EUR 850.00 For Business Accounts Only

Morningstar | Disposal Gain Drove CMP’s Strong First Half; Western Shenzhen Port Sees Little Tariff Pressure

China Merchants Port’s, or CMP’s, strong first-half growth was well expected, primarily driven by an HKD 3.72 billion one-off gain from the disposal of Shenzhen Chiwan Terminals. The core operation was also decent, with recurring profit rising 13.7% to HKD 2.8 billion as container throughput growth jumped 7.3% year over year. This suggests little tariff pressure from CMP’s core western Shenzhen ports, despite the government’s mandated 33% tariff cut starting 2018. This is in line with our expectations, and we estimate the current rates offered by CMP are lower than CNY 500 per 20-foot equivalent unit, well below the National Development and Reform Commission's guidance of CNY 800/TEU. We expect CMP to extend its positive throughput growth in the second half, but we think port operators may face higher uncertainty owing to the trade war in 2019. We maintain our key throughput assumptions, but we raise our full-year 2018 earnings forecasts by 2.4% to HKD 8.9 billion after we factor in CMP’s recent acquisition of a 50% stake in the Port of Newcastle. We lower our fair value estimate to HKD 22.00 per share from HKD 24.50, owing to the weaker Chinese yuan and rising currency risks amid the company’s global expansion.

Following a 24% fall in its share price in the year to date, we think CMP’s shares are undervalued, trading at only 0.6 times price/book, below our valuation of 0.9 times price/book and the company’s 10-year average of 1.2 times price/book. CMP was recently removed from the Hang Seng Index, and this may result in a near-term overhang due to potential share sales by index funds. However, the company’s fundamentals remain healthy with stable cash flows and earnings despite near-term hiccups. We expect CMP’s geographically diversified port portfolio to sustain the company’s stable growth in the medium to long term.

Overseas ports continue to lead growth, with throughput volume rising 18% in the first half, driven by initial contributions from TCP Port in Brazil and strong throughput volume growth at Terminal Link. The latter’s growth benefited from the acquisition of the port of Thessaloniki in Greece at the beginning of the year. Hence, 43% of the incremental throughput came from CMP’s overseas terminals. Throughput growth at domestic terminals slowed to 5% in first-half 2018 from 7% in 2017, owing to lackluster performance at western Shenzhen Terminals. This is in line with our expectation, and with most of the second-half orders already locked in, full-year growth should remain healthy. However, we think 2019 will be a challenging year for port operators, given the greater risks surrounding the trade war, and we maintain our assumption of low-single-digit organic throughput volume growth in 2019.

With the CNY 3.7 billion cash proceeds from the disposal of Shenzhen Chiwan Terminals, CMP further expanded its reach to Australia, following its acquisition of a 50% stake in the Port of Newcastle with 98 years of concession rights. The Port of Newcastle is the largest coal terminal in the world, handling about 40% of Australia’s coal exports. We expect the transaction to bring HKD 180 million-HKD 200 million in net profit contribution per year for CMP; this will offset the loss in contribution from the company’s disposal of Shenzhen Chiwan Terminal, which accounted for 45% of its total throughput from Shenzhen operations. However, we think the acquisition of the Port of Newcastle increases CMP’s overall risks, given the higher exposure to cyclical commodity prices/volumes, and doesn’t help it hedge against China coal policy risks.