Monday, July 06, 2015

Perennial Real Estate Holdings - Diversifying into healthcare

What Happened 
PREH has entered into a strategic 40/60 JV with Guangdong Boai Medical Group (GBMG) to expand into the hospital/medical services business in China. GMBG is a subsidiary of China Boai Medical Group (BOAI), one of the largest private hospital/medical services operators in China. The JV will focus on 8 core medical fields including oncology, O&G, aesthetic surgery and medicine, orthopaedics, paediatrics, ENT, dentistry and cardiology. Its first acquisition is the Modern Hospital Guangzhou, one of BOAI’s more profitable leading tumour and cancer hospital operations in Guangzhou. The price tag for PREH’s 40% share works out to be Rmb286.7m (12x FY14 EV/EBITDA) and will be funded through internal funds and bank borrowings.   
What We Think 
The benefits of this transaction to PREH is two-fold. For one, it introduces a new asset class within its developments that would complement its existing real estate business as a source of additional demand for its commercial space, and encourage cross spending between other components of the development. As a start, the Perennial Dongzhan Mall will be repositioned as a health and medical hub with a hospital, medical suites and other healthcare and wellness-related services. In the medium term, the Xian HSR and Beijing Tongzhou integrated developments could also be repositioned as such. More importantly this change would enable the group to sustain a 6-8% yield on cost for its properties. In addition, this diversification would allow the group to ride on the growth of private healthcare in China. This sector is projected to grow since China began introducing new healthcare reforms in 2009 and lifted restrictions for foreign investment in China’s private hospitals in 2012. Moreover, the rapidly rising income of the middle class could also lead to greater demand for better healthcare services. 
What You Should Do 
We maintain our current profit estimates as the initial impact from this acquisition is not significant. Maintain Add, with a target price of S$1.39, based on a 35% discount to RNAV.

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