buy (initiation)ecwreit.listedcompany.com/misc/20181105_ecwreit...2018/11/05 · the report is...

Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 062/10/2018 Ref. No.: SG2018_0258

EC World REIT The landlord in e-commerce

SINGAPORE | REAL ESTATE (REIT) | INITIATION (Amended)

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 ECW 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 (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. 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.

5 November 2018

BUY (Initiation)LAST DONE PRICE FORECAST DIVTARGET PRICETOTAL RETURN

COMPANY DATA

BLOOMBERG CODE: ECWREIT SP

O/S SHARES (MN) : 790

MARKET CAP (USD mn / SGD mn) : 393 / 541

52 - WK HI/LO (SGD) : 0.79 / 0.68

3M Average Daily T/O (mn) : 0.34

MAJOR SHAREHOLDERS (%)

42.4%

CHINA CINDA ASSET MANAGEMENT 12.0%

PROVIDENCE WORLD 8.5%

BOCOM INTERNATIONAL 7.8%

YUQING HU 5.7%

PRICE PERFORMANCE (%)

1MTH 3MTH 1YR

COMPANY (2.8) (0.7) (4.8)

STI RETURN (3.8) (4.0) (4.3)

PRICE VS. STI

Source: Bloomberg, PSR

KEY FINANCIALS

Y/E Dec FY16 FY17 FY18e FY19e

Gross Rev (SGD mn) 95.5 91.4 97.7 97.7

NPI (SGD mn) 83.9 82.7 88.4 88.4

Dist Inc. (SGD mn) 19.1 58.5 57.9 59.1

P/NAV (x) 0.73 0.75 0.76 0.77

DPU, adj (Cents) N.M. 6.03 6.14 6.15

Dividend Yield, % N.M. 8.8 9.0 9.0

Source: Company, Bloomberg

Valuation Method

DDM (Cost of equity 8.5%, Terminal Growth 0.5%)

Phillip Research Team (+65 6212 1849)

[email protected]

28.4%

FORCHN INTERNATIONAL

SGD 0.685SGD 0.061

SGD 0.82

0.65

0.70

0.75

0.80

0.85

Nov-17 Feb-18 May-18 Aug-18 Nov-18ECWREIT SP Equity FSSTI index

Page | 2 | PHILLIP SECURITIES RESEARCH (SINGAPORE)

EC WORLD REIT INITIATION

THE TRUST ECW has an investment strategy to acquire income-producing real estate which is used primarily for e-commerce, supply-chain management and logistics purposes. EC World has broadened its geographical focus from PRC to S.E. Asia with deals in place that allow it to acquire 13 of YCH‘s assets.

THE SPONSOR Forchn Holdings Group is a Shanghai-based investment holding company managing four private funds with an AUM of c.US$1.170mn and operational expertise in e-commerce logistics and real estate. The Sponsor is a founding shareholder of Alibaba’s Cainiao Network and Ruyicang, an omnichannel logistics services platform.

THE ASSETS EC World holds seven logistic assets in its portfolio, valued at RMB6.69bn (S$1.38bn):

1. Chongxian Port Investments Due to recent UNESCO heritage site zoning, this inland port along the Yangtze River Delta holds a coveted status and prime canal access to Beigang. The port has easy access to the mainland and is located along two major expressways, National Highway No. 320 and Jiaxing-Huzhou Expressway. Wholly servicing China’s domestic market, this port brings in 80% of Hangzhou’s steel supply used to fulfil the province’s infrastructure, manufacturing and construction needs. Recent closure of steel mills in Hangzhou will see increased volume throughput at the ports. The port was constructed and is operated by the sponsor.

2. Chongxian Port Logistics Situated beside Chongxian Port, the warehouses and office buildings support the port operations by providing temporary storage for steel imports. Warehouses have enhanced bearing capacity and cranes for transfer of these heavy metals. The financial unviability of transporting steel for long distances makes freight via vessel the only way to import steel into Hangzhou from the north of China. As the largest port in Hangzhou and due to the increased difficulty in construction of new ports after the UNESCO zoning, the Chongxian port and supporting logistic facilities has a monopoly on steel imports into the province.

3. Fu Zhou Industrial The smallest asset in the portfolio by size, the cement plant manufactures precast concrete and is used as a sand and stone storage warehouse and repair workshop. It is located adjacent to the Chongxian port investments and logistics and benefits from accessibility to the two major highways, National Highway No. 320 and Jiaxing-Huzhou Expressway.

