• NPI and DPU were in line with our forecast. 5.3% and 5.6% YoY boost in gross revenue and NPI, respectively, driven by the acquisitions of Wuhan Meiluote in 2Q17.
• Wuhan asset performing well after acquisition; slow rap-up of occupancy at Beigang.
• Early renewal of master lease on favourable terms, pending shareholder vote at an EGM to be convened.
• Maintain Buy with higher TP of S$0.85 (prev. S$0.82).

The Positives

+ Wuhan asset performing well after acquisition. Occupancy has ramped up from c.60% to c.86% since acquisition in April 2018, owing to the efforts of the Manager.

The Negatives

– Slow ramp-up of occupancy at Beigang. Occupancy for this asset has increased from 55.3% to 84% over the last 3.6 years. As this asset is currently under master lease with the sponsor, there is income support provided by the master lease gives the Manager a finite runway to work on boosting vibrancy of the property.

Outlook

All ECW’s master-leased assets – Chongxian Port, Beigang Stage 2 and Fuheng warehouse – are up for renewal in 4Q20. The rents from these three properties represent 70% of EC World’s revenue. If the terms are accepted by shareholders, portfolio WALE will increase from 2.0 to 4.8 years, providing stable earnings visibility. The master leases will now have built-in annual rental escalation of 1-2% (vs 1-3% rental growth rates for warehouses in Hangzhou), and will be renewed at existing prices. We also note that that Fuheng’s rents are currently already c.50% above market (c.RMB3.91psf vs c.RMB2.60psf).

100% of debt will be expiring in July 2019 comprising 50:50 onshore and offshore debt, and 89% of revolving credit facilities have been drawn down.

Maintain Buy with higher TP of S$0.85 (prev. S$0.82)

We raise our rental assumptions due to early lease renewals this quarter with positive reversions. We raise our target price to S$0.85, which translates to a FY19e yield of 20.2% and a P/NAV of 0.84x.

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 mentioned in the report.

Source: Phillip Capital Research - 01 Mar 2019