% respectively. Urban retail sales grew at a CAGR of 6.5% to reach RMB29,424bn by end-2020.
  • After a slowdown of disposable income growth and annual expenditure and retail sales in 2020 due to the pandemic, y-o-y changes in monthly retail sales turned positive in September 2020. Growth in monthly retail sales averaged 4.3% y-o-y for the period September to December 2020.
  • China was one of the few countries whose economy grew in 2020, by 2.3%. Although a handful of COVID-19 cases have popped up in certain cities, the Chinese government has again managed to corral the clusters through swift lockdowns. With China’s GDP forecast by the Chinese government to expand 8.2% in 2021, sustained growth in retail sales is expected.
  • FY20 footfall at BHG Retail REIT’s malls averaged 80% of FY19 levels. About 80% of BHG Retail REIT’s retail sales in FY20 were captured offline. BHG Retail REIT launched online platforms during COVID-19 to better connect with omnichannel visitors, via the WeChat Mini-Program, an app within TenCent’s WeChat ecosystem that provides advanced features to users such as e-commerce, coupons, etc. Points are awarded to its customers to enhance their loyalty to both BHG malls and retailers.

3. M&A growth opportunities

  • Sponsor, Beijing Hualian Department Store Co. Ltd, has a pipeline of ROFR properties. Of these, BHG Retail REIT completed its acquisition of the Hefei Changjiangxilu mall in April 2019 for RMB334.0mn. The mall added NLA of 26,826 sqm and accounts for 13.3% of its portfolio valuation. Under its ROFR agreement, BHG Retail REIT could potentially acquire 11 properties in various cities.
  • BHG Retail REIT also continues to explore opportunities among third-party quality income-producing retail properties.
  • Gearing was 35.7% as of 30 September 2020. Borrowings of S$284.2mn were drawn down in FY19. Debt headroom for acquisitions remains comfortable, with a gearing limit of 45%. More than 80% of borrowings are offshore loans denominated in S$ and US$. About 60% of these offshore loans have been hedged using interest-rate swaps.

Risks: Income support coming to an end.

  • BHG Retail REIT's sponsor had waived its entitlement to dividends since IPO in December 2015. The amount of distributions waived, attributable to strategic investor units, in FY18 and FY19 amounted to S$5.3mn and S$3.6mn respectively or 25% and 15% of the REIT’s total units. The final distribution waiver was in FY20.
  • From FY21 onwards, BHG Retail REIT's unitholders may face a drop in their DPUs and distribution yields.


Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-02-08
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000