Prospects holding up

• Healthy volume growth did not translate to similar revenue and earnings growth in 3Q12
  
• FY12F DPU of 6.6UScts looks safe; FY13 DPU may be affected by absence of capex deferral
  
• Macro indicators trending up in US and China, and yield compression continues in Singapore
  
• Maintain BUY with higher TP of US$0.88
  

Earnings momentum lags pick up in volumes. Headline net profit declined 15% y-o-y to HK$602m in 3Q12, but excluding the impact of forex losses and timing of river port income, net profit would have been down a more modest 1.5% y-o-y. Despite decent YTD volume growth of 5% and 7% at Yantian Port and HIT (HK) respectively, the higher proportion of transhipment volumes and empty containers has led to lower ASPs and subdued revenue growth. Operating cashflows are tracking somewhat below our estimates due to higher operating costs and HPHT will need to defer about HK$500m in capex to meet the 6.6UScts FY12 DPU guidance.

But is there light at the end of the tunnel? After 2 consecutive months of double-digit volume growth at Yantian Port, we expect that growth may normalise in 4Q12. But the recent string of better than-expected September data from the US that spanned from ISM manufacturing/ services, initial jobless claims, retail sales, industrial production and housing starts point to potentially better times ahead for PRD ports. While this bodes well for future DPU sustainability, we cut our FY13F DPU by about 3.5% to factor in higher operating costs and the absence of support from further capex deferral.

BUY on any near term weakness. While slightly lower DPU forecasts for FY13 could impact near term share price performance, we believe HPHT’s stock price will benefit in the long term not only from potentially better macro data and yield compression in the market, but also increased confidence from investors that it can sustain a high payout. Our DCF-based TP is raised to US$0.88 on lower WACC assumption of 7.4%, given lowered market risk premium.

Chugging Along at the Core

3Q/9M2012 results largely in line. Hutchison Port Holdings Trust (HPHT) reported 9M2012 EBITDA of HKD5.26b, that made up 73% of our FY2012 EBITDA estimates, results of which were distorted slightly by FX losses which had a total impact of ~HKD80m. Adjusting for this impact, HPHT’s 3Q2012 core EBITDA of HKD1.92b declined only marginally by 1% YoY, and was largely in line with ours and consensus expectations.

9M2012 throughput +6% YoY, but on Transhipment cargo. HPHT recorded throughput growth of 6% YoY for 9M2012. For 3Q2012, HIT throughput increased 5.6% YoY, while YICT throughput increased 9.7% YoY. However both HIT and YICT’s higher throughput were primarily due to the growth in Transhipment cargo, and that correspondingly affected core EBITDA margins by ~2 percentage points. We believe this effect should be mitigated when the global economy picks up, with more higher-margin O&D cargo handled.

2H2012 DPU likely in the bag. Management guided that Development Capex deferrals would keep FY2012 Capex to ~HKD700m (vs FY2012 projection of ~HKD1.2b), allowing them flexibility to maintain the FY2012 projected DPU of HKD51.2cts, barring an economic catastrophe in 4Q2012. However, they could not commit to maintaining current DPU levels for FY2013 in light of current economic uncertainties, and also stated that deferred capex would eventually have to be spent. We believe our forecasts have adequately captured such a possible reduction in DPU (-5% YoY) for FY2013.

Still yielding 8% despite recent price surge, BUY. We continue to like HPHT for its resilient earnings and attractive dividend yields of 7.7-8.3% p.a., providing a yield advantage over the S-REITs sector of 2.0-2.6%. While current sentiment surrounding the global economy remains tentative, we believe HPHT remains well poised to benefit from an economic recovery. We leave our DDM assumptions largely intact, and maintain our Target Price of USD0.925. Reiterate BUY.