EC World REIT - Q3FY17

EC World REIT

Risk

1. Lease Expired concentration from Oct 2020 onward which account 86.6% of gross rental income (Q2FY17 Wale 3.5 years)
2. Asset concentration risk as it is within the province and the asset is very close to each other
3. 3 of the asset on the same sector are close each other
• Chongxian Port Investment, Chongxian Port Logistics, Fu Zhuo Industrial 
• Those assest are likely depend on the steel demand and account 46.% of the total gross revenue
4. 70% of the gross rental income depend on the cash flow of the Sponsor - Forchn Holding
5. RMB - SGD Currency fluctuation
6. Watch Metal demand and price.... up and down might impact the port asset rental or even the default in worst case
7. $200 million loan are offshore loan which has a risk of currency fluctuation
8. The overall loan interest is pretty high compare to the existing reits at 5.4% which might give a hint on the quality of the Sponsor that is not that strong and any increase/decrease of interest rate by 25bps will have impact of around $772,000 based on FY2016 annual report. 
• This currently mitigated by interest rate swap to manage the fluctuation

Why I take the risk

1. Small public float of 20% and supported by few big institution.
1. The sponsor is currently holding 41.2% and one of the loan provision is the sponsor must hold at least 30% of total units
2. Low gearing 29.2%
3. Dividend Yield around 7.5% (based on $0.78 price and assumption of 6% annualized yield) with built in rental escalation which will help to boost the dividend growth - yet to be proven
1. Chongxian Port Investment will have 5% rental increment in FY2018 and it currently contribute around 33% gross revenue based on Q2FY17 
2. Beigang logistic will have 1% rental increment every year and it currently contribute around 27.5%
3. Fu Heng will have 5% rental increment in FY2018 and it is currently contribute around 10% of gross rental income
4. Current CEO average cost is at $0.77 and holding 80,000 shares
5. Performance fee is based on DPU growth, they won't get paid if it is like Sabana Reit.
6. There is a clause in the loan that the unit holder fund should not be less than the higher of (i) 75% of the net assets attributable ($682,024,000) to Unitholders as at the Listing Date and (ii) S$460,000,000. Taking the lowest this will translate to $0.58

What Cause dividend to drop for Q3 17
This will happen if they use this approach

Investment Highlight

UNIQUE EXPOSURE TO THE LOGISTICS AND E-COMMERCE SECTORS IN HANGZHOU Hangzhou is one of the largest e-commerce hubs in China and has market coverage over Zhejiang Province Hangzhou is one of the most important steel transportation hubs along the Beijing-Hangzhou Grand Canal Strong potential of the Chinese logistics and e-commerce infrastructure market

SPONSOR - FORCHN HOLDINGS GROUP

As at 31 December 2015, the audited net asset value of the Sponsor group was RMB 1,363.4 million, and the total debt and total cash of the Sponsor group were RMB 2,649.7 million and RMB 726.5 million respectively. The revenue and the profit after tax of the Sponsor group for the financial year ended 31 December 2015 were RMB 2,950.4 million and RMB 208.6 million respectively

Properties Details with the Rental Agreement Information

CHONGXIAN PORT INVESTMENT
One of China’s key inland ports and Hangzhou’s top inland port for steel products


CHONGXIAN PORT LOGISTICS
One of the largest metal warehouse and logistics developments in the Yangtze River Delta


FU ZHUO INDUSTRIAL
Comprises berths and office buildings and located next to Chongxian Port Investment


STAGE 1 PROPERTIES OF BEI GANG LOGISTICS
One of the largest e-commerce developments in the Yangtze River Delta


HENGDE LOGISTICS
High-specification warehouses offering features such as temperature and humidity control systems


FU HENG WAREHOUSE 
A purpose-built e-commerce distribution centre comprising warehousing, logistics, parcel producing and sorting

Chongxian Port Investment, Stage 1 Properties of Bei Gang Logistics and Fu Heng Warehouse are the three Properties under the Master Leases, and they are expected to collectively contribute to 71.6% of the IPO Portfolio’s Gross Rental Income (RMB298.7 million) for Projection Year 2017. In the absence of the master lease arrangements, the contribution of these Properties to the IPO Portfolio’s Gross Rental Income (RMB251.4 million) will decrease to 68.0%.

According to the Independent Valuers, the rental rate of each of the Properties under the Master Leases is expected to rise and approach the master lease rental level at the end of the five-year period for the reasons as follows. Savills reported that the rent of each of the Properties under the Master Leases is expected to rise as they are dominating projects in the locality. Colliers reported that as the Hangzhou Government imposes more restrictions on the land supply for port use and fewer comparable ports will be built in its area, the rent of Chongxian Port Investment is expected to increase. According to Colliers, outlook for both Stage 1 Properties of Bei Gang Logistics and Fu Heng Warehouse is also expected to be positive as Bei Gang Logistics will become a more mature project in its market and is likely to remain competitive, while Fu Heng Warehouse is expected to benefit from the increased demand and limited supply for e-commerce logistics parks

Pipeline

Lease Profile

Some of the fees structure

Management fee structure based on distributable income and DPU growth which demonstrates the Manager’s alignment of interest with Unitholders


Management Fee
10.0% per annum of the Distributable Income (calculated before accounting for the Base Fee and the Performance Fee in each financial year).

