HPH Trust puts faith in ports’ scale, reliability

It sees boon from bigger ships, more sharing of vessels

BIGGER vessels, more shipping lines sharing vessels – all this only bodes well for the ports held by Hutchison Port Holdings (HPH) Trust, said its trustee-manager’s CEO in an interview with BT.

‘The trust ports, in terms of scale and service reliability, are probably the best in South China,’ said Hai Chi Yuet. ‘If a vessel handles 1,000 TEUs per vessel call versus one that handles 10,000 TEUs per vessel call, the bigger one saves time berthing and unberthing, deploying gangways, resources and the like.

‘And with consortiums working together, it may mean several such vessels at one time. They can only work with certain ports in the world, not to say in South China.’

At the same time, HPH Trust’s ports are more than capable of catering to smaller vessels.

This is key especially when HPH Trust, in its wrap up of the financial year ending Dec 31, 2011, said that it would grow its market share and volumes coming from faster growing economies in the Far East, Africa, Oceania and South and Central America that typically feature much smaller vessels.

‘That is not a problem. In Yantian, we have the biggest contiguous berth frontage. The deepwater handles the very big vessels, and we have other berth space that handles the smaller ones,’ said Ms Hai.

The decision to grow volumes out of faster, newer economies, said Ms Hai, is a logical one because of their growth rates.

She added: ‘And because of the growth of international transshipment, you want to have more coverage in services instead of covering just one or two areas. That’s how international transshipment is made viable.’

Ms Hai also cautioned that while they are working with its existing set of ocean carrier customers, channelling more volumes from these newer markets involves ‘scheduling and rescheduling and this takes time’.

With the movement westward of Chinese manufacturing, there may come a time when ships may bypass the port of Hong Kong entirely and opt to transship at closer-by South Chinese ports – but the time is not now.

‘Manufacturing may be going west, slowly. But what has happened over the 10-12 months, the Pearl River Delta is still the main cargo source,’ she said.

‘Hong Kong has found its own niche: it has a free port status that is unique – there’s nothing like that in China. And Hong Kong is right next to China, so it gives Hong Kong a very competitive edge. Hong Kong has a long way to go. It may not see double-digit growth, but its growth will be sustainable.’

Since HPH Trust’s debut on the Singapore Exchange last March, the stock has lost over 20 per cent from its IPO price of US$1.01. It closed trading yesterday at 78 US cents.

However, Ms Hai and CFO Ivor Chow are more than content with it choosing Singapore as a listing location, over Hong Kong, which had since then amended its rules to allow business trust structures to list.

Said Mr Chow: ‘Hong Kong tends to focus on PE and Ebitda, and Singapore investors tend to understand what yield is about. It’s actually more conducive in Singapore, investors ask better questions.’

However, HPH Trust continues to evaluate rule changes in Hong Kong that may allow it to float its units there one day.

‘If and when suitable, we would like to be back home as well,’ said Mr Chow. ‘A lot of investors in Hong Kong like to be investing in us, and it’s not as easy for them to be investing in Singapore. We did want to IPO in Hong Kong at first, but it was not possible at the time.’

DPU above expectations; raise TP

Impressive cost control. HPH Trust (HPHT)’s FY11 DPU of 37.70HK¢ was 11% ahead of our forecast (33.80HK¢) but slightly below street estimate of 39.30HK¢. The better-than-expected DPU was attributed to HPHT’s impressive cost control and low interest rate. Following the results, we raise FY12F DPU by 9% due to lower interest rate on its debts and higher 2012 throughput volume growth of 6% and 3% for HIT and Yantian respectively. We are forecasting 47.22HK¢ (6.07US¢) dividend in FY12, which implies a yield of 8.1% at its last close. We upgrade our DCF-derived TP to US$0.83, based on 8% WACC and 2% long-term growth rate (for period beyond 2015). Maintain BUY.

Extension of peak season lifted 4Q11’s volume. HIT’s 4Q11 volume showed strong growth of 10.6% YoY while Yantian registered 5.5% YoY in 4Q11. For the period between 16 Mar to 31 Dec 2011, HIT and Yantian grew by 5.5% and 0.6% respectively. HIT’s growth was ahead of its peers in Hong Kong. Yantian’s ASP was positive, up 4-5% in 2011 vs. 1% drop for HIT’s ASP (on our estimates).

Maintaining FY12 DPU guidance of 51.24HK¢. In the results teleconference, management set a high target for 2012 by maintaining its IPO DPU forecast of 51.24HK¢, close to a 11% YoY increase (seasonally adjusted). This will be driven by 5-7% throughput growth and 1-2% ASP growth. We think the target is slightly ambitious given its ports could see 5-6% increase in cost per TEU from inflationary pressure. Our DPU target is 8% below management’s guidance.

Other developments: HPH has refinanced the HKD$2.8b loan for Yantian and the next debt maturity is in 2014. The company may look to take advantage of the low interest rates by making an early move to refinance some of its debts maturing in 2014 from bonds or other instruments.

Hutchison Port trust’s Q4 profit in line with forecast

HUTCHISON Port Holdings (HPH) Trust posted net profit attributable to unitholders of HK$608.2 million (S$98.5 million) for the three months ended Dec 31, 2011, in line with the HK$592.9 million forecast. The local bourse’s heftiest listing last year also announced distribution per unit (DPU) of 23.4 HK cents for the July-December 2011 period.

As for the full-year period – starting on constitution date Feb 25 – the trust’s net profit attributable to unitholders was HK$1.97 billion, 4.8 per cent higher than projections of HK$1.88 billion.

Full-year DPU was 37.7 HK cents, higher than the 37.4 HK cents projected in the IPO prospectus.

