HPH Trust - OCBC Investment 2018-06-07: Scary Waters, Hidden Treasure

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HUTCHISON PORT HOLDINGS TRUST SGX: NS8U

HPH Trust - Scary Waters, Hidden Treasure

• Highly volatile stock.
• Take a look at fundamentals.
• Attractive risk-reward.

Still room to go after yesterday’s rally

• After we re-iterated our BUY call on Hutchison Port Holdings Trust (HPH Trust) on 1 Jun (see report: Hutchison Port Holdings Trust - Scary Water, Deep Value), the stock has been up 10.9% in less than a week and up 7.0% yesterday alone. Yet, HPH Trust share price is still down 26.5% YTD mainly due to the
  1. NDRC announcement of a 30% cut in the “list price” for Shenzhen ports,
  2. US-China trade tensions and
  3. most recently, the removal which has prompted selling from index and institutional funds.
• Based on what has been announced so far, we see little impact operationally for the first two factors and no change in fundamentals following the third.

Closer look at the factors prompting HPHT’s unit price decline

• First, for NDRC, we estimate that HPHT’s Yantian is already charging below the new list price and believe 1Q18 results indicate that these fears have indeed been overblown.
• Second, with regard to the US- China trade war, the list of goods targeted in the proposed US tariffs on US$50b of Chinese goods make up < 2% of HPHT’s throughput.
• Furthermore, we believe it would be unrealistic to assume that this throughput related to these goods would cease completely as a result of tariffs.

Lower FV; still maintain BUY

• Government-related actions remain highly unpredictable and volatile. We note that it is possible for
  1. the NDRC to come back with more cost reduction measures within the logistics industry including ports, and for
  2. a worsening in the US-China trade situation.
• We keep our forecasts but after updating our beta assumptions, our cost of equity increases from 8.8% to 10.0%, such that our fair value decreases from US$0.43 to US$0.375.
• With regard to the longer term outlook for HPHT, we note that distributions are currently “depressed.” Cash that could be distributed is currently being used to voluntarily pay back HK$1b of debt (~11.5 HK cents per unit) annually from FY17 to FY21 to help offset the rise of interest rates.
• Overall, we still see significant value at current prices. As at 6 Jun’s close, there is a 22.4% upside to our fair value with an 8.8% FY18F yield. Re-iterate BUY.

A summary of the different issues HPHT faces

Issues to consider	Comments
National Development and Reform Commission (NDRC) reduces reference tariff rate Shenzhen ports from RMB 1400/TEU to RMB 980/TEU	HPHT’s unit price fell from US$0.41 on 1 Feb’s close to US$0.365 on 6 Feb and has not recovered since. We estimate that HPHT’s tariff rates are significantly below the new tariff rate issued by the NDRC and thus that the regulation should not be a large impact on HPHT as a whole. HPHT’s 1Q18 results also indicate little to no impact in terms of Yantian’s ASP. Recall that 1Q18 revenue/TEU for YICT fell only 1% YoY in 1Q18, which in turn was mainly a result of continued impact from shipping line M&A and a change in throughput mix, countered by RMB strength. We nonetheless note that there may be a possibility of NDRC coming back to implement further cuts and have adjusted our cost of equity accordingly.
Trade war tensions	The list of goods targeted in the proposed US tariffs on US$50b of Chinese goods make up around only 2% of YICT’s throughput and only 1% of HPHT Kwai Tsing’s throughput, based on analysis done by HPHT’s management of the product types they handle. Even if all of the throughput related to these goods were to cease completely as a result of the tariffs (which may or may not be implemented), we estimate that the impact on HPHT is less than 2%.
Demotion from MSCI Singapore Index	HPHT’s unit price fell from US$0.33 as at 25 May’s close to US$0.275 on 31 May 2018, the day on which the MSCI changes became effective. As far as we know, there was no news/updates suggesting a change in company fundamentals during the period. We re-iterated our BUY call on 1 Jun 2018. HPHT has since rallied 10.9% to US$0.305 as of 6 Jun’s close.
Throughput going forward	We expect positive throughput growth for the whole of FY18, especially for Yantian. Recall that in 1Q18, HPHT’s Yantian throughput increased 9% while Kwai Tsing throughput increased 1%. 2Q18 throughput may appear weaker on a YoY basis as 2Q17 throughput was boosted by temporary phasing-in-phasing-out business.
Tariff rates going forward	We expect tariff rates to be weaker in 1H18 but to strengthen in 2H18 relative to the low base in 2H17. We currently project a 5% decline in overall tariff rates.
Voluntary debt repayment	With regard to the longer term outlook for HPHT, note that distributions are currently “depressed.” Cash that could be distributed is instead being used to voluntarily pay back HK$1b of debt annually from FY17 to FY21 to help offset the rise of interest rates. HK$1b translates into roughly 11.5 HK cents for each unit.

Source: OIR

Deborah Ong OCBC Investment | https://www.iocbc.com/ 2018-06-07

SGX Stock Analyst Report BUY Maintain BUY 0.375 Down 0.430