Hutchison Port Holdings Trust

Hutchison Port runs into headwinds

Goh Eng Yeow
The Straits TimesMonday,
Dec 16, 2013

THERE are no signs of the traditional Christmas cheer awaiting shareholders of Hutchison Port Holdings Trust (HPHT), the port operator controlled by Asia's richest man Li Ka Shing. The shares have fallen by around 21.5 per cent since late October, when HPHT announced an 8.4 per cent drop in third-quarter profits to HK$539 million (S$87 million) because of weaker container traffic and higher labour costs. This week, the counter suffered a sell-off on Wednesday that sent the price to a two-year intra-day low of 60 US cents. Traders said the plunge could be due to funds readjusting their portfolios before the year-end, but that offers no consolation to long-suffering investors who have been loyal supporters since HPHT listed in March 2011. Even though the price recovering to 64 US cents on Friday, it is still a hefty 36.6 per cent below the initial public offering price of US$1.01 in 2011. Analyst reports right after the downbeat quarterly results suggested that the counter might see only limited upside in the months ahead. OCBC Investment Research, for example, said the port operator's tax rate might rise significantly next year as a tax holiday expires for some phases of its Yantian Port in Shenzhen. It will also feel the full-year impact of the 9.8 per cent increase in wages that subcontractors hammered out with port workers in May, following a high-profile protest by striking workers outside Mr Li's home in Hong Kong. The greatest challenge for HPHT will come from Shanghai Port, Hong Kong's rival up north, which is pressing ahead with its free trade zone. Standard Chartered Equity Research analyst Claire Teng said in a recent report: "We expect Shanghai Port to be the main beneficiary of the free trade zone - the policy should support Shanghai's position as one of the largest transshipment hubs in Asia." However, for the short term, she noted, HPHT's management believes implementation of the free port policy could take several years because of political and national security concerns. As a result, the impact of Shanghai on HPHT might be limited over the next two years. Many companies are attracted to the Shanghai free trade zone because they hope that the strict capital controls now implemented in China will be relaxed to make it easier for them to take yuan out of the country. Ms Teng noted that HPHT should be able to grow its throughput next year because of increased transshipments via Yantian as global trade improves. "We believe that the 2013 dividend of 40 HK cents guided by management is achievable," she wrote. HPHT already paid out an interim dividend of 18.7 HK cents in the first half of the year. For the previous financial year, it made a dividend payout of 51.24 HK cents - See more at: http://business.asiaone.com/news/hutchis...ptWvb.dpuf

(Not Vested)

I've learnt through the years to watch what Superman does, rather than what he say. Since he is Superman, it is probably not good to take an opposite long term view from him, though very short term he may leave some pocket money on the table.

http://www.hellenicshippingnews.com/News...71ca3f6e07

G6 expansion just the tip of the iceberg


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In this article, I am more interested in the ports of call than the shippers capacity.

Although not scientific, what could see all loop of call go to shanghai port except one that go straight to Japan. Out of the 13, yantian and HK appear in six.
Singapore appear only in 3?

UOB released a short monthly report on ports on China and its listed peers including HPHT:

http://research.uobkayhian.com/content_d...8b3234d997 [Report]

Cosco Pacific does seem to be interesting on a PE basis.

(Not Vested)

HPHT results are out, at first glance, thing look really bad:

http://infopub.sgx.com/FileOpen/HPH_Trus...eID=274099

What I feel puzzling is the divergence in the performance of earnings and cash flow.

Profits FY is 3000 mio HKD compared to 3500 mio HKD a year ago (Before accounting for minority interest)

But operating cash flow is
5.1 billion HKD compared to 4.4 billion HKD

Can I ask a few accounting questions here?

How is cash generated from operations calculated?
It is not Operating profits plus depreciation and ammortization?
Has it already taken into account operating expenses, cost of services, etc.

It seems quite puzzling and amazing to me that expenses, cost of services all increase but operating cash flow can still improve

Thanks for the help...

(12-02-2014, 09:23 AM)Greenrookie Wrote: HPHT results are out, at first glance, thing look really bad:

http://infopub.sgx.com/FileOpen/HPH_Trus...eID=274099

What I feel puzzling is the divergence in the performance of earnings and cash flow.

Profits FY is 3000 mio HKD compared to 3500 mio HKD a year ago (Before accounting for minority interest)

But operating cash flow is
5.1 billion HKD compared to 4.4 billion HKD

Can I ask a few accounting questions here?

How is cash generated from operations calculated?
It is not Operating profits plus depreciation and ammortization?
Has it already taken into account operating expenses, cost of services, etc.

It seems quite puzzling and amazing to me that expenses, cost of services all increase but operating cash flow can still improve

Thanks for the help...

I think Operating profits plus depreciation and ammortization will give you a rough estimate of "operating cash flow before change in working capital". Adding in that "change in working capital" will then give you "cash from operation". HPH results don't show these figures in detail.

Disclaimer: Not an accountant.

(12-02-2014, 09:23 AM)Greenrookie Wrote: HPHT results are out, at first glance, thing look really bad:

http://infopub.sgx.com/FileOpen/HPH_Trus...eID=274099

What I feel puzzling is the divergence in the performance of earnings and cash flow.