HPH’s fiscal 2011 effectively began on March 16 as acquisition of its assets and business undertakings were completed then.

While HPH hit its distribution targets, its topline lagged behind its targets, affected by the economic slowdown in the US and Europe last year.

Revenue for the October-December period was HK$3.1 billion, against the expected HK$3.2 billion. Similarly, for the fiscal year, HPH’s revenue was HK$9.7 billion, about 5 per cent lower than the $10.2 billion set out in the IPO prospectus. At the same time, HPH Trust managed to increase throughput at its ports by 4 per cent year-on-year.

In the final quarter, its Hong Kong terminals did the heavy lifting, with throughput 3.5 per cent higher than forecast due to the longer-than-expected peak season.

Yantian’s throughput, however, was 9.4 per cent below projections as the port is more reliant on the US and European market.

As a result of softer demand from Europe and the US, the chief executive officer of HPH’s trustee-manager, Hai Chi-Yuet, said the trust will focus on increasing volume growth on transshipment, intra-Asia trade and certain high-growth trade routes out of the Middle East, Oceania, Central and South America and Africa.

‘We are trying to get business out of these routings and we are in discussions and negotiations with shipping lines,’ she said in a teleconference yesterday.

In 2012, Ms Hai expects the portfolio ports to do well in the face of more mega-sized vessels being deployed this year and shipping lines entering into vessel-sharing agreements. ‘The consolidation and bigger vessels mean that shipping lines use less vessels with capacity remaining largely same. It is good for us because we like to handle less vessels, but each vessel with more boxes,’ she said.

HPH Trust ended yesterday a cent lower at 74.5 US cents.

Strong Dec11 throughput

Yantian throughput up 13.5% in Dec11. Buoyed by early restocking activity ahead of the Chinese New Year factory closures – CNY falls two weeks earlier than in 2011 -, December throughput at Yantian Port grew 13.5% YoY. This took 2011 volume up 1.3% to 10.26m TEUs, slightly better than our zero growth assumption. This also supports our hypothesis that a weaker-than-usual 3Q11 peak season would be followed by a stronger-than-usual 4Q11, which volume only fell 6% QoQ vs 15% drop in 4Q10. Hence, 2011 container volume was more evenly spread out as shippers moved to just-in-time shipments. At Hong Kong port, Dec11 volume grew 1.4%, while it grew 2.5% at Kwai Tsing terminals. And for full year 2011, Hong Kong port saw 3% throughput growth while Kwai Tsing terminals registered 2% growth. Hence, we estimate volume at HIT Terminals at Kwai Tsing grew 3-4% YoY in 2011, within our expectation.

Stable outlook. The decent volume growth in 4Q11 should help the Trust to meet its DPU guidance for FY11; we expect 3.0 US cts for 2H11. DBS economist forecasts 2.3% GDP growth for the US and zero growth for Eurozone in 2012. Hence, HPH Trust’s volumes in Hong Kong and Yantian should show modest growth this year. Given strong operating margins and cash flows, we assume the Trust would pay c.6.0 UScts DPU next year, similar to 2011 distribution. Our estimate is about 10% lower than initial guidance as we imputed weaker throughput growth and smaller potential tariff hike.

Attractive yields, maintain BUY. Despite the recent share price rally, HPH Trust is still offering attractive 8.5-9.0% prospective yields. Our US$0.85 TP is based on DCF metric (7.8% WACC) and translates into 7% target yield. HPH Trust is among the top yielding stocks in Singapore (excluding special dividends). With US data picking up and retail inventory-to-sales ratios still at historic lows, restocking activity should pick up and lead to stronger growth as early as 1H12, which could drive up the share price. We might see HPH Trust quoted in S$ on the SGX in the near term, which would broaden its investor base.

Update: September 2011 operating statistics

Another month of disappointing data at Yantian. Yantian Port’s throughput volume fell 4.6% y-o-y in Sep 2011 to 911,400 TEUs, the second consecutive month of negative y-o-y growth. Volume was also down 9% m-o-m, which is not unusual seasonally, but we were expecting a delayed peak season this year, which has evidently not materialised. YTD in 2011, Yantian Port’s throughput is flat y-o-y, compared to initial management guidance of 7-8% growth, and our current estimate of 2% growth. Slower exports to US and Europe, which account for close to 70% of Yantian volumes, have been the key drag.

Data from HK port caused no cheer either, as throughput growth at Kwai Tsing terminals declined by 1.7% for Sep 2011, and YTD growth now stands at 1.8%. However, we believe HPT should still be on track to achieve our volume growth assumption of 4% in FY11. Volume at JV terminal COSCO-HIT registered 4.5% throughput growth in Aug (YTD growth of 6.7%).

Discount the peak season this year. Given the data from ports and container liners so far in 3Q11, the peak season has been much worse than expected. Trade activity picked up somewhat in August but again moderated in September, as retailers remained cautious in building up inventory ahead of the holiday season, in light of the prevailing economic uncertainties. The traditional lull period in 4Q will likely be better than usual though, as retailers shift to justin-time shipments. But that again might benefit air cargo more than containers.

Maintain BUY, immaterial change in DPU estimates. Following this set of disappointing data, we would likely lower our FY11 volume growth projections at Yantian Port to 0% from 2% earlier. Lack of pricing competition and gradual shift to RMB pricing at Yantian should help support tariffs, though. Our DPU projections for FY11/12 are thus, likely to be lowered by another 2% and 1%, respectively to 5.5UScts (annualised) and 5.9UScts. This still implies a yield of 8.9-9.6% at current price, which is very attractive. We maintain our BUY call on the stock, but will finalise the numbers following the 3Q11 results and further discussions with management. Our DCF-based TP remains at US$0.95.