SINGAPORE (Apr 16): Fears of the effect from the US-China trade spat on Hutchison Port Holdings Trust are overblown, says research house OCBC, just like the stock's overreaction to a recent move by the China government to cut port prices.
Assuming the worst-case scenario where the US-China trade spat puts a complete halt to goods targeted in the tariffs passing through its ports, HPH Trust should escape relatively unscathed, says OCBC.
In a Monday report, lead analyst Deborah Ong calculates goods targeted in the proposed tariffs make up around 2% of Yantian International Container Terminals' (YICT) throughput and 1% of throughput of HPHT Kwai Tsing, which is collectively made up of Hongkong International Terminals (HIT), COSCO-HIT and Asia Container Terminals (CAT).
In a scenario which OCBC considers unlikely, 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, Ong estimates that the impact on HPHT should be less than 2%.
Following NDRC’s announcement of a 30% cut in the “list price” for Yantian ports, HPHT’s unit price fell 10% the week, even though OCBC asserted the measure would be largely insignificant to HPHT’s operational outlook.
Year to date, HPH Trust units have fallen by 19.5% to 33 US cents.
"We believe 1Q18 results indicate that these fears have indeed been overblown. Revenue and TEU for YICT fell only 1% y-o-y 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," says Ong.
Overall, HPH Trust's 1Q18 results were in line with expectations. 1Q18 revenue was up 3.5% y-o-y to HK$2.7 billion ($451 million) or 23.4% of OCBC's full-year forecast, consistent with seasonal variation.
See: Hutchison Port Holdings Trust's 1Q earnings fall 12.9% to $24.3 mil
1Q18 PATMI came in at HK$145.4 million or 23.3% of OCBC's full-year forecast, down 12.9% y-o-y, mainly due to the increase in interest costs. Throughput for HPHT’s ports increased 5% y-o-y during the quarter, with YICT’s throughput increasing 9% due to growth in empty and transshipment cargoes, and Kwai Tsing throughput increasing 1% on better transshipment volume.
Looking ahead, Ong believes the key catalysts for HPH Trust’s unit price rerating include the dissipation of NDRC-related fears from tariff stability, a lifting of trade spat worries from continued throughput growth and a slowdown in y-o-y average selling price declines in 2H18 from the low base in 2H17.
Management continues to guide 20-23 HK cents for FY18 DPU.
OCBC has a "buy" on HPH Trust with a fair value of 43 US cents. This represents a 30.3% upside against HPH Trusts' current unit price and gives an 8.1% DPU yield for FY18.
