EUR 850.00 For Business Accounts Only

Morningstar | COSCO Shipping Ports' 2018 Results Above Expectations; Share Attractive

No-moat-rated COSCO Shipping Ports’ 2018 performance well exceeded our expectations with revenue jumping 57.6% year over year and recurring net profit up 42.9%. CSP benefited from increased visits from COSCO group and Ocean Alliance vessels, which we expect will be sustained, leading to an average 20% increase in our forecast profit for CSP. The bottom-line jump was helped by the first full year of contribution from Qingdao Port International and its Spanish terminals. As a result, we see CSP’s earnings per share growing at an average 9% over our five-year forecast period. However, as CSP is guiding for higher capital expenditure, our discounted cash flow-based fair value estimate is unchanged at HKD 9.80. We think CSP is attractive at the current price level, trading at 8.9 times price/earnings versus 10.7 times at our fair value estimate and the current forward peer group median of 11.8 times.

We believe CSP is on the right track to achieve its five-year goal of doubling net profit by 2021. CSP has increased net profit 79.4% in two years and is only 20% away from its 2021 target. We think it is not difficult for the company to achieve a 6.5% compound annual growth rate in the next three years, since it realized 6.4% organic growth in equity throughput in 2018, higher than the national average of 5.2%. However, we believe CSP needs to acquire more assets to meet its 60% equity throughput growth goal.

We think CSP could face some pressure in 2019 from slower economic growth in China and U.S.-China trade uncertainties. China customs data shows that February exports fell 20.8% year over year, suggesting weakening global confidence heightened by the U.S.-China trade dispute. Nationwide container throughput in the first two months also slowed to 4.8% from 9.1% last year. However, we believe CSP will continue to benefit from synergies with its parent and Ocean Alliance, as reflected in the 33.7% growth in volume contributions from Ocean Alliance last year.

There are concerns about the current investigation by the Hong Kong Competition Commission on the newly formed Hong Kong Seaport Alliance by CSP, Hongkong International Terