Why EC World REIT shows the trade war may not hit all of China’s trade-dependent plays

EC World REIT's Stage 1 of Bei Gang Logistics, which comprises eight buildings, located in North Hangzhou, China. It is one of the largest e-commerce developments in the Yangtze River Delta. Credit: EC World REITEC World REIT's Stage 1 of Bei Gang Logistics, which comprises eight buildings, located in North Hangzhou, China. It is one of the largest e-commerce developments in the Yangtze River Delta. Credit: EC World REIT

Concerns over the U.S. trade war with China have hurt sentiment across a host of China-focused investments, but outside of a drop in its unit price, EC World REIT has said it hasn’t seen any impact on its operations.

“The common understanding would be that the port [in Hangzhou] is affected by all these trade tensions, but ours is not at all,” Goh Toh Sim, executive director and CEO of EC World Asset Management, the REIT’s manager, told Shenton Wire recently. The REIT has six properties specializing in e-commerce and port logistics near the port in Hangzhou and another property in Wuhan.

“It’s a river port. It’s handling domestic transportation and it’s not affected at all by whatever international trade tension,” he said.

That’s even as Hutchison Port Holdings Trust, or HPHT, which operates ports in Shenzhen and Hong Kong, reported on Tuesday that trade tensions spurred it to take a large asset impairment, causing it to report a net loss for 2018.

But while China’s exports fell 4.4 percent in December, largely believed to be caused by an earlier surge due to front-running ahead of the U.S. imposing tariffs on Chinese imports, e-commerce in China is still growing. Total retail e-commerce in China is forecast to grow to US$1.989 trillion this year, according to eMarketer.

China e-commerce set to grow

Goh said that growth in China’s online shopping means logistics warehouses were set to remain in high demand, especially as he said trade concerns haven’t affected the country’s e-commerce,and even cross-border e-commerce doesn’t seem to be particularly affected.

The trade war may impact trade with the U.S., but that’s not China’s only trading partner. According to World Bank data, the U.S. is by far China’s largest trading partner by exports and by imports, but Indonesia, Thailand, Vietnam and Malaysia all rank highly as well.

Another factor may help support China’s e-commerce demand: E-commerce can differ significantly in emerging markets, such as China and Indonesia, from developed markets.

In developed markets, consumers are often making a choice between bricks-and-mortar and online shopping, but in emerging markets, consumers often don’t have an alternative to online shopping for many categories of products. 

“Rural China has seen significant growth as emerging middle income group consumers with limited access to physical retail outlets turn to e-commerce,” PwC said in a report last year.

PwC wasn’t alone in expecting consumption growth there: Morgan Stanley estimated in a report last year that private consumption in China’s smaller cities could triple between 2017 and 2030.

That’s a factor in the rest of Asia as well.

‘Hidden demand’

Santitarn Sathirathai, group chief economist of SEA, which owns e-commerce site Shopee, said at a Refinitiv event last month that in places such as Indonesia, e-commerce offers a lot of hidden supply and demand. Shopee ranks second by market share in Southeast Asia, after Lazada, according to iPrice Group. 

According to data from app analytics firm AppAnnie, Shopee was the most downloaded shopping app on iOS and Google Play in Indonesia in the second quarter of 2017. 

“The demand is mainly [from] the people in the rural regions, in these different islands who now have access to the internet like never before because they can [use] smartphones,” which are seeing rising penetration, he said. Indonesia’s smartphone penetration was above 45 percent last year, according to data from Statista.

Santitarn noted that the majority of his company’s sales in Indonesia was coming from outside Jakarta, the country’s largest city. And on the supply side, the company’s Indonesia site has set up a separate tab for sellers of boutique items and it helps to train them, he said.  

Expectations of further e-commerce growth in Southeast Asia are particularly important or EC World REIT: Its sponsor, Forchn Holdings, last year tied up with Singapore supply-chain manager YCH Group. The deal could see the REIT eventually acquire up to 13 properties from YCH, located across India, China, Vietnam, Thailand, Malaysia and Indonesia.

But in the meantime, jitters over trade have weighed on EC World REIT’s unit price, pushing its dividend yield up to nearly 9 percent. 

It’s an affliction shared by a number of China plays, and even formed part of DBS’ recent positive view on China shares for this year, in which it said that the mainland market was paying investors to wait for stocks to recover.

As a REIT, EC World REIT is required to pay out at least 90 percent of its income to shareholders.

Correction: This article has been updated to correct the spelling of Shopee.

This article was originally published on Thursday, 14 February 2019 at 8:58 A.M. SGT; it has since been updated to include data from AppAnnie. 

 

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