• 4Q19 and FY19 NPI and DPU were in line with our forecast
• High income visibility due to portfolio occupancy of 99.9% and WALE of 4.1 years
• FY19 DPU down 2.1% YoY; accretion from Fuzhou E-commerce acquisition wiped out due to FX and timing lag between drawdown of loans and acquisition
• Maintain BUY with a lower TP of S$0.83 (prev S$0.84). Our TP translates to a FY20e DPU yield of 8.7%

The Positives

+ Solid portfolio to weather turbulence. High income visibility due to portfolio occupancy of 99.9%, and WALE by GRI of 4.1 years. Post-acquisition of Fuzhou E-Commerce, 84.4% of FY20e revenue is secured through 4 master leases to the Sponsor, with build-in rental escalations ranging 1% to 3%. Hengde Logistics, the specialised logistic asset customized for and leased to a state-owned tobacco company, contributes c.8% to NPI. This brings the percentage of “stable” leases to 91%.

The Negatives

– Accretion from the acquisition of Fuzhou E-commerce wiped out. DPU -3.8%/-2.1% in 4Q19/FY19 due to FX and higher finance expense and 5% retention of distributable income (DI) in 4Q19. Higher finance expense was due to the timing mismatch of drawdown of loans and the acquisition of Fuzhou E-Commerce and the higher loan quantum. 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). DPU would have been 6.13 cents if 100% of 4Q19 DI was paid out, but this would still have been 0.8% lower than FY18 DPU of 6.18cents. 5% of DI was retained for working capital purposed and unforeseen circumstances.

Outlook

The management received notification of non-renewal of 24,929sqm of space on a lease expiring in 2Q20 at Wuhan Meiluote. This represents 50% of Wuhan Meiluote’s NLA of 48,695sqm. Occupancy is expected to fall from 97.7% to 46.7%. This asset contributes 1.6% to gross rental income (GRI) and will not affect DPU materially. Muted leasing demand is expected in the near term.

15.7% of leases by GRI is up for renewal in FY20. One of the leases expiring is for space at Hengde Logistics which is leased out to a state-owned tobacco company at below-market rentals. With the country in a state of flux, brought on by the Covid-19 outbreak, management is guiding for flattish rental reversions on leases expiring in FY20.

Key risk to our valuation remains the weakening of the RMB. The manager has revised its hedging strategy from a put spread to a plain vanilla call option. The previous hedging strategy employed would only protect ECW if FX fluctuated within a collar – exchange movements outside of the collar would mean that ECW would have to take the prevailing market rate. The amended strategy effectively locks in a worst-case exchange rate.

Maintain BUY with lower TP of S$0.83 (prev. S$0.84).

We maintain our BUY call with a marginally lower TP of S$0.83. This translates to a FY20e/FY21e DPU yield of 8.9%/9.3%.

Source: Phillip Capital Research - 5 Mar 2020