SINGAPORE (Apr 16): Soochow CSSD Capital Markets is starting coverage of EC World REIT at “buy” with a price target of 88 cents on the belief that the trust is well-positioned to benefit from China’s growing e-commerce market, to which its currently has about a 29% exposure.
In an initiation report on Monday, analyst Tan Cheng Wee highlights the trust as a prime beneficiary of Hangzhou’s ongoing logistics boom with its rising exposure to the e-commerce sector, as well as yield anchored by steady master-leased assets.
At its last closing price of 73.5 cents on Friday, the REIT offers a FY18 yield of 8.4% with 3.8% DPU CAGR from FY17-20, and trades at sector-lowest 0.78 times P/B.
“Within EC World REIT’s current portfolio, three assets are backed by master-leases with built-in rental escalation incorporated into the leases. As these master leases contribute to 60% of gross rental income (GRI), it provides stability and organic growth for EC World REIT’s distribution income, while the multi-tenanted assets enjoy positive rental reversions,” says Tan.
The analyst is expecting a blended +4-5% p.a. rental reversion on EC World REIT’s portfolio over the next three years.
He also believes that the REIT sponsor, Forchn Holdings Group, presents further inorganic growth opportunities through right of first refusal (ROFR) for two pipeline assets as phase 3 of the Fu Zhou e-commerce properties is now “ripe for injection” and could increase the REIT’s underlying asset gross floor area (GFA) by 34%.
Looking ahead, he expects the REIT’s exposure to the e-commerce sector to rise to 40% in the near-term from 29% currently.
This will be due to the rapid growth of Forchn’s integrated smart warehousing and logistics services platform, RuYiCang, which Tan believes EC World REIT will be able to leverage on by acquiring assets with RuYiCang as the operator.
After the recent acquisition of a third-party asset, Wuhan MeiLuoTe, the analyst sees EC World REIT’s stabilised yield reaching 6.3% by FY18E with gearing remaining low at 29%, implying $224 million of debt headroom for future acquisitions.
“There will likely be acquisition opportunities for e-commerce assets as EC World REIT, as the asset owner, rides on rapid growth in Ruiyicang, the sponsor’s integrated smart warehousing and logistics services platform,” says the analyst.
“Hangzhou, home to e-commerce giants such as Alibaba Group, has the most number of e-commerce parks in China. With a large market catchment area, EC World REIT could potentially benefit from underlying sector fundamentals, which are positive in a secular uptrend. Amid tight supply of compatible logistics facilities, there is a potential for EC World REIT’s e-commerce logistics properties to see further rental reversion in the future,” he adds.
As at 3.26pm, units in EC World REIT are trading flat at 74 cents or 0.82 times FY18 book value.