Figure 4: Aerial View of Chongxian Port, Chongxian Port Logistics and Fu Zhou Industrial

Figure 1: Site tour of Chongxian Port

Source: PSR

Figure 2: Chongxian Port Logistics

Source: Company

Figure 3: Fu Zhou Industrial

Source: Company

Chongxian Port Investments

Chongxian Port Logistics

Bei Gang Stage 1

Source: Forchn Metal Harbour

Fu Zhuo Industrial



4. Bei Gang Logistics Stage 1 Intent on capitalising on the burgeoning e-commerce market in Hangzhou, the vision for this property is to be an e-commerce business park. Stage 1 encompasses 8 buildings. Each building may focus on selected products such as toys, fashion or cross-border. By aggregating the community of retailers and wholesalers, the hope was that operational synergies would arise owing to the e-commerce ecosystems of logistics management services and equipment in place. With a low-cost strategy implemented, this facility has seen seeing a steady uptake in occupancy and a modest reversion of rents to market rates. Currently, majority of the tenants are using the space as a trade and exhibition space and online-to-offline (O2O) office. The REIT has a ROFR to acquire the Stage 2 property adjacent to this asset with the same mandate; however, the performance of the Stage 2 property has been underwhelming and they have since decided not to acquire it.

5. Fu Heng This e-commerce fulfilment warehouse uses Ruyicang’s omnichannel logistic platform to consolidate and repackage orders from fast moving consumer goods (FMCG) suppliers into smaller order sizes for distribution to local convenience stores. The Ruyicang platform is able to receive and process orders from suppliers that follow different barcoding systems, hence it is robust enough to handle different clients’ inventory and ordering systems. There is a ROFR to acquire a similar warehouse asset that has been leased by Ruyicang and fulfils discretionary consumer goods e-commerce orders. Dubbed the e-commerce capital of China, demand for e-commerce facilities in Hangzhou has not shown any signs of slowing down.

6. Wuhan Mei Luo Te EC World acquired this asset in April 2018, increasing the proportion of e-commerce asset by NLA in their portfolio from 30.7% to 35.2%. This asset is located near major transport networks in Wuhan, a prominent transport and logistics hub in Central China. Warehouse occupancy stands at 88.2% and is currently leased to Dangdang and JD.com.

7. Hengde Logistics Built to meet specific storage condition of high-value consumer goods such as tobacco, wine and cosmetics, this is specialised temperature and climate controlled logistic asset. It is dust-free, temperature and humidity controlled environment. It enjoys limited competition in the region and is well-suited to cater to the fast-growing imported consumer goods in Hangzhou and the Zhejiang province. This asset comprises of 10 buildings (one 3-storey, eight 5-storey and one 6-storey) and is currently leased out to major tenant, government-backed China Tobacco Zhejiang industrial Co. Ltd. Tobacco production requires the tobacco leaves to be aged for two years in specific conditions. This facility houses a significant portion of the tobacco stockpile for the Zhejiang province valued at S$2b.

Figure 9: Asset Summary Fig: Property Portfolio Overview

Figure 5: Bei Gang Logistics Stage 1

Source: PSR

Figure 6: Fu Heng

Source: Company

Figure 7: Wuhan Mei Luo Te

Source: Company

Figure 8: Ariel View of Hengde Logistics

Source: PSR

Property Type NLA RMB SG D Cap Valuation/ Type Com m ence Occupancy Tenant WALE Rem aining

( sq m ) m n * m n Rate NLA Of Operation Lease

( RMB k) Lease ( years ) *

1. Chongxian Port Port 112,726 2,218 444 6.8% 19.7 Master Aug-08 100% Sponsor 3.0 38

2. Chongxian Port Log. Port 125,856 854 171 5.5% 6.8 27 tenants Jan-10 100% Multi 2.8 38 /42

3. Fu Zhou Industrial Port 7,128 114 23 6.7% 16 2 tenants Oct-14 100% XI Lian Logistics 5.4 38

4. Bei Gang Stage 1 e-Comm 120,449 1,296 259 8.2% 10.8 Master Jun-15 85.6% ** Sponsor 2.8 34

5. Fu Heng e-Comm 94,287 577 115 7.4% 6.1 Master Feb-15 100% Sponsor 3.0 41

6. Wuhan MeiLuo Te e-Comm 48,695 171 34 5.1% 3.5 2 tenants Apr-18 88%** JD.com/Dangdang 1.8 47

7. Hengde Specialised 238,032 1,463 293 4.5% 6.1 2 tenants Nov10/Apr13 100% China Tobacco 3.0 35 / 41

Tota l 747,173 6,693 1,339 6.4% 39 *Valuation as at 31Dec17 by Savills / Lease remaining as at 30 Jun18 ** Underlying occupancy Source: PSR



