• 3Q19 NPI and DPU were in line with our forecast.
• High income visibility due to portfolio occupancy of 99.2% and WALE of 4.6 years
• DPU down 5.2% YoY. Accretion from Fuzhou E-commerce wiped out due to FX and timing lag between drawdown of loans and acquisition.
• Maintain BUY with a lower TP of S$0.84. We lower our profit forecast due to the weakening of RMB against SGD.

The Positive

+ High income visibility due to portfolio occupancy of 99% (69%/72% of FY19e/FY20e revenue underpinned by master leases) and WALE by GRI of 4.6 years. 69% of revenue is secured by master leases to the Sponsor, Hengde Logistics, the specialised logistic asset customised and leased to a state-owned tobacco company, contributes c.15% to NPI. All assets are at 100% occupancy, except Wuhan Meiluote (85.1%), bringing portfolio occupancy to 99%.

 The Negatives

– Accretion from the acquisition of Fuzhou E-commerce was wiped out by the FX movement and timing lag between drawdown of loan and acquisition. The acquisition financing for Fuzhou E-commerce (completed on 8 August 2019) was done in conjunction with the refinancing of the IPO loans (28 June and 8 August). The lower DPU was 60-70% due to the unfavourable FX movement and 30-40% due to the timing lag on the acquisition.

 – Occupancy at Wuhan Meiluote slipped 0.7ppts QoQ. This comes after a -13.8pps fall in occupancy in 2Q19 due to non-renewals. This asset contributes c.S$0.7mn (1.7%) towards NPI and consists of a warehouse, auxiliary office building and a dormitory. c.6,000 sqm of warehouse space was vacated in 2Q19. Throughout the quarter, the asset was rented out on a short-term lease.

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.

Outlook

Two leases with below-market rents will be up in 2020 and 2021 – one lease at the Hengde facility and the second lease to one of the anchor tenants at Wuhan Meiluote which is c.25% below market rent. Under market rents represent positive reversionary potential for the REIT.

A key risk to our valuation remains the weakening of the RMB. Figure 1 shows the prices that the SGDRMB pair has been trading at, with emphasis on the 3Q18 and 2Q19. The area between the red lines indicates the put spread hedge for the quarter ended September 2019.

ECW hedges 75% of distributable income on a 6-month rolling hedge using put spreads. The hedging strategy employed means that the REIT will accept the FX fluctuations within a collar, and remain protected when the SGDRMB pair moves strongly against (as well as in favour of) them. The cost of implementing the put spread strategy is 50% the cost of the forward hedge strategy, however, it also takes away the upside potential when the currency moves in favour of them. The management is re-evaluating their FX hedging strategy.

Maintain Buy with lower TP of S$0.84 (prev. S$0.87).

We maintain our BUY call with a lower TP of S$0.84. We lowered our revenue forecasts to reflect the weaker RMB which has fallen 2% against SGD YoY. FY19e/FY20e DPU has been lowered from 6.38/6.83 cents to 5.98/6.76 cents. This translates to a FY19e/FY20e DPU yield of 8.1%/9.0% (prev. 8.7%/9.3%).

Source: Phillip Capital Research - 11 Nov 2019