Banyan Tree Holdings Limited: A new era through partnerships August 4, 2017

PSR Recommendation: BUYStatus: InitiationTarget Price: 0.77
  • Strategic partnerships signed with China Vanke and AccorHotels offer divestment gains, new management fee income and fresh capital for Banyan Tree.
  • Potential 9c/share gain on disposal of China assets provide upside to dividends.
  • Pipeline of potential hotel openings with Accor can almost double Banyan Tree’s hotel network from the current 40 to 76.
  • Initiate coverage with BUY rating and S$0.77 target price, implying a 36% upside.

Company Background

Banyan Tree Holdings Limited (BTH) is a developer and operator of premium resorts, hotels, residences and spas with a presence in 25 countries. The group’s properties include 40 hotels and resorts, 64 spas, 77 retail galleries and three golf courses as of FY16. The group’s primary business is centred around four brands, namely Banyan Tree, Angsana, Cassia and Dhawa.

Investment Merits

  • Significant capital gains expected on divestment of assets into Banyan Tree China.

BTH’s strategic partnership with one of China’s largest listed property developer, China Vanke is expected to generate significant gains for the Group from the disposal of Banyan Tree-branded hotels and assets in China into the new joint venture entity. We expect revaluation gains of S$66mn or 9c/share from the disposal of these assets, which are currently carried at cost. This is supported by the significant appreciation of Chinese land and property prices since the Group acquired these assets.

  • Strategic partnerships with Vanke and AccorHotels to accelerate growth in management fees.

Partnership with Accor enables BTH to leverage on Accor’s strength to drive new hotels expansion especially in areas outside of Asia where BTH currently has lesser exposure to. We project 3 new hotel openings with Accor per year from 2020, each of which on average would contribute S$0.23mn to BTH’s EBITDA (or 0.4% of FY16 EBITDA).

  • Capital injection from strategic partners to reduce gearing and interest costs.

The strategic partnerships will see a potential S$50mn capital injection each from Vanke and Accor for a respective 10% stake in BTH. We foresee BTH utilising the cash to reduce the debt load and lowering finance costs going forward. Assuming 4% cost of debt, interest cost savings of up to S$4m/year can increase FY18e NPAT by c.48% (or EPS impact of 23%).

Initiating coverage with BUY rating and target price of S$0.77

We initiate coverage on BTH with a BUY rating and an SOTP-derived target price of S$0.77. This implies a 36% upside and a FY18e P/NAV of 0.91. Our SOTP incorporates a 20% discount on PPE for the owned hotel business, 30% discount on RNAV for development properties, and 10x EV/EBITDA for the fee-based segment.

 

Company Background

Banyan Tree Holdings Limited (BTH) is a developer and operator of premium resorts, hotels, residences and spas with a presence in 25 countries. The group’s properties include 40 hotels and resorts (with equity interest: 19, without equity interest: 21), 64 spas, 77 retail galleries and three golf courses as of FY16. The group’s primary business is centred on four brands, namely Banyan Tree, Angsana, Cassia and Dhawa. Additionally, the Group operates three integrated resorts in Asia, in particular, Laguna Phuket via its 65.8% owned subsidiary, Laguna Resorts Hotel & Hotels Public Company Limited (LRH TB). As at 1Q17, the Group has another 36 hotels and resorts either under development.

Investment Merits

Catalyst 1: Capital gains on divestment of assets into Banyan Tree China (BTC)

Banyan Tree’s strategic partnership with China’s largest listed property developer, China Vanke is expected to generate significant gains for BTH from the disposal of Banyan Tree-branded hotels and assets in China into a new entity, BTC. BTC will be jointly controlled by BTH and Vanke. Currently carried at cost, disposal of these assets will be at a market value to be confirmed by an independent valuer. We expect revaluation gains on disposal to be significant given the massive appreciation of Chinese land and property prices since the Group acquired these assets.

As of 31 December 2016, the net book value of these assets which are carried at cost, is S$163.7mn. We attempt to estimate the size of revaluation gains that BTH will be able to realise on divestment. Occupying a significant portion of the valuation are two plots of land BTH owns in Chengdu (land size 324mu or 215,784 sqm) and Lijiang (land size 283mu or 188,478 sqm). We expect the bulk of the revaluation gains on disposal to come from these two assets.

Disposing Laguna Chengdu will add S$16mn gain

Currently, housing the Laguna Chengdu project is a plot of land sized around 324mu (215,784 sqm) in Wenjiang, Chengdu acquired in 2012. More recently in October 2016, two separate plots of land of sizes 28k sqm and 20k sqm were sold for RMB3,900 and RMB4,350/sqm respectively1. These plots of land sit c.15km away from BTH’s Chengdu site. We apply a 25% discount to the lower of the above two transacted selling prices in trying to determine the approximate market value of BTH’s Chengdu site. This is to account for the larger land plot (which typically transact at a lower price per plot) and the greater distance from the city centre. At RMB2,925/sqm, we arrive at an approximate land value of S$126mn, S$16mn or 15% higher than the S$110mn carried on the BTH’s book at cost (plus development costs incurred so far).

Figure 1: Location of Laguna Chengdu and plot of land to be disposed into BTC

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Source: Google Maps, PSR

As a comparison, average land prices for commercial properties in Chengdu gained 13% from RMB9,671/sqm in 2012 to RMB10,913/sqm in 2016

Figure 2: Average land prices for commercial properties in Chengdu

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Disposing Banyan Tree Lijiang will add S$50mn gain

Banyan Tree Lijiang, a 125-key resort opened in 2006, makes up the remaining majority of the assets to be disposed into BTC. The resort sits on a 283 mu (or 188k sqm) plot of land which collectively makes up the bulk of the S$51mn of Property, Plant and Equipment held at cost for disposal into BTC. As a result of a lack of comparable prices of land in the vicinity, we estimate a growth rate consistent with the average rate of increase in property prices in Lijiang city. Lijiang has seen a near doubling of property prices in the decade following the opening of Banyan Tree Lijiang in 2006. We assume a disposal gain of c.S$50mn based on the assumption of doubling of property prices during the period.

Figure 3: Average property prices in Lijiang, Yunnan doubled since 2006

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Finalisation of market valuations of disposal assets could provide share price boost

Our conservative estimates for the total revaluation gain for BTH add up to S$66mn, with the bulk of it coming from the Lijiang land and property. This brings the total valuation of the disposal group of Chinese assets to c.S$230mn. A divestment of 50% of this group of Chinese assets could then yield BTH cash proceeds of S$115mn. Any upside to our estimated total revaluation gains could be a catalyst for a further upgrade. We would not discount the possibility of a distribution of partial divestment proceeds as dividends given the ample cash on the balance sheet for development properties expenditure.

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