HPH Trust – BT

Port spin-off may give Hutchison US$5.8b booster

But distributions in HK$ may be a downside for local investors

Hutchison Whampoa’s port unit is set to raise anywhere from US$4.91 billion to US$5.83 billion from the initial public offering (IPO) of Hutchison Port Holdings Trust (HPH Trust), the trust’s preliminary prospectus showed yesterday.

The offering – South-east Asia’s largest – will be backed by Temasek Holdings, one of its cornerstone investors. The trust will sell about 3.9 billion units to the public and institutional investors, priced within a range of US$0.91 and US$1.08 apiece.

On top of that, about 1.5 billion units will be parcelled out to eight cornerstone investors that will subscribe for US$1.62 billion worth of trust units, in total.

Aranda Investments Pte Ltd, of which Temasek Holdings is the ultimate controlling shareholder, has committed a subscription amount of US$100 million. Capital Research and Management Company will lead the group, investing US$634 million. Paulson & Co, which is managed by John Paulson, will take a US$350 million stake and Lone Pine Capital LCC has pledged US$186 million.

Based on the maximum offer price of US$1.08, the cornerstone investors will hold 17.2 per cent of the trust. The trust’s sponsor – Hutchison Port Holdings Limited – will own a 38 per cent stake. PSA International holds an effective 20 per cent stake in the sponsor. At that price, the trust will have a market capitalisation of about US$9.41 billion.

The sponsors have estimated annualised distribution yields of 5.5 per cent and 6.1 per cent for 2011 and 2012, respectively, based on the maximum offer price. The 2011 period is a nine-and-a-half month period running from Mar 16 to the end of the year. Kenneth Ng, head of CIMB-GK Research, deemed the yield ‘fairly decent’.

With the distributions being declared in Hong Kong dollars, however, local investors might face an accompanying downside, said Phillip Securities analyst, Alfred Low. ‘If it’s in Hong Kong dollars – which is tied to the US dollar – then if the Sing dollar appreciates next year, it’s bad,’ said Mr Low.

The timing of the IPO might work against it as well, as investors have displayed skittishness in response to the turbulence in the Middle East.

‘The equity markets are doing so badly, with all the IPOs underperforming. Based on the mid-point of the price range, I would not subscribe,’ said Mr Low.

Other market watchers, however, believe that the turmoil in the Middle East will make this region look like a safe haven for investments, in comparison. The merits of the trust could also make it an outlier, according to CIMB’s Mr Ng. ‘It’s a business trust or a Reit-like structure marketed as a yield-providing instrument, so even in jittery markets, there should be demand for such issues,’ he said.

HPH Trust’s portfolio will include Hongkong International Terminals (HIT) and Cosco-HIT Terminals, along with the Yantian terminal in the Shenzhen Port. Last year, total throughput for all the container terminals in the trust’s portfolio stood at 21.17 million twenty foot-equivalent units (TEUs), up from 18.08 million TEUs in 2009.

In 2009, Hong Kong and Shenzhen topped global container throughput lists with a combined throughput of about 39.2 million twenty foot-equivalent units.

Revenue from the trust’s deep-water port business accounted for more than 90 per cent of HK$11.56 billion in total revenue last year.

The trust will also have a claim on the economic benefits derived from the three river ports of Jiangmen, Nanhai and Jiuzhou. These three ports brought in HK$70.9 million in economic benefits last year.

As Intra-Asian trade explodes and an increasingly large proportion of it begins to revolve around the mainland, the trust will focus on developing and investing in deepwater container ports lining the Pearl River Delta.

The proceeds from the offering will partially pay off the HK$102.9 billion price tag on the assets when the trust acquires them from the sponsor. The rest of the acquisition will be funded by a three-year US$3 billion debt facility and an issue of consideration units.

DBS, Deutsche Bank, and Goldman Sachs are joint bookrunners and issue managers.