Hutchison Port Holdings Trust - OCBC Investment 2018-07-24: Volatile, But Too Cheap Already 

Hutchison Port Holdings Trust - OCBC Investment Research 2018-07-24: Volatile, But Too Cheap Already  HUTCHISON PORT HOLDINGS TRUST SGX:NS8U

Hutchison Port Holdings Trust - Volatile, But Too Cheap Already 

  • Expect near-term price weakness. 
  • Impact on US tariffs not yet apparent. 
  • Attractive risk-reward as at 23 Jul. 

FY18F DPU guidance adjusted downwards – expect price weakness 

  • In our last report on Hutchison Port Holdings Trust (HPHT) dated 17 Jul (Hutchison Port Holdings Trust - Diving Like Neymar; Don’t Overreact |, we expected a relatively weak 2Q18 set of results and encouraged investors to wait before collecting units.
  • HPHT’s 2Q results were indeed weak and largely within expectations. Notably, management has lowered full-year DPU guidance from 20-23 HK cents to 17-20 HK cents. Given the lowered guidance, we expect share price weakness following last night’s results. 

Effect of US tariffs not apparent in 2Q18 

  • 1H18 throughput of HPHT’s ports is 1% below last year’s, with YICT’s up 2% y-o-y and Kwai Tsing’s down 3% y-o-y. In 2Q18, outbound cargoes to the US continued to grow by 3%, which seems to suggest little impact from the US-China trade spat.
  • On the other hand, outbound cargoes to the EU declined by 3%, mainly due to a strong base in 2Q17. We maintain our full-year throughput growth assumption of -3% for Kwai Tsing while we reduce that for Yantian from +4% to +1%. 2Q ASPs increased in both Hong Kong and Shenzhen, and we expect ASPs to remain largely stable for the rest of the year. 

Trade war is certainly not great in the longer term… 

  • The longer-term ramifications of a trade war are certainly unfavorable to HPHT. Most importantly, US retailers and distributors may choose to switch to cost-competitive alternatives from other countries thereby reducing its reliance on CN manufacturers.
  • One saving grace is that southern China is a manufacturing hub for many lower-cost items (such as toys or clothes) – items for which US customers may be less price sensitive, and for which increased costs may be easily passed to. 

But HPHT continues to look significantly oversold 

  • The market treats HPHT as a proxy to trade tensions, and we continue to expect high volatility heading into the US mid-term elections. Nonetheless, we believe the stock is oversold. 
  • We currently place a 70% probability on HPHT’s YICT throughput falling 10% in 2019, an assumption we deem to be sufficiently conservative given that YICT’s outbound cargoes to the US only account for ~30-40% of its total throughput.
  • After adjustments, our fair value drops from US$0.37 to US$0.36 which is 31% above 23 Jul’s close. HPHT is currently trading at a 9% FY18F yield. Maintain BUY

Deborah Ong OCBC Investment Research | 2018-07-24
SGX Stock Analyst Report BUY Maintain BUY 0.360 Down 0.370