Hutchison Port Holdings Trust

Just to share some quick thoughts on the HPH Trust IPO:

+ PSA and Hutchison Whampoa Ltd (HWL) are the previous owners, both of whom can be considered world-class port operators.

+ Good assets: total port business portfolio returned 11.8% on its total assets in 2010. However, post-IPO, this will drop to about 2.4%, mainly because of an big increase in goodwill. Furthermore, ROE is only about 3%. High net margins of about 25 - 30%.

+ Assets are include some of the busiest terminals in HK, in the Kwai Tsing Container Terminals, which for years, has been Singapore's main rival. Now it's ranked 3rd in the world behind Singapore and Shanghai in throughput volume.

+ Aggregate interest rates on its loans are at 1.2% + LIBOR, implying good status among creditors. With the high margins, and an interest coverage of 6.3 times, slight increases in interest rate should not hurt profits too much.

+ Temasek Holdings and Paulson & Co. (of John Paulson fame, who famously shorted the banks pre-2007, went long on them in the depths of 2009, and also rode the gold rush last year) are cornerstone investors.

- They have a strange way of calculating distributable income, which is = net income / seasonality factor. No details on how seasonality factor is calculated. Sans seasonality factor, pro forma distributable income (i.e. the net profits for 2011) is only US$0.049, a 4.5% yield over the maximum IPO price. This implies roughly a P/E of 21.5 times. HWL, the parent is currently trading at 23 times on the SEHK.

- 99% of the proceeds will be used to buy over the port business portfolio, essentially providing an exit for HWL. An astute businessman like Li Ka Shing is unlikely to sell one of its prized assets at a good discount. Assuming the maximum price (US$1.08) received for the IPO units, approximately HK$93 bn will be received. Of this amount, about HK$ 47 bn will be used to purchase HWL's share of the portfolio assets, while the remaining HK$46 bn will be recorded as goodwill. Only 1% of the IPO proceeds will be used to pay off creditors.

- The trust has stated its policy to distribute 100% of distributable income. Distributable income can come from operating cash flow even if net profits after tax is negative. This hints at the same problems that REITs have; they have no reinvested income for growth. Additional growth will require additional capital raising. The new entity after IPO will have 50% equity and 50% liabilities. Thus, there does not seem to be much room for growth without equity-dilutive fund-raising

- The Trust Manager is a wholly-owned subsidiary of HWL. Their remuneration comes in 4 forms:
a. They will earn a base fee of US$2.5mn a year. This will increase with HK CPI, and is subject to upward adjustments if there are major additions to the portfolio. There is no mention of downward adjustments.
b. There will be a performance fee. Basically, unless they can increase their projected distributable income by 16%, they will still earn more from their base fee than their performance fee. There are no clawbacks, but underperformance will be carried forward till it is earned back.
c. They will earn acquisition fees of between 0.5% - 1% of the enterprise value of future acquisitions.
d. Finally, they will earn 1.5% - 2.5% of future development project costs as development fees.

- There is no lock-up period for the cornerstone investors. The sponsor (HWL) has a lock-up period of only six months.

- Investment mandate can be changed after 3 years, meaning HPH Trust may be allowed to acquire non-port businesses.

- Trust manager can only be removed by the approval of more than 75% of unitholders.

- For FY 2010, "costs of services rendered" was HK$3.7 bn while "net profits" were HK$3.3 bn.

In general, it seems like a case of good, stable business, but not-so-good price. As with most trusts, it also seems better to manage the trust than to own it.

Here's some feed from OCBC:

Issue Statistics
Offer price: US$0.91- US$1.08, subject to refund based on final offer price
Invitation size: 3.619b – 3.899b units (185.2m to public, the rest via international placement)
Note: Cornerstone Investors to subscribe for about US$1.62b, in addition to the above offering
Market cap based on post-invitation share capital: US$7.9b – US$9.4b
Annualised 2011F yield: 5.5 – 6.5%
Annualised 2012F yield: 6.1- 7.2%
IPO closing date: 10am, 14 Mar 2011 (see below for more details)

Business Overview
HPH Trust’s principal business portfolio comprises the following key assets:

- Hong Kong International Terminals Ltd, which operates Terminals 4,6,7 and two berths in Terminal 9 at Kwai Tsing (“HIT”)
- 50% interest in COSCO-HIT Terminals (Hong Kong) Ltd, which operates Terminal 8 East at Kwai Tsing (“COSCO-HIT”)
- Effective interest of 56.4% in YICT, and 51.6% in both YICTP3 and SYWPT, which operate Yantian International container Terminals and Shenzhen Yantian West Port Terminals

This is in addition to ancillary services and interests in other container terminals.

