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HPH Trust: Storm clouds over a safe harbour?

Saturday, April 27, 2013

The last time I blogged about HPH Trust was in August 2011 or almost two years ago. I was not really keen on the Trust primarily because I felt that the distribution yield was not high enough compared to the alternative investments available.

Now, I think all of us must have read or heard of the strike by port workers that is going on in Hong Kong. It has been going on for a month or so by now. There doesn't seem to be an end in sight.

I was told by a friend in Hong Kong that she sympathises with these workers because apparently their salaries are kept really low to help the port operations keep cost levels almost unchanged in the last 10 years! That is truly amazing.

I thought she could be exaggerating but reading the weekend edition of The Business Times this morning gave her account credence. Ideally, a raise of some meaningful magnitude has to be given.

The port workers are asking for a 20% increase in salary but have been offered only 7%. This explains the gridlock.

The strike is costing the port millions in losses every day and if the port were to give in to the request for a 20% increase in salary, unit holders of HPH Trust could see DPU reduce some 5 to 7%.

Honestly, if I were a unit holder of HPH Trust, I would vote to give these workers the raise they are asking for even if it means having less income distributions for myself. 10 years without a raise is pretty bad.

Then, the question of whether HPH Trust is a good investment comes to mind again. Why would Li Ka Shing spin off his port assets? He is a savvy businessman, an old ginger. If a business is very lucrative and growing, why would he list it?

Well, some might sell a fantastic asset because they need money but definitely not Li Ka Shing. So, why?

In the article today, it was reported that Hutchison's market share of Hong Kong port operations has grown to 53% by 2012 although container volume has been shrinking.

"The port has been in a slow decline despite the double digit growth in China's trade over the last decade; falling victim to competition from Chinese ports and Singapore. The fast-rising costs of living at home in recent years could worsen the crunch. Last year, total throughput volume decreased by 5.3% year on year."
The Business Times, 27 April 2013.

This seems like a business that is fiercely competitive and HPH was already losing out to competition even before the strike by port workers. Could things get any worse?

At US$1.01 a unit, the IPO of HPH Trust was definitely a good deal for the issuer.
Added (1 Feb 17):
Related posts:
1. HPH Trust: Interim Financial Results.
2. HPH Trust: A weak debut.


seefei said...

quote "At US$1.01 a unit, the IPO of HPH Trust was definitely a good deal for the issuer."

the major reason i didnt participate in its IPO is Mr Li and the fact that this counter is denoted in USD. HK has been losing its lustre as the gateway status with the opening up of China. 10 years no salary increase? No as bad as the computer manufacturing workers who work in an industry that see its product pricing dropping 50% in the last 10 years.
This is a sticky situation and the stalemate will only get worse...

Casey said...

Hi AK,

In fact, I hope that the price of the HPH could drop further on the labour movement..

HPH owns 4 sea ports: HIT, HIT-Cosco, ACT and the ShenZhen Yantian. The revenue was contributed at almost 50%-50% from HK and SZ.

While it is directly affected by the industrial output and input of the Pearl Delta area, it continues to enjoy healthy growth yoy in terms of the container throughput. Well, it is at least a significant 'growth' rather than 'decline', although the growth rate is not as fast as Shanghai and SG. In long term, the DPU looks sustainable to me

Unlike SPH or Sabana, at current unit price, it seems very attractive to me, as its NAV is still so much higher than the unit price. While I am still trying to verify the land lease term of the ports, I believe that being the first mover, unlike K-green, it should have enjoy very long lease term / operation term. If one day, the current HIT area is claimed for other commercial development, the residual Value should be attractive too.

From pass experience, the HK tycoons are very unlikely to budge on such worker movement. Especially, when it seems to have hidden agenda. They will defend at all cost as they disagree the way the strike is carried out that to the extend of personal insults. I don't think LKS is not listening, but giving a victorious impression for such aggressive labour movement (leader) would be a disastorous precedence. The previous construction labour movement was ended with failure at that time as lose-lose situation. Well, they did enjoy a healthier wage growth in subsequent years.

AK71 said...

Hi seefei and Casey,

Very nice to see comments from both sides of the fence here. :)

If we believe that all investments are good at the right price, then, HPH Trust could possibly be a good investment at a lower price and in my last blog post on the Trust, I suggested 59c as a rather attractive proposition for me. ;p

ivan said...

Hi AK,

I smiled when you wrote "old ginger" :)

Reminds me of days past when i ate those preserved red ginger "sweets" from even older provision shops.


AK71 said...

Hi ivan,

I still eat a lot of ginger these days especially those pickled ones at Japanese restaurants. ;p

seefei said...

