EC World REIT - DBS Research 2019-05-12: Proposed Acquisition Of Fuzhou E-commerce Enhances Yield

EC WORLD REIT (SGX:BWCU)

EC World REIT - Proposed Acquisition Of Fuzhou E-commerce Enhances Yield

EC WORLD REIT (SGX:BWCU) has proposed to acquire Fuzhou E- Commerce for RMB 1,112.5m from its Sponsor, which will be fully funded by debt.
Strategic M&A to further anchor the REIT’s dominance in Hangzhou’s booming e-commerce sector.
Backed by 5+5 year master leases, the transaction is estimated to boost pro-forma DPU by c.1.6%.
BUY recommendation and $0.86 Target Price unchanged pending unitholders’ approval at the upcoming EGM.

EC WORLD REIT (SGX:BWCU) has proposed to acquire Fuzhou E-commerce, an integrated E-commerce logistics asset from its Sponsor.
Located in Hangzhou, the 214,284 sqm property comprises of a three-storey warehouse with a single-storey basement and two fourteen-storey office and support buildings which are primarily office spaces for auxiliary use for dormitory purposes. The asset sits on 88,000 sqm of land with land tenure of a further c.40 years, ending 2 May 2059.
Through master leases back to the Sponsor’s entities Fuyang Yunton and Zhejiang Yuntong for an initial term of 5+5 years, the acquired properties will come fully pre-committed with fixed rent escalations of 2.25% p.a., which ensures steady income growth for the REIT.
The acquisition price of RMB 1,112.5m (S$223.6m) represents a c.7.5% discount to the average property valuation (with master lease agreement) by Colliers and Knight Frank of RMB1,203m. Excluding the master lease agreement, the effective discount would have been closer to 6.3% of average valuation of RMB1,187m. We understand that the acquisition will be fully funded by debt.

The asset is adjacent to one of EC World REIT’s existing assets – Fu Heng Warehouse - which is also focused on e-commerce related fulfilment activities, creating a 308,571sqm logistics hub. Through the acquisition of Fuzhou E-commerce, which is nearly twice the scale of Fu Heng Warehouse, allows the group to unlock operational efficiencies and further enhance its proposition in Hangzhou’s (and the Greater China) booming e-commerce industry.
According to industry experts, Hangzhou’s e-commerce sector expanded by c.17.5% in 2018, while online retail sales in China grew 23.9%.
Located within Dongzhou Industrial Zone, the site enjoys convenient water transportation provided by Fuchun rivers and connectivity to downtown Hangzhou. This catchment is also well supported by demand from a wide spectrum of e-commerce players – ranging from brand manufacturers, online market places to last mile delivery companies, as well as other auxiliary facilities.
The warehouse is operated by Ruyicang (a wholly-owned subsidiary of the Sponsor), a leading omni-channel logistics service provider in China and one of the earliest key partners and service providers of Cainiao network (Alibaba’s logistics arm). Ruyicang currently operates more than 30 warehouses in China across 25 cities, with a footprint of over 1m sqm of warehouse space, processing more than 1.5m orders each day.

The proposed acquisition will boost EC World REIT’s e-commerce exposure by NLA from c.35.3% in FY18 to c.49.7%, and c.36.7% to c.45.6% in NPI terms. Taking into account the new proposed master lease agreements for the acquisition, portfolio WALE will also be lengthened significantly from 1.8 to 4.8 years.
While we acknowledge that a majority of its income is derived from the Sponsor, which we estimate to be c.74% of GRI post-acquisition vs c.69% currently, this is balanced against improved income visibility to unitholders.

With an estimated initial yield of c.6.4% and ample gearing headroom, the acquisition is projected to be earnings accretive to the REIT. Pro-forma DPU is projected to increase by c. 1.6% on the back of an increase in gearing to c.38%. Post-acquisition, EC World REIT’s gearing will be more optimal and further acquisitions could entail potential fund raisings.

EC World REIT reported a 2.2% increase in 1Q19 DPU to 1.501 Scts (vs 1.469 Scts a year ago). This was despite a slight 1.4% dip in net property income to S$21.2m due to exchange differences. In RMB terms, NPI would be 1.9% higher y-o-y.
Meanwhile finance cost was higher due to higher loan quantum compared to a year ago.
Overall, Distribuable Income increased 3.1% y-o-y mainly due the absence of higher withholding taxes which were incurred in 1Q18.

Carmen TAY DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-05-12

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