2012 DPU Spot-on; Yields Still Attractive

4Q results in-line, 2H2012 DPU as promised. Hutchison Port Holdings Trust (HPHT) reported 4Q results that were in line with our forecasts as FY2012 EBITDA came in at 2% above our estimates. As expected, 2H2012 DPU of HK27.19 cts /share was declared, bringing FY2012 DPU to HK51.24 cts, exactly in line with IPO prospectus projections. Although FY2013 will have a market-expected dip in DPU, HPHT remains a solid yield play (~8% p.a.) when put in perspective with S-REITs which currently trade closer to ~5% p.a. Reiterate BUY.

Deferred Capex again a hot potato. Questions were once again raised about the sustainability of FY2012 DPU levels going forward due to the fact that distributions were only achieved this year through a deferral of capex. Management stated that no further deferral of capex would be planned in 2013, and barring an extremely positive business environment, FY2013 DPU would come in at lower levels – something which is already expected by the market.

Volumes strong, HK leads the way. FY2012 volumes posted a credible 5% growth YoY: HK leading the way with a 5.4% YoY increase and Yantian posting a 3.9% YoY increase.

Outlook tentative, but more positive signs now. Management sounded more optimistic about the US and Chinese economies although this will be mitigated by the uncertain European situation. They also stated that the trend of an increasing proportion of megavessels will benefit HPHT’s ports given their natural deep water channels and scale.

Don’t miss the forest for the trees, reiterate BUY. We leave our forecasts largely unchanged, as we introduce our FY2015 estimates. As the market has already priced in FY2013’s weaker DPU, we advise investors not to miss out any further on a stock with sustainable yields of 7.6-8.3% p.a. Reiterate BUY, with DDM-based Target Price of USD0.93 implying a 20% total return including distributions.

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.

Strong 3Q12 throughput offset by weak ASP

Results were in-line, with 9M12 net profit accounting for 72% of our FY12F forecast. Strong throughput growth in 3Q12 was primarily driven by transshipment volumes, leading to lower ASP. HPHT guided down FY12 ASP growth from 1-2% to flat and narrowed throughput growth from 5-7% to 5-6%. They kept DPU guidance of 51.24 HK¢. With capex spending likely to fall ~HK$500m below its projection, the excess cash will be used to meet the guided dividend payout but this will come at the expense of future DPU. We raise FY12F DPU to be in-line with guidance but lower FY13 payout. Maintain Neutral with a revised DCF-derived TP of US$0.79 (from US$0.78).

Transshipment drove volume growth; Oct growth easing. HPHT achieved strong 3Q12 throughput growth of +5.6% YoY in HIT and +9.7% YoY in Yantian. A big part of the growth in Yantian came from transshipment cargoes where the mix from transshipment cargoes rose from 4% to 9%. HPHT also gained from push forward of cargoes to Sept due to the National Day Week in early Oct and bad weather at other ports. There are signs that volumes are easing in early Oct.

Higher costs eating into margins. 3Q12 EBITDA margin of 56.9% was lower compared with 61.7% in 3Q11. 3Q12 revenue growth was +2.6% YoY but staff cost and COGS grew at a faster pace of +7% YoY. Other operating income was significant lower due to a ~HK$78m swing in forex (see details in Figure 1).

Cash from deferred capex to meet FY12 DPU; lower future payout. In 9M12, HPHT spent HK$598m for capex. With full-year capex likely to be around HK$700m, we expect the HK$500m cash from lower capex spending to be paid out as dividend in FY12. However, the need for higher capex spending in FY13- 14 to meet volume growth will reduce future payout.

Revisions: (1) We revised FY12-13F net profit by ±1% and introduce our FY14F estimate. (2) We raised FY12F DPU to 51.24 HK¢ as we expect the HPHT to meet its IPO projection but lower FY13F DPU by 5% to 41.84 HK¢ (5.38 US¢).

Positive surprise from Yantian

Second consecutive month of double-digit growth at Yantian Port. Yantian Port’s September throughput grew by 16.7% y-o-y to 1.06m TEUs for the month. This follows healthy growth of 11.7% y-o-y in August. While part of the growth in August was weather-related, the higher growth in September is largely a function of a lower base in September 2011, a likely return to more normal peak season patterns in trade, and continued market share gains.

Yantian Port volumes continued to outstrip growth in Western Shenzhen ports – which grew at c.8% for the month – as we believe larger container vessels utilised on the US and European main lanes prefer to call at Yantian Port in Eastern Shenzhen given its wider access channels. For 3Q12, Yantian Port volumes are up 10%. YTD in 2012, Yantian Port’s throughput growth now stands at 4.8% y-oy, compared to only 2% in 1H12.

Hong Kong numbers decent. Over in HK, throughput growth turned positive at Kwai Tsing terminals for the first time in 4 months, again helped by a low base effect. Volume handled at Kwai Tsing terminals grew 7.3% y-o-y to 1.46m TEUs in September. YTD, Kwai Tsing terminal throughput is up 1.5%. We estimate volumes at HPH Trust’s HIT terminals at Kwai Tsing could be up at a faster clip of 5-6% YTD, as other terminal operators are losing ground. In 1H12, HIT had registered 8% growth in volumes, compared to 2.2% growth overall at Kwai Tsing. COSCO-HIT volumes registered growth of 1.4% y-o-y in September, and are up 5.1% y-o-y YTD.

Re-rating in progress. Overall growth numbers are in line or slightly higher than our 2-4% full year growth forecast for Yantian and HIT. No changes to our DPU estimates. We forecast 6.6UScts payout for FY12, including interim DPU of 3.1UScts. This implies a higher DPU of 3.5UScts for 2H12, supported by seasonally higher volumes, and some deferral of development capex plans. Better growth numbers at Yantian may lead to lower need for capex deferral to meet DPU guidance. Maintain BUY, TP US$0.85. Despite some recent re-rating, yield remains attractive at 8.25%. We expect further re-rating as market increasingly appreciates the steady and sustainable dividend generating capability of the Trust.