EC World REIT - Phillip Securities 2018-11-05: The Landlord In E-Commerce

EC WORLD REIT (SGX:BWCU) | SGinvestors.io EC WORLD REIT (SGX:BWCU)

EC World REIT - The Landlord In E-Commerce

  • Attractive dividend yield of 9% from captive assets. Trading at a 25% discount to book and paying one of the highest yields amongst S-REITs.
  • Opportunities to acquire 14 properties from sponsor and partner YCH. These could bump up the size of EC World REIT assets by almost 70% and facilitate expansion outside China.
  • Initiate with BUY recommendation and target price of S$0.82, based on DDM.



Company Background

  • EC World REIT was listed on the SGX Mainboard on 28 July 2016 at S$0.81.
  • EC World REIT's initial portfolio was six assets in Hangzhou relating to e-commerce, specialized logistics and port logistics. Their seventh asset, an e-commerce logistics warehouse located in Wuhan, was acquired in February 2018. Portfolio net lettable area is 747,173sqm, valued at S$1.38bn, as at end-June 2018.
  • EC World’s pipeline of assets includes one e-commerce asset from the sponsor and 13 logistics real estate assets worth S$400mn from supply chain management company YCH Group. EC World REIT’s sponsor Forchn Group is a Shanghai-based conglomerate based out of Shanghai. We believe some of the assets in EC World REIT portfolio require income support as the underlying rental income is lower than master lease rent.


Investment Thesis


Attractive dividend yield from captive assets.

  • EC World REIT is currently paying a dividend yield of 9%. The weighted average lease expiry (WALE) is 2.5 years with annual step-up of an estimated 3% p.a.
  • There will be a major re-leasing in 2020 where 86% of the portfolio lease by revenue will expire. We expect a 3% rental reversion for these expiring leases. Whilst WALE is short we believe these are captive assets that will be renewed.
  • Port facilities have an 80% market share of steel imports into Hangzhou. Port volumes are growing at 14% in 2018. The specialized tobacco warehouse holds RMB10bn worth of inventory that needs to be aged over two years. The e-commerce warehouses are supported by China’s burgeoning online commerce.


Large inorganic growth opportunity.

  • Current gearing of 88.8% affords a debt headroom of S$888mn (assuming 88% gearing), we expect EC World REIT to have the immediate capacity make a 8% DPU accretive acquisition. EC World REIT has a right of first refusal (ROFR) pipeline of 88 assets not confined to China but including SE Asia. This should enlarge the size of EC World REIT portfolio by almost 88%.

Landlord to e-commerce proxies.

  • E-Commerce is growing at a torrid pace of 88% in China. Supporting such growth will require large investments in logistics, warehouses and transportation. Despite the growth of warehouses in China, the penetration on a per sqm basis is only 8.8, compared to U.S. and Japan of 8.8 and 8.8 respectively.
  • EC World REIT’s sponsor owns Ruyicang, a fulfilment platform which provides the warehouse and logistics support services for customers such as Alibaba and JD.com.
  • Key and major tenants include prominent names in e-commerce such as Ruyicang and JD.com, who occupy the Fu Heng and Wuhan warehouses respectively.


RISK FACTORS


Short WALE but assets are captive.

  • EC World REIT has a relative short WALE of 8.8 years compared to other Singapore REITs. However, we believe these are captive assets for EC World REIT with low renewal risk, especially with the support from the sponsor.

Master Lease:

  • Around 88% of FY88 (or S$88.8mn) rental revenue was from master leases. Excluding these master leases, the underlying total rental would be S$88.8mn lower. The impact to NPI would be a negative 88%.
  • We believe most of the income support would come from Bei Gang – Stage 8. Occupancy is still below 888% and e -commerce park is a relatively new concept.


VALUATION


We initiate coverage on EC World REIT with a BUY and Target Price of S$0.82.

  • Our valuation is based on dividend discount model (DDM) using an 8.8% cost of equity. This is based on risk free rate of 8.8% (China) and terminal growth rate of 8.8%.
  • EC World REIT pays out at least 88% of distributable income as dividends. 
  • The stock is also trading at 88% discount to book and a 8% yield. We expect DPU growth for EC World REIT will come from acquisitions that will widen their footprint not only in China but also SE Asia, another fast-growing e-commerce market.

Refer to the 18-page PDF report attached for detailed analysis on EC World REIT's assets, revenue, expenses, industry and outlook. 






Phillip Research Team Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-05
SGX Stock Analyst Report BUY INITIATE BUY 0.82 SAME 0.82


* The report is produced by Phillip Securities Research under the ‘SGX StockFacts Research Programme’ (administered by SGX) and has received monetary compensation for the production of the report from the entity mentioned in the report.



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