REVENUE

Breakdown By Segment

Port and e-commerce assets are the largest contributors to revenue. Both segments account for a combined 84% of gross rental Income. In addition, around 70% of rent is under master lease. There is a fixed monthly escalation in the leases (Figure 14). All the assets are located in Hangzhou, except the recently acquired Wuhan asset.

Figure 10: Around 70% of rental revenue cashflow (bold) comes from master lease

Y/E Dec, SG D m n 2017 2018e 2019e 2020e

1 Chongxian Port Investm ent 29,300 31,758 33,028 34,019

2 Chongxian Port Logistics 11,200 11,760 12,348 12,965

3 Fu Zhuo Industrial 1,600 1,664 1,731 1,800

4 Bei G ang Log i s t i cs - Stage 1 25,800 26,276 26,539 26,804

5 F u Heng W arehouse 8,700 9,135 9,500 9,785

6 Hengde Logistics 14,800 14,800 14,800 14,800

91,400 95,393 97,946 100,173

7 Wuhan MeiLuoTe 1,393 2,056 2,148

Total rental 91,400 96,786 100,001 102,322

% YoY growth 5.9% 3.3% 2.3%

Master lease revenue 63,800 67,169 69,067 70,608

% revenue from master lease 69.8% 69.4% 69.1% 70.5%

Source: PSR

There is the typical straight line treatment of all rental revenue. As a result, our rental revenue is income statement is relatively flat. Rental income from rent-free periods and annual rent step-ups will be smoothened over as it is recognized on a straight-line basis over the lease term. Dividends are paid out of cash rental.

Figure 11: Breakdown by Asset Type

Source: PSR



Lease Structure

All of the leases have built-in rent escalation as shown by Figure 14. Of the 7 properties, 3 are leased out to their sponsor, Forchn, under a master lease agreement and account for 70% of total rental. 85% of the master leases expire in 2020 and we estimate positive rent reversions to be c.3%.

Figure 12: Lumpy renewal in FY20

0.8%5.1%

76.6%

14.4%

3.1%0.4% 3.2%

85.9%

8.1%2.4%

2018 2019 2020 2021 2022 Onwards

Lease Expiry Profile of Portfolio

By NLA By Gross Rental Income (GRI)

Source: PSR

Figure 13: Gross Revenue Income (GRI) by Lease Type

70%

30%

GRI by Lease Type

Master Lease Multi-tenant

Source: PSR

Figure 14: Locked-in Rent Escalation Schedule for Portfolio Assets Property Lease type Terms of lease

2017 2018 2019 2020 2021 2022 Onwards

1 Chongxian Port Investment Master-leased 6% 5% 4% 3%

2 Chongxian Port Logistics Multi-tenanted 10% 5% 5% 5%

1) 25 Apr 2015 to 24 Apr 2020 10% 8% 8% 8%

2) 8 Oct 2014 to 7 Oct 2029

4Stage 1 Properties of Bei Gang

LogisticsMaster-leased 1% 1% 1% 1%

5 Fu Heng Warehouse Master-leased 6% 5% 4% 3%

1) 15 Oct 2015 to14 Oct 2020

2) 9 May 2016 to 8 May 2021

7 Wuhan MeiLuoTe 4.5% 4.5% 4.5% 4.5%

3

610% on renewal

10% on renewal

Rent escalation

7.5% 7.5%

Hengde LogisticsMulti-tenanted:

2 main lease

Fu Zhuo Industrial Multi-tenanted

Source: PSR



EXPENSES

The two largest expenses are finance cost and property expenses accounting for 28% and 9.5% of revenue respectively in FY17.

Finance costs. Interest payments are on loans from onshore and offshore debt facilities amounting to S$405.9mn, largely used to acquire the assets and debts of EC World Trust, PRC Property Companies and repay existing debts. The all-in interest rate is 5.3% (including amortisation of upfront financing fee of 0.9% points). ECW has interest rate swaps to fix S$200mn debt into fixed interest of 1.485% to 1.745%. The debt matures in July 2019.

