BHG RETAIL REIT

BMGU
End-of-day quote. End-of-day quote  - 09/24
0.57SGD 0.00%

General Announcement::DBS initiates coverage on BHG Retail REIT with "Buy" rating

07/01/2021 | 06:58am

Singapore Company Focus

BHG Retail REIT

Bloomberg: BHGREIT SP | Reuters: BHGR.SI

Refer to important disclosures at the end of this report

DBS Group Research . Equity

BUY

(Initiating Coverage)

Last Traded Price ( 29 Jun 2021): S$0.55 (STI : 3,089.49)

Price Target 12-mth:S$0.60 (10% upside)

Potential Catalyst: M&A activity, better than expected distributions

Analyst

Woon Bing Yong +65 6682 3704 woonbingyong@dbs.com Derek TAN +65 6682 3716 derektan@dbs.com

Price Relative

S$

Relative Index

0.7

0.7

208

0.7

188

0.6

168

0.6

0.6

148

0.6

128

0.6

108

0.5

0.5

88

0.5

68

Sep-20

Dec-20

Mar-21

Jun-21

BHG Retail REIT (LHS)

Relative STI (RHS)

Forecasts and Valuation

FY Dec (S$m)

2019A

2020A

2021F

2022F

Gross Revenue

79.1

60.6

71.8

76.6

Net Property Inc

50.5

36.4

46.4

49.5

Total Return

(0.9)

15.5

13.6

15.4

Distribution Inc

18.6

12.1

17.1

18.8

EPU (S cts)

(0.2)

3.04

2.63

2.96

EPU Gth (%)

nm

nm

(13)

12

DPU (S cts)

3.86

2.24

3.01

3.26

DPU Gth (%)

(26)

(42)

34

8

NAV per shr (S cts)

116

120

119

119

PE (X)

nm

18.1

20.9

18.6

Distribution Yield (%)

7.0

4.1

5.5

5.9

P/NAV (x)

0.5

0.5

0.5

0.5

Aggregate Leverage (%)

29.1

29.3

28.4

28.3

ROAE (%)

(0.2)

3.6

3.1

3.5

Consensus DPU (S cts):

N/A

N/A

N/A

Other Broker Recs:

B: 0

S: 0

H: 0

GICW Industry: Real Estate

GIC Sector: Equity Real Estate Investment (REITs)

Principal Business: BHG Retail REIT was listed on the SGX on 11 Dec 2015. The REIT's investment strategy revolves around investing real estate primarily used for retail purposes with an initial focus on China.

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

30 Jun 2021

Good proxy for China's retail recovery

  • DPU to reverse 3-year declining trend with projected 34.4% y-o-y rise in FY21F DPU
  • Good potential for long-term high rental supported by strong disposable income growth in China
  • ROFR over 12 assets by the established Beijing Hualian Group, the owner of Beijing SKP Mall
  • Initiate with BUY and TP of S$0.60

Bottoming DPU heralds new phase of growth. FY20F DPU marked the bottom in BHG REIT's 3-yeardeclining DPU trend. Going forward, we believe DPU will grow steadily starting with a c.34% y-o-ybounce this year to an estimated 3.01 Scts. The recovery will be led by the end of rental rebates and a recovery from COVID-19restrictions. FY22F DPU is projected to grow c.8% y-o-yto 3.25 Scts and rise steadily from hereon as there are no more distribution waiver units remaining.

High growth potential with exposure to key cities. BHG REIT has exposure to three properties located in Hefei and Chengdu. Urban disposable income per capita grew by a 5-yearCAGR of 8.5% and 7.9% in Hefei and Chengdu, compared to Beijing's 7.2%. Correspondingly, retail spending in Hefei and Chengdu grew faster at a 5-yearCAGR of 16.6% and 7.3% versus 5.7% in Beijing. Arguably, BHG REIT's assets in Hefei and Chengdu may potentially enjoy higher rental growth even as its Beijing Wanliu mall provides a stable foundation.

Established Sponsor with pipeline of assets for acquisition. BHG REIT has a right-of-first-refusal(ROFR) over 12 assets. The REIT's pipeline of assets may expand beyond the ROFR, with previous proposed acquisitions outside the ROFR. Using the proposed acquisition of Badaling Outlets as a basis, we estimate that BHG REIT has an acquisition firepower of between c.S$300m and S$500m when combined with a rights issue.

Valuation:

Initiate with BUY and DCF-based TP of S$0.60 based on WACC of 8.0% and terminal growth rate of 2.5%. Our TP implies FY22F target yield of 5.4%.

Key Risks to Our View:

Surge in COVID-19 cases leading to restrictions in Beijing, Chengdu or Hefei and higher-than-expected shift in retail spending to online space.

