(Oct 16): Palm trees, soft white sand on endless beaches and blue seas on the west coast of Phuket conjure up images of the Banyan Tree brand and its luxury spas and mouth-watering Thai cuisine.

Laguna Resorts and Hotels (LRH) and its parent Banyan Tree Holdings own the brands and hotels synonymous with seaside tourism in the Land of Smiles. The past three years have been difficult, however, with BTH notching up losses.

The leisure business is notoriously volatile, and disruptors such as Airbnb and Expedia have pressured margins across the sector.

Moreover, the Russians, who were major visitors at Laguna Phuket, were hit by the collapse in oil prices three years ago. In the meantime, the slowdown in China and poor execution by the company resulted in an additional drag.

Now, BTH executives think they have found a winning formula.

The company has engaged equity analysts and is going on a roadshow with Credit Suisse and Maybank Kim Eng to promote its new asset-light strategy.

A recent UOB Kay Hian report waxes lyrical about BTH, and values the stock at 93 cents. It lowered this to 92 cents a couple of weeks later.

“Riding on the back of global tourism growth and economic recovery, we like BTH for its solid market positioning as the leader in luxury resort experience, focus on an asset-light approach in hotel management services and brand management, new revenue channels through synergistic partnerships with key industry players such as China Vanke Co and Accor, potential full divestment of its remaining China assets, and attractive valuation and potential resumption of a dividend in 2017,” the report gushes.

Not so fast. BTH recorded a net loss of $11.1 million for 1HFY2017, a modest $6.95 million loss in FY2016, and a large loss of $25.9 million in FY2015.

BTH’s major contributor is 54.8%-owned subsidiary LRH, which recorded a net loss of THB43.6 million ($1.8 million) for 1HFY2017, but earnings of THB377.8 million in FY2016, and THB176.4 million for FY2015.

Increasing liquidity LRH owns four hotels in Phuket: Angsana Phuket, Banyan Tree Phuket, Angsana Villas Resort Phuket and Cassia Hotel. It also owns a hotel in Bangkok — Banyan Tree Bangkok — and two golf clubs: Laguna Phuket Golf Club and Laguna Golf Bintan.

Its 1HFY2017 loss was due partly to lower sales of villas in Laguna Phuket.

Last year, LRH benefitted from recognition of sales from two property projects, Cassia Phuket and Laguna Park, and a backlog of sales from prior years. In addition, 1HFY2016 included the sale of two units of Banyan Tree Spa Pool Villas. LRH still has about THB2,520 million in property sales to be recognised.

In August, BTH signed an agreement with Vanke to obtain much-needed liquidity. First, BTH will sell a 4.99% equity stake to Vanke for $24 million, or 60 cents a share. The two companies will then form a 50:50 joint venture called Banyan Tree Assets (China) Holdings.

BTH will sell its China assets into BTAC directly and Vanke will pay BTH $72 million.

Vanke will pay an additional $18 million for stakes in BTH’s spa and gallery business and hotel management company, which will also be placed into BTAC.

All in, BTH will receive a cash inflow of $114 million from Vanke.

Separately, Accor is acquiring a 5% stake in BTH for $24 million through an irredeemable convertible debenture, convertible into 95.3 million BTH shares at a floor price of 47 cents.

The total $138 million cash infusion will result in some loss of income from its properties, and dilution to its major shareholders Ho Kwon Ping and Qatar Investment Authority in return for quicker growth from being asset-light.

According to BTH, some Accor properties will carry the Banyan Tree brand. This will help BTH increase the number of rooms under management from its current 3,479 to 9,000 by 2020 without having to use its stretched balance sheet.

Accor’s online booking system is a lot more efficient than Banyan Tree’s and will make it easier for the latter to acquire customers.

BTH could also receive fees from joint-venture projects managed by Accor but branded as Banyan Tree.

BTH’s joint venture with Vanke will yield more tangible results. Vanke is likely to help BTH sell its remaining property development projects in China, leaving BTH with just fee-based services.

China has been a drag on BTH’s earnings and balance sheet. BTH blamed a 24% decline in revenues from management fees for FY2016 to a slowdown in China. For FY2016, room revenue for its managed hotels in China fell 10%, the company stated in its annual report.

