Hit by impairment charge

• HK$19b impairment charge
  
• FY15 DPU range in 33-36 HK-cents
  
• Tariff increases likely mid-low single digits ppt
  

Hit by HK$19b one-time impairment charge

HPHT swung to a 4Q14 loss (after taxes and minority interest) of HK$18,610.0m, versus a profit of HK$334.8m in the same period last year. This was mainly due to a HK$19b impairment charge on goodwill allocated to a cashgenerating unit in Hong Kong which was adversely impacted by uncertainties in the global economy, challenging trading environment and labor cost pressures. Excluding the impairment charge, adjusted net profit after tax for FY14 was HK$2,981.7m (down 0.7% mainly due to higher taxes), which constitutes 101.7% of our full year forecast and is within expectations. FY14 distribution per unit is 41.0 HK-cents; but management has guided for FY15 DPU to dip to 33-36 HK-cents, below the consensus of 38.6 HK-cents.

Outbound cargoes to EU remained soft in 4Q14

In terms of the topline, FY14 revenue increased 1.9% to HK$12,622m as throughput at HIT increased 2.1%, mostly due to higher transshipment volume but partially offset by weaker intra-Asia cargoes. At YICT, throughput was up 8.1% YoY due to higher transshipment volume, US and empty cargoes. Average revenue per TEU increased YoY in HK, but decreased in China given the higher proportion of transshipment throughput handled. While outbound cargoes to the US remain firm, volumes to the EU continue to soften in 4Q14. Cargo volume for transshipment and the niche trade routes of Far East, Africa, Central and South American and Oceania is projected to increase moderately. Management reports that it is still in discussions with the shipping lines regarding tariff increases and sees a mid-low single digit percentage increase. While the impairment is a non-cash item and will not affect the trust’s cash flow generation and debt servicing ability, we note that unitholder’s NAV per unit (after deducting DPU for both years) has dipped significantly from HK$7.26 (end FY13) to HK$4.86 (end FY14), and believe the share price will likely react negatively to the impairment charge and lower DPU guidance. Maintain HOLDwith an unchanged fair value estimate of US$0.68.

Persistent headwinds from cost pressures

• 2Q14 figures in line
  
• Continued cost pressures
  
• FV unchanged at US$0.68
  

1H14 interim DPU at 18.70 HK-cents

2Q14 PATMI came in at HK$368.4m (EPU: 4.23 HK-cents), which decreased 12.4% YoY mostly due to continued cost pressures and lower contributions from ACT given the divestment of a 60% stake last quarter. Accounting for divestment gains, we estimate that 1H14 PATMI constitute 47.1% of our full year forecast, which we judge to be mostly within expectations. In terms of the topline, the trust reported 2Q14 revenue of HK$3063.9m, up 1.0% due to higher container throughput at HIT and YICT, offset by the absence of ACT contributions as it become an associated company after the stake sale. The trust declared an interim DPU of 18.70 HK cents for 1H14.

Higher throughput at group’s deep-water ports

The trust reported that outbound cargoes both to the US and EU continued their uptrends in 2Q14. The throughput of HPHT’s deep-water ports in 1H14 increased ~6%, with throughput at HIT and YICT growing 3.7% and 4.9%, respectively. YICT’s throughput growth was driven by transshipment and US cargoes, while HIT’s higher throughput was due to higher transshipment volume, partially offset by weaker intra-Asia cargoes. The average revenue per TEU for HK and China was mostly flat YoY; fewer concessions were granted to some liners for China which was offset by a higher proportion of transshipment throughput handled.

Maintain HOLD with unchanged US0.68 FV

Over the quarter, we continue to see upward pressure in terms of cost of services rendered, which increased 9.8% YoY due to higher external contractor costs and inflationary pressures while staff cost also increased 7.7%. 1H14 capex is up 64% to HK$643m, as management continues its expansionary plans at Yantian to add one berth each year from 2015. Maintain HOLD with an unchanged fair value estimate of US$0.68. While conditions remain mixed due to an uncertain outlook and persistent cost pressures, we see the downside to be limited here due to an attractive FY14F dividend yield of 7.4%.

4Q13 one-off items hit P&L

• Misses expectations
  
• Cost pressures in FY14
  
• Reduce FV to US$0.63
  

PATMI nearly halves

HPHT reported 4Q13 earnings results that were lower than ours and the street’s expectations due to one-off items: (1) concession to shipping lines (translating into lower average revenue per TEU for HK) after previous industrial action at HIT, (2) write-off of upfront fee after US$3.6b bank loan refinancing, and (3) exchange loss from the conversion of USD to HKD for repayment of bank loan for the ACT acquisition. 4Q13 revenue fell 0.8% YoY to HK$3.12b. Total operating expenses increased by 10.9% to HK$2.17b. PAT dropped 34% to HK$644m. PATMI fell 47% to HK$335m. 4Q13 throughput volume for HIT was down 10.1% YoY, but HK throughput was down only 2% for FY13 due to the acquisition of ACT in Mar 2013. 4Q13 throughput for Yantian (Shenzhen) was up 4.7% YoY, translating into a 1% growth for FY13. The portfolio as a whole registered a 1% decline in FY13.

