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Morningstar | Overseas Expansion Will Continue to Drive CMP's Throughput Growth

China Merchants Port is China's largest port operator and investor. Its geographically diversified port network stretches down China’s major coastline and includes 8 of the top 10 container ports, which closely align with China’s economic needs, in our view. The company has been steadily expanding its handling capacity, averaging 10% per year for the past five years, and total throughput reached 109 million 20-foot equivalent units, or TEUs, in 2018, reaffirming its leading position in container port operation worldwide. While CMP has maintained decent earnings growth from its port operation, we remain concerned about its exposure to the Pearl River Delta, which has high exposure to China’s cyclical manufacturing export volume and exposes the company to the effects of global economic headwinds. In addition, there is a trend developing for industrial businesses and manufacturers to move from China's coastal areas to its inland regions, such as Anhui, Sichuan, and Hubei, which further pressures throughput growth in this region. As a result, CMP’s western Shenzhen port, which accounts for about 50% of the operating profits of its port operations, registered flat throughput growth between 2010 and 2018, significantly underperforming the 5%-6% average annual growth clip for Chinese ports. We expect CMP’s western Shenzhen port to continue underperforming with marginal or low-single-digit growth, while we expect other ports to be largely in line with the nationwide growth outlook.With high-quality port assets more difficult to obtain, CMP has been actively exploring overseas expansion. Since 2010, it has successfully acquired a number of overseas port assets, including Colombo in Sri Lanka, Lagos in Nigeria, Djibouti City in Djibouti, Togo in Lome, TCP in Brazil, and Terminal Link and Kumport in Turkey. These overseas port assets brought in 20.7 million TEUs in 2018, representing about 19% of the company’s total container throughput. We expect continued overseas expansion to drive CMP’s throughput growth and sustainable profit growth in port operations.