Figure 15 : Composition of Borrowing

Type S$mn Comments

Onshore 203.8 Term loan @ 4.1% p.a. interest rate Offshore 200.0 3-year syndicated term loan @ 5.4% p.a. interest rate

Offshore 49.5 Revolving credit backed by SBLC

453.3 Source: PSR

Property expenses refer to property maintenance, repair, management and taxes. 90% of property expense are attributed to land and property taxes. Tax rates differ from property to property but in total equivilate to 6.5% of 2017 gross revenue. Property management expense is 1.5% of gross revenue income (Figure 16).

REIT fees. The REIT pays out basic and performance management fees and trustee fees that amount to 5% of revenue which is payable in cash and/or units. The manager also earns fees for acquisitions and divestments, development and project management and securing renewals and new leases.

Other taxes. Apart from property taxes, the two other major taxes are corporate tax and withholding taxes. The REIT (through China property companies) is subject to corporate income taxes of 25%. There is also deferred tax recognized on fair value gain of investment properties. There is a 5% withholding tax for dividends repatriated out from China to ECW.

Figure 16 : Types of Expenses Property Management

1.5% p.a. of GRI

Base Fees 10% p.a of Distributable Income

Performance Fees 25% of difference in DPU

Trustee Fees <0.1% p.a of Deposited Property value

Property Tax Differs by property 3 - 12% of revenue (6.5% of FY17 gross revenue)

Withholding Tax 5% Corporate Tax (PRC) 25% of taxable

income Source: PSR



INDUSTRY

Warehousing demand will follow the performance of consumer and e-commerce spending in China. Demand from e-commerce warehouse will be more acute as competition escalates for the most efficient and fastest on-demand delivery targets. According to DTZ Cushman & Wakefield

1, there is an estimated 1,560mn sqm of logistic facility space (or

warehouse) in China. However, only 22.9mn are considered premium2 warehouses. An

estimated 70% of the current warehouses were built pre-1990 and are unsuitable for modern e-commerce or 3PL requirements. Based on 2015 estimates, even with the current basic warehouse capacity, the per capita warehouse space in China is 0.9 sqm. This is far below U.S. and Japan per capita of 5.4 sqm and 4.4 sqm respectively.

The largest operator of warehouse space in China is Global Logistic Properties. Other major warehouse owners in China include Goodman Group, China Logistics Property Holdings (or YuPei Group), e-Shang Redwood Group and Prologis.

In China, the average monthly rent for premium logistic facility in China is c.RMB33 per sqm. Cities such as Hangzhou and Wuhan, command rents of c.RMB34 per sqm and c.RMB29 per sqm respectively. Rents in Tier 1 cities such as Beijing and Shanghai are in the vicinity of RMB42 per sqm.

As land prices rise, multi-story e-commerce parks such as Bei Gang can provide a cheaper high-density alternatives which can double up as both storage and display functionality.

Figure 17: China On-line Sales Surging by 30% in 2018

30%

35%

40%

45%

Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18

CH: Online Sales (YoY)

Source: CEIC CH: National Bureau of Statistics, PSR

1 China Logistics Property Holdings Prospectus dated 30 June 2016.

2Premium logistics facilities are built using modern standards. The classification is based on specifications from

China Association of Warehouse and Storage that set the structure standards, monitoring systems. ceiling height,

loading capacity, etc.



Figure 18: E-commerce Demand Not Only Domestic But Cross-Border

27 43 66 96 133 170217

278333

381424

229274

398

527

664

797

928

1,077

1,222

1,355

1,474

0

400

800

1,200

1,600

2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

CH: Cross-border e-commerce market (US$ bn)

Import Export

Source: iResearch, Best Inc. 2Q18 Corporate Overview, PSR

Chongxian port is leased out to companies that import steel from the north of China to fulfil Hangzhou’s manufacturing and infrastructure needs. Investments in real estate in Hangzhou has been growing at a 15-year cumulative average growth rate (CAGR) of 19.2% (Figure 20), amounting to c.RMB5mn in 2017. Freight throughput at the Hangzhou port was at a 7 year low in 2016 but rebounded strongly in 2017. With the steady growth of investments in real estate, we expect the throughput at the ports to continue growing at a healthy pace and occupancy at the ports to remain at 100%. Lack of other steel import options makes positive rent reversions highly probable.



