BHG Retail RETI ("BHG" or the "REIT") is offering 151.169m units at S$0.80 per unit. The placement tranche comprises 143.169m units with the retail tranche making up the balance of 8m units. The gross proceeds raised will be around S$394.2m. Based on the IPO price, the market cap is ~$597.2m. The IPO will close on Dec 7 and starts trading on Dec 11.
There is an over-allotment option of up to 24.636m units. This over-allotment option will be a strong indicator if there is demand for the IPO.
As the name implied, BHG is a REIT focused (initially) on quality properties in Tier 1 and Tier 2 cities in China. Since investors in Singapore are very familiar with REIT, after some of the basic information, I will jump straight into what i think BHG.
The initial portfolio comprises of 5 properties listed below with valuations by DTZ and Knight Frank. It is good to see that the company is valuing it at >$$30m below the market value.
Valuation of IPO Properties
It is good to note that they are not pricing the IPO at the maximum valuation.
The forecast below for records purpose.
The distributions will be made semi-annually.
The projected yield for FY2016 is around 6.3% but that is because strategic investors have waived their entitlements. The yield would drop to 4.5% if there had been no financial engineering! (I don't like it!) This financial engineering will be in place all the way till 2021!
What I like about BHG
- China will be the biggest consumer market by 2018 and with rising income and middle class, consumer expenditure will drive the China economy. The relaxing of the one child policy is also positive for this sector
- Experienced management team
- Strong sponsor in BHG. They have 12 other malls which they own and another 26 managed by the Group
- Some decent cornerstone investors such as China Life, China Hi-Tech Holding Company, China Merchant Banks
- BHG didn't max out the valuation and mark it up and based on existing valuation, there is modest leverage around 34% with more headroom if required for acquisition
- Strong pipeline with 12 properties identified under ROFR which will triple BHG's size
Some of my concerns
- Competitive landscape – In my limited understanding, while each property is unique and location dependent, the landscape for retail is pretty competitive
- Changing consumer habits. With investors making purchases online via smartphones, a physical store may become obsolete over time and we can see that happening in China with rising online sales
- Financial engineering in increasing the distribution yields. Without the financial engineering, the yield for FY2016 would drop from 6.3% to 4.5%! Yucks.
- The manager has elected to receive the fees in units, which would further dilute the yield from FY2017 onwards.
- While BHG group and its affiliates will continue to own about ~31.5% of BHG REIT, the alignment is not as strong
- Potential conflict of interests with other sponsor properties
- The properties have less than 32 years of lease tenure balance
According to REIT data, Capital Retail China is trading at 7.122% with gearing of 28.5% while Mapletree Greater China Trust is yielding 7.52% with a 41% gearing.
In my view, the above two REITs provide better value propositions then BHG REIT in terms of dividend yield but definitely Capita Retail China Trust has a better debt ratio than Mapletree. Assuming BHG REIT trades to a yield of 7%, the fair value range will be between 51-72 cents
My Chilli ratings
Considering this is the first mainboard IPO for Singapore Exchange for 2015, it is hugely disappointing. I will give it a zero Chilli rating based on the above reasons.
Do note that i am vested.