FY14 guidance

Management anticipates mid-single digit growth in volume for its HK and Shenzhen ports, with 1-2% increase in ASP. Due to the expiry of tax holidays for some phases of Yantian, management foresees a tax rate of 19-20% for FY14, versus the 12% in FY13. There will also be the full year impact of the 9.8% wage increase for port workers decided on in early May 2013. Capex delayed in FY13 will be pushed over to FY14 (HK$1.5b-2.0b). FY13 DPU is 41 HK cents, and management’s internal target is to reach a similar figure for FY14. While FY13 operating profit had contracted by 9.5%, cash generated from operations expanded by 10.2%, and management says there will continue to be a gap between profitability and cash flows in FY14.

Maintain HOLD

Lowering our DPU forecasts, we reduce our FV on HPHT from US$0.74 to US$0.63. We maintain a HOLD rating on HPHT. HPHT is trading at a FY14F dividend yield of 8.0%.

3Q13 missed expectations

• 3Q13 revenue up 1%; PATMI down 8%
  
• Cut topline forecasts
  
• Reduce FV to US$0.74
  

HK volume flat YoY

Hutchison Port Holdings Trust (HPHT) reported 3Q13 results that were lower than ours and the street’s expectations. Revenue climbed 1% YoY to HK$3.36b. Total operating expenses increased by 1.3% to HK$2.17b. Profit before tax fell 1.6% to HK$1.07b and profit after tax fell 2.2% to HK$966m. Profit attributable to HPHT unitholders fell 8.4% to HK$539m. According to management, for 3Q13, volume through the HPHT’s HK ports was roughly flat YoY (the prior effect of striking workers has worn off) and the 9M13 volume is down 4%.

Volume through Yantain (Shenzhen) was down 3-3.5% QoQ, making 9M13 volume for Yantian flat. All-in-all, the US trade is flat YoY and European volumes remains disappointing, down roughly 5%. Fully-laden export cargo for both US and Europe had registered single-digit growth in 3Q13, but empty boxes were down quite a lot YoY, affecting overall volume.

Trimming 2013 topline forecast

We lower our forecasts to -1% and 0% YoY change in 2013 throughput for HPHT’s ports in Kwai Tsing, HK (including the increase in TEU from the acquisition of Asia Container Terminals in Mar) and Yantian, Shenzhen respectively. Our previous forecasts were 0% and 2% growth. Our revenue forecast for FY13 thus falls to HK$12.4b from HK$12.6b. Shipping lines’ formation of alliances, e.g. P3, G6 and CKYH, should continue to put pressure on transshipment volumes, especially in HK.

FY13F dividend yield of 6.8%

Management is guiding FY13 DPU of approximately 40 HK cents, versus a previous range of 40-44 HK cents. With the adjustment of our topline and cost assumptions, we trim our FY13 dividend from 44.2 HK cents to 40.6 HK cents. HPHT is trading at a FY13F dividend yield of 6.8%.

For FY14, tax rate should increase significantly because of the expiry of tax holidays for some phases of Yantian, and there will be the full year impact of the 9.8% wage increase for port workers agreed on in early May.

Downgrade to HOLD

We trim our FV for HPHT to US$0.74 from US$0.84 and downgrade HPHT from Buy to HOLD on valuation grounds.

Safe harbour

• Strong cash flows from high quality ports
  
• Attractive distribution yield of 7%
  
• Initiate with BUY, US$0.76 target price
  

Market leader in the Pearl River Delta

Hutchison Port Holdings Trust (HPH Trust) is the biggest container port operator in China’s Pearl River Delta region by throughput, with market shares of around 70% at Hong Kong’s main Kwai Tsing Port and 47% in Shenzhen. The business trust enjoys the backing of sponsor Hutchison Port Holdings, one of the world’s biggest port operators and a subsidiary of HK-listed conglomerate Hutchison Whampoa, headed by billionaire Li Ka-shing.

Well-placed to ride rebound in world trade

HPH Trust owns interests in four deep-water container port assets – three at Hong Kong’s main Kwai Tsing Port and one in Shenzhen – with a combined throughput of some 22.9m TEU in 2012. We believe that its market dominance in the Pearl River Delta puts the trust in a strong position to capture the region’s trade flows of manufacturing exports and raw material imports, including intra-Asia cargo. HPH Trust is also likely to be a key beneficiary of the trend by shipping companies to deploy bigger vessels as they strive for greater economies of scale; its container terminals are situated in harbours with natural deep water approaches and are equipped with advanced equipment capable of serving even the world’s biggest vessels. Overall, we believe that HPH Trust is wellplaced to benefit from a rebound in international trade as the US and Europe economies recover, as well as continued growth in intra-Asia trade.

Recent price drop offers good entry point, decent upside

HPH Trust’s unit price has declined by 16% from its recent peak of US$0.86 on 2 Apr, hurt by concerns over the impact of strikes by port workers in Hong Kong in April and in Shenzhen earlier this week (both since resolved), and the weakness in the global economy. At the current price of US$0.725, we believe that the trust offers upside potential, including distributions, of more than 10% over the next 12 months as the recovery in the US and Europe gathers momentum. The main risk to our investment thesis in the short term is a renewed slowdown in these major economies. Still, we expect strong support for HPH Trust at its current price, given its attractive distribution yield of around 7%. Initiate with a BUY rating and US$0.76 target price.