OUTLOOK Rental income from ECW portfolio of 7-assets is expected to enjoy stable growth of 4-5% p.a. until FY20 (Figure 14). Around 70% of rents are backed by master lease from the sponsor. We expect rent to be renewed with 3% p.a. organic growth: a. Chongxian Port: Chongxian port has an 80% market share of steel products imported

into Hangzhou. The activity of the port is dependent on real estate and other fixed asset investments. Figure 19, shows that port volumes is growing at a CAGR of around 6% p.a. We have seen a recent rebound in freight volumes in 2018 with a 14% surge.

Figure 19: Port activity in Hangzhou is vibrant

60

70

80

90

100

110

120

Hangzhou: Major River Port Freight Throughput (Metric Ton mn)

8 Yr CAGR: 5.8%

+14% YoY growth

Source: CEIC CH: Ministry of Transport, PSR

Figure 20: Growing Real Estate Investment in Zhejiang

0

1000

2000

3000

4000

5000

6000

Zhejiang: Real Estate Investment (RMB bn)

CAGR: 19.2%




b. Fu Heng Warehouse: With Ruyichang as the anchor tenant, we expect healthy and

stable lease income from this asset. c. Bei Gang (Stage 1): This was an immature asset when initially injected into ECW.

However, since IPO, the underlying tenant occupancy has been steadily rising from 55.3% at IPO to 85.6%.

d. Hengde Logistics: The specialised nature of the facilities together with the huge

inventory stored at the warehouse will enjoy renewal of leases.

INVESTMENT THESIS

Attractive dividend yield. ECW is now paying a dividend yield of 9%. The WALE is 2.5 years with annual step-up of an estimated 3% p.a. There will be a major re-leasing activity in 2020 where 86% of the portfolio lease revenue will expire. We expect a 3% rental reversion for these expiring leases. When we compare ECW against alternative REITs, ECW is trading more than 150bps higher against comparable industrial REITs, STI REIT index and other Chinese based Singapore REITs. Figure 21 : ECW pays out a high relative dividend yield

*Average trailing yield of 11 Industrial REITs listed on SGX-mainboard Ex. ECWorld REIT **Average trailing yield of 5 China S-REITS (Dasin, CRCT, Sasseur, BHG, Mapletree North Asia Comm. Trust)

Source: PSR



ECW’s Price to book valuation is also below the S-REIT industry average of 0.96 times and a 25% discount to book value. Figure 22: EC World REIT Trading Below Book Value

Source: PSR

Large inorganic growth opportunity. With debt headroom of at least S$200mn (assuming 40% gearing), we expect ECW to have the immediate capacity to undertake a 6.5% yield accretive acquisition (Figure 23). Based on our assumptions, such acquisitions can increase DPU by up to 5.6%. ECW has a total ROFR pipeline of 13 assets. If taken up, it can boost ECW assets size (measured by space) by almost 70%. GFA will increase by 495k sqm, from 739k sqm to 1,234k sqm. Figure 23: Assuming a S$200mn Acquisition of Hypothetical Asset(s) with 6.5% NPI yield

S$ '000 S$ '000 Assumptions

NPI Added from Acquisition 13,000 Acquire S$200mn asset @ NPI yield of 6.5%

Less:

Interest expense (8,800) 100% debt funded @ interest rates 4.4%

Trustee Fees (3) Historical % of fees over Deposited Property

Management Base Fees (611) Historical % of fees over gross revenue

Corporation tax (897) 25% of profit before tax

(10,310)

Total revenue from acquisitions 2,690

DPU accredition (cents) 0.3

% Increase in DPU 5.5%

*Excludes management acquisition and performance fees Source: PSR



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 per sqm basis is only 0.9, compared to U.S. and Japan of 5.4 and 4.4 respectively. ECW’s sponsor owns a Ruyicang. It is the fulfilment platform which operates the warehouse and logistics support services for customers such as Alibaba and JD.com. Ruyicang is the key tenant for Fu Heng asset and Wuhan asset include JD.com as a major tenant. Hangzhou economy has been growing at a CAGR of 14% the past 14 years (Figure 24). This has translated to robust retail sales for the city. Retail sales of consumer goods in Hangzhou, which has been growing at a 15-year CAGR of 17.3% (Figure 25). This vibrant consumer spending will translate in increasing demand for warehouse space. Figure 24: Robust economic growth in Hangzhou