Performance Fee 
25.0% of the difference in DPU in a financial year with the DPU in the preceding full financial year (calculated before accounting for the Performance Fee but after accounting for the Base Fee in each financial year) multiplied by the weighted average number of Units in issue for such financial year.

The Manager has agreed to receive 100.0% of the Base Fee and 100.0% of the Performance Fee in the form of Units for the period from the Listing Date to the end of Projection Year 2017.


Trustee’s fee
Trustee’s fee shall not exceed 0.1% per annum of the value of the Deposited Property, subject to a minimum of S$12,000 per month, excluding out-of-pocket expenses and GST in accordance with the Trust Deed

Management Salary

Pretty much based on salary based for 2016, would have prefer if it is tie to the performance percentage to be higher.

Major Shareholder of EC World REIT

BOCOM International Global Investment Limited (7.88%)
BOCOM International Global Investment Limited is an indirect wholly-owned subsidiary of Bank of Communications Co., Ltd. Headquartered in Shanghai, Bank of Communications Co., Ltd. is the first nationwide, state-owned joint-stock commercial bank in China with both national and global coverage.


Fosun International Holdings Ltd. (9.77%)
Fosun International Holdings Ltd. is an investment holding company incorporated in the British Virgin Islands which is the indirect controlling shareholder of Fosun International Limited, a company listed on the Hong Kong Stock Exchange with stock code 00656

Sunkits Resources Limited (12%)
Sunkits Resources Limited is an indirect wholly-owned subsidiary of China Cinda Asset Management Co., Ltd., a financial asset management company listed on the Hong Kong Stock Exchange with stock code 01359.

The Ministry of Finance of the People’s Republic of China is deemed to be interested in the Units held by Sunkits Resources Limited. Sunkits Resources Limited is a wholly-owned subsidiary of China Cinda (HK) Asset Management Co., Limited. China Cinda (HK) Asset Management Co., Limited is a wholly-owned subsidiary of China Cinda (HK) Holdings Company Limited, which is in turn 100% owned by China Cinda Asset Management Co., Ltd.. The Ministry of Finance of the People’s Republic of China owns 67.84% of China Cinda Asset Management Co., Ltd.

Debt Profile

Onshore Facilities 

• 3-year RMB998.9 million (S$203.3 million) secured term loan facility. The portion of the loan due for repayment within one year has been classified as current liability

• The annualized all-in interest rate for the quarter and six months ended 30 June 2017 were 6.2% and 6.3% respectively. As at 30 June 2017, the above facilities were fully drawn.  

• Onshore Obligors shall maintain a minimum blended debt service coverage ratio (“DSCR”) of 4.0x during the loan tenor ; and

• The DSCR ( defined as Net Operating Cash Flow/Debt Service Payments, refer to IPO for details) will be tested with reference to a 12-month trailing period, ending on the last day of the fiscal year

•  Unitholders’ funds shall not be less than the higher of (i) 75% of the net assets attributable to Unitholders as at the Listing Date and (ii) S$460,000,000

• EC World REIT shall have a minimum consolidated interest coverage ratio of 2 times4 ; and

• EC World REIT shall have a maximum gearing ratio of 45.0%

Offshore Facility

• 3-year S$200 million syndicated secured term loan facility secured

• The annualized all-in interest rate for the quarter and six months ended 30 June 2017 were 5.1% and 4.9% respectively. As at 30 June 2017, the above facilities were fully drawn and 100% of the interest rate risk of the Offshore Facility was hedged using floating to fixed interest rate swaps.

• Unitholders’ funds shall not be less than the higher of 75% of the net assets attributable to Unitholders as at the Listing Date and (ii) S$460,000,000;
• EC World REIT shall have a minimum consolidated interest coverage ratio of 2 times; and

• EC World REIT shall have a maximum gearing ratio of 45.0%.

• the Sponsor shall at all times own and maintain an effective Unitholding of at least 30.0% of the total Units

• the Sponsor shall remain at least 51.0% owned by Mr Zhang Guobiao at all times

• the Manager shall not cease to be an affiliate of Forchn Investment (Singapore) Pte. Ltd

Revolving Credit Facility

• S$50.0 million with DBS Bank Ltd. As at 30 June 2017
• ECW had drawdown total of S$24.0 million short-term loan backed by standby letter of credit (“SBLC”) of S$24.0 million issued by DBS Bank (China) Limited in favor of DBS Bank Ltd. The SBLC is collateralized against a cash deposit of RMB130 million (S$26.5 million). 
• The annualized all-in interest rate for the quarter and six months ended 30 June 2017 were 1.3%

The annualized all-in interest rate for the ECW for the quarter and six months ended 30 June 2017 were 5.4%. The Aggregate Leverage for the Group as at the end of the period was 29.2% as compared to 28.6% as at 31 March 2017

The final maturity date of the Onshore Facilities and the Offshore Facility 3 years from the date of the drawdown of the Facilities; and the repayment date of the Onshore Facilities to be extended by the Onshore Lenders

Side note

Cash flow is tight as it is paying down the income tax

• From FY2016 10,798 , paid $0
• Q1 $13,693, paid 468
• Q2 $6,042, paid (10,416)
• Average income tax per quarter is around (3,806)

There is a repayment of principal an interest required for the onshore termloan






















Financial Ratio
Gearing 29.2%
WALE 3.5 Years
Interest Rate 5.4%
100% of offshore SGD facilities on fixed rate
Debt Maturity 3 years

Key Risk
1. 86.6% Lease expiry by FY2020