HPH Trust – DBSV

On track to deliver promises

• Decent y-o-y volume growth at both Yantian (4%) and HIT (8%) in 2Q12; boosted by transhipment cargo

• 3.1 UScts DPU declared in 1H12, as per IPO guidance

• DPU should be sustainable at 6.6UScts level annually, as capex deferral is not a very significant proportion of total distributable cash flow in FY12

• Maintain BUY with unchanged TP of US$0.85

Highlights

Market share gains continue. Overall throughput volume growth at HPH Trust's ports have continued to exceed estimates, with c.5% y-o-y growth being recorded in 2Q12. This was driven by 8.3% throughput growth at HIT and 4% throughput growth at Yantian Port in 2Q12. YTD in 2012, volume growth at HIT and Yantian Port was at at 8.9% and 1.9%, respectively. Growth at HIT has significantly outperformed overall HK Port volumes YTD, largely driven by transhipments. The higher mix of transshipment cargo, however, has led to lower ASPs at HIT. ASPs at Yantian Port continue to improve with the gradual shift to Rmb pricing.

Earnings growth more muted. Though volume growth has led to 6% growth in revenues y-o-y, net profits were largely flat. Without the impact of forex gains/losses, net profits would have been up by about 4%. Higher staff costs, higher interest costs and the higher transhipment mix continue to weigh on EBITDA margins.

Our View

There will be low volume growth but negative volume growth is unlikely. We have explained this in our last report "Sustainable yield story" published 21 June, 2012. Though volumes to Europe have contracted, and sedate US volume growth barely offsets that, we still expect a 4% overall volume growth in FY12, driven by other trade routes and transshipment growth. For the upcoming peak season, berth bookings are looking robust according to management, but it remains to be seen how full these ships will be over the next few months.

Recommendation

3.1 UScts DPU declared in 1H12, on track to meet IPO projections for 2012. We expect the Trust to meet its DPU guidance of 6.6UScts for FY12, as it will be deferring some development capex to future years, and have the option of redeploying the cash to dividends. We estimate the Trust could defer about HK$500m from its original HK$1.2bn capex plan for FY12. We appreciate that this is not a sustainable strategy for propping up dividends, but this capex deferral is still a small component and only adds about 5% to estimate total distributable cash generated in FY12. This implies that, at worst, FY13 DPU would likely stay flat as operating cash flows can grow at more than 5%, in line with throughput volume growth.