Casey argument is very persuasive and open up a new perspective to HPH. May divest some Sabana if there is opportunity to come in cheap on HPH.

This strike is a blessing in disguise offering a possible window of entry at a discounted price to prospective investors.

Out of topic - AK any news on the lease renewal for sabana?

AK71 said...

Hi seefei,

My blog is fortunate to have some high quality comments from readers from time to time. :)

Another reader, JCK, shared the response from Sabana REIT's management to his questions: Reply from Sabana REIT's IR

letissier07 said...

If i am not wrong the ships that needed to be diverted from HIT during the strike period were diverted to Yantian, so there is supposedly minimal loss to HPHT on a whole.

Very very long term wise i am expecting HK ports to be closed and operations being diverted to China. Most of HK container volume are not domestic production anyway; and are mostly transshipment from Shenzhen and neaighbouring China provinces. The ports are prime land by the water and surely property king LKS should know better. He bought over another few berths in HK and he virtually own the entire port area now. Shouldn't be a problem for him to close down all his berths and force HK govt to shut down port operations entirely and rezone for him to re-develop if the port is deemed untenable.

Well just my view..

AK71 said...

Hi letissier,

Thanks for offering another perspective on the prospects for HPH Trust. :)

JW said...

Mr Li made his name by being able to sell off at highs.

That was the simple red herring for me when he listed HPH Trust. Perhaps I was simple minded :( But hey, it worked!

AK71 said...

Hi JW,

Perhaps, if Mr. Li starts buying persistently and in large amounts, we should buy too. ;)

Casey said...

Hi AK, Seefei,

I think I need to clarify. I am not suggesting that HPH is better than Sabana as a whole, I was comparing the NAV. Having said that, the computation of NAV of the two are very different, being a business trust, we will see items like business relationship, and other intangible asset are quantified and included as part of the NAV computation. Yes, I do agree that at IPO price, the trust was fully valued or even overvalued to me. Thanks.


AK71 said...

Hi Casey,

Thanks for the clarification. I could be enticed to buy into HPH Trust at much lower prices. :)

AK71 said...

We downgrade our total FY13 throughput volume from 23.2m
to 22.86m under the assumption that the strike will end in the next two weeks.

Our throughput forecasts for FY14 and FY15 remain unchanged at 24m and 24.7m respectively.

Furthermore, we assume that staff costs per TEU is higher by 12% as opposed to 6% earlier to reflect the passthrough costs from the contractors in meeting the higher wage demand of 7% as proposed to the workers under strike.

This trims our earnings for FY13/FY14/FY15 by 8% / 5% / 5% respectively. Consequently, our FY13 / FY14 / FY15 DPU is trimmed by 8% / 2.5% / 3.7%.

FV on HPHT is cut to USD0.82 (from USD0.85) premised at a cost of equity of 8%. Hence, we downgrade HPHT from BUY to NEUTRAL.

OSK DMG, 2 May 2013.

AK71 said...

HPH Trust said net profit in the Oct-Dec quarter dropped 46.9% from a year earlier. Its 2013 net profit fell 25.1%, amid the slump in the shipping market and weighed down by costs due to a strike by port workers in Hong Kong last year.

Barclays Research maintains a neutral rating on the trust with a target price of US$0.78, citing limited growth opportunities.


AK71 said...

I have looked at it on and off and in 2011, I said that I would need to see a 10% distribution yield or close to be enticed. At that time, the forecast DPU was 5.9c.

I think they have missed 5.9c by a big margin this time.

It suggests to me that the business is either very challenging or the management is poor or both.

So, unit price must go even lower before I might be interested.

AK71 said...

Presentation slides:

"Hope is now on possibly improving volumes in the next 12 months on the back of expected economic recovery in USA and Europe. Will this happen and if it does, will it be enough to allow the Trust to operate normally again (i.e. with normal CAPEX). This is an unknown which is, of course, a risk.

"For a Trust with a big chunk of its assets with land leases expiring just 33 years from now, I would really need a much higher distribution yield to be interested. Some people would say that an 8% yield is effectively only 5% if we take land leases into consideration.

"Then, add to the fact that gearing level is 50% which, in effect, doubles the yield, the investment becomes even less attractive. If we accept that, effectively, yield is only 5%, then, unleveraged yield is only 2.5% over the useful life of the assets as I would think that loans have to be repaid at some point.

"I fear that the competition from Chinese ports will only intensify in time to come and that the business could face more headwinds.

"HPH Trust has to offer a much higher yield than 8% which I think is already quite a challenge before it is a reasonably good investment for income." - Taken from my FB wall.

AK71 said...