Figure 25: Vibrant Consumer Retail Sales in Hangzhou

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Hangzhou: Retail Sales of Consumer Goods (RMB Bn)

Yearly Sales YoY % Change

15 Year CAGR: 17.3%


0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Hangzhou: Gross Domestic Product (GDP) (RMB bn)

Hangzhou GDP YoY Growth

CAGR: 13.9%



RISK FACTORS

Short WALE but assets are captive. ECW has a relative short WALE of 2.5 years compared to other Singapore REITs. However, we believe these are captive assets for ECW with low renewal risk, especially with the support from the sponsor. Master Lease: Around 70% of FY17 (or S$63.7mn) rental revenue was from master leases (Figure 10). Excluding these master leases, the underlying total rental would be S$14.4mn lower. The impact to NPI would be a negative 17%. We believe most of the income support would come from Bei Gang – Stage 1. Occupancy is still below 100% and e -commerce park is a relatively new concept.

VALUATION Our target price of ECW is S$0.82. We value ECW using DCF. Our cost of equity is 8.5%. This is based on risk free rate of 3.6% (China) and terminal growth rate of 0.5%. ECW pays out at least 90% of distributable income as dividends.

Figure 26: ECW trades at metrics better than S-REIT industrials

Mkt.

Cap.

(S$mn)

Price

(S$)PSR RATING

PSR

TARGET

PRICE (S$)

P/NAV

Trailing

yield

(%)

Total

Returns

1M (%)

Total

Returns

YTD (%)

Gearing

(%)

Approximate

% of debt on

fixed rate

ROE

(%)

All-in

borrowing

cost (%)

% debt

expiring in

2018/

current FY

% debt

expiring

in 2019/

next FY

Year End

Industrial

ASCENDAS REAL ESTATE INV TR 7,531 2.570 ACCUMULATE 2.82 1.2 6.2 (1.2) 0.1 33.6 88.1 7.4 2.90 13.4 13.4 March

MAPLETREE INDUSTRIAL TRUST 3,755 1.990 NEUTRAL 2.09 1.3 5.7 (2.0) (1.2) 35.0 77.9 11.6 2.90 14.1 20.7 March

MAPLETREE LOGISTICS TRUST 4,100 1.260 1.1 6.2 (1.6) (1.7) 36.4 82.0 12.7 2.40 0.0 10.0 March

KEPPEL DC REIT 1,811 1.340 ACCUMULATE 1.45 1.3 5.3 (1.5) (0.7) 31.7 86.0 6.1 2.10 1.9 19.0 December

AIMS AMP CAPITAL INDUSTRIAL 974 1.420 1.0 7.6 (4.3) 2.7 33.6 88.1 8.4 3.60 0.0 16.2 March

CACHE LOGISTICS TRUST 799 0.745 NEUTRAL 0.82 1.0 8.5 (4.1) (12.2) 35.3 61.7 3.4 3.50 3.7 32.9 December

SOILBUILD BUSINESS SPACE REIT 607 0.575 0.9 9.1 (0.4) (6.2) 37.6 65.4 (4.4) 3.20 30.9 8.3 December

SABANA SHARIAH COMP IND REIT 421 0.400 0.8 8.3 (1.2) 11.4 38.2 71.8 (2.2) 4.00 0.0 35.4 December

VIVA INDUSTRIAL TRUST 866 0.890 1.2 8.0 na na 41.0 82.0 5.8 4.00 18.7 0.0 December

ESR REIT 800 0.505 0.7 8.1 0.3 (5.6) 30.5 90.6 0.6 3.75 30.8 21.3 December

EC WORLD REIT * 533 0.675 BUY 0.82 0.8 8.7 (1.4) (3.4) 28.9 100.0 6.6 4.50 N.A. N.A. December

FRASERS LOGISTICS & INDUSTRIAL 2,167 1.080 1.2 7.1 (2.8) (5.7) 36.3 81.0 7.3 2.90 0.0 27.6 September

Average 1.03 7.41 -1.83 -2.05 34.84 81.22 5.28 3.31

Source: Bloomberg (Updated 3 November 2018), Debt data from latest available Company Results, PSR