At A Glance

Issued Capital (m shrs)

512

Mkt. Cap (S$m/US$m)

281 / 213

Major Shareholders (%)

Free Float (%)

3m Avg. Daily Val (US$m)

0.00

ed: TH/ sa: xx,PY, CS

Company Focus

BHG Retail REIT

Table of Contents

Investment Summary

3

Valuation & Peer Comparison

6

Key Risks

7

SWOT Analysis

8

Critical Factors

9

Financials

10

Company Background

15

Management & Strategy

18

Page 2

Company Focus

BHG Retail REIT

Investment Summary

Initiate with BUY and DCF-based TP of S$0.60. We believe the worst is over for BHG REIT. DPU is expected to reverse its 3-yeardeclining trend in FY21F underpinned by 1) a recovery from COVID-19as rental rebates taper down and

  1. no more distribution waiver units remaining. Additionally, BHG REIT is exposed to cities that could see high rental growth. The REIT is also supported by an established Sponsor with a ROFR over 12 assets and could be set to acquire a new asset in the coming months. Overall, while BHG REIT trades at a premium with a FY22F yield of c.5.8%, we think that investors are paying for higher growth potential and a visible pipeline by buying the REIT.

FY20 marks bottom of declining DPU trend. BHG REIT's DPU has been on a declining trend since FY18 as units that were previously waived from distributions regained their entitlement to distributions. BHG REIT's DPU was hard hit in FY20 due to the double whammy of the COVID-19outbreak and c.49m units regaining their entitlement to distributions. For FY21F, we are projecting DPU to rise 34.4% y-o-yto c.3.01 Scts. Just c.25m units are expected to regain their entitlement to distributions in FY21F and its impact will bre more than offset by BHG REIT's rebound from the COVID-19pandemic. From FY22F onwards, DPU is expected to rise steadily as there are no more units remaining that are waived from distributions.

Distribution waiver schedule

Distribution Period

Distribution

% of total units

waiver units

as of listing date

Listing date - 31 Dec 16

147.8m

30.0

1 Jan 17 - 31 Dec 17

135.5m

27.5

1 Jan 18 - 31 Dec 18

123.2m

25.0

1 Jan 19 - 31 Dec 19

73.9m

15.0

1 Jan 20 - 31 Dec 20

24.6m

5.0

Source: Company, DBS Bank

Respectable tenant acquisition ability. As of end-FY19before the height of the pandemic in China, Beijing Wanliu, Chengdu Konggang, Hefei Mengchenglu and Hefei Changjiangxilu had 35.3%, 30.0%, 30.5% and 34.9% of leases by NLA set to expire in FY20. Taking into account the lease expiries and the impact of the pandemic, we think BHG REIT has managed COVID-19well, with occupancies of most of its properties declining only a few percentage points in FY20. This suggests that BHG REIT's property attributes remain attractive to tenants.

Occupancies generally remained healthy despite COVID-19

Property

Lease

FY19

FY20

expiry by

Occupancy

Occupancy

NLA (%)

(%)

(%)

Beijing Wanliu

35.3

96.2

92.7

Chengdu Konggang

30.0

94.7

96.4

Hefei Mengchenglu

30.5

95.1

81.7*

Hefei Changjiangxilu

34.9

97.6

92.4

*Hefei MCL is currently ongoing tenancy rejuvenation efforts in preparation of a new train line set for trial operations in Dec 2021 Source: Company, DBS Bank

High disposable income growth could pave way for higher rental increases. Urban disposable income per capita at Hefei, Chengdu and Beijing grew at a CAGR of 8.5%, 7.9% and 7.2% respectively from 2016-2020.As expected, retail spending in all three cities kept pace from 2016-2020,growing at a CAGR of 16.6%, 7.3% and 5.7% in Hefei, Chengdu and Beijing respectively. Notably, growth in China's relatively less developed cities, such as Chengdu and Hefei, was faster than in Beijing. Positively, this may signal that BHG REIT's properties situated in Hefei and Chengdu could enjoy higher rental growth compared to their Tier 1 city peers.

Urban disposable income per capita rose the fastest in Hefei (RMB)

80,000.0

Hefei

Chengdu

Beijing

60,000.0

40,000.0

20,000.0

0.0

2016

2017

2018

2019

2020

Source: Company, DBS Bank

Retail spending in Hefei grew at a CAGR of 16.6% (RMB bn)

1,500.0

Hefei

Chengdu

Beijing

1,000.0

500.0

0.0

2016

2017

2018

2019

2020

Source: Company, DBS Bank

Page 3

Company Focus

BHG Retail REIT

Reputable anchor tenant to drive footfall. BHG Hypermarket is a key tenant in BHG REIT's mall portfolio and contributed 19.1% of the REIT's gross rental income in FY20. BHG Hypermarket is a supermarket that has consistently ranked among China's top 100 retail chain stores, according to China Chain Stores & Franchise Association. The chain was ranked 43rd in 2020, a rise from the its rank of 53rd in 2019. Anchor tenants in essential trade sectors such as supermarkets will help underpin sustained footfall to BHG REIT's properties.

