Highlights

Simons Trading Research

Author: simonsg   |   Latest post: Thu, 19 Sep 2019, 8:20 PM

 

EC World REIT - E-commerce Logistics + 9% Yield; Initiate BUY

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  • EC World REIT’s (运通网城) seven logistics assets in China cater to a thriving e-commerce, logistics, and supply chain segment that is expected to remain resilient despite trade tensions. 70% of income is backed by its sponsor’s master leases, which we expect will continue beyond the current term ending 2020.
  • With low gearing levels presenting debt headroom, the next leg of growth could come from the acquisition of YCH’s South-East Asia’s logistics assets – potentially transforming EC World into a pan-Asian logistics play. 
  • Initiate coverage with BUY and SGD0.81 Target Price, 16% upside plus 9% yield.

Company Background & Structure

  • EC WORLD REIT (SGX:BWCU) is a Singapore-based industrial REIT that was listed on the Main Board of the SGX on 27 Jul 2016:
    • EC World Asset Management – a wholly-owned subsidiary of sponsor Forchn – is the manager of REIT;
    • DBS Trustee acts as the REIT’s trustee;
    • Property manager Yuntong Property Management is a Forchn subsidiary that is responsible for providing property and lease management, marketing, and property maintenance and repair services for the properties under the portfolio.
  • Refer to the PDF report attached for diagram on EC World REIT's trust structure. 

Sponsor Details

  • Forchn (富春) is a diversified enterprise group specialising in the real estate, industrial, e-commerce, logistics, and finance sectors. The sponsor was established in 1992 and is headquartered in Shanghai. Refer to the PDF report attached for Forchn's milestones. 
  • Forchn has extensive construction and operational experience in the logistics industry, and has independently invested over CNY5bn in Zhejiang Province. This includes investments in and construction of the Chongxian Port facility – which is recognised as a key construction project by the Chinese Government at both provincial and national levels. It is also ranked among China’s Top 3 inland ports by scale (excluding those along the Yangtze River). Forchn is an operator of the Chongxian Port facility.

Investment Highlights

  • A logistics and e-commerce REIT with a geographical focus in the People’s Republic of China (PRC), EC WORLD REIT (SGX:BWCU) has seven properties under its portfolio: six are in Hangzhou, while another – acquired on Apr 2018 – is located in Wuhan.
  • The assets have a total NLA of 0.75m sqm, with the remaining land-lease tenures ranging between 35 and 47 years. Overall, these assets can be categorised under three main logistics segments:
    1. Port;
    2. E-commerce;
    3. Specialised.
  • The port logistics segment is the biggest contributor to gross rental income, accounting for 47% of the total as at 9M18. It also accounts for 33% of the REIT’s NLA portfolio. E-commerce logistics is the second-biggest contributor, making up 38% of the portfolio’s gross rental income with 32% NLA.
  • The specialised logistics segment – which makes up the most NLA in EC World REIT’s portfolio (35%) – accounted for only 15% of gross rental income.

Assets play a vital role in the product fulfilment cycle.

  • EC World REIT’s port logistics assets are strategically-located next to key waterways and road networks. They have the capability to handle products from shipping to warehouse, storage, handling, and processing before handling them to the delivery agents.
  • The specialised logistic assets are generally used for warehousing purposes and currently store high-value consumer goods, eg tobacco. The REIT’s e-commerce logistics assets, meanwhile, enable last-mile connectivity with multiple functions – these include warehousing, third-party logistics, and parcel producing and sorting. With the PRC seeing a booming growth in e-commerce retail and delivery, we see good demand for such eco-systems in future.

We see minimal impact from the US-China trade war,

  • as the portfolio tenant mix is geared towards domestic consumption. As at end-2018, EC World REIT’s assets were occupied by 25 tenants (excluding Wuhan Mei Luo Te). 80% of the underlying tenant mix in the portfolio is geared towards delivery, logistics & distribution, and e-commerce services which – in our view – are closely linked to the consumption growth of China’s economy.
  • With the Chinese Government’s continued push towards propping the domestic economy, we believe the aforementioned segments are primed to benefit while also remaining less affected by the US-China trade war.

Strong sponsor support with 44% stake.

  • Sponsor Forchn has a > 25-year track record with interests across diversified real estate and e-commerce sectors. Additionally, the latter’s wholly-owned RuiYiCang (如意仓) subsidiary is a leading China-based omni-channel e-commerce service provider that operates 35 warehouses in 23 cities. It is also one of the founding shareholders of smart logistics provider Cainiao Network (菜鸟网络科技), along with Alibaba and other key logistics players. With the sponsor holding a majority stake and being the master lessee of three key assets, we believe there is an alignment of interest from Forchn to ensure EC World REIT’s success.

Master lease assets ramping up with underlying occupancy improvements.

  • As at end-3Q18 EC World’s portfolio’s committed and underlying occupancy stood at 99.2% and 96.9%. Except for Stage 1 Bei Gang Logistics (Stage 1 BL) and Wuhan Mei Luo Te (WHML) the underlying occupancy of the remaining property has remained fully occupied since the IPO.
  • As for Stage 1 BL, which is currently under master lease, the occupancy has been steadily ramping up to c.86% from 55.3% during the IPO. Occupancy at the newly-acquired WHML has also ramped up to c.88% as at end 3Q18 from 82.2% in Apr 2018, which indicates steady growth in demand for logistics assets.
  • In terms of assets underlying NPI yields, it ranges between 4.5% and 8.8%, with an average portfolio NPI yield of 6.5% (Figure 11).