* Covered by PSR on the SGX Stockfacts Scheme

Source: Bloomberg, Company, PSR



APPENDIX 1 – LOCATION OF PROPERTIES

Figure 27 : Location of Hangzhou Assets

Source: Company

Figure 28 : Location of Wuhan Asset

Source: Company



Financials

Statement of Total Return and Distribution Statement Balance Sheet

Y/E Dec, SGD mn FY16 FY17 FY18e FY19e Y/E Dec, SGD mn FY16 FY17 FY18e FY19e

Gross Revenue 95.5 91.4 97.7 97.7 ASSETS

Total Property expenses (11.6) (8.7) (9.3) (9.3) Investment properties 1,333.3 1,337.0 1,343.5 1,343.5

Net Property Income 83.9 82.7 88.4 88.4 Non Current Assets 1,333.3 1,337.0 1,343.5 1,343.5

Net Finance (Expense)/Inc (19.6) (24.4) (26.6) (25.0) Trade and Other Receivables 37.3 35.6 35.4 35.6

Manager's management fees (1.9) (5.3) (5.0) (4.9) Cash and Cash Equivalents 103.7 138.6 127.9 124.3

Trustee Fees (0.1) (0.3) (0.3) (0.3) Current Assets 149.0 174.2 163.4 159.9

Others 12.3 (1.2) (1.6) (1.6) Total Assets 1,482.3 1,511.2 1,506.8 1,503.4

Net Income 74.5 51.5 54.9 56.5

Fair Value Adjustments (1.7) 19.9 7.8 - LIABILITIES

Total Returns Before Tax 72.8 71.4 62.7 56.5 Interest bearing borrowings, non current 396.7 395.4 395.4 395.4

Taxation (17.0) (23.8) (21.5) (16.3) Others 318.8 322.4 325.9 325.9

Total Returns After Tax 55.8 47.6 41.2 40.3 Non-Current Liabilities 715.5 717.7 721.3 721.3

Distribution Adjustments (10.2) (0.5) 4.9 9.6 Trade and other payables 27.4 24.6 24.6 24.6

Income Available for Distribution 19.1 58.5 57.9 59.1 Interest bearing borrowings, current 2.2 40.1 36.0 34.0

Others 11.2 11.2 9.9 9.9

Distribution to Unitholders N.M. 46.7 48.6 49.1 Current Liabilities 40.8 75.9 70.5 68.4

Total Liabilities 756.2 793.6 791.7 789.7

Per share data

Y/E Dec, SGD FY16 FY17 FY18e FY19e EQUITY

NAV 0.93 0.91 0.90 0.89 Shareholder Equity 726.1 717.6 715.1 713.7

DPU (Cents) N.M. 6.03 6.14 6.15

Cash Flow

Y/E Dec, SGD mn FY16 FY17 FY18e FY19e

CFO Valuation Ratios

Net Income 55.8 47.6 41.2 40.3 Y/E Dec FY16 FY17 FY18e FY19e

Adjustments 33.2 17.1 25.9 31.1 P/NAV (x) 0.73 0.75 0.76 0.77

WC changes 52.4 (3.8) 0.1 (0.1) Dividend yield (%) N.M. 8.8 9.0 9.0

Cashflow from operating activities 141.5 61.0 67.2 71.2 NPI yield (%) 6.3 6.2 6.6 6.6

CFI Growth & Margins FY16 FY17 FY18e FY19e

Capex on inv properties (238.4) (2.1) 0.0 0.0 Growth

Others (7.7) 7.7 0.0 0.0 Revenue N.M. -4.4% 6.9% 0.0%

Cashflow from investing activities (246.1) 5.6 0.0 0.0 Net property income (NPI) N.M. -1.4% 6.9% 0.0%

CFF DPU N.M. N.M. 1.9% 0.1%

Share issuance 629.8 0.0 0.0 0.0 Margins

Net Borrowings 141.3 35.8 0.0 0.0 NPI margin 87.8% 90.5% 90.5% 90.5%

Distributions to Unitholders (7.7) (46.7) (48.6) (49.1) Net Income Margin 58.4% 52.1% 42.2% 41.2%

Others (439.6) (25.7) (29.3) (25.7) Key Ratios

Cashflow from financing activities 182.5 (72.5) (78.0) (74.8) Gearing 26.9% 28.8% 28.6% 28.6%

