EC World REIT - CGS-CIMB Research 2018-12-04: Unique E-Commerce Landlord

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

EC World REIT - Unique E-Commerce Landlord

  • EC World REIT has exposure to China’s e-commerce and logistics sectors via its portfolio of seven well-located assets.
  • Visible organic revenue growth drivers in the form of inbuilt rental escalations.
  • The stock is trading at 8.8% annualised 9M18 dividend yield.



Exposure to China’s e-commerce and logistics sectors

  • EC World REIT (ECW) owns 7 assets in China (six in Hangzhou, one in Wuhan), valued at S$1.33bn at end-3Q18, spread over 747,173 sq m of net lettable area. The largest asset by value is the Chongxian Port Investment, accounting for 33% of portfolio AUM and 46.8% of 9M19 net property income. This is followed by Hengde Logistics (22% of AUM) and Phase 1 Beigang Logistics (19% of AUM).
  • In terms of asset value by trade sector, an estimated 47.6% of portfolio value is derived from port logistics, 30.5% from e-commerce and 21.9% from specialised logistics.


Unique e-commerce landlord


High quality, differentiated portfolio

  • EC World REIT (ECW) has a diversified portfolio comprising port, specialised and e-commerce logistics assets. Its port logistics assets were the highest contributor to 9M18 gross rental income (46.5%) and asset value (47.6%), while e-commerce properties contributed 38.1% of 9M18 gross rental income and 30.5% of asset value.

Well-located assets

  • EC World REIT’s assets are predominantly located in the Hangzhou area, with one asset in Wuhan that was acquired in May 2018. According to independent market research firm, Analysys Consulting Ltd, Hangzhou is the capital and largest city of the Zhejiang Province in China, known as the most important steel transportation hub along the Beijing-Hangzhou Grand Canal, and steel is one of the pillar industries of the Yangtze River Delta region.
  • The steel market is a significant segment of the Hangzhou Port area, with steel throughput accounting for a substantial 13.6% of Hangzhou port’s total volume in 2015. The demand for steel at Hangzhou is over 20m tonnes in 2015, according to Analysys. Based on in-house research by Analysys, the Chongxian Port ranked first among the ports in Hangzhou in terms of the volume of steel handled.
  • Refer to the attached PDF report for property details. 


Income stability with growth

  • EC World REIT boasts strong portfolio occupancy with an occupancy of 99.2% and underlying occupancy of 96.9% in 3Q18. Master lease assets formed c.71% of the trust’s 9M18 net property income, providing stability to the trust. These comprise properties such as Beigang Logistics Stage 1, Fu Heng and Chongxian Port Investment. More importantly, these leases come with inbuilt rental escalation structures.
  • For example, Fu Heng and Chongxian Port Investment’s leases have rental uplift of 4% and 3% built in from 1 Jan 2019 and 1 Jan 2020 respectively, while Beigang Logistics Stage 1 has 1% rental growth built in on 1 Jan 2019 and another 1% on 1 Jan 2020.
  • About 86% of EC World REIT’s portfolio rental income is due to expire in 2020, coinciding with the expiry of the master leases.


Low gearing provides debt headroom for new acquisitions

  • EC World REIT’s gearing stood at 30.7% at end-3Q18 with an all-in interest cost of 5.3%. Total debt drawdown as at Sep 2018 comprised Rmb983m onshore, S$200m offshore and S$61.9m revolving credit facility (RCF), which will mature in Jul 2019. 100% of its offshore S$ facilities are on a fixed-rate basis. This significant gap between the allowable gearing ceiling of 45% and ECW’s provides debt headroom for potential new acquisitions of both its sponsor’s and third-party assets.
  • Management indicated that Forchn manages four private funds, with a targeted AUM of US$1.2bn, together with China Cinda Asset Management (1359 HK) and YCH Group (Unlisted), that could be injected into the REIT when ready.
  • According to YCH’s press release in Apr 2018, Forchn has secured an exclusive opportunity for ECW to consider an acquisition portfolio of 13 YCH logistics real estate assets.


Strong sponsor

  • EC World REIT’s sponsor, Forchn Holdings Group Co Ltd (富春控股), was established by the Chairman of EC World REIT’s Board of Directors, Zhang Guobiao, in 1992.
  • Forchn is a diversified enterprise group with businesses spanning the real estate, industrial, e-commerce, logistics, finance and health & wellness sectors. The sponsor founded Ruyicang (Unlisted), a leading People’s Republic of China (PRC) e-commerce logistics and supply chain management services provider, in 2013.
  • According to independent market research, Ruyicang is a leading domestic professional e-commerce warehousing logistics operator that provides professional and efficient packaging services and warehouse and distribution services for e-commerce clients through a self-developed warehousing logistics system. Forchn is also a founding shareholder of Alibaba’s logistics platform Cainiao (Unlisted), together with Alibaba Group (BABA US), Intime Retail Group (Unlisted), Fosun Group (656 HK), and five other logistics companies.


Fee structure

  • EC World REIT’s management fee structure includes a base fee comprising 10% of distributable income p.a. and an annual performance fee amounting to 25% of the difference in the distribution per unit in the current year vs. the preceding financial year.
  • For 9M18, it paid fees of S$3.8m, equivalent to 5.7% of net property income. EC World REIT also charges acquisition and divestment fees of 1% and 0.5% of asset value, respectively, similar to other SREITs.


Financials

  • EC World REIT reported 3Q18 DPU of 1.57 Scts, +9% y-o-y and flat q-o-q. This was underpinned by 0.1% y-o-y increase in revenue to S$23.9m and 0.5% y-o-y improvement in NPI to S$22.2m. Revenue growth was mainly driven by contributions from Wuhan Mei Luo Te, acquired in Apr 2018.
  • According to management, in Rmb terms, excluding the effects of straight-lining and security deposit accretion accounting adjustments, 9M18 topline grew 6% y-o-y to Rmb115.4m, while NPI rose by a stronger 6.8% to Rmb106.9m; however, a weaker Rmb dragged revenue and NPI growth in S$ terms. Distribution income grew by a stronger 10% y-o-y to S$12.4m in 9M18, thanks to a dip in operating expenses and lower effective tax rate due to the absence of withholding taxes on repatriation of dividends.
  • The trust maintains a rolling 6-month forex-hedging strategy. According to the REIT, the hedges it put in place in 2Q-4Q18 are based on Rmb/US$1 rates of 4.8634-5.05, for dividend distributions in 2HFY18-1HFY19.


Trading at a high dividend yield of 8.9% in 9M18

  • Based on the annualised 9M18 DPU of 4.609 Scts, EC World REIT is trading at 8.9% yield. EC World REIT is also trading at 0.8x 9M18 P/BV. This represents a 5.42% spread over China’s 10-year government bond yield of 3.38% and 6.4% over the Singapore government bond yield of 2.39%.
  • EC World REIT has been included in the FTSE ST China and FTSE Singapore Shariah indices.
  • Distribution income has been hedged until 1HFY19, according to the company.





LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-12-04
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998


* This Eyes On the Ground report represents a preliminary assessment of the subject company, and does not represent initiation into CIMB's coverage universe. It does not carry investment ratings and CIMB does not commit to regular updates on an ongoing basis.



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