What You Must Know Before Investing In Perennial Real Estate Holdings Limited

*Please note Perennial Real Estate Holdings has announced a privatisation offer of $0.95 per share by the main shareholders and might be privatised in the next few months. You can find the announcement here.

More About The Delisting of Perennial Real Estate

Perennial Real Estate Holdings Limited (SGX: 40X) is an integrated real estate and healthcare company formed through the reverse takeover of St James Holdings in 2014. 

Within a short time from 2014, it has gained a firm foothold in the China market with its signature mixed-use projects. 

In this article, let’s take a look at its asset portfolio, earnings, and growth potential. 

Business Overview 

Perennial owns, develops, and manages more than 65 million square feet of mixed-use developments in China, Singapore, Malaysia, and Indonesia.

In China, the group is developing 4 integrated projects adjacent to major High-Speed Railway (HSR) stations in Chengdu, Xian, Tianjin, and Kunming. These regional medical and commercial hubs comprise healthcare, medical, retail, and office facilities with easy access to commercial areas and HSR commuters. Other notable projects are found in Beijing, Shenyang, and Zhuhai, mostly integrated developments featuring retail, office, and residential components. 

In Singapore, Perennial owns iconic buildings such as AXA Tower, Capitol Singapore, and CHIJMES.

The group’s healthcare businesses are operated through three hospitals located in Chengdu and Guangzhou that provide various specialist and aesthetic surgery services. Perennial also owns a 50% stake in Renshoutang, an established private eldercare player in Shanghai with 17 retirement nursing homes and traditional Chinese medicine clinics. 

Source: Perennial corporate website

Latest Earnings 

Perennial achieved $124.2 million of revenue in the financial year 2019, 58.7% higher than 2018. This is due to the operations ramp-up from Capitol Singapore after its re-positioning exercise and opening of Perennial International Health and Medical Hub (PIHMH) in Chengdu. 

Despite selling away investment properties and better results from healthcare associates, earnings before interest and tax fell 64%. This was caused by lower fair value gains from its investment and development properties. 

Source: 4Q 2019 financial results presentation

Net debt remained largely unchanged at $2.8 billion, giving rise to a net debt to equity ratio of 0.74. 

Net asset value fell slightly to $1.58 per share due to translation loss arising from RMB depreciation. 

Cash Flow and Gearing Trend

Perennial is still investing substantial capital into the development of many of its integrated complexes and hospitals. As a result, Perennial has negative cash flow from operations in the past five years. Concurrently, the group is taking on higher loans and borrowings to fund its investments. This is seen from the positive net cash from financing activities in four out of the last five years. 

Its net debt-to-equity ranged between 0.45 to 0.75 and seems to be trending up recently in the last two years. 

Source: Self-compiled from Annual Reports

Capital Recycling Efforts

Perennial has been actively divesting stakes in various investment properties to recycle capital into its core integrated development projects in China. In 2019 alone, the group exited its stakes in Chinatown Point, United Engineers Limited, Aidigong – a maternal and child health business in China. It also sold 48 strata office units in 111 Somerset. 

On 6 May, Perennial announced the sale of its stake in AXA Tower to Alibaba Singapore, a subsidiary of global e-commercial giant Alibaba group. The transaction will reduce its effective stake in AXA Tower to 10%, raise net proceeds of about $196 million, and concurrently allow the group to enjoy an uplift in property value arising from its redevelopment. 

Focusing on China Integrated Developments

China’s rising affluence and a fast ageing population have pushed demand for quality medical services. Concurrently, private hospitals accounted for less than a quarter of total hospital beds and less than 10% of total hospital revenue in 2016. 

At the national level, the China government published the ‘Healthy China 2030’ directive under its 13^th Five-Year Plan in 2016 which emphasised on sustained development of the healthcare industry.

Perennial is well-positioned to capture the vast opportunities through its private healthcare institutions and eldercare facilities strategically combined with the integrated developments located right beside key HSR stations. This takes advantage of increased inter-city connectivity and ensuing regional development, effectively enlarging the customer pool beyond the immediate city population. The integrated developments also create synergy between the various components, further boosting the healthcare operations. 

The PIHMH, Perennial’s first regional healthcare hub within its HSR complex, has started operation in 2019. The group is partnering Gleneagles to operate a 350-bed hospital as an anchor tenant within the complex. 

Perennial will leverage the experience of the successful opening of PIHMH to refine the operations of similar projects in Xian, Tianjin, and Kunming that will come on stream from 2021 onwards. 

Source: 4Q 2019 financial results presentation

Tremendous Opportunities but Huge Risks Too

While Perennial pursues growth that dovetails with China’s demographic and HSR macro trend, it remains to be seen if the integrated complexes can deliver good returns that commensurate with the huge investment. Currently, only one integrated development has started operations. It is still early days to tell if these projects would turn out successful, as hospitals are expensive to run and typically sustain an operational loss in the initial years. 

Other risks that can derail its growth, such as a fundamental change in government policy and infrastructure plans, shortage of capital, or a massive economic slowdown triggered by the ongoing pandemic. These threats can deal a huge blow to Perennial’s ability to complete and manage the projects. 

Management and Shareholding

Mr Pua Seck Guan is the group’s CEO and an executive director. A prominent business leader, he is best known as Singapore’s pioneer in REITs, having served as CEO of CapitaLand Retail and CapitaMall Trust Management in the early 2000s. 

The Board of Directors features other business heavyweights, such as Mr Kuok Khoon Hong, CEO of Wilmar International, and Mr Ron Sim, founder, and CEO of Osim International. Their reputation, network, deep knowledge of China market, and relationships with financial institutions are instrumental in Perennial’s China expansion in China. 

These key personnel are also personally vested in the group. Collectively, they own an effective ownership of 82.4% of the entire group. 

Source: 4Q 2019 financial results presentation

Conclusion

I am intrigued by Perennial’s unique business model of coupling real estate business strategically with healthcare by building integrated complexes that ride on China’s HSR expansion. It is a smart strategy that rides on China’s macro trend. 

While the business holds great promises, it faces big risks too. Besides, the projects have a long gestation period that can last for years before earnings turn positive. 

Perhaps that is the reason that Perennial’s share trades at a large discount to its book value. At a share price of $0.50, its price-to-book ratio is 0.31. 

Prospective investors need to be sure of the nature of this company – a high risk, high reward investment. One would need deep research and a sound understanding of China markets to hold the shares over the long run for potentially huge returns. 

I would prefer to monitor its performance a little longer. So it remains on my watch list for now. 

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