Tough times won’t last long

• HK volumes below par YTD, but the worst is over and look forward to better data
  
• Revised down FY13/14F DPU by 8%/6% given lower volume estimates
  
• 1H13 DPU could be around 2UScts, should improve in 2H13 in line with trade flows
  
• Weaker DPU priced in; Maintain BUY with lower TP of US$0.82
  

Can only get better from here. Volume growth at the Trust’s HIT terminals in HK has been below par so far in FY13, with the port workers’ strike in April adding to the woes. HIT volumes could be down more than 10% y-o-y in 2Q13, with the high base in 1H12 – arising from higher transshipment activities between newly formed liner alliance partners – further skewing the comparison. Yantian Port volumes though remain on course for mid-single digit growth as expected, but overall volumes in FY13 could be flattish, despite contribution from newly acquired ACT terminals in HK. But the worst should be over and even though Europe trade remains weak, US volumes show relatively positive signs and upcoming peak season should provide more visibility for investors. This was the key message that HPHT communicated during our Pulse of Asia investor conference in Singapore recently.

Some key indicators looking up. US payrolls data came in better than expected recently, and while unemployment rate didn’t fall, consumer sentiment is improving and US inventory to sales ratio has maintained its upward momentum, giving us some confidence that trade flows in 2H13 will improve.

Worst is over, good time to BUY. In line with lower volume estimates, we moderate our FY13/14 DPU expectations by about 7%/ 6% to 5.3UScts/ 5.9UScts. Our TP is adjusted down to US$0.82. HPHT share price has corrected significantly in line with market sentiment, and we believe it has more than priced in lower DPU expectations. Maintain BUY in light of healthy yield promise amid the uncertain macro environment. A trade recovery by 2H13 could provide an additional cyclical leverage boost to the stock price.

• Hutchison Port Holdings Trust’s 1Q ’13 normalized net income (exclusive of performance fee and acquisition related costs) came in at HK$697.7 million, up 2% y-o-y, whist normalized net profit after tax (NPAT) attributable to unitholders of HPH Trust was HK$436 million, down 3% y-o-y in the same period.
  
• The 2% uplift in normalized net income was mainly attributable to higher profit from Yantian International Container Terminals (YICT) but partially offset by lower contributions in Hongkong International Terminals (HIT). On the other hand, the normalized NPAT attributable to unitholders of HPH Trust was 3% lower than the same period last year, as the Trust has 100% in HIT but only has slightly more than 50% interest in YICT.
  
• 1Q ’13 throughput of HPH Trust was also in line with last year, despite slowing trans-shipment growth in Hong Kong and continued weakness in the EU.
  
• Likewise, capex for 1Q ’13 came in at HK$244 million up 8% y-o-y compared to the same period last year.
  
• Management highlighted that the recent disruptions to HIT’s terminal operations due to the port workers strike, is unlikely to have a material adverse impact on the performance of HPH Trust.

Poised to leverage on a cyclical upturn in global trade

In its latest quarterly results, Hutchison Port Holdings Trust (HPHT) continued to showcase its resilience against the backdrop of a softened macro environment. While HPHT’s recent labour dispute at Hong Kong International Terminal (HIT) will put a slight dampener on its bottom‐line, we believe this will be negated by the revenue contribution from its recent acquisition of Asia Container Terminals (ACT). We reiterate that HPHT’s current valuations remain hugely enticing given the sustainability of its 7+% yield and the scope for recovery in global trade conditions. Maintain BUY with a FV of US$0.955.

Demonstrating resilience. HPHT recorded a 1.1% y‐o‐y growth in its overall revenue for Q113, and this forms 21.3% of our forecast FY13 revenue. This came on the back of its flatish throughput volume growth, which showcases its resilience amid weaker transhipment growth in Hong Kong and uninspiring trade conditions in the EU.

Bottom‐line weighed down by acquisition‐related costs. While HPHT’s net profit declined by 6.5% in Q113, we note that this

was largely a result of additional expenses incurred in relation to its recent acquisition of ACT on 7 March 2013. Stripping out the performance fee and acquisition‐related costs of HKD55.7mil, HPHT’s overall net profit would have increased by 1.6% y‐o‐y. Moreover, we observed that HPHT’s operating margins (excluding the impact of the acquisition‐related expenses and performance fee) remained strong at 31.2%, comfortably outperforming its Chinese port peers.

Strike at HIT likely to end soon. Around 450 people, mainly crane operators and stevedores that were employed by external contractors, have staged a strike at HIT on 28 March to demand a 23% pay increase. The strike escalated in the following days and HIT, a subsidiary of HPHT, has sought a court injunction prohibiting workers from demonstrating in their terminal premises on 1 April. This allowed HPHT to quickly resume normal operations and HIT is currently running at 86‐90% of normal operations. HPHT expects to run at 100% in 6‐8 weeks’ time.