Profits FY is 3000 mio HKD compared to 3500 mio HKD a year ago (Before accounting for minority interest)

But operating cash flow is
5.1 billion HKD compared to 4.4 billion HKD

Can I ask a few accounting questions here?

How is cash generated from operations calculated?
It is not Operating profits plus depreciation and ammortization?
Has it already taken into account operating expenses, cost of services, etc.

It seems quite puzzling and amazing to me that expenses, cost of services all increase but operating cash flow can still improve

Thanks for the help...

It is likely due to working capital management. The NPAT + Dep + Amort will give you the Ops Profit before Working Capital (assuming interest expense is included in the OCF).

It cost HPHT HK$3.48 billion to pay out 40 HK cents dividend annually. The FCF generated this year is still insufficient to pay both unitholders and minority investors alone.

Do you foresee a recovery in NPAT and OCF next year ? Perhaps the M&A and strikes did result in some one-off costs.

http://research.uobkayhian.com/content_d...adf1e49a1b [UOB Kay Hian Report]

(Not Vested)

There is a research report from OCBC that mentioned that capex for 2014 will be in the range of 1.5 billion to 2 billion. This is to make up for the past 2 years of lower than expected development of Yantian West Phase2.

UOBkayhian however expect HPHT to continue to hold off capex for Yantian.

To sustain current distribution to both unitholders and minority owners, FCF should be 5.4 billion. OCF is only 5.1 billion.

If we take into consideration capex of 1.5 billion, OCF need to be 6.9 billion.

Almost 30% improvement in operating numbers for current distribution to be on a sustainable footing without finance engineering.

Tough call, they could continue to push off capex, or take loans for capex, and top up shortage with existing cash.

If operating numbers improve by 10% but they keep capex to 700 million or lower, this it is quite possible to maintain the payout.

Not impossible to maintain payout for 2014, but if you look further, out look is bleak, unless you believe operating numbers can improve by 30% and more...

Based on the guidance from that UOBKH report, I estimated a FY14 DPU of 35HKcents assuming zero change in WC and same level of CAPEX without "top-up" from borrowed money. The problem is HPH has been topping up the DPU from borrowed money for the last three years. Since HPH guided that there will continue to be a gap between profitability and cash flows in FY14 (I assumed that means negative WC), they will continue to do so next year.

I see strong wind blowing against it so will probably divest first and see how it perform in the next Q.

(still vested but waiting for opportunity to divest)

GPD, I have the same conclusion as you. Below is a write-up I did for my blog. Comments welcomed from any buddies

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Market has given HPHT the thumb down for it Q4/full year results.

NPAT and NPAT attributable to unitholders for the 4th quarter was 34% and 47% lower than last year. It seems like operations are deteriorating. First some number crunching.

1) OCF is 5.1 billion HKD compared to 4.4 billion a year ago. Q4 OCF is 1.4 billion.

2) Yantian did show better throughput of about 1% but is offset by the 12% decline in HIT ports.

3) There were several one-off items, below are the items and the amount

a) Expenses incurred for acquisition of ACT; est. 110 million HKD

b) Additional interest expense due to refinancing of loans; est 7 million

c) One-off concession to liners due to the disruption of HIT ports due to strikes; preliminary calculation – 600K

d) Currency loss/gain- I would not classify it as one-off

4) recurring higher costs

-> Worker fees hike ->Full year impact to be felt, est. 230 mio (refer to previous blogpost for its calculation)

-> expiring of Yantian tax credit, assuming 10% growth in Yantian profits and resultant in total tax increase = 200 million

Assuming operations stay status quote, the one-off costs are insignificant and not enough to offset higher costs from tax expiry and higher workers’ pay.

Yet, against all the odds of a lower distribution than projected, this is the third year HPHT has meet its distribution target. It did mainly by postponing Capex and management of working capital.

The management of working capital is especially amazing, given that cost of service, and various expenses all increase in Q4, it still managed a OCF of 1.4 billion, compared to OCF of 1.2 billion in 2012Q4.

Management has expect throughput to improve, which is likely if trade rebounds and HIT recover from post-strikes problems.

The question is how much must OCF improve in 2014, so that the 40 cents distribution can be put on solid sustainable footing, without postponing capex (management guide CAPEX as 1.5 billion to 2 billion ), or drawing down more loans?

Answer: about 30% (Assuming Capex of 2 billion and dividends to minority interest of 1.8 billion, OCF need to be 7.2 billion)

IS that an tall order? You bet!

Will 2014 distribution be cut? Unlikely, HPHT has not missed projected target of distribution for 3 years in a row, they will most probably resort to further postponement of capex and use cash or loans to deliver the shortfall. Net gearing is about 50%. If we use 10% growth is OCF and a more reasonable capex of 700 million, there is no need to drawn down loans at all.

What is then a sustainable distribution going forward? 31 HKD cents. A FCF of 2.73 billion after capex and MI,at current price, it means a 5.4% yield after 2014 is reasonably achievable and sustainable.

In conclusion, do I think HPHT is still an attractive investment?

My average price for HPHT is 81 cents, there would give me an 8% yield for this year and the next. I do not think I have a high risk of capital loss if I hold it, but the returns will suck if the rebound in trade do not surprise on the upside.

I have better alternative. I will look to take profits in strength, but will not be in a rush to sell.