Look forward to better data

• Yantian numbers in August make for poor reading; subsequent months should be better

• Trade contraction is unlikely in 2012; hence current valuations look oversold

• Maintain BUY with lower TP of US$0.95, as we lowered our FY11/12 DPU estimates by 4.5%/6.5%

Yantian numbers disappoint. Yantian Port’s throughput volumes fell 6.9% y-o-y in August 2011. While the drop was expected, the quantum surprised us. YTD in 2011, Yantian Port’s throughput was up just 0.5% y-o-y, well below initial expectations. In view of the weaker peak season, and ongoing economic uncertainties, we thus cut our volume growth assumptions at Yantian to 2% and 4% for FY11 and FY12. We also lower our growth assumptions at HIT by 1ppt, and flatten our tariff growth assumptions, resulting in 4.5%/6.5% decline in FY11/12 DPU projections, to 5.7UScts (annualised) and 6.0UScts respectively.

But we continue to expect only sub-par growth and not negative growth in GDP/trade. Given Yantian Port’s exposure to export volumes to US and EU economies, growth are expected to remain anaemic in the near to medium term, but we are decidedly not looking at the kind of recession that HPH Trust’s current valuations seem to imply. Our economist believes that in terms of numbers, the US could grow at 2.3-2.4% (QoQ, saar) rate in 3Q11 and 4Q11, which is below average (3.0%) but a far cry from recession. Real consumption growth in the US is on track at 2.4% (QoQ, saar) in 3Q11 and retail inventory to sales ratios remain at alltime lows.

Maintain BUY, TP cut to US$0.95. Even with our lower DPU projections, the Trust is still trading at attractive 8.5-9.0% yields. We think this offers a very good entry point with limited downside even in the case of a deep recession and contraction in trade. We reckon current share price is pricing in a DPU (and by extension, EBITDA) decline of close to 22% in FY12. Compare this to 2009 – when global container trade contracted by an exceptional 9% – and EBITDA had declined by only 17%.

Have a little faith in HPH Trust

THE thing about businesses that bill themselves as cash cows is that cows are plodding creatures. In good times, this was not a problem for Hutchison Port Holdings (HPH) Trust.

All it had to do then was be the yawning maw at the gateways of Hong Kong and China, sucking in port fees from the deluge of cargo passing through its jaws. But times are lean now, and in lean times, global trade is part of the fat that falls away first. Since HPH Trust was listed in March this year, the business trust has fallen about 36 per cent from its listing price, closing at 65 cents yesterday.

It would be tempting to offer, ‘It’s the economy, stupid’ as an explanation, but China Merchants Holdings and Cosco Pacific – two of HPH Trust’s competitors – lost only 30 per cent and 29 per cent of their value in the same period.

While a significant part of the selldown had been industry-related, investors are – for reasons that are not entirely clear – taking a more narrow view of HPH Trust, relative to its competing port operators.

To be sure, there are some causes for concern that have been well-visited over the past few months. The ports in the trust’s portfolio have seen the direct impact of slowing global trade, with revenue falling about 2.6 per cent short of the forecast figure for the period ended June 30, 2011 – even as it grew year on year.

The distribution that is denominated in Hong Kong dollars remained a bugbear, as the US dollar – to which the HK dollar is pegged – continued on its merry way southwards.

Even so, HPH Trust’s unit price has come down, making another bugbear more of an advantage – its distribution yield. When it was first listed, the yield was knocking about in the 5-6 per cent range.

It was consequently sniffed at, since real estate investment trusts offered comparable – and even higher – rates. Shipping trusts, as well, offered rates in the region of about 12-13 per cent.

Now, however, at 65 cents, the trust’s yield – estimated at about 5.9 US cents for a full year – is about 9.1 per cent. This far outstrips the average yield offered by Reits in the 5-7 per cent neighbourhood. You could compare it to the shipping trusts that offer two-digit yield percentages, but analysts will wearily tell you that the comparison is unfair.

Shipping trusts have ships that are depreciating assets, while ports sit on land that appreciate over time if no one does anything silly.

The higher yield that investors get from shipping trusts is also something of a stress premium, given the myriad uncertainties that exist in the form of refinancing and counterparty risks.

