HPH Trust – DMG

Margins squeezed; downgrade to Neutral

Results s lightly below expectations. HPH Trust (HPHT) reported 1Q12 EPU of 5.31HK¢, 20% of our forecast and 22% of consensus estimates, as margins were squeezed on higher costs. Following the results, we lower FY12/13F EPU by 3% (on higher costs) but maintain DPU estimates on lower capex. We cut HPHT to Neutral with a lower DCF-derived TP of US$0.78, which reflects our revised estimates and 23.4HK¢ distribution in Mar 2012. With growth concerns emerging in Europe and inflationary pressures, we see downside risk to management’s forecasts. We expect FY12 distribution to come in 8% below HPHT’s IPO target of 51.24HK¢. Based on our DPU estimate, the stock is yielding 8% for FY12.

HIT showed strong throughput growth; Yantian slightly down. 1Q12 revenue was 6% below IPO projection due to weaker-than-expected volume growth from Yantian (-0.4% YoY) and lower ASP from HIT. HIT managed to record strong throughput growth (+9.4% YoY) driven by higher transshipment cargoes. HPHT’s market share is growing: throughput at HIT, Yantian and COSCO-HIT accounted for 53.1% of Kwai Tsing and Shenzhen volume vs. 51.8% in FY11. We maintain our 6% and 3% volume growth for HIT and Yantian respectively.

But margins lower due to higher costs. EBITDA margin came in lower at 56% compared to 59-61% in the past three quarters, as costs per TEU are rising due to the RMB appreciation and inflationary pressures. Staff cost rose +17% QoQ while we estimate that cost of services rendered per TEU is up 4-5%.

Positive demand outlook for April 2012 and May 2012. Management painted a more robust demand outlook for April and May, with volume growth likely to hit the 5-7% range. In our view, the stronger volume has been priced in given the weaker 1Q12 demand in Yantian. Europe demand remains uncertain but the shortfall will be compensated with higher international transshipment. Management may defer some of the capex planned for 2014/15 berths.