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Morningstar | China Merchants Port: Port Operators Face Greater Risk From U.S.-China Trade War in 2019

China Merchants Port, or CMP, will reflect a one-off land appreciation gain of HKD 3.6 billion and boost the company’s 2019 net profit to HKD 9.3 billion, but this has little impact to its core port operation and our fair value estimate of HKD 22 per share is unchanged. The planned land restructure in Shenzhen’s Qianhai area is in response to a government-led initiative to address the city’s urban planning, and CMP will exchange its land in Qianhai area, which composes about 55% of its total land, for a piece of land in Dachan Bay Port with the same area and length and will also receive a one-off revaluation gain. With the cash proceeds from the land restructure and the disposal of Shenzhen Chiwan Terminals earlier this year, we expect CMP to continue to expand investment along the “one-belt-one-road” routes, which we think will help to diversify the risk of reduced activity from the U.S.-China trade war and provide fuel for the company’s long-term growth. We think CMP is slightly undervalued presently with its share price reflecting near-term activity risks.

Nationwide container throughput growth slowed to 5.3% for the cumulative 11 months in 2018 from 8.3% in 2017. This probably reflects a slower pace in global economic growth, which may only reflect indirect impact from the U.S.-China trade war despite no seeming drop in U.S. trade so far. There are signs that traders have pushed through purchases and sales in case tariffs escalate. Seasonal activity tends to slow by December, but shipments to the U.S. did not abate, with loading rates in the Shanghai port close to 95% and the freight rates on U.S.-East and U.S.-West Lines staying high. This is also evidenced in the strong 10.5% throughput volume growth in November at Shenzhen terminals, compared with a 0.7% decline a year ago. However, we think port operators may face greater uncertainty due to slower global growth triggered by trade war concerns in 2019.

CMP’s container throughput volume rose 4.9% by the end of Nov 2018. Overseas ports continue to lead growth, with volume rising 12.7% and contributing 51% of the incremental throughput. This was helped by initial contributions from TCP Port in Brazil and strong growth at Terminal Link following its acquisition of Thessaloniki in Greece in March; while organic growth at overseas assets was also decent, with major assets in Sri Lanka, Togo, and Turkey seeing double-digit growth. Nevertheless, organic growth at domestic terminals slowed to 4.1% from 7.2% in 2017, due to lackluster performance at western Shenzhen Terminals. This is in line with our expectation, and we think 2019 will be a challenging year for domestic port operators, given the greater risks surrounding the trade war. We maintain our organic throughput assumption of 5.1% for CMP in 2019 as well as a five-year CAGR of 4.5%. We think the company has some buffers from the U.S.-China trade war given that around 26% of its group throughput is generated by its ex-China assets.