There is the question, however, of whether HPH Trust will keep up its promise of paying out 100 per cent of distributable income or if distributable income will shrink, especially if trade worsens.

In pricing in this eventuality, however, the market appears to have crossed the line by so much that the line is now a dot, according to some analysts’ estimates.

Volume, while not expected to grow at the 7-8 per cent clip previously expected, will probably still grow at a lower rate.

‘Current valuations seem to be implying negative trade growth and negative Ebitda growth of almost 20 per cent in FY2012, which we don’t think is a realistic possibility even if the world goes into similar levels of recession as in 2008-09,’ said DBS Group Research analysts Suvro Sarkar and Paul Yong in a report last month, when the stock hit 67.5 US cents.

They have a ‘buy’ rating on the stock with a target price of US$1.05.

HPH Trust does look rather dear, relative to its rivals – Hong Kong-listed Cosco Pacific and China Merchants Holdings. While HPH Trust trades at a price-to-earnings (PE) ratio of the high teens, Cosco Pacific and China Merchants have PE ratios in the high single-digits.

This disparity in PE ratios, however, is balanced out by the edge that HPH Trust holds in terms of dividend yield – 9.1 per cent at its current price, compared to 4.55 per cent and 4.5 per cent for China Merchants and Cosco Pacific, respectively.

At this price, HPH Trust is a relatively superior dividend play and when trade turns around, potentially a capital gains one as well.

The call that the investor will have to make, however, is how much a depreciation in the US dollar would erode the gain in dividend. By the time the greenback loses enough value to eat through a dividend yield of 9 per cent, perhaps an investment in HPH Trust will be the least of one’s worries.

COSCO Pacific July 2011 operating data – implications for HPH Trust

Operating statistics for ports co-owned by Cosco Pacific and HPH Trust indicate that Yantian throughput volumes fell 2.9% y-o-y in July 2011. This is in line with our expectations as we have already highlighted that y-o-y growth rates in July and August will not make for good reading, owing to the early onset of the peak shipping season in 2010. We expect the 2011 peak season to arrive later, end later and also be weaker than previously estimated, and have already reduced our full year FY11 volume growth projections for Yantian to 4% and HK to 5% from 6-7% previously, in our last report.

A look at the chart below illustrates the point about how we feel volumes will play out at Yantian Port in 2011, compared to 2010. As highlighted earlier, the peak in 2011 will be more traditional months of August to October, rather than the July-August peak we saw last year. July is already a much better month than June 2011, with volumes up 11% m-o-m.

The operating numbers also indicate that volumes at HPH Trust’s HK JV (COSCO-HIT) grew an impressive 8.7% y-o-y, and YTD performance at COSCO-HIT is above expectations (YTD throughput growth of 7.6%). As to data from Hong Kong port, we note that throughput growth at Kwai Tsing terminals came in at 2.8% for July 2011, and YTD growth stands at 2.9%. Given that competitor MTL has seen Maersk volumes shift partly to Nansha, we estimate HIT throughput growth to be comfortably tracking our 5% growth rate assumption for FY11.

Thus, we would prefer to look beyond the near term weakness in Yantian Port’s operating numbers and advise investors to accumulate the Trust at current bombed-out valuations (8.0% FY11 and 8.7% FY12 dividend yield). Current valuations seem to be implying negative trade growth and negative EBITDA growth of almost 20% in FY12, which we don’t think is a realistic possibility even if the world goes into similar levels of recession as in 2008-09. All we are expecting at this point of time is potentially slower-than-previously estimated economic growth and trade growth in the near-to-medium term, which does not justify the sharp selldown in HPH Trust’s shares.

Maintain BUY with TP of S$1.05.

DPU in line; deep value at these levels

At a Glance

• DPU of 14.3HKcts (1.84UScts) for first period in FY11 in line with our estimates and above IPO guidance

• Lower-than-expected revenues offset by lower operating and interest expenses

• FY11 DPU estimate unchanged; Lower FY12 DPU by 3% to reflect economic concerns

• Maintain BUY; TP adjusted lower to US$1.05

Comment on Results

No surprises in DPU. Revenues of HK$3400m for the 3-and-half month period (16 Mar to 30 Jun 2011) was lower than expected on account of disappointing throughput growth at both ports, but net profit and distributable cash was boosted by cost and interest savings. Staff costs and Trust expenses were well contained, and depreciation and amortisation were also lower than expected, though these were offset by higher tax recognition (deferred tax credits). Interest costs came in significantly below estimates as floating interest rates remained much lower than our conservative assumptions. Income from associates and JVs was boosted by better performance at COSCO-HIT, where throughput growth outperformed assumptions.