Established Sponsor with wealth of experience in mall management and pipeline of malls mostly located in Beijing. BHG REIT's Sponsor, Beijing Hualian Group ("BHG"), is an established retailer managing more than 30 malls in over 10 different Chinese cities. The Group has opened 24 malls with a total gross floor area of over 1.6m sqm. In Beijing, BHG has 14 malls including its crown jewel, Beijing SKP. Beijing SKP is a high-enddepartment store that is arguably China's top luxury mall. In 2020, despite COVID-19,the mall was expected to generate double-digitgrowth revenue.

Time may be ripe for next acquisition. Since its listing, BHG REIT has acquired Hefei Changjiangxilu and proposed the acquisition of Badaling Outlets. The proposed acquisition of Badaling Outlets was ultimately shelved as the COVID-19pandemic ensued. We note that the acquisitions of Hefei Changjiangxilu and Badaling Outlets were proposed in November 2018 and December 2019 respectively. Given the stabilising pandemic and retail mall situation in China, we believe that a possible acquisition may be on the horizon in 2H21. This would be in line with the timeframe of its two previous proposed acquisitions. BHG REIT's next acquisition could also stem from Beijing, considering the Sponsor's larger presence in the city.

China's non-online retail sales have rebounded back to pre- pandemic levels. Following the outbreak of COVID-19in China in the first few months of 2020, full lockdowns were implemented in China to control its spread. In turn non- online retail sales plunged c.17.9% y-o-yin 1H20.

Subsequently, in 2H20, retail sales in China improved as the pandemic came under control and COVID-19 restrictions were lifted. Unsurprisingly, non-online retail sales recovered, bouncing c.27.9% y-o-y in 5M21 due to last year's low base. 5M21 non-online retail sales also totalled RMB12.6tr, 2.8% higher than pre-pandemic levels (5M19). Indeed, non-online retail sales may be benefitting from a combination of pent-up spending and a lack of international travel.

Post-COVIDnon-online retail sales have risen above pre- COVID levels (RMB bn)

14,000

12,269.1

12,608.0

12,000

10,000

8,000

6,000

4,000

2,000

0

Pre-Pandemic (5M19)

Post-Pandemic (5M21)

Source: NBS, DBS Bank

Growth in online retail sales has slowed; share of non-online sales has risen. While online retail sales continue to grow at a

double-digit pace, growth appears to be on a downward trend, at only 11.8% y-o-y in May 2021 compared to the 15.6% and 18.9% recorded in May 2020 and May 2019. This was also slower when compared to the 25.8% and 38.8% growth seen in May 2018 and May 2017. To reinforce this notion, 5M21 non-online retail sales share was higher than in 5M20, the first time it has increased since at least 2016. Optimistically, non-online retail sales may finally be catching a respite after years of losing share to online competition.

Page 4

Company Focus

BHG Retail REIT

China's online retail sales share has whittled down non-online retail sales share

China non-online retail sales share

90.0%

2016

2017

2018

2019

2020

2021

85.0%

2016

80.0%

2017

75.0%

2018

2021

2019

70.0%

2020

65.0%

Comments

Share of China's non-online retail sales have shown a gradual but clear trend of decline in the past years. However, 5M21 non- online retail sales share was higher than in 5M20, hinting that non-online retail sales share may have bottomed.

60.0%

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Source: NBS, DBS Bank

China online monthly retail sales value and growth (RMB bn)

1,800

Online Retail Sales

y-o-y growth (%)

1,600

1,400

1,200

1,000

800

600

400

200

0

May-21

Apr-21

Mar-21

Feb-21

Dec-20

Nov-20

Oct-20

Sep-20

Aug-20

Jul-20

Jun-20

May-20

Apr-20

Mar-20

Feb-20

Dec-19

Nov-19

Oct-19

Sep-19

Aug-19

Jul-19

Jun-19

May-19

Apr-19

Mar-19

Feb-19

Dec-18

Nov-18

Oct-18

Sep-18

Aug-18

Jul-18

Jun-18

May-18

Apr-18

Mar-18

Feb-18

45.0%

35.0%

25.0%

15.0%

5.0% -5.0%

Comments

Online retail sales continued to grow at a double-digit rate but is observed to be on a downward trend, growing only 11.8% y-o-y in May 2021 compared to the 15.6% and 18.9% recorded in May 2020 and May 2019.

Source: NBS, DBS Bank

Page 5

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Disclaimer

BHG Retail REIT published this content on 01 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 July 2021 10:57:06 UTC.

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