A China-based logistics focused company, EC World Real Estate Investment Trust (EC World Reit) is seeking for a SGX mainboard listing with a potential Initial Public Offering (IPO) of between 172.37 million to 191.05 million shares at a price range of S$0.76 to S$0.82 per unit. The prospectus has been filed with the Monetary Authority of Singapore (MAS) and is now pending for approval. The listing comes after the successful mainboard debut of Frasers Logistics and Industrial Trust (FLT) whose shares soared from an opening price of S$0.905 per unit to end the day of its listing on June 21 at a price of S$0.91 per unit on a volume turnover of 140.2 million units. The IPO price of FLT was S$0.89 per unit.
Who are the sponsor and underwriters
The main sponsor for EC World Reit’s IPO offering is Forchn Holdings Group Co. Ltd, a Shanghai-based operator of port facilities and other logistics properties in China with over 20 years of experience. The Chongxian Port Facility was constructed and operated by Forchn Holdings, and through its partnership with Fosun Group, it has established a presence in property management.
Forchn Holdings is also specialised in offering an integrated e-commerce business model through the use of Business to Business (B2B) and Business to Customer (B2C) e-commerce models that seek to efficiently cater for commercial transactions and end-consumers.
Forchn Holdings was also one of the founding members of a joint venture with Cainiao Network Technology Co. Ltd, a logistics subsidiary owned jointly by Alibaba Group, Intime Retail (Group) Company Ltd, Fosun Group, and five other logistics companies, including SF Express, STO Express, ZTO Express, YTO Express and YunDa Express.
The underwriters and bookrunners include DBS Bank Ltd, CICC, Maybank Kim Eng, and Bank of China (BOC).
Details of the IPO portfolio
According to EC World Reit’s prospectus, the initial portfolio will comprise of six properties located in Hangzhou, China with an aggregate net lettable area (NLA) of 698,478 sqm as at December 31, 2015 and a total appraised value of approximately RMB6.36 billion (S$1.303 billion). The six properties are shown in the diagram below:
The Company noted in the prospectus that among the six logistics properties, the Chongxian Port Investment is one of the key and established inland ports in China, and it provides diversification and stability to the IPO portfolio. It also provides good potential growth through its B2B platform. Chongxian Port Logistics, which is located next to Chongxian Port Investment has one of the largest metal warehouses and logistics developments in the Yangtze River Delta.
The Fu Zhuo Industrial facility comprises of berths and office buildings located next to Chongxin Port Investment. The Stage 1 properties of Bei Gang Logistics facility is an integrated e-commerce facility located next to Chongxin Port Investment and Chongxian Port Logistics. The Fu Heng Warehouse facility is also another integrated e-commerce facility located in the south of Hangzhou, and Hengde Logistics facility comprises of two high-specification warehouses offering stable income with rental growth potential.
The growth potential of Hangzhou
Hangzhou is the capital and largest city in Zhengjiang Province in Eastern China. It is also one of the major e-commerce hubs covering Shanghai, Ningbo, Jinhua and Yiwu. Several Chinese e-commerce companies are located in Hangzhou including Alibaba Group, Baidu, JD.com, and Tencent. According to independent researcher, Colliers International, there are currently more than 470,000 online business entities located in Hangzhou.
The Chinese government has approved the set-up of the China (Hangzhou) Cross-border E-commerce pilot zone in Hangzhou in March 2015. There are special concessions around taxation policy and the broadening of merchandise categories in the pilot zone. This helps to support many e-commerce platforms including Tmail.com, SFHT.com, JD Worldwide and yintai.com. According to Colliers, the Hangzhou e-commerce market will continue to be the top demand driver for the logistics industry.
Hangzhou is also one of the top ten Chinese cities for express delivery volume growth in 2015 with 411.4 million units delivered across the country. A chart depicting the delivery volume measured in the number of units is shown below:
The major tenants come from across several industries, with the top three sectors including e-commerce services, logistics and distribution companies, and industrial companies.
According to the prospectus, the weighted average lease expiry (WALE) by committed NLA of the IPO portfolio is 4.1 years as of December 31, 2015, and the WALE by gross rental income in December 2015 is 4.6 years. In addition to the diversified tenant base, the longer leases (including the Master Leases) provide a stable source of income for EC World Reit.
The company pointed out that the master leases for Stage 1 properties of Bei Gang Logistics and Fu Heng Warehouse are expected to lend stability to EC World Reit’s sources of income as the leases of the e-commerce tenants in these two facilities are shorter and the newly built facilities take time to mature.
