Smooth sailing so far

• Year-to-date throughput numbers in HK and Yantian Port are largely on track with our expectations

• 7%-8% throughput growth along with modest improvement in rates to drive EBITDA growth in FY11

• Maiden interim DPS of c. US 1.8cts projected when HPHT reports 1H11 earnings before mid August

• Maintain BUY and US$1.15 TP

Throughput volumes on track with our projections. Throughput volumes for the first four months of 2011 rose by 5.7% y-o-y at Yantian Port, 7.9% at COSCOHIT, and we believe by between 6%-8% at HIT, which means that operations at HPH Trust are on track to meet our expectations for FY11.

Firm prospects over the short and medium term. We like HPH Trust for its stable and growing earnings profile, which we believe will be driven by continued rising trade volumes into and out of the Pearl River Delta region, translating into an annual growth of 10% in distributions to unit-holders for the next few years. HPH Trust is due to report its interim results by mid-Aug, and we are expecting a DPS of c. 1.8UScts to be declared.

Maintain BUY and US$1.15 TP. Given that HPH Trust seems to be well on its way to meet our projections in FY11/12, current FY11/12 yields look very attractive at 6.6%/7.2%; expect DPU CAGR of 10% up to 2013. Maintain BUY on the stock with a TP of US$1.15. This implies a total return potential in excess of 30% at current prices. Amongst Singapore listed REITs, Business Trusts and high yield plays, HPH Trust offers one of the highest combinations of yield and DPU growth.

Attractive mix of yield & growth

• Dominant container port player in HK and Shenzhen

• Stable 60% EBITDA margin business to support 100% payout policy, with room to grow

• Currently trading at attractive annualized FY11 yield of 6.3%; 10% DPU CAGR expected over FY11-13

• Initiate with BUY, US$1.15 TP based on DCF (7.2% WACC) with FY12 implied yield valuation of 5.8%

Top container port operator in HK and Shenzhen. Hutchison Port Holdings Trust (HPHT) is the largest container port player in HK and Shenzhen, handling 21.2m TEUs in 2010 or 54% of the entire volume handled at deep-water ports in this area. It is sponsored by Hutchison Port Holdings Limited, the world’s top container port operator by gross throughput.

Predictable and growing cash flows. As the market leader in an oligopolistic environment, and operating on a large scale in one of the China’s most important trade hubs, HPHT’s operations are highly efficient and profitable, with a stable and predictable cash flow stream. HPHT is also expanding its capacity in Yantian Port in East Shenzhen to capture the projected continued growth in trade flows into and out of Southern China, a vital economic region of the country. These factors should underpin the Trust’s ability to generate EBITDA margins of close to 60% and grow distributions by about 10% CAGR over FY11-13.

Attractively trading at FY11F annualised yield of 6.3%, growing to 7.1% in FY12F, compared to S-REITs, which are trading at 6.0-6.3% FY11/12F average yield. Our target price of US$1.15 is based on a 3-stage DCF model with a WACC of 7.2% and terminal growth of 1%. Key concerns include HPHT’s vulnerability to global trade cycles and various foreign currency fluctuation risks for HPHT and its unitholders.

Hutchison Port trust struggles to top IPO price

Amid weak market, stock price dips after bankers stop stabilisation action

HUTCHISON Port Holdings (HPH) Trust has not touched anything above its IPO price of US$1.01 per unit since its listing nearly a month ago.

Units of the business trust closed yesterday at 95.5 US cents apiece, down 2.55 per cent, with some 100 million units traded. This followed the close of price stabilisation by its bankers this week. On Tuesday, stabilising manager Deutsche Bank said it has ceased to stabilise the unit price, after buying a total of 540 million units – all units offered under the greenshoe option.

Amid a poor market showing – as investors grappled with the nuclear fallout from Japan’s massive earthquake – the stock went underwater on listing day. It touched US$1.01 between last Thursday and Monday, but gave up its gains afterward.

Market watchers say that concerns over the weakening greenback against the Singapore dollar still weigh on the stock. Distribution from the trust will be paid out in HK dollars, which is pegged to the faltering US dollar – which means forex losses if the Singapore dollar continues to strengthen as expected.

Foreign funds have been the main buyers of the stock, said UOB-Kay Hian executive director Chan Tuck Sing. ‘This could partly be due to its parentage,’ said Mr Chan, referring to HPH’s honcho Li Ka Shing. ‘Response from the local boys has not been that strong.’

The Singapore Exchange’s move to facilitate the quotation and trading of HPH Trust in both Singapore dollars as well as US dollars, can mitigate some concerns, Mr Chan said. ‘But with an issue of this size, local interest will barely make a dent.’ He added that the stock’s poor showing could be due to funds adjusting over-allotment from the IPO, which raised some US$5.45 billion.

A BT analysis earlier also noted that while HPH Trust offers fairly attractive yields – with a forecast seasonally annualised DPU for 2011 at 45.88 HK cent – the trust is not obligated to make minimum levels of payout as the real estate investment trusts (Reits) do.

Reits must pay out at least 90 per cent of their distributable income to unitholders to qualify for tax transparency on the amount they pay out.

