1 REIT to Ride on the E-Commerce Growth in China
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1 REIT to Ride on the E-Commerce Growth in China

Sudhan P
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At its current unit price of S$0.65, EC World REIT (SGX: BWCU) has a dividend yield of around 9% (technically known as distribution yield for REITs).

EC World REIT’s distribution yield looks attractive, on top of the fact that the REIT can ride on the online retail sector growth in China.

However, we shouldn’t buy REITs based on distribution yields and growth factors alone.

Here, let’s explore holistically using a 10-step REIT investing framework to determine if EC World REIT is a worthy investment.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

EC World REIT is the first Chinese specialised logistics and e-commerce logistics REIT that was listed here in July 2016.

It owns properties mainly used for e-commerce, supply-chain management and logistics located in one of the largest e-commerce clusters in China’s Yangtze River Delta.

As of 31 December 2019, EC World REIT’s portfolio comprises eight assets, of which seven are in Hangzhou and one in Wuhan.

The asset in Wuhan accounted for 1.6% of the REIT’s net property income in 2019.

In terms of net lettable area (NLA), e-commerce logistics properties took up 49.7% of total NLA, followed by port logistics (25.6%), and specialised logistics (24.7%).

EC World REIT portfolio

Source: EC World REIT 2019 annual report

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

Let’s look at how EC World REIT has performed from FY2017 to FY2019 (the REIT has a 31 December year-end):

 FY2017FY2018FY2019Compound annual growth rate (CAGR)
Gross revenue
(S$' million)
91.496.299.14.1%
Net property income
(S$' million)
82.787.389.74.2%

Over the past three years, EC World REIT has shown growth in both gross revenue and NPI.

(Note: Since the REIT was only listed in July 2016, there are only three full years of financial data as a public entity.)

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Next, let’s explore EC World REIT’s DPU history.

 FY2017FY2018FY2019CAGR
Distribution per unit (Singapore cents)
6.0256.1796.0470.2%

In FY2019, DPU fell 2.1% to 6.047 Singapore cents largely due to a 5% retention of distributable income in the fourth quarter of the year. The amount was retained by EC World REIT’s manager for general working capital purposes and unforeseen contingencies due to the Covid-19 outbreak.

Overall, EC World REIT’s DPU has shown an uptick from FY2017 to FY2019, although at a slow rate.

Verdict: Pass

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For FY2019, EC World REIT had an NPI of S$89.7 million and a portfolio value of S$1.6 billion. This translates to a property yield of 5.7%.

EC World REIT passes this criterion as well.

Verdict: Pass

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 December 2019, EC World REIT had a healthy gearing ratio (also known as aggregate leverage) of 38.7%, which is below my threshold of 40%.

EC World REIT gearing ratio (as of 31 Dec 2019)
Source: EC World REIT FY2019 earnings presentation

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

At the end of 2019, EC World REIT had an interest cover of 3.7 times, which is below my threshold of 5 times.

The REIT’s interest cover has also been falling over the years, as seen below:

EC World REIT interest cover ratio trend
Source: EC World REIT 2019 annual report

Verdict: Fail 

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

EC World REIT’s portfolio was almost 100% occupied at the end of 2019.

The latest occupancy rate of 99.97% is also above the sector average of 90.5% (excludes EC World REIT’s occupancy rate). 

EC World REIT occupancy rate
Source: EC World REIT FY2019 earnings presentation

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

EC World REIT passes the rental reversion check as most of its leases have built-in rental escalations.

EC World REIT rental escalationSource: EC World REIT 2019 annual report

Verdict: Pass

8. Growth Prospects Check

EC World REIT has a strategy to grow with yield-accretive acquisitions focusing on the e-commerce logistics sector.

On that front, in August 2019, the REIT acquired Fuzhou E-Commerce, a sizable integrated e-commerce logistics asset that is expected to fully contribute to revenue in FY2020.

The acquisition increased EC World REIT’s asset portfolio by 19.2% and expanded the REIT’s exposure to the fast-growing e-commerce logistics sector. According to the China National Bureau of Statistics, online retail sales grew 16.5% in 2019, far outstripping the growth in Chinese retail sales of consumer goods of 8.0% that year. 

Right now among industrial Singapore REITs, EC World REIT has the highest concentration of e-commerce logistics assets in its portfolio.

EC World REIT comparison with other REITs
Source: EC World REIT FY2019 earnings presentation

One of EC World REIT’s tenants is an e-commerce logistics operator that services reputable companies such as Taobao of Alibaba and JD.com. 

JD.com expects significant growth in the Chinese e-commerce sector, as seen below:

JD.com online retail growth

Source: JD.com investor presentation

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At EC World REIT’s unit price of S$0.65, it is valued at a PB ratio of 0.76x, which is below 1x and could mean it’s undervalued.

We are unable to compare its current PB ratio with its historical five-year average since the REIT was listed only in 2016. 

Verdict: Pass

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At EC World REIT’s unit price of S$0.65, it has a distribution yield of 9.3%, which passes my criterion resoundingly.

Verdict: Pass

The Final Verdict

EC World REIT has a final score of 9/10.

The major attractive factor about EC World REIT is that it can ride on China’s e-commerce growth. However, I’m not investing in EC World REIT for now due to its short listed history.

Also, even though the REIT has tailwinds from the online retail sector growth in China, historical DPU has not grown significantly, and this concerns me.

A major risk that investors have to be aware of EC World REIT is that 77.7% of its gross rental income comes from its top three tenants.

If, for any reason, those tenants pull out and the REIT manager can’t find quality tenants to replace them, EC World REIT’s DPU would be hit significantly.

Many investors might be wondering if EC World REIT is affected by the Covid-19 pandemic. Since the REIT caters mainly to the e-commerce and specialized logistics sector, it is less affected compared to businesses with operations that rely largely on human traffic.

Considering everything, I’d rather place EC World REIT on my watchlist to monitor it for the next few years.

Would You Invest In EC World REIT?

Come discuss your thoughts and more in our Seedly Community under a page specifically dedicated to EC World REIT (SGX: BWCU). 

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.

REITs Tool

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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