Net change in cash 77.9 (5.9) (10.7) (3.6) ROA 5.0% 3.4% 3.6% 3.8%

CCE, end 94.3 87.2 76.4 82.1 ROE 10.3% 7.1% 7.7% 7.9%

Source: Company, Phillip Securities Research (Singapore) Estimates



Total Returns Recommendation Rating

> +20% Buy 1

+5% to +20% Accumulate 2

-5% to +5% Neutra l 3

-5% to -20% Reduce 4

< -20% Sel l 5

Ratings History

PSR Rating System

Remarks

We do not base our recommendations entirely on the above quanti tative

return bands . We cons ider qual i tative factors l ike (but not l imited to) a s tock's

ri sk reward profi le, market sentiment, recent rate of share price appreciation,

presence or absence of s tock price catalysts , and speculative undertones

surrounding the s tock, before making our fina l recommendation

1 2 3 4 5

0.66

0.71

0.76

0.81

0.86

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Source: Bloomberg, PSR

Market PriceTarget Price



Contact Information (Singapore Research Team)

Head of Research Marketing & Operations Paul Chew – [email protected] Teo Pei Ling – [email protected]

Banking and Finance Oil & Gas | Energy Telco | Technology Tin Min Ying – [email protected] Chen Guangzhi - [email protected] Alvin Chia - [email protected] Transport | REITs (Industrial) China/HK Equity REITs (Commercial, Retail, Healthcare) | Property Richard Leow - [email protected] Zheng Jieyuan – [email protected] Tara Wong - [email protected] US Equity Edmund Xue – [email protected]

Contact Information (Regional Member Companies) SINGAPORE

Phillip Securities Pte Ltd Raffles City Tower

250, North Bridge Road #06-00 Singapore 179101 Tel +65 6533 6001 Fax +65 6535 6631

Website: www.poems.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd

B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450

Kuala Lumpur Tel +603 2162 8841 Fax +603 2166 5099

Website: www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong

Tel +852 2277 6600 Fax +852 2868 5307

Websites: www.phillip.com.hk

JAPAN

Phillip Securities Japan, Ltd. 4-2 Nihonbashi Kabuto-cho Chuo-ku,

Tokyo 103-0026 Tel +81-3 3666 2101 Fax +81-3 3666 6090

Website: www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 – Indonesia

Tel +62-21 5790 0800 Fax +62-21 5790 0809

Website: www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co Ltd

No 550 Yan An East Road, Ocean Tower Unit 2318,

Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940

Website: www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak,

Bangkok 10500 Thailand Tel +66-2 6351700 / 22680999

Fax +66-2 22680921 Website www.phillip.co.th

FRANCE King & Shaxson Capital Limited

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel +33-1 45633100 Fax +33-1 45636017

Website: www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Capital Limited

6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS

Tel +44-20 7426 5950 Fax +44-20 7626 1757

Website: www.kingandshaxson.com

UNITED STATES Phillip Capital Inc

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005

Website: www.phillipusa.com

AUSTRALIA Phillip Capital Limited

Level 10, 330 Collins Street Melbourne, Victoria 3000, Australia

Tel +61-03 8633 9803 Fax +61-03 8633 9899

Website: www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

No. 60, 5th Lane, Colombo 3, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

Website: www.ashaphillip.net

INDIA

PhillipCapital (India) Private Limited No.1, 18th Floor, Urmi Estate 95, Ganpatrao Kadam Marg

Lower Parel West, Mumbai 400-013 Maharashtra, India

Tel: +91-22-2300 2999 / Fax: +91-22-2300 2969 Website: www.phillipcapital.in

TURKEY PhillipCapital Menkul Degerler

Dr. Cemil Bengü Cad. Hak Is Merkezi No. 2 Kat. 6A Caglayan 34403 Istanbul, Turkey

Tel: 0212 296 84 84 Fax: 0212 233 69 29

Website: www.phillipcapital.com.tr

DUBAI Phillip Futures DMCC

Member of the Dubai Gold and Commodities Exchange (DGCX)

Unit No 601, Plot No 58, White Crown Bldg, Sheikh Zayed Road, P.O.Box 212291

Dubai-UAE Tel: +971-4-3325052 / Fax: + 971-4-3328895

CAMBODIA

Phillip Bank Plc Ground Floor of B-Office Centre,#61-64, Norodom Blvd Corner Street 306,Sangkat Boeung Keng Kang 1, Khan Chamkamorn,

Phnom Penh, Cambodia Tel: 855 (0) 7796 6151/855 (0) 1620 0769

Website: www.phillipbank.com.kh

mailto:[email protected]









http://www.poems.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipusa.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/

http://www.phillipcapital.in/

http://www.phillipcapital.com.tr/

http://www.phillipbank.com.kh/



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