Labour dispute has immaterial financial impact. As the strike only began on 28 March, the labour dispute has had a negligible impact on HPHT’s Q1 results. While the full impact of the strike will be borne out in its Q2 results, we believe the financial impact as a result of the labour dispute is likely to be insignificant. According to HPHT, its daily revenue loss has narrowed to HKD2.4mil (0.02% of FY12 revenue) on 5 April from HKD5mil (0.04%) during the initial days of the strike. We currently estimate the overall earnings loss from the strike to make up approx. 1.6% of our FY13 earnings projection.

Entrenching its leadership position

ACT acquisition a good strategic fit. On 7 March 2013, Hutchison Port Holdings Trust (HPH Trust) announced its acquisition of Asia Container Terminals (ACT) for a cash consideration of approx. HKD3.2bil. HPH Trust also procured an amount of HKD750mil to fund the full repayment of ACT’s existing indebtedness. ACT owns and operates Container Terminal 8 West (CT8W), which has two berths located in Kwai Chung, Hong Kong and has a concession lease that runs till 30 June 2047.

Stretching its footprint across Kwai Chung. The acquisition of two additional berths in Kwai Chung would allow HPH Trust to consolidate a stronger market position in Hong Kong. In 2012, HIT and COSCO‐HIT, HPH Trust’s portfolio container terminals in Kwai Chung, collectively achieved total throughput of 12.2mil TEUs, which translates into a market share of 53% in Hong Kong. Given CT8W’s throughput of 1mil in 2012, HPH Trust’s acquisition would bolster its market share to 57%.

Entrenching its position as the port of choice for mega‐vessels. Equipped with the largest number of long, contiguous berths, that not only caters well to mega‐vessels but also permits the simultaneous berthing of vessels, HPH Trust stands in pole position to leverage on Hong Kong’s status as a preferred regional transhipment hub. As CT8W is situated right beside HPH Trust’s existing berths, the acquisition would certainly strengthen HPH Trust’s competitive edge in this regard and leave it better positioned to cater to the continuing trend of increasing vessel sizes. Moreover, HPH Trust could potentially benefit from economies of scale and reap cost savings through an integration of its container terminal operations.

Compelling forward yield of 7.4‐8.3%. We expect the acquisition of ACT to be yield‐accretive given that the deal is entirely financed with debt. We raise our DPU forecast for 2013 from HKD43.1cents to HKD45.7cents, implying a forward yield of 7.4%, which is one of the most attractive yields on offer across the S‐REIT and business trust universe at present.

Raise TP to US$0.955. Supported by the strategic positives of massive operational scale, long contiguous berths as well as the relatively resilient nature of its throughput mix, HPH Trust remains favourably positioned to ride on the burgeoning intra‐ Asia and transhipment trade in the coming years. Therefore, we continue to believe that the current degree of undervaluation in HPH Trust remains unjustified. In our opinion, current valuations represent an attractive entry point for investors to partake the benefits of HPH Trust’s growth story as it unfolds over the longer term.

Final Piece to HK Jigsaw?

Light on details, but a positive. Hutchison Port Holdings Trust (HPHT) announced the acquisition of the entire stake in Asia Container Terminals (ACT) for a total cash consideration of HKD3,167m (USD408m) from DP World (55%) and PSA (45%). HPHT also procured the payment of HKD750m (USD97m) in ACT’s loans owed to DPW and PSA’s affiliates. All these would be financed entirely from a term loan facility agreement. We view this acquisition positively for three reasons: 1) it alleviates capacity constraints to growth in HK for HPHT, 2) HPHT expects the acquisition to be accretive to DPU, and 3) ACT is already an ‘overflow’ port for HPHT, and is hence tried and tested.

Look to cashflow instead of NTA. ACT’s NTA as of 31 Dec 2012 was HKD625m (USD81m). This implies a ~5x multiple of the acquisition price over NTA and looks demanding at first glance. However we believe this should not be used as a benchmark of value to HPHT despite the scant details revealed in the announcement. We instead prefer looking at the ACT acquisition from a discounted cashflow point of view, which, together with the above-mentioned financing rates were not disclosed in the announcement. Free cashflow is the pivotal metric to the investment thesis of HPHT being a strong yield play. For this, we take comfort from HPHT’s expectations of DPU accretion from this deal.

2 more berths at HK. Figures 1 and 2 summarise the key geographical details and available facilities for ACT, which feature 2 berths of 15.5m depth, and with lease expiry in 2047 (34 years’ time, similar to rest of HPHT berths).

Reiterate BUY as strong yield play. HPHT remains a strong yield play in our view, with distribution yields of 7-8% p.a. without including the ACT acquisition. We prefer to maintain our forecasts and adjust them once more details such as financing terms and ACT cashflow are made available – any DPU accretion remains as upside for now. HPHT remains a BUY, TP unchanged at USD0.93.