The manager of Hutchison Port Holdings Trust says it is selling a 60% stake in Asia Container Terminals Holdings (ACT Holdings) for HK$2.47 billion ($403.4 million).

HPH Trust will sell a 40% stake in the Hong Kong terminal to Cosco Pacific and another 20% stake to China Shipping Terminal Development (Hong Kong) Co, said the manager of the mainboard-listed trust in a Singapore Exchange filing on March 13.

The sale comes about a year after HPH Trust paid HK$3.17 billion for ACT Holdings, the holding company of Asia Container Terminals which owns and operates Container Terminal 8 West, located at Kwai Chung, Hong Kong.

This terminal is next to HPH Trust's existing two container terminals, namely Hongkong International Terminals (HIT) and Cosco-HIT Terminals (HK).


AK71 said...

Hutchison Port Holdings Trust may end up lowering its distribution payout ratio "significantly" as it grapples with higher costs and a slowdown in business, according to UBS.

The Swiss bank's distribution per unit forecasts of 38 Hong Kong cents for 2015 and 37 Hong Kong cents for 2016 are 7% and 11% below consensus estimates respectively.

"One of the major risks in 2015 is a potential interest rate hike, as the company is on a 100% floating rate, which is very low now," UBS analyst Robin Xu said in a note.

"It is difficult for HPH Trust to sustain 100%-plus dividend payout ratios forever, and there is potential risk that the dividend payout ratio may be cut significantly in the future."

Already, management has indicated that it was considering whether HPH Trust's mid- to long-term dividend policy should follow actual cash flow, Xu noted.

"We think a potential dividend payout ratio reduction is one of the major long-term risks."

HPH said at its recent results briefing that it was negotiating with liners for a potential tariff hike in 2015 to cover additional costs arising from, among other things, a need for more barges and inter-terminal trucking services.

Even so, "we are concerned about cost inflation in addition to a lack of a mid- to long-term volume growth outlook given that capacity constraints in Hong Kong and the potential free trade zone to be implemented in Shanghai may have a negative impact on Hong Kong’s transhipments," said Xu, who has a "neutral" rating and a price target of 67 US cents on the stock.


AK71 said...

Hutchison Port Holdings Trust has posted earnings of HK$1.2 billion ($215 million) for 9M2015 ended September, a 14.6% decrease from the earnings of HK$1.4 billion posted in 9M2014.

Although HPHT declares distributions semi-annually which are announced in June and December, the 9M earnings translate into DPU of 15.7 HK cents, compared to 18.7 HK cents a year ago.

The Edge Markets

AhJohn said...

hi AK, are you still following this company. The DPU and price drop a lot, now ~10% yield.

AK71 said...

Hi Ah John,

The worry is whether future DPU will continue to be the same as the past. With management saying that they cannot hold back much needed CAPEX anymore, DPU could reduce, all else remaining equal. Past DPU were higher because money which should have been used for CAPEX was distributed. DPU were higher due to delayed CAPEX.

AK71 said...

There is no doubt now that investors who bought shares in Hutchison Port Holdings Trust (HPH Trust) at its IPO 7 years ago paid Hong Kong tycoon Li Ka-shing's corporate stable far too much.

AK71 said...

2017 outlook – pricing pressure
Looking forward, we believe that existing business relationships with shipping lines under alliances are likely to remain intact, though pricing will be under pressure as lines will negotiate for the lowest rates offered to other members in the alliance. We currently project a 3% decline in revenue/TEU for FY17. We also note HPHT has been losing market share in HK, from 75.5% for FY15 to 71.0% for FY16. While HK Kwai Tsing container throughput rose +10.5% YoY for 4Q16, HPHT’s HK throughput only increased +1.6% YoY. While we believe HK container throughput has turned a corner, we are slightly less optimistic on the extent of throughput growth HPHT will enjoy.

FV change minimal
For FY17 DPU guidance, management has shifted from 25-27 HK cents earlier to 20-23 HK cents assuming flat operational conditions after taking into account the voluntary debt amortization and possible interest rate hikes. There is also no certainty that HIT’s HK$430m rates refund given last year will be used to soften the impact of the DPU drop. After tweaking our model, which now assumes no buffer applied by the refund, our DPU falls to 23.4 HK cents. This is slightly higher than the range cited by the management, partly as we have input expectations for lower capex.

HPHT is trading at a FY17 yield of 6.8%. Our DDM-based fair value drops from US$0.46 to US$0.45. While the FV change has been minimal, we downgrade HPHT from a Buy to a HOLD given the lower expected FY17 yield. We encourage investors to collect HPHT at US$0.41 and below.

Source: OCBC Research - 13 Feb 2017

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