• Active management keeps BHG’s community shopping malls relevant amidst e-commerce struggle
• A measured entry into China’s lucrative luxury sector
• SKP’s track record in the luxury-goods sector provides support and runway for the management and further expansion of luxury outlet segment within BHG REIT’s portfolio

We visited BHG REIT’s highest grossing asset in Beijing – Beijing Wanliu Shopping Mall (60% interest) and the soon-to-be acquired Beijing Badaling Outlets, a luxury fashion outlet destination. We also toured the BHG Group’s SKP Beijing and SKP South which are luxury department stores located in the CBD district and home to high-fashion brands. 

Company Background

BHG Retail REIT (BHG REIT) was listed on the mainboard of the SGX on 11 December 2015 with an investment mandate of owning income-producing real estate used primarily for retail purposes, with an initial focus on China. BHG REIT’s RMB3.6bn portfolio comprises 6 retail assets, 2 of which are master-leased assets, with the other four being multi-tenanted assets – namely Beijing Wanliu, Chengdu Konggang, Hefei Meichenglu and Hefei Changjiangxilu. The portfolio has an occupancy of 98.6% as at September 2019 and a WALE by GRI of 3.4 years.

BHG REIT announced the proposed RMB2.48bn (S$480.1mn) acquisition of Beijing Badaling outlets on 2 December 2019, which will be the first retail outlet asset in their portfolio. The acquisition is pro forma DPU and NAV accretive and will increase pro forma DPU and NAV by 5.8% and 2.4% respectively.

Site Visit Highlights

• Active management keeps BHG’s community shopping malls relevant amidst e-commerce struggle – BHG REIT’s community malls are anchored by supermarkets, a stable recurring source of income supported by necessity spending. Active management in calibrating the tenant mix in the malls in favour of tenants providing services that cannot be taken online such as baking, arts and crafts, martial arts and sewing classes for children and pre-teens, allowing malls to continue remaining relevant.
• A measured entry into China’s lucrative luxury sector – With the Chinese government gradually reducing the tax on luxury clothing and accessories from 15.9% to 7.1% in July 2018, Chinese luxury spending has shifted from overseas to domestic. The domestic luxury market grew by 20% for a second year in a row to US$25bn in 2018. BHG REIT will enter the lucrative luxury segment through Badaling, which will account for 45% of the enlarged portfolio revenue. We saw an impressive list of luxury brands at Badaling including Bvlgari, Givenchy, Gucci and Jimmy Choo. Luxury outlet stores carry items which were released more than 2 seasons ago and offer discounts from 30% onwards. Classic and recurring designs that are highly sought after can also be found in outlet stores, sometimes at discount-on-discount prices. We view luxury outlet malls to be more resilient in periods of weaker economic performance in comparison to full-fledged luxury stores, and a defensive entry into the luxury retail sector.
• SKP’s track record in the luxury-goods sector provides support and runway for the management and further expansion of luxury outlet segment within BHG REIT’s portfolio – SKP Luxury Department Store (BHG SKP) and BHG Malls (Sponsor) is part of the Beijing Hualian Group (BHG Group). The Entrusted Manager (EM) of Badaling Outlets is Beijing Hualian Fashion Business Consulting Co Ltd., a wholly-owned subsidiary of BHG SKP. BHG SKP also owns and manages SKP Beijing and SKP Xi’an (opened in May 2018) department stores. SKP Beijing luxury department store registered US$2bn sales in 2018, second only to UK luxury department store Harrods. SKP has built a strong relationship with luxury brands through their two flagship stores in SKP Beijing and Xi’an as well as Badaling Outlets. The luxury markets in Beijing appears to have sufficient breadth and depth for full-priced luxury stores and outlet stores to co-exist without cannibalizing each other. With SKP planning to open more outlets stores, there will be a potential pipeline of luxury outlets for BHG REIT to acquire. One likely location of the next outlet store would be Xi’an where there is an existing SKP store. 

Investment Thesis

No stock rating or target price as we do not have coverage on BHG REIT.

Comparables

Post-acquisition of Beijing Badaling Outlets, the luxury outlet segment will contribute to 41% of FY20 revenue while the community malls will contribute the remaining 59%. As such, we identify CapitaLand Retail China Trust (not rated), Dasin Retail Trust (Accumulate) and Sasseur REIT (not rated) as BHG REIT’s comparable peers. BHG REIT’s FY18 DPU yield with and without distribution waiver are 7.2% and 5.5% respectively while its comparables are trading in the range of 6.7% to 7.5% (Figure1).

Distribution waivers were put in place to provide income support for BHGREIT when the REIT was listed and would fall off progressively as the REIT stabilises. FY2020 will be the last year with distribution waivers. 5% of units have distribution waivers in FY2020.

Pro forma FY21 DPU yield post-acquisition of Badaling Outlets will be 7%.

Beijing Wanliu

Beijing Wanliu is a community mall located in Beijing’s Haidian district. Home to residents with one of the highest per-capita disposable income in Beijing. Beijing Wanliu boasts 55,069sqm of net lettable area (NLA) and 300 shops. The higher purchasing power of the surrounding catchment is reflected in the tenant mix of the mall. We see a prevalence of international brands and emphasis on children education and enrichment. We estimate that 40% of NLA is leased to tenants providing retail and services targeted at children and pre-teens such as enrichment classes, arts and craft, skill and hobby-related workshops. The mall is anchored by BHG supermarket and Golden Harvest Cinema with mini-anchors being H&M and Muji. F&B outlets are mostly located on the highest floors and include a 24-hour Haidilao outlet, as well as a popular local franchise, Green Tea.