In a recent report, DBS Credit Research warns bondholders that performance guarantees and an undertaking on the parties’ obligations have to be provided as part of the BTAC transaction by both BTH and Vanke. “This could constitute an off-balance-sheet liability to BTH,” DBS says.

Share and asset sale to reduce gearing In a statement, BTH says it intends to use the proceeds from the share placement to Vanke and other monies from Vanke to reduce gearing and for general working capital.

BTH’s pro-forma net asset value is likely to increase from $548 million as at June 30 to $596 million, taking into account the new shares issued to Vanke and the $24 million injection from Accor. Its pro-forma gearing could fall to as low as 0.75 times, owing to BTH’s larger equity base.

In 1HFY2017, BTH’s shareholders’ equity fell to $548 million from $564.5 million as at Dec 31, owing to accumulating losses.

In the last three years, BTH’s earnings before interest, tax, depreciation and amortisation have barely covered its interest expense.

In May, BTH redeemed a $50 million bond issue with bank debt.

“We see [the Vanke transaction] as a positive for both bondholders and shareholders. Nonetheless, even after this deal, BTH’s interest cover (Ebitda/finance costs) will still be very tight. As such, prospects for the $100 million bond that matures on June 3, 2020 will be dependent on whether the turnaround the company is doing now will work,” says Ezien Hoo, a credit analyst at Oversea-Chinese Banking Corp.

While there are many positives to the two deals, BTH’s business will remain dependent on tourism. Tourist arrivals in Asia-Pacific are forecast to grow at 4.9% a year from now until 2030, according to UN World Tourism Organisation.

The good news is that about half of BTH’s hotel rooms are in China and Thailand.

Whether the global economic recovery boosts tourism or the sector will stay maligned by geopolitical problems and pressured by disruptors remains to be seen.

Asset-light path Under its new model, BTH will own fewer assets. For instance, on Oct 11, it announced that it would be managing a 400-room resort in Mandai, owned by Mandai Park Holdings, to be ready in the 2020s.

On the other hand, the fees generated from its management business and lending its brand name to Accor and Vanke are unlikely to compensate for the loss of income from its China properties.

Other companies have gone down the asset-light path.

The merger of DBS Land and Pidemco Land saw the formation of a new company with an indebted balance sheet in 2000. It managed to securitise its investment properties into five real estate investment trusts, two of which are the largest in the retail and office sectors: CapitaLand Mall Trust (in 2002) and CapitaLand Commercial Trust (2004).

As at June 30, CapitaLand’s gearing was a healthy 0.39 times, and interest cover, 8.6 times. It is also a highly profitable company.

BTH is a long way from becoming another CapitaLand and analysts are promoting it as a turnaround story.

UOB Kay Hian is forecasting a “core Ebitda [compound annual growth rate] of 35.4% for 2016 to 2019” for BTH. “We expect a surge in revenue and an accompanying margin expansion in hotel investment and hotel management services,” the report enthuses, adding that its forecasts are conservative. It forecasts a $20 million loss this year and earnings of $1 million for FY2018.

BTH’s shares are up 35.4% this year, ending at 65 cents on Oct 12. Its NAV as at June 30 stood at 74 cents. A sum-of-the-parts valuation taking into account its assets, property development costs and a valuation of its fee-based business puts BTH’s value at 87 cents.

According to OCBC’s Hoo, the company has a lot of “brand value”. As such, it is a good acquisition target for many hospitality players, she adds.

A recent report by Hoo indicates that BTAC could look to an IPO if it can get to a certain size.

BTAC will hold Management (Tianjin) Co, a hotel management company in China; 100% of Laguna Chengdu, which owns an uncompleted property project; 100% of Banyan Tree Lijiang hotel; and 100% of Banyan Tree Ringha hotel.

The exact valuation of these assets will be based on valuations, to be performed by independent third-party valuers at a later date. As at Dec 31, the net book value of these Chinese assets was $163.7 million.

Banyan Tree adopts asset-light strategy, gets cash infusion from Accor, Vanke

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