Recommendation

Slightly lower growth trajectory but combination of yield and growth still attractive. For the period under consideration, throughput growth disappointed, with HIT and Yantian Port registering 4.6% and 2.1% y-o-y growth, respectively, lower than our 6-8% initial estimates. And there is no evidence of a strong peak season as yet, owing to economic uncertainties in the US and EU. As our economist cuts US GDP growth to 1.6% in 2011 and 2.5% in 2012, we revised down our volume growth assumptions in FY11/12 to 4-5%. However, ASP trends remain intact and since cost savings will largely offset volume weakness in FY11. We keep our 2H11 DPU estimate of 2.9UScts unchanged but cut our FY12 DPU estimate by 3% to 6.4UScts.

Maintain BUY with revised DCF-based TP of US$1.05 (lower DPU CAGR of 7% over FY11-15). Management re-iterated their commitment to pay out 100% of distributable income. Current valuations – ~8% dividend yield is even higher than what some infrastructure and shipping trusts are trading at – look unjustifiably low given HPH Trust’s superior asset profile, earnings quality, balance sheet strength and organic growth potential.

HPH Trust posts HK14.3cents DPU

It reports net profit attributable to unitholders of HK$653.7m for Feb 25 – June 30

HUTCHISON Port Holdings (HPH) Trust posted a net profit attributable to unitholders of HK$653.7 million (S$101.2 million) for the period Feb 25 (when HPH was constituted) to June 30.

It also announced a distribution per unit (DPU) of 14.3 HK cents.

Compared to the forecast net profit of HK$577.6 million in the trust’s initial public offering (IPO) prospectus, the actual profit figure is 13.2 per cent higher. This works out to earnings per unit of 7.51 HK cents.

Including minority interests, net profit was HK$1 billion, 10 per cent higher than the forecast HK$915.8 million.

Although the results announced yesterday – its first since its listing on March 18 this year – were for the period Feb 25 to June 30, its operating activities were recorded from March 16 onward because the acquisition of the assets and business undertakings of its initial portfolio was only completed on March 15.

Operating profit for the period was HK$1.23 billion, 4 per cent more than had been forecast for the same period.

Revenue and other income for the period stood at HK$3.39 billion, 3 per cent lower than the HK$3.49 billion forecast in the prospectus.

Container throughput at Hongkong International Terminals (HIT) and Yantian International Container Terminals (Yantian) – which are in the trust’s portfolio – came in 2.1 per cent and 2.6 per cent below forecast.

This was attributed to ‘throughput growth being weaker than expected, particularly in the Europe and US trade lanes’, the trust said in a statement yesterday.

On a year-on-year basis, however, the trust saw throughput for HIT and Yantian up 4.6 per cent and 2.1 per cent, respectively.

Yesterday, HPH Trust’s unit price closed 3.9 per cent down, with 52.4 million units changing hands, from 76.5 US cents to 73.5 US cents before the release of the results.

A reason for its price downtrend has been market worries over weak volume growth and the trust’s exposure to the weak US dollar.

A report by UBS Investment Research that was issued on Monday gave the trust a ‘buy’ rating with a target price of US$1.10.

‘We find current yield attractive at more than 8 per cent in 2012E, while we believe it is not likely for dividends to miss although volume missed,’ the report said.

A Bank of America Merrill Lynch report, however, cut the trust’s earnings forecast by 11 per cent for 2011 and by 12 per cent for 2012 – with an ‘underperform’ rating and a 70 US cent target price on the stock, according to Reuters.

Since the trust listed on the Singapore Exchange in March with an offer price of US$1.01 in a US$5.5 billion IPO, its price has trended lower.

Against its first-day closing price of 95 US cents, the business trust has shed almost 23 per cent of its unit price to date.