More than the sum of its ports?

IT IS not always true that bigger is better, and Hutchison Port Holdings Trust spent last week finding that out first-hand.

The region’s largest ever initial public offering (IPO) went on its roadshow amid a great deal of scepticism, as analysts and market-watchers fell over themselves to list the number of reasons the IPO was more of an IP-no.

These had ranged from remote reasons such as a certain sunglass-wearing dreadlocked figure whose country has sneezed all over equity markets in recent weeks, to the more immediate issue of the trust’s distribution per unit (DPU) being quoted in Hong Kong dollars.

To be sure, the choice of currency is not nit-picking, as the Hong Kong dollar is pegged to the US dollar. Between 2007 and the start of this year, the HK dollar has depreciated against the Sing dollar by 16.8 per cent. While it is little consolation, it is worth noting, however, that all three shipping trusts in Singapore declare their distribution in the beleaguered US dollar.

Much has also been made of how the trust’s expected yield of about 5.9 per cent for 2011 (based on the expected offer price of US$1.01) pales in comparison to that of the shipping trusts’, which started out offering yields in the neighbourhood of 8 per cent.

While both businesses involve water in one way or another, that is where the grounds for comparison end. Shipping trusts have come undone by counterparty risk lately, with charterers threatening to default or handing a vessel back to the trust several years early and leaving it at the mercy of the spot market.

These charterers, unlike the large liners that frequent Hutchi-son’s ports in Hong Kong and China, are so obscure that some analysts have had an uphill battle sizing up their creditworthiness. For all the heartburn-causing moments shipping trusts have had in the last 12 months, unitholders have more than earned their 8-10 per cent antacid premium.

All that aside, most of the pundits have said very little about the port business itself, strangely enough. A port’s earnings have more to do with trade volumes than anything else. In that respect, it is looking very promising for Hong Kong and China, where its ports assets are.

Morgan Stanley is forecasting export growth of 15 per cent and import growth of 18 per cent for China this year. This is also the year that the mainland’s 12th five-year plan starts, which will see the launch of a whole pipeline of projects, all of which need to be fuelled by cargo going through the ports.

If any exuberance from Hutchison seems suspect, it might help to know that its competitor feels the same way about container volumes. Tianjin Port Group is expecting its container volumes to more than double from last year to as much as 20 million 20-foot equivalent units (TEUs) a year by 2015. It is putting its money where its mouth is, with a 110 billion yuan investment planned.

By 2015, Hutchison’s Yantian terminals will be larger, too. Its Yantian West Port Phase II will add three million TEUs in capacity a year. How this will be funded has been a sticking point with some analysts, wary of the bite it might take out of the total distribution for unitholders.

However, development capital expenditure is not going to do that for the next two years, at the very least. For 2011 and 2012, the trust’s capex of HK$1.84 billion and HK$1 billion respectively is going to come out of the existing reserves of the portfolio, which stand at HK$5.19 billion.

This has been partially the reason the trust has been so bold as to commit itself to a distribution that is 100 per cent of its distributable income. There is nothing to hold it to this ratio in the future, but 100 per cent is a very difficult number for unitholders to forget.

Relative to its competitors, its assets appear to have the upper hand – or the deeper waters. Its terminals at Yantian are of the deepwater kind, which many of its nearby competitors that are on the Pearl River Basin cannot claim to have. With Maersk possibly ordering 30 18,000-TEU ships – the largest the world has seen – being deep has become an advantage in the ports business that has got nothing to do with wearing a beret.

Beyond the medium-term, however, several things remain to be seen, such as how future capital expenditure will be funded and whether its investment mandate will change. The trust is entitled to invest in other assets after three years, without the unitholders’ approval.

But as trading kicks off this Friday in the shadow of Middle Eastern unrest and general glumness, one suspects that holding on to the units past the short-term is going to be absorbing enough.