Majority of the leases are structured on higher of fixed rent or percentage of gross turnover basis, allowing BHG REIT to benefit from the upside while being protected by a minimum (fixed) rent. 90% of the contributing revenue accrues from the fixed rent. Many of the F&B establishments on the highest floor are contributing to the Gross Turnover (GTO) rent. The same leasing strategy applies to the remaining 3 multi-tenanted malls in BHG REIT’s portfolio.

Beijing Badaling Outlets (Badaling)

The proposed acquisition of Beijing Badaling Outlets for an agreed price of RMB2,482.3mn (S$480.1mn) is at a 16.8% discount to the valuation of RMB2,982.2mn (S$576.8mn) and at a FY18/1H19 NPI yield of 8.7%/8.3%. Badaling will account for 45% of revenue in the enlarged portfolio. Badaling will be managed under an Entrusted Management Agreement (EMA) for a term of 10 years.

Under the EMA, the Entrusted Manager (EM) of Badaling, Beijing Hualian Fashion Business Consulting Co., will receive a fee for their management services and are responsible for the performance of Badaling. BHG REIT will receive a minimum fixed rent and 20% of revenue generated in excess of the fixed income (if any). The fixed income will be RMB225.1mn in the first operating year and will escalate at 3% p.a. each year. Any shortfall in the fixed income is guaranteed by BHG SKP, the holding company of the Entrusted Manager (EM) of Badaling, Beijing Hualian Fashion Business Consulting Co. 

Badaling is located in Changping District, 40km (1hr 10mins drive) from Beijing’s city centre, and has NLA of 38,797sqm. Beijing Badaling is organised into three categories; (A) International Fashion, (B) Young Fashion and (C) Domestic Fashion. The brands represented at Badaling include:

(A) International Fashion: Bally, Bvlgari, Burberry, Celine, Coach, Dolce&Gabanna, Fendi, Givenchy, Gucci, Jimmy Choo, Marc Jacobs, Max Mara, MCM, Moschino, Prada, Saint Laurent, Salvatore Ferragamo, Tod’s, Valentino, Versace

(B) Young Fashion: Adidas, Boy London, Brooks Brothers, Calvin Klein, Converse, Diesel, Evisu, Ed Hardy, Fila, Furla, Gap, Lacoste, Levis, Michael Kors, New Balance, Nike, Puma, Skechers, Superdry, The North Face, Timberland, Tommy Hilfiger, Under Armour, Ugg

(C) Domestic Fashion: Balabala, Clarks, Cottonfield, Dyson, Huawei, JNBY, The Simsons, Teenie Weenie, Villeroy&Boch, Wacoal, Zwilling J.A Henckels

Luxury goods sold at the Badaling outlets have discounts starting from 30% onwards, with selected items entitled discount-on-discount prices. There are complimentary shuttle buses that bring customers from 8 locations to and from the mall. Based on membership tracking, customers who shop at Badaling also shop at SKP Beijing, evidence that there are sufficient breadth and depth in the Beijing luxury market. 80% of sales are from Beijing residents with the remaining 20% of sales contributed from customers from neighbouring cities Hebei and Inner Mongolia.

SKP Beijing and SKP South

SKP Beijing

The pinnacle of luxury shopping in China – SKP Beijing is second to UK luxury department store Harrods in terms of sales. In the financial year ended February 2019, Harrods recorded sales revenue of £2bn (US$2.6bn) while SKP Beijing raked in RMB13.5bn (US$1.96bn) in the financial year ended December 2018. Each floor has specially curated scent, with art installations throughout the mall.

BHG Group has two stores within the mall, SKP Select and SKP Rendezvous. Their concept store SKP Rendezvous creates a minimalistic-themed mixed-use store, which combines a modern bookstore with an artisanal cheese grocer, wine bar and cellar, modern home décor store and F&B outlet.

SKP South

Located across the road from SKP Beijing, SKP South is a futuristically themed creative space featuring innovative designs and art installations, newly opened in January 2020. BHG SKP is leading the way in “retailtainment”, emphasizing the experiential and immersive aspect of shopping malls. With Korean brand Gentle Monster as the creative lead, the mall was designed under the narrative of a “Digital-Analog Future”. Artworks and pop-up shops as well as in-shop displays have echoed the same futuristic theme creating an immersive and memorable experience.

As a wholly owned subsidiary of BHG SKP, the EM of Badaling will benefit from the relationships that SKP has built with the luxury brands and well as BHG SKP’s knowledge and expertise in the luxury retail sector. The strength and success of BHG SKP in the luxury scene also means more growth opportunities for BHG SKP that may eventually come to BHG REIT.   BHG SKP has plans to open outlets stores in location where they have full-priced luxury department stores. As such, there will be a potential pipeline for luxury outlets for BHG REIT to acquire. The most likely location of the next outlet store would be Xi’an where there is an existing SKP store.

Source: Phillip Capital Research - 29 Jan 2020