EUR 850.00 For Business Accounts Only

Morningstar | Lowering CMP's FVE to HKD 20.50; Shares Attractive for Long-Term Investors

Following higher assumed interest costs on the back of raised capital expenditure, we lower our fair value estimate on no moat rated China Merchants Port, or CMP, to HKD 20.50 from HKD 22.00. This follows an around 15% reduction in our net profit forecast. Nevertheless, we remain positive on the outlook for CMP as we think it is building a potentially attractive global terminal portfolio and CMP will benefit from additional handling capacity and higher operating efficiency after development and upgrading projects are completed. We think CMP’s share is attractive currently trading at forward price/earnings ratio of 9.0 times compared with 13.4 times based on our fair value and peer group median of 13.2 times.

The 2018 result is in line with our expectations with recurrent net income down 21.8%. The decline was due to reduced profit sharing from SIPG and disposal of interest in CMPG (formerly SCW) in June 2018 and CIMC in 2017. Due to the disposal of SCW, western Shenzhen container throughput dropped by 4.4% year on year and we expect the same for 2019. The disposal has already been reflected in our model as we have adjusted the throughput growth after the announcement of the transaction in 2018. However, due to aggressive capital expenditure, CMP’s interest-bearing debt jumped 36.1% over the year and finance cost increased by HKD 600 million, which is equivalent to 14% of 2018 recurrent net income. We think the finance cost will remain high in the short run given CMP’s capital expenditure needs. Therefore, we lower our net income forecast in the next three years by 15%.

We expect CMP to see some pressure in throughput growth in China this year due to domestic economy deceleration and trade uncertainties with the U.S. Among the five port cluster regions in China, we think CMP’s terminals in the Pearl River Delta, or PRD, will be the most affected. China’s Ministry of Transportation data shows that foreign trade makes up 75% of total throughput volume in Shenzhen compared with 60% in Shanghai and the national average of 40%. Overall throughput in Hong Kong declined by 5.7% in 2018 but we are glad to see CMP’s Hong Kong terminals seeing 2.5% growth. After accounting for the SCW disposal, we forecast CMP’s throughput in the PRD to fall by 2% in 2019. CMP increased its stake in SIPG to 26.77% from 26.45% and we think this is a positive move given Shanghai port’s strong competitive advantage in the Yangtze River Delta, or YRD. We forecast CMP’s throughput in the YRD to grow by 3% in 2019. We think domestic handling tariff will remain flat in 2019 as CMP already cut tariff in major ports last year as per the instruction from NDRC.

We think CMP’s overseas terminals will continue to outperform domestic terminals in 2019. Currently, overseas volume accounts for around 20% of CMP’s total throughput. Last year’s overseas throughput was up 12.9%, more than double domestic throughput growth of 4.5%. Ethiopia declared a state of emergency in February and lifted that in June 2018. As the main transshipment port for Ethiopia, we believe PDSA will grow its throughput significantly this year in the absence of another political hiccup. We expect Terminal Link to record mid-high-single-digit growth after the acquisition of the Thessaloniki Port Authority in May 2018. We think newly added TCP will also drive growth with its first full-year contribution in 2019.