Forchn’s collaboration with YCH brings exciting opportunities for growth.

  • In Apr 2018, EC World REIT’s sponsor Forchn signed a framework agreement with YCH, a Singapore-based leading logistics supply chain provider with logistics assets across South-East Asia.
  • The partnership aims to leverage upon each party’s expertise in the logistics supply chain markets. The collaboration also allows the two to tap into China's Belt & Road initiative and opportunities in the logistics sector arising from it. In this regard, YCH and Forchn are formally launching the USD150m Belt Road Initiative Logistics Real Estate Private Equity Fund.
  • As a part of the collaboration, YCH has also granted EC World the right of first refusal (ROFR) to acquire the former’s 13 logistics assets in South-East Asia when available for divestment. The assets – totalling more than 280,000 sqm of GFA – are located across the region and carry an estimated value of SGD400m. Leveraging on the REIT’s sponsor’s track record, YCH is also planning to introduce cutting-edge supply chain management technologies to enhance its asset value. Besides this, EC World also has the Fu Zhou E-Commerce property in the pipeline from Forchn.
  • Recently EC World REIT announced that it has declined its ROFR to acquire Stage 2 Bei Gang Logistics from its sponsor, stating that the transaction would not be accretive to its unit holders. We see this as a prudent move, and are comforted that EC World is under no pressure to acquire Forchn’s assets and will evaluate more so on a case-by-case basis, with yield-accretion being the key consideration.

Fee structure aligned with distributable income growth.

  • EC World REIT’s management base fees of 10% of distributable income and performance fees of 25% of DPU growth are aligned to deliver sustainable DPU returns. This enables the REIT to return better values to shareholders. This is superior when compared with peers, as other industrial REITs typically derive their fees as a proportion of portfolio values. The acquisition fees from related parties are also slightly lower at 0.75% compared with 1% charged by majority of other REITS.
  • The trustee fee is capped at 0.1% pa of the value of the deposited property, with a minimum of SGD12,000 per month, while the acquisition and divestment fees are also comparable – and relative – with industry peers.

Recent inclusion in two FTSE indices is likely to boost liquidity.

  • One of the key investor concerns about EC World REIT has been the lack of stock liquidity. However, with more active investor engagement and education of its assets, recent-term trading volumes have been slowly creeping up – the 1-year average daily turnover: SGD0.3m. See EC World REIT's share price history.
  • More recently, in Sep 2018, EC World REIT was included as one of 20 constituents of the FTSE ST China Index and one of 48 constituents in the newly-launched FTSE ST Singapore Shariah Index. We believe this will further boost the stock’s liquidity and visibility.

Lease expiry profile.

  • As at 3Q18, the weighted average lease to expiry of EC World REIT’s portfolio is 2.2 years by NLA and 2.3 years by gross rental income. The bulk of these lease expiries are in 4Q20, when the master lease expires.
  • One of the key overhangs on the share price is EC World’s reliance on sponsor master leases and potential impact upon the end-2020 expiry. Our recent site visit showed that master lease assets are steadily ramping up, with Forchn likely to extend them for another term. We also understand that total income from underlying leases is above the lease payments. Our forecasts assume these leases to be extended in similar terms beyond 2020.

Valuations

Initiate coverage with a BUY and SGD0.81 Target Price.

  • Our 5-year DDM-based Target Price is derived from cost of equity (COE) of 10% (risk-free rate: 4.5%, terminal growth: 2%). We have assumed a 100% payout ratio, taking into consideration EC World REIT’s near-term capex requirements and management fees having to be fully paid in units.
  • Our sensitivity analysis – for changes in Target Price that correspond to every 1% change in terminal growth and COE assumptions – is provided in Figure 22 of the PDF report attached.
  • Our Target Price corresponds to 0.9x FY2018F P/BV – we believe this is reasonably conservative, considering the positive logistics sector outlook in China. In comparison, S-REITs on average trade at 1x P/BV.

FY19F yield of 9% among the highest in S-REITs.

  • EC World REIT currently offers high FY18F-19F yields of 8.8% and 9.2%, which is a good 250bps and 150bps above the average yields of S-REITs and overseas REITs. Its portfolio of logistics e-commerce assets, coupled with annual rent escalations and growth potential, makes it a value buy among overseas S-REITs. 

Cheapest among the logistics REITs.

  • Including EC World REIT, there are four pure-play logistics REITs listed in Singapore.
  • MAPLETREE LOGISTICS TRUST (SGX:M44U) is the biggest among all in terms of asset size (SGD8bn). It has a portfolio of 139 assets spread across eight countries in Asia. However, Mapletree Logistics Trust also offers the lowest yields among the logistics REITs, with Bberg consensus FY19 yield of 6.2%. It also trades at a P/BV of 1.15x.
  • FRASERS LOGISTICS & IND TRUST (SGX:BUOU) has a portfolio of 83 assets across Australia, Germany, and the Netherlands with a total value of AUD3bn. The REIT currently trades at a consensus FY19F yield of 6.8%, 1.15x P/BV.
  • CACHE LOGISTICS TRUST (SGX:K2LU) has a total of 26 properties (SGD1.3bn in value) across Australia and Singapore, and offers a FY19F yield of 8.6%.
  • EC World REIT is the smallest among them, but offers the highest yields, as well as exciting growth potential.

Source: RHB Invest Research - 09 Jan 2019

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