Use of Proceeds
Gross proceeds: US$4.91b – US$5.83b (from offering and cornerstone units)
Application:
- Payment of partial acquisition amount: US$4.87b- US$5.78b
- Payment of upfront debt transaction costs: US$45m

Competitive Strengths
- HIT and COSCO-HIT had about 60% of the market share in Kwai Tsing Port, Hong Kong by throughput in 2009 and operate about 14 of the 24 deep-water berths there.
- Natural deep-water geographic advantages underpinned by long-term rights
- Established reputation with strong customer relationships
- Complementary services for customers at the portfolio container terminals

Key Risks
HPH Trust’s business is highly dependent on global trading volumes and regional and global economic conditions. Hence it may be affected by adverse economic conditions, including uncertainty and instability in market conditions.

For FY10, the portfolio container terminals’ five and 10 largest customers accounted for about 41% and 68%, respectively, of total throughput, although none individually accounted for more than 15%.

Certain land use right certificates and construction permits have not been received for Yantian, and delays may occur in the development and construction of berths and port facilities.
The portfolio container terminals may also face increased competition from other ports.

Management Strategy
The principal investment mandate of the Trustee-Manager involves investing in, developing, operating and managing deep-water container ports in the Pearl River Delta. HPH Trust may also invest in other types of port assets and undertake certain port ancillary services.

Plans:- increase throughput of portfolio container terminals
- enhance throughput mix
- improve operational efficiency and reduce operating costs
- optimize overall capital structure of HPH Trust and its assets
- manage overall financing costs
- pursue value-enhancing development projects
- right-of-first refusal over sponsor’s pipeline in the Pearl River Delta
- pursue third party acquisition opportunities

So the price has been fixed at US$1.01. Hasn't anyone wondered why Hong Kong doesn't allow this sort of business trust whereas Singapore does? And Hong Kong is supposed to be a larger, more sophisticated market than ours.....

Li Ka-shing's Hutchison Port Holdings Trust sets IPO price of $1.01-IFR

SINGAPORE, March 11 | Thu Mar 10, 2011 7:17pm EST

SINGAPORE, March 11 (Reuters) - Li Ka-shing's Hutchison Port Holdings Trust priced its Singapore initial public offering at $1.01 per unit, meaning the listing will raise $5.4 billion, IFR reported on Friday.

The price was around the middle of the revised range of $0.99-$1.03 per unit.

DBS , Deutsche Bank and Goldman Sachs are joint bookrunners and issue managers for the offering that was previously expected to raise $5.8 billion. (Reporting by Fiona Lau; Editing by Dhara Ranasinghe)

Thought this from L&M is useful,

- Investors should be aware of the forex risk when
subscribing for units via the ATM.

- Note the subscription will be at S$1.383 per unit,
translated from the US$1.08 maximum price and
based on exchange rate of US$1 = S$1.2806.

- Should the price be fixed lower than US$1.08
(subject to US$0.91 minimum), the difference will
be refunded based on the same exchange rate of
S$1.2806.

- The same “protection” however does not apply in
respect of refund in the event the subscription is
not successful or partially successful.

- In which case, the refund will be based on the
prevailing exchange rate. Yesterday, the mid-US$/
S$ rate is S$1.2690 (source BT / OCBC).
Remember the variance between the daily bid
(when you subscribe) and offered rates (when the
bank makes the refund).

- One option is to apply closer to the closing time
and date at 10 am on Monday Mar 14.

HPH owns 51 ports around the world. This link contains the complete list of their ports. Clearly a pipeline of potential acquisitions for their business trust to under-take in the future.

http://www.hph.com/globalbusiness/ports....7#Section7

There are Shanghai ports as well, why not package into the trust?


clearly Shanghai ports has much better future than HK ports

Mar 15, 2011
Hutchison Port prices Singapore IPO at US$1.01 a share
By Jonathan Kwok

HUTCHISON Port Holdings Trust (HPH Trust) is still on track to become Singapore's largest initial public offering (IPO) after pricing its units at US$1.01 apiece.

The price is in the middle of the indicative range set by the company, which is the Chinese ports unit of Hong Kong conglomerate Hutchison Whampoa, helmed by billionaire Li Ka Shing.

It means that the business trust, which boasts booming ports in Hong Kong and southern mainland China, will raise US$5.5 billion (S$7 billion) from its listing here - beating the previous largest IPO, SingTel's 1993 effort which raised about $4 billion.

About 3.8 billion units will be issued under the offering to both retail and institutional investors, with another 1.6 billion going to cornerstone investors.

There is also an over-allotment option, which may be exercised by joint book runners DBS Bank, Deutsche Bank and Goldman Sachs. If exercised, it will increase the number of units sold - and the total amount raised.

The price of HPH Trust's units was determined after a book-building process which took into account the demand for units and market conditions, said parent Hutchison Whampoa yesterday in an announcement yesterday.

The market capitalisaion of HPH Trust will be about US$8.8 billion after the offering.

HPH Trust's distribution per unit is expected to be 37.4 Hong Kong cents - or 4.81 US cents - for the period mid-March till the end of this year. Based on the final offering price, this will give the trust a seasonally adjusted yield of 5.8 per cent.

Next year, distribution per unit is expected to be the equivalent of 6.59 US cents - a yield of 6.5 per cent.

Investors who had applied for HPH Trust units under the Singapore public offering - for instance, via ATMs - will find out by tomorrow if they have been allocated their units.

They will receive a refund for units not allocated to them. There will also be a partial refund for units allocated since investors had paid for the units at the top of the indicative range while the price ended up in the middle.

Investors had forked out $1.383 per unit - or the Singdollar equivalent of US$1.08 - the top of the range. The final offer price is $1.294, or US$1.01 per unit, and investors will get back the difference.

HPH Trust applied the same exchange rate for the refund as when investors paid for the stock.

'I think the (final IPO) price is reasonable, given the size of the issue and market uncertainty,' said NRA Capital executive chairman Kevin Scully. 'It's a good performance.'

He said investors also benefited, since they will now have a higher forward-running yield than would have been the case if the trust had been priced at the top of the indicative range.

Balloting is out. Looks like most who subscribe should be glad since quite a decent amount of units were allocated to retailers.

http://info.sgx.com/webcoranncatth.nsf/V...400459517/$file/HPHTRUSTBALLOTING.pdf?openelement

Mar 18, 2011
Business trusts 'have their downside'
Some experts worry it can be tough to oust managers, but others say safeguards in place
By Jonathan Kwok

CORPORATE experts have cautioned that entities like bourse newcomer Hutchison Port Holdings Trust (HPH Trust) can make it hard for disgruntled investors to dislodge managers.

Well-known Hong Kong activist David Webb and others have noted that the different laws applying to such trusts can present obstacles to good governance.

Singapore's 2004 Business Trusts Act states that the trustee-manager of a business trust can be removed only if 75 per cent of the unit-holders vote in favour.

Real estate investment trusts (Reits) require only a simple majority of unit-holders to vote out a manager.

With trusts and Reits, operational decisions and directions are set by the trustee-manager or manager, which receives management fees.

For normal companies, a simple majority of shareholders is enough to succeed with board changes.

The discrepancy has raised objections from observers, given that the giant HPH Trust is expected to list today.

Mr Webb, a former director of the Hong Kong Stock Exchange and a high-profile stock activist there, argued in January that the Singapore listing of HPH Trust, the Chinese ports unit of Hong Kong conglomerate Hutchison Whampoa, is 'no loss to Hong Kong'.

'Hutchison Whampoa plans to initially retain only 25 per cent of HPH Trust,' wrote Mr Webb.

'If this were a Hong Kong-listed company, then it would be feasible for others to launch a takeover or to insist on board changes, particularly if they become dissatisfied with management.'

He argued that Singapore's business trust laws mean Hutchison Whampoa need hold only 25 per cent of HPH Trust plus one unit to make it bid-proof.

'Short of that, unit-holders will have very little say (except on connected transactions) because they will not be able to elect directors of (the trustee-manager), unlike a listed company. In short, the only way to change the directors of a trustee-manager is to own the trustee-manager.'

National University of Singapore professor Mak Yuen Teen, who monitors corporate governance, has his concerns: 'There are definitely question marks over the governance structure, especially regarding the entrenchment issue.'

According to HPH Trust's prospectus, the sponsor - a unit of Hutchison Whampoa - will hold between 31.8 per cent and 38 per cent of the trust after the initial public offering.

Mr Canning Fok, chairman of HPH Trust's trustee-manager, admitted in a briefing last Monday: 'The 25 per cent interest that we will maintain... will save us from potential hostile situations, in terms of shareholder situations.'

He added that 'this is a standard piece of Hutchison's strategy'.

But corporate lawyer Robson Lee has played down the risks, noting that a trust's audit committee will help safeguard the interests of unit-holders.

The Monetary Authority of Singapore, the Singapore Exchange, external auditors, analysts and even the media can also watch for any mismanagement, he added.

'Having listed the trust, you don't want a situation where someone creeps up to stage a hostile takeover or acquire an adversarial controlling stake in the trust,' he said.

'It is important to have continuity of management so that unit-holders can trade on the basis of management's track record. This is nothing unusual, and neither should public investors be concerned that this is management entrenchment.'

Mr Lee said that in HPH Trust's case, Hutchison Whampoa has 'considerable experience' in managing the port assets in the trust and investors 'should look at things in good faith'.

Ms Rachel Eng, managing partner of WongPartnership, noted that the law stipulates that the majority of board members of the trustee-manager must be independent directors.

This is unlike the managers of Reits, or the boards of listed companies, where the Code of Corporate Governance says that one-third of directors should be independent.

Ms Eng said: 'The control mechanism (for business trusts), to protect the various stakeholders, is by making sure the majority of the board is independent.'

Five of the nine directors at HPH Trust's trustee-manager are independent.

jonkwok@sph.com.sg

Frankly, what the use of having independent directors when most independent directors are probably just 'yes-man' and agrees with everything the board says in the first place? The independent directors are not truly independent as long they are receiving a fat director fee from the trust. I hardly call that a safeguard.