Hutchison Port Holdings Trust - OCBC Investment 2018-02-06: Better Than The Headlines

Hutchison Port Holdings Trust - OCBC Investment 2018-02-06: Better Than The Headlines HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Hutchison Port Holdings Trust - Better Than The Headlines

  • Fair Value increased to US$0.43.
  • Overreaction to NDRC announcement.
  • Look at HPHT as a whole.

Results within expectations 

  • Hutchison Port Holdings Trust (HPHT)'s FY17 revenue was down 3.0% y-o-y to HK$11.6b, or 98.1% of our full-year forecast, with 4Q17 revenue down 3.4% y-o-y at HK$2.9b. Excluding Hongkong International Terminals (HIT)’s rent and rates refund in FY16, FY17 PATMI was HK$2.2b, down 15% y-o-y. 
  • DPU for FY17 came to 20.60 HK cents, down from 30.60 HK cents in FY16, and at 98.1% of our full-year forecast. 
  • All-in-all, full-year throughput for HPHT’s ports increased 8% y-o-y, with Yantian International Container Terminals 盐田国际集装箱码头 (YICT)’s throughput increasing 9% due to growth in US and transshipment cargoes, and Kwai Tsing throughput increasing 5% on the back of stronger transshipment volume.

7% price correction on 2 Feb too steep 

  • As announced on 1 Feb 2018, the National Development and Reform Commission (NDRC) has reduced the “list price” or reference tariff rate for origin and destination foreign trade containers at Shenzhen – Yantian ports from RMB 1400/TEU to RMB 980/TEU. (see 部分沿海港口调降装卸作业费每年减轻进出口物流成本9.6亿元)
  • Though Yantian International Container Terminals (YICT) contributes ~64% to HPHT’s top-line, it contributes less to the bottom line as a 50+% owned subsidiary of HPHT. 
  • Furthermore, we estimate that YICT’s ASP is already ~50% below the new “list price” tariff, which allows the port operator some buffer in negotiations. Following this, we believe that the impact on dividends will be only slightly negative on HPHT as a whole for FY18, and that the recent share price correction has been too severe. 

Trading at 7.0% yield as at 5 Feb close 

  • Going forward, we forecast single-digit throughput growth in FY18. We also believe the bulk of sharp ASP declines is behind us (-10% in FY17) though we expect mild softness in tariff rates going forward. We have reduced our revenue per TEU growth rate for FY18 from -2% to -4%. 
  • In our view, the main headwind for HPHT is the increase in interest costs; we currently assume three rate hikes each for 2018 and 2019. The management is guiding 20-23 HK cents for FY18F. 
  • HPHT is trading at a 7.0% FY18F yield based on our forecasts (7.1% FY18F yield based on Bloomberg consensus), as at 5 Feb 2018. After rolling our estimates forward, our fair value increased slightly from US$0.42 to US$0.43. We upgrade Hutchison Port Holdings Trust (HPHT) from Hold to BUY.


Significance of YICT to HPHT. 

  • On a top-line basis, Mainland China (effectively YICT) contributes 64% of HPHT’s revenue. However, YICT contributes a significantly smaller proportion to the bottom line given the leakage in minority interests with HPHT owning a 50+% stake in YICT. 
  • Furthermore, we estimate that only 85% of the volume at YICT is import/export-related, and not all of it is laden. 

YICT ASPs significantly below new “list price” tariff. 

  • The “list price” is one of the factors on which negotiations are based, though from our understanding, HPHT’s contracted prices are not structured as discounts to the list price. Based on our understanding, contracted rates are based more on historical rates for YICT. 
  • Given the latest figures for YICT as at FY17, we estimate that YICT’s ASP is around 50% of the newest tariff price. We believe this will offer significant buffer when HPHT enters renegotiations when contracts with the shipping lines expire. 

HPHT’s unit price fell 7.3% on 2 Feb, after 1 Feb announcement. 

  • HPHT’s unit price also fell a further 1.3% on 5 Feb, though this was in line with general market weakness. We believe the price correction has been too steep, and see this as an opportunity to buy units. --

Deborah Ong OCBC Investment | http://www.iocbc.com/ 2018-02-06
OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 0.430 Up 0.420