The hefty IPO was widely seen as a coup for Singapore, which had established perimeters for the listing of business trusts ahead of long-time competitor, Hong Kong, where HPH’s business is based.

This has mounted pressure on Hong Kong regulators to review its listing rules to accommodate business trusts, with Hong Kong’s telecoms giant PCCW – led by Li Ka Shing’s son Richard Li – lobbying for changes in this area to try listing its trust there.

Are Reits a better alternative to Hutchison Port trust?

HUTCHISON Port Holdings (HPH) Trust’s initial public offering has clearly been a letdown for punters who are in for a quick ride. The container port business trust sank in its stock market debut almost two weeks ago and has not recovered past its offer price of US$1.01 per unit since.

But for long-term investors seeking yields, the verdict remains open. The lower unit price means a chance of securing higher yields by buying in now, assuming that the projected distributions to unitholders (DPUs) materialise. Is HPH Trust worth a shot for this purpose?

The answer may be ‘no’, because better options exist in the form of real estate investment trusts (Reits).

To be fair, HPH Trust is dangling attractive yields. Its forecast seasonally annualised DPU for 2011 is 45.88 Hong Kong cents and at yesterday’s closing unit price of 98.5 US cents, after currency conversions, the yield comes up to almost 6 per cent. This is high in today’s low interest rate environment. For 2012, based on the same closing unit price, the yield could be 6.7 per cent.

What is uncertain is whether HPH Trust will eventually pay out the same DPUs as projected, and also maintain reasonable distributions in future.

In the first place, business trusts are not required to make minimum levels of payout. This is something that a number of investors may not have noticed, because they assume that business trusts and Reits are the same. They are not.

HPH Trust said in its prospectus that its policy is to give out all of its distributable income. But in any case, it has flexibility to change this, especially if hard times come along.

Recall what shipping trust Rickmers Maritime did in 2009 when it had to conserve cash during the financial crisis. Even though income available for distribution in Q2 rose 42 per cent year-on-year, Rickmers still cut DPU and unitholders received 73 per cent less from the previous year.

By contrast, Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency on the amount they pay out. This alone puts Reits ahead of business trusts for investors keen on steady yields.

Unitholders can be pretty sure that this rule will not change. Even in the face of 2009’s credit crunch, the authorities rejected requests from some Reit managers to lower the minimum payout ratio, emphasising that Reits’ characteristics as a stable, high-payout, pass-through vehicle must be preserved.

Reits look even safer when we consider the currency exposures HPH Trust investors face. Most of HPH Trust’s revenue is recognised in Hong Kong and US dollars; its units are priced in US dollars; and its DPUs are in Hong Kong dollars. The risks are worth repeating given how the Singapore dollar looks poised to continue strengthening.

The Sing dollar was trading at around S$1.26 to the US dollar yesterday and one of the more bullish research houses believes this could reach S$1.19 by year-end. If the forecast materialises, HPH Trust investors will have to pray that unit prices go up by more than 5 per cent just to make up for foreign exchange losses.

The Singapore Exchange (SGX) is looking at ways to facilitate the quotation and trading of HPH Trust in Singapore dollars as well as US dollars. But until details emerge, it is not clear if the arrangement will remove currency exposure on that front.

Also, assuming that the Sing dollar appreciates against the Hong Kong dollar at the same pace (since the latter is pegged to the greenback), HPH Trust’s distributions would lose value after currency conversion.

Investors can easily minimise foreign exchange risks by investing in Reits. All but one of them listed on SGX trade in Sing dollars, and most pay out distributions in Sing dollars. It is even possible to find Reits which hold only assets in Singapore, meaning that income streams are insulated from currency movements.

A quick scan on Bloomberg turns out a few Reits that generate yields of over 6 per cent and pay out distributions in Sing dollars. Some examples are Ascendas Reit and Frasers Commercial Trust.

Some may argue that HPH Trust has greater growth potential because its Shenzhen ports still have a lot of room for expansion. Also, unlike Reits, business trusts are not hampered by limits on borrowings or development asset size.

These are good reasons for the growth-seeking investor to consider HPH Trust. But investors hungry for yields and stability may sleep better with their money parked in Reits.

Newly-listed port operator Hutchison Port Holdings Trust (NS8U.SG) said Friday that it expects "minimal" impact from Japan''s destructive earthquake and tsunami.

"It''s minimal," Chairman Canning Fok said when how Hutchison Port''s operations might be affected by last week''s magnitude-9 earthquake and ensuing tsunami, which has forced the closure of many production lines and ports in Japan.

"Our trade is more intercontinental, 70% of our trade is intercontinental. I think we are well protected by the nature of our business," he added.

The unit of Hong Kong conglomerate Hutchison Whampoa Ltd. (0013.HK) made its debut on the Singapore Exchange Friday at US$0.975 a unit, 3.5% below its initial public offer price of US$1.01, in the largest ever listing on the Singapore bourse.

Fok said he was happy with the opening price given the current market conditions.

The debut comes at a difficult time for new listings in Asia, with equity markets being sold off heavily after the destructive earthquake and tsunami in Japan and worsening geopolitical tensions in the Middle East.