Volume growth should pick up

• Results in line; Yantian Port volumes disappointing in 1Q12, but offset by better than expected HIT volumes

• FY12F dividend guidance stays at 6.6UScts; cash flows to be supported by deferring capex plans if needed

• Maintain BUY for yield in excess of 8.5%

• Catalysts expected from better y-o-y throughput data

Highlights

HIT gains market share in HK port. Overall volume growth for HPH Trust’s portfolio came in at about 5% y-o-y, largely thanks to 9.4% throughput growth at HIT, driven by higher transhipment and Intra-Asia volumes. Container throughput at Yantian Port was down 0.4% y-o-y, as export volumes to US and especially Europe remained weak. ASP grew by about 2-3% at Yantian Port, and declined slightly at HIT in 1Q12, largely due to the change in volume mix towards transhipment cargoes.

Cash generation not far from projections. Though revenues fell 6% short of management projections, savings at the operating level, lower interest expenses and taxes, and the larger contribution from 100%-owned HIT meant that net profits attributable to unitholders were largely in line with estimates. This has been the trend in previous quarters as well and the ~7% y-o-y growth in revenues and likely similar growth in EBITDA implies that the Trust is on track to deliver on its DPU guidance for FY12.

Our View

Expect better growth numbers hereon. We believe a somewhat more sustainable y-o-y recovery in volumes could be noticeable from April 2012 onwards, as volumes had started to flatten out during that period in 2011. Management 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 estimate that volumes at HIT and Yantian Ports should show modest low, single-digit growth of 2-4% this year, though management still remains optimistic about the possibility of 5-7% growth.

Recommendation

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 growth capex if volume growth is not strong enough in the near term. In 1Q12, the capex outlay was indeed 51% lower than projected.

Separately, HPH Trust announced the succession plan for its CEO, Ms. Hai Chi Yuet, who will be retiring in Nov-2012. Mr. Gerry Lui Fai Yim has been named the CEO designate. Mr. Yim had served with the HPH Group between 2003-09 and last served as the CEO of HK-listed Hysan Development Company. We do not expect any change in strategy or DPU policy.

Margins squeezed; downgrade to Neutral

Results s lightly below expectations. HPH Trust (HPHT) reported 1Q12 EPU of 5.31HK¢, 20% of our forecast and 22% of consensus estimates, as margins were squeezed on higher costs. Following the results, we lower FY12/13F EPU by 3% (on higher costs) but maintain DPU estimates on lower capex. We cut HPHT to Neutral with a lower DCF-derived TP of US$0.78, which reflects our revised estimates and 23.4HK¢ distribution in Mar 2012. With growth concerns emerging in Europe and inflationary pressures, we see downside risk to management’s forecasts. We expect FY12 distribution to come in 8% below HPHT’s IPO target of 51.24HK¢. Based on our DPU estimate, the stock is yielding 8% for FY12.

HIT showed strong throughput growth; Yantian slightly down. 1Q12 revenue was 6% below IPO projection due to weaker-than-expected volume growth from Yantian (-0.4% YoY) and lower ASP from HIT. HIT managed to record strong throughput growth (+9.4% YoY) driven by higher transshipment cargoes. HPHT’s market share is growing: throughput at HIT, Yantian and COSCO-HIT accounted for 53.1% of Kwai Tsing and Shenzhen volume vs. 51.8% in FY11. We maintain our 6% and 3% volume growth for HIT and Yantian respectively.

But margins lower due to higher costs. EBITDA margin came in lower at 56% compared to 59-61% in the past three quarters, as costs per TEU are rising due to the RMB appreciation and inflationary pressures. Staff cost rose +17% QoQ while we estimate that cost of services rendered per TEU is up 4-5%.

Positive demand outlook for April 2012 and May 2012. Management painted a more robust demand outlook for April and May, with volume growth likely to hit the 5-7% range. In our view, the stronger volume has been priced in given the weaker 1Q12 demand in Yantian. Europe demand remains uncertain but the shortfall will be compensated with higher international transshipment. Management may defer some of the capex planned for 2014/15 berths.

HPH Trust Q1 profit in line with target

HUTCHISON Port Holdings (HPH) Trust posted a net profit attributable to unitholders of HK$462.8 million (S$74.3 million) for the quarter ended March 31, 2012, sliding in one per cent ahead of its projected figure in its initial public offering prospectus last year.

Revenue and other income, however, fell 6 per cent short of projections, at HK$2.84 billion for the quarter.

While throughput at its Hong Kong terminals rose 9.4 per cent year-on-year and also beat the projection as transhipment volumes grew, throughput from its Yantian International Container Terminals (YICT) side dipped 0.4 per cent year-on-year and also fell 12.3 per cent short of the projection.

The trust declares a distribution per unit (DPU) on a semi-annual basis, with the amount calculated as at June 30 and Dec 31 each year.

• In US$ terms, HPH Trust is at its lowest in 3 months.

• Clearly, the introduction of the S$ counter (announced on Mar 22nd) has not really “helped”, other than the knee jerk up-tick in unit price, as we had expected, to 79 US cents (on Mar 27th).

• In fact, trading volume, on an aggregate basis, has actually declined:

– In the 7 trading sessions since debut of the S$ counter, total volume came to 106 mln units (87.68 mln in US$, and 19 mln S$, which could also suggest less-than-strong retail interest) or 15 mln units average a day.

– In March, volume totaled 554.42 mln units or 25.2 mln units average a day.

– For the week ended Feb 24th, when 2011 results were released, it was 222.7 mln units or 44.5 mln units daily average.

• For period Mar 16 – Dec 31 ’11, HPHT earned HK$1970.3 mln and paid out 37.7 HK cents / 4.86 US cents a unit (6.09 US cents annualized ) to unit holders. Yield would be 8.5%.

• Profit in H2 was HK$1316.6 mln; distribution 23.4 HK cents / 3.02 US cents or 5.99 cents annualized, a unit, giving a yield of 8.3%.

• We maintain individual investors in Singapore would do better sticking with S-Reits / business trusts. Our picks remain City Spring, Fraser Centrepoint, Mapletree Commercial, Parkway Life.

Notes

* Suggesting exchange rate of US$1=S$1.27. Note the rate has been pretty stable at this level, although most experts expect MAS to allow S$ to strengthen to combat the difficult inflation situation in Singapore.

HPH Trust to launch dual currency trading

Hutchison Port Holdings Trust (HPH Trust) is set to be the first to launch dual currency trading of its units on Singapore Exchange’s (SGX) recently introduced dual currency trading platform.

‘We believe dual currency trading is in the best interests of our unitholders and may enhance the liquidity of our units by attracting investors who wish to invest in S$. Fungibility between the two currency counters also means potential and existing Unitholders have the added flexibility to trade in either counter,’ Canning Fok, Chairman of the trustee-manager of HPH Trust, said.

The SGX recently introduced a Singapore dollar (S$) counter to the existing system where units are quoted and traded in United States dollars (US$).

Trades made in the US$ counter will be settled through SGX in US$, while trades made in the S$ counter will be settled through SGX in S$; units traded in both counters are identical.

HPH Trust is a container port business trust listed in Singapore, which is managed by Hutchison Port Holdings Management Pte. Limited.

Investors will be able to buy or sell in either counter beginning 9.00am on 2 April 2012.