• Keep NEUTRAL, new SGD0.65 TP from SGD0.76, 5% upside. 1Q DPU was below due to the incurring of withholding taxes for income repatriated from China. Key risk hanging over the stock: The pending refinancing of debts due in May/July, but management reiterated this was in the final stages of completion. China’s zero-COVID-19 stance poses headwinds too, although operations remain unaffected so far. Key catalyst: The likely positive announcement of successful debt refinancing.

• 1Q DPU was down 10% YoY/QoQ, mainly due to the incurring of additional withholding taxes (c.5%) for cash repatriated during the quarter. In addition, there was also a provision of SGD1.2m (CNY5.8m) – this is 30% of the expected pre-termination compensation for third-party tenants at Fu Zhuo Industrial (FZ) as a result of a compulsory expropriation exercise. The 70% balance of the provision will be incurred upon receiving full settlement from the Chinese Government. Management noted that the total pre-termination compensation of CNY19.2m (18% of government compensation proceeds of CNY108.5m) was for third-party tenants in FZ – agreed upon as part of their earlier tenancy agreements. In addition, there will also be income tax charges on disposal, which is likely to result in a final available amount of c.CNY80m for FZ, in our view, or about 30% below the latest valuation.

• Expects debt refinancing to be completed in the coming weeks. Management reiterated it is in final stages of refinancing debts (98%) due in May/July and that banks remain supportive. EC World REIT’s onshore borrowings of SGD181m are due in end May while offshore borrowings of SGD416m are due in July. Its current blended interest rates are at 4.2% pa, and we believe a potential refinancing – when completed – could come with 30-100bps higher interest costs, ie depending on mix and tenure.

• Operations are running normally so far across all assets, as Hangzhou is currently not facing any form of lockdowns. However, management noted there had been some slowdowns in business operations and a rise in testing procedures. It does not expect or see any need to offer rental assistance to tenants for now. About 5% of leases by rental income are pending renewal in FY22, mainly at Chongxian Port Logistics, for which management expects leases to be rolled over for another year under similar terms. Gearing is modest at 37.3%, but we do not see any acquisitions in the pipeline for the current year due to challenging market conditions in China.

• We lower our FY22F-24F DPU by 5-6%, factoring in additional withholding taxes and provisions. We have also raised COE assumptions by 50bps to factor in refinancing risks. We derive an ESG score of 2.6 out of 4.0 based on our proprietary in-house methodology. As this score is four notches below the country median, we applied an 8% ESG discount to the TP.

Source: RHB Research - 17 May 2022