The Port of Choice for Your Portfolio

Sustainable yield of 9%; initiate with BUY. Hutchison Port Holdings Trust (HPHT) is a business trust holding container port assets in Hong Kong and Yantian, providing stevedorage and other port services to global shipping lines. We initiate coverage of HPHT with a DDM-derived target price of USD0.925 and a BUY recommendation. A sustainable distribution yield of 8.4-9.1% p.a. is far too attractive to ignore, especially given HPHT’s earnings resilience and capacity for further growth.

Resilient throughput growth. While HPHT’s portfolio ports have shown strong historical throughput CAGR of ~10% p.a. from 1993 to 2011, it also demonstrates resilience in times of global crises. Volume declines in crisis-hit 2008 and 2009 were marginal, at -1% and -4% YoY. Following the crisis, volumes in 2010-11 rebounded to an average CAGR of 10%, more than making up for the volume declines of the two prior years. We think HPHT remains well poised for a recovery based on recent stimulus measures from the EU and US Fed.

Looking favourably upon this fallen angel. HPHT’s share price has been depressed since its IPO at USD1.01 in Mar 2011, declining ~26% to date. A mispriced IPO and, more recently, concerns about economic growth in China and HK, were said to have been contributing factors. However, we think that current pricing levels, which imply yields of 8.4-9.1%, are attractive vis-à-vis its regional peers, REITs and other

business trusts, adding to its compelling investment case.

Underappreciated by the market: BUY. HPHT remains one of the largest holders of container port assets made available to investors who have an interest in dividend yield plays. Its current depressed price provides a rare opportunity to own a resilient business which would also be a beneficiary of a global economic recovery. Initiate coverage with BUY. Our target price of USD0.925 provides 24% upside in addition to stable dividend yields of 8.4 – 9.1% p.a.

On track to deliver promises

• Decent y-o-y volume growth at both Yantian (4%) and HIT (8%) in 2Q12; boosted by transhipment cargo

• 3.1 UScts DPU declared in 1H12, as per IPO guidance

• DPU should be sustainable at 6.6UScts level annually, as capex deferral is not a very significant proportion of total distributable cash flow in FY12

• Maintain BUY with unchanged TP of US$0.85

Highlights

Market share gains continue. Overall throughput volume growth at HPH Trust's ports have continued to exceed estimates, with c.5% y-o-y growth being recorded in 2Q12. This was driven by 8.3% throughput growth at HIT and 4% throughput growth at Yantian Port in 2Q12. YTD in 2012, volume growth at HIT and Yantian Port was at at 8.9% and 1.9%, respectively. Growth at HIT has significantly outperformed overall HK Port volumes YTD, largely driven by transhipments. The higher mix of transshipment cargo, however, has led to lower ASPs at HIT. ASPs at Yantian Port continue to improve with the gradual shift to Rmb pricing.

Earnings growth more muted. Though volume growth has led to 6% growth in revenues y-o-y, net profits were largely flat. Without the impact of forex gains/losses, net profits would have been up by about 4%. Higher staff costs, higher interest costs and the higher transhipment mix continue to weigh on EBITDA margins.

Our View

There will be low volume growth but negative volume growth is unlikely. We have explained this in our last report "Sustainable yield story" published 21 June, 2012. Though volumes to Europe have contracted, and sedate US volume growth barely offsets that, we still expect a 4% overall volume growth in FY12, driven by other trade routes and transshipment growth. For the upcoming peak season, berth bookings are looking robust according to management, but it remains to be seen how full these ships will be over the next few months.

Recommendation

3.1 UScts DPU declared in 1H12, on track to meet IPO projections for 2012. We expect the Trust to meet its DPU guidance of 6.6UScts for FY12, as it will be deferring some development capex to future years, and have the option of redeploying the cash to dividends. We estimate the Trust could defer about HK$500m from its original HK$1.2bn capex plan for FY12. We appreciate that this is not a sustainable strategy for propping up dividends, but this capex deferral is still a small component and only adds about 5% to estimate total distributable cash generated in FY12. This implies that, at worst, FY13 DPU would likely stay flat as operating cash flows can grow at more than 5%, in line with throughput volume growth.

DPU in-line; near-term volumes could be weak

Results in-line; low capex in 1H12 due to uncertain outlook. HPHT’s 1H12 DPU of HK24.05¢ accounted for 51% of our estimate and 47% of the guidance in its IPO Prospectus (HK51.24¢). 1H12 throughput volumes grew 5% YoY, in-line with our estimate and at the lower end of management’s guidance of 5-7%. Key takeaways from the 2Q12 results conference call: (1) outlook is uncertain due to weak exports to Europe and slow recovery in the US; (2) Management will not be aggressive in spending development capex. HPHT spent HK$370m in 1H12 vs. projection of HK$802m. (3) Management maintained throughput growth guidance of 5-7% in FY12 but if the current situation does not improve, growth will likely hit the lower range. Maintain Neutral with a DCF-derived TP of US$0.78. The stock is trading at FY12-13F yield of 7.8% and 7.3% respectively.

Throughput growth in-line; HIT saw strong growth from transshipment. 2Q12 revenue rose +6.1% YoY, driven by higher overall throughput (+5% YoY) and ASP (1.0-1.5%). HIT achieved strong volume growth in 2Q12 of +8.3% YoY, outpacing the flat growth for all Kwai Tsing terminals, but the growth was mainly driven by higher transshipment movements. HIT’s YTD June volume grew +8.9% YoY. Yantian’s volume rose +4.0% YoY in 2Q12 and +1.9% YoY YTD June.

Margins fell as ports handled more transshipment cargoes. 2Q12 ASP at HIT was weaker (~0.5%) while ASP at Yantian saw a positive growth of ~2%. Overall EBITDA margin declined to 57% (2Q11: 60%) due to higher mix of transshipment cargoes at HIT. Cost of services per unit TEU was up 1-2%, in-line with CPI.

Weak near-term outlook for container volumes. Management painted a soft outlook due to the Euro-zone debt crisis and slow economic recovery in the US. Throughput numbers already showed weakness in June: COSCO-HIT -1.9% YoY, Kwai Tsing terminals -1.7% YoY and Yantian +1.1% YoY. We maintain our FY12F volume growth of +6% YoY for HIT and +3% YoY for Yantian.

Sustainable yield story

• Container throughput growth at Trust’s ports running in line with expectations so far in 2012

• We do not foresee another global credit crunch scenario, nor any resultant sharp negative trade growth as implied by current share price levels

• Maintain BUY for >9% yield; TP US$0.85

Asia-US trades help prop up Yantian volumes YTD in 2012. Continuing with the trend seen in April, Yantian Port operating data for May was again encouraging, with volumes growing 5.1% y-o-y. YTD volume growth at Yantian Port now stands at 2.1%, and is trending in line with our estimates even before the traditional peak season has started. We think export bookings to the US are still holding up, though the European market remains weak and could weaken further.

Slow growth in volumes a reality but a repeat of 2009 – negative trade volume growth – is unlikely. According to our economists, the prospect of a Greek exit from the Eurozone does not have to be another “Lehman moment” for Europe or the rest of the world. The key driver for sharp decline in container trades in 2009 was the credit crunch, which rendered trade financing very difficult. The risk of a credit crunch remains lower this time than in 2008-09, as liquidity is abundant in Asia and markets have had 2 years to think about the current situation and prepare for it. Also, in 2008, the crisis was about dollars, this time it’s mainly the euro, which is not as important to Asia’s trade financing as the dollar.

FY12-13 DPU should still be sustainable even in bear-case scenarios. Under our base case scenario, we expect the Trust to meet its DPU guidance of 6.6UScts for FY12, after taking into account some degree of capex deferral. We also devise 2 sets of pessimistic scenarios, as shown on inside pages, but according to our calculations, unless tariff rates are affected materially, DPU for FY12/13 will still be above the (annualised) FY11 DPU of 6.0UScts. But despite these largely secure cash flows, the Trust is trading in excess of 9% yield, which makes it one of our top large cap high yield picks in Singapore.

Yantian port volumes up 6%

Yantian Port volumes pick up in April. As we had highlighted in our last report, Yantian Port data for April looked more encouraging, with volumes growing 6% y-o-y to 822.5k TEU. YTD volume growth at Yantian Port turned positive for the first time this year, at 1.2%. Over at Hong Kong Port's Kwai Tsing terminals, April volume was slightly higher y-o-y, and YTD volume growth now stands at 3.6% yo-y. Of course, HIT volumes are growing faster than overall Kwai Tsing volumes, as was evident in 1Q12 throughput data for HPH Trust, which showed HIT volumes had grown close to 9% in 1Q, compared to 4.6% growth at Kwai Tsing during

the same period. The higher growth at HIT is partly from higher transhipment volumes handled, and thus, lowers average ASPs for HPHT.

Catalysts falling in place. We had highlighted potential catalysts to stock price from better Yantian Port data as we expected a more sustainable y-o-y recovery in volumes to be noticeable from April 2012 onwards. During discussions, management has indicated that volumes have started to pick up in April and May, and export bookings to the US are looking better, though the European market still remains weak. We are conservative about the economic outlook and estimate that volumes at HIT and Yantian Ports should show modest low, single-digit growth of 2-4% this year, though management remains optimistic of achieving a 5-7% growth.

DPUs secure, maintain BUY with TP of US$0.85. We expect the Trust to meet its DPU guidance of 6.6UScts for FY12, as it can divert some cash reserves earmarked for longer-term growth capex if volume growth in the near term is not strong enough to justify acceleration of new berth developments beyond 2014/15. In 1Q12, the capex outlay was indeed 51% lower than projected. Despite the largely secure yield, share price has been pressured by ongoing macro uncertainties and the Trust is back to trading at 9% yield, which makes it one of the top yielding large caps in Singapore. Our US$0.85 TP is based on DCF valuations (7.8% WACC).