The reputable tenants in the IPO portfolio include state-owned enterprises (SOEs) like China Tobacco Zhengjiang Industrial Co. Ltd, and China Post Express Logistics Co. Ltd, Zhengjiang SF Express Co. Ltd and Shanghai Yimin E-commerce Co. Ltd (a subsidiary of Shanghai Yimin Commerce Group Co. Ltd, a public-listed company on the Shanghai Stock Exchange).
A breakdown of the lease agreements and occupancy rates for the six logistics properties are as follows:
Occupancy rates of its tenants
With the exception of Stage 1 properties of Bei Gang Logistics, all six logistics properties enjoy full occupancy rates. The Bei Gang Logistics facility has just turned operational at year’s end 2015, which might explain the less than full occupancy rates. However, it is projected to grow to 85% and 95% in forecast periods 2016 and 2017 respectively.
Distribution per unit (DPU) projections for EC World Reit
The Company noted in its prospectus that it seeks to distribute approximately 3.34 Singapore cents per unit for forecast period 2016. This represents an annualised DPU yield of approximately 7.5% based on minimum offering price of $0.76 per unit and an annualised DPU yield of 7.0% based on the maximum offering price of $0.82 per units. In the absence of the Master Leases, the annualised yield for forecast period 2016 shall be 6.2% to 5.7% based on the minimum and maximum offering prices respectively.
For forecast year 2017, the company expects the DPU yield to grow to 7.2% based on the maximum offering price, and in the absence of master leases, the yield is expected to grow to 6.2%.
How does the DPU yield and leverage factors of EC World Reit compare with peers
The following table shows the DPU yield and leverage factors of its listed peers:
According to the Company’s prospectus, it expects to have gross borrowings of S$405.9 million and its total borrowings and deferred payments as a percentage of the deposited property (aggregate leverage) is approximately 28.9% based on the maximum offering price.
When compare to its listed peers, EC World Reit’s expected DPU yield of 7.0% to 7.5% for forecast year of 2016 seemed to be at the low end of its logistics related Reit peers shown in the chart, but is slightly ahead with its industrial Reit peers like Ascendas Reit and Mapletree Industrial Trust.
As for its aggregate leverage factor, the projected leverage factor of 28.9% is at the relatively low end and is on par with FLT in the Logistics Reit peer group, and the rest of the Reits. The Monetary Authority of Singapore (MAS) has introduced a single-tier leverage limit of 45% for Reits since 2015 in order to strengthen corporate governance, alignment of incentives, and allow greater operational flexibility.
Although EC World Reit is able to borrow up to the maximum leverage limit stipulated by MAS, it has not done so. In our view, a low leverage factor of 28.9% provide more opportunities for EC World Reit to expand and acquire additional logistics facilities to broaden its current six logistics properties held under the IPO portfolio.
EC World Reit has also outlined plans to use the projected gross proceeds of around S$590.9 million to S$637.6 million from the IPO to expand, repay its existing loans, and pay the remaining paid-in capital of Hangzhou Fu Heng Warehouse Co. Ltd. In addition, the Reit has plans to draw down its debt facilities of S$405.9 million to finance for working capital, and other capital expenditures.
Projections for Net Property Income (NPI) growth
The Company cited e-commerce growth as one of the major catalysts for growth in its Net Property Income for projected years 2016 and 2017. Other contributors to growth include favourable political environment through policy support for cross-border e-commerce, and standardisation and refinement of e-commerce related regulations. There are also economic factors including China’s transition to a more consumption-based economy.
The continued growth of internet usage, and mobile online shopping portals also help to generate growth of e-commerce activities. For example, the proportion of netizens involved in online shopping has grown from 55.7% to 60% in 2015, and is China’s highest in five years. The compounded annual growth rate (CAGR) of online mobile shopping has rose to around 95% in 2011, and in 2015, the number of online mobile shoppers outpaced China’s online shoppers by approximately three times.
We think that EC World Reit offers compelling strengths in the area of e-commerce growth in China, and the evolving landscape of the Chinese economy to a more consumption-based economy. At an offer price of between S$0.76 to S$0.82 per unit, and projected DPU of around 7.0% to 7.5% for projected 2016, we think that the Reit deserves some investment consideration if one is looking for income stability and participating in the online e-commerce growth in the country. Although the DPU yield projections might be at the low-end of most of its listed logistics-related peers which are generating around 9%, we think that it is still at a reasonable level given the current low interest rate environment.
Moreover, the low leverage factor of close to 29% offers additional room for further expansion through taking on some leverage.
However, we note that EC World Reit’s current IPO portfolio comprising of six logistics properties and its major concentration in Hangzhou might not offer much diversification. We do anticipate the company to continue expanding and acquire additional value-added logistics facilities in the coming years in order to generate growth, and accumulate economies of scale along the way.