Hutchison Port Holdings Trust (HPHT or the company) operates ports in Kwai Tsing, Hong Kong and Shenzhen, China – two of the world’s busiest port cities measured in throughput terms. Since its IPO in 2011, the company’s stock has been on a downward trend (down ~90%). In the more recent years, the company’s equity market performance has been battered by a number of adverse events including i) Hong Kong’s inability to cope with increased competition from its Chinese counterparts, ii) the US-China trade war, and finally iii) COVID-19-led trade disruptions. However, in the past two months the stock has jumped more than 60% from its lows reported on 14 August 2020, covering most of the ground it lost in the COVID-19-led fire sale earlier this year (-42.4% YTD 14 August 2020). Through this write-up, we will try to demystify reasons behind such a strong up-move.
HPHT operates Hongkong International Terminals (HIT), COSCO-HIT Terminals (COSCO-HIT) and Asia Container Terminals (ACT) in Hong Kong – collectively known as “HPHT Kwai Tsing”, whereas in mainland China, it operates Yantian International Container Terminals (YICT) and Huizhou International Container Terminals (HICT). On one side Kwai Tsing is a major transhipment hub for the region, and on the other YICT is considered as the premier gateway to China for foreign trade.
What has dampened the stock price?
Hong Kong’s container terminals are operated by five private companies (HIT Ltd, COSCO Ltd, ACT Ltd, Modern Terminals Ltd and Dubai Port International Terminal Ltd) with little or no direct government links, whereas in China the majority of terminals have direct/ indirect government shareholders. Hong Kong has not been able to keep pace with the developments within the region, whereas China has invested heavily to expand its capacity.
The company’s stock price has a very strong correlation with its Chinese counterparts (CMPorts: 0.92, Dalian: 0.83 and Tianjin: 0.94), indicating that its performance is also heavily influenced by the state of the Chinese economy and the Chinese maritime sector, both of which are highly regulated.
The geographic revenue contribution clearly highlights the declining prominence of the company’s Hong Kong operations (2019: 31.7% of its revenue vs 2012: 44.1%) as the revenue per teu has declined at faster pace (CAGR 2012-19: -3.3%) when compared with its Chinese operations (CAGR 2012-19: -1.8%).
Also, beginning 2018 the port industry in Hong Kong started experiencing additional challenges as the US-China trade war intensified. While the country decided not to expand its capacity due to falling demand, both Singapore and Malaysia opted to expand their capacities betting big on the reconfiguration of the supply chain outside China. Singapore has decided to create a mega transhipment facility at Tuas (expanding its capacity from 45 mteu to 65mteu), and Port Klang has planned to develop eight additional container terminals, doubling its handling capacity to 28 mteu per annum.
The company’s weakening business model is clearly visible through the poor stock price performance (Figure 1) and continuous fall in the distribution per unit- only two ways for a company to generate wealth for its investors.
… let us look at the company’s efforts to counter the problem
In early 2019, HPHT formed the Hong Kong Seaport Alliance (HKSA) with Modern Terminals Limited, a key competitor. With this, HPHT’s 16 berths in Kwai Tsing and MTL started to operate as one port (leaving the sole remaining operator, DP World, to operate one berth at terminal 3). This alliance has been formed mainly to improve HPHT’s operational efficiencies and cost savings, and to increase its handling capabilities. The alliance was also challenged in front of the competition commission, which later (on 12 August 2020) gave it the green signal. This we believe was a big announcement for HPHT as it smoothed the path for the company’s cost curbing initiatives.
Also, the company is in the fourth year of its five-year HKD 1bn (USD 128mn) per annum debt repayment plan, which it started in 2017. As a result, it is expected to reduce its total debt from HKD 33.5bn (USD 4.2bn) at end 2016 to HKD 30.6n (USD 3.9bn) by end 2019 translating into a stable gross debt to EBITDA of 4.7x in FY19. This despite an 8.6% decline in EBITDA from 2016 to 2019. Barring an extension to the debt repayment plan, we believe there would be room for the company to raise its dividend pay-out from 2022 onwards.
Finally, the recent up-move in the stock also highlights investors’ bullishness towards the prospects attached with the re-opening of the economies. Recently the US reported an impressive jump in its imports for the month of September (from World +11.8%, from Asia +15.9%, from Northeast Asia +12.5%, from Southeast Asia +28.8% and from North Europe +6.2%). Even though the risk of the second wave of COVID-19-led infections looms large (which we are seeming happening in some parts of Europe), we believe the world is now far more prepared to tackle the spread. After the current jump in the share price, the company’s stock seems fairly priced with EV/EBITDA of 10x (vs Drewry’s port portfolio’s average of 9.9x).