Company Background
EC World REIT (ECW) was listed on the SGX Mainboard on 28 July 2016 at S$0.81. Its 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. ECW’s sponsor Forchn Group is a Shanghai-based conglomerate based out of Shanghai. We believe some of the assets in ECW portfolio require income support as the underlying rental income is lower than master lease rent.
Investment Thesis
Attractive dividend yield from captive assets. ECW 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 28.6% affords a debt headroom of S$200mn (assuming 40% gearing), we expect ECW to have the immediate capacity make a 6% DPU accretive acquisition. ECW has a right of first refusal (ROFR) pipeline of 14 assets not confined to China but including SE Asia. This should enlarge the size of ECW portfolio by almost 70%.
Landlord to e-commerce proxies. E-Commerce is growing at a torrid pace of 30% 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 0.9, compared to U.S. and Japan of 5.4 and 4.4 respectively. ECW’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.
We initiate coverage on ECW with a BUY and TP of S$0.82. Our valuation is based on dividend discount model (DDM) using an 8.5% cost of equity. The stock is also trading at 25% discount to book and a 9% yield. We expect DPU growth for ECW will come from acquisitions that will widen their footprint not only in China but also SE Asia, another fast-growing e-commerce market.
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