EUR 850.00 For Business Accounts Only

Morningstar | Disposal Gain Drove Strong First Half for CMP; Core Port Operation Sees Tariff Pressure

China Merchants Port’s profit alert of 50%-plus year-over-year growth in its first-half net profit was well expected, largely driven by the CNY 3.88 billion one-off gain from the disposal of Shenzhen Chiwan Terminals. However, the preliminary result implies weak port earnings, despite decent 7% container throughput growth. We think the National Development and Reform Commission’s port tariff cuts at seven major terminals should pressure the company’s profitability, but the downside risk should be manageable. Our earnings forecasts and fair value estimate have already factored in 30% handing tariff cuts and 20% lower U.S throughput volumes affected by the trade war. We retain our earnings forecasts and our fair value estimate of HKD 24.5 per share ahead of interim results due out in August, pending additional details. We think shares remain undervalued, trading at only 0.7 times price/book, lower than the company’s 10-year average of 1.2 times price/book, despite solid earnings growth outlook and robust cash flows.

While tariffs for western Shenzhen terminals were cut to CNY 800 per 20-foot equivalent unit, or TEU, from CNY 1,200 (representing a 33% decrease), we expect the actual downside to its average tariff to be less than 5%, because: 1) the transshipment and domestic trade cargos account for about 60% of the overall container throughput volumes, which will not be affected by the tariff cuts; and 2) the company has been offering tariff discounts to its favorable clients, and we estimate the average tariff offered should be around CNY 700-CNY 800/TEU, similar to the targeted CNY 800/TEU. In addition, the company’s disposal of Chiwan terminals will further reduce its exposure to western Shenzhen. We also anticipate positive synergies from the asset restructure between the Shekou and Chiwan terminals, which will reduce competition between the two terminals and improve the competitiveness of western Shenzhen terminals relative to eastern terminals.

China Merchants Port continues to see decent container throughput growth, with volume rising 7% year over year. This is in line with our expectation that port activity should have bottomed since second-half 2016. Despite the decent growth in first-half 2018, we anticipate no change to our assumption of low-single-digit organic volume growth in 2018 and 2019, given the rising risks from the U.S.-China trade war. With the cash proceeds from its disposal of Chiwan terminals, we expect the firm to accelerate its port network expansion, targeting more overseas opportunities. While port companies see some near-term challenges, we expect China Merchants Port's geographically diversified port portfolio to sustain the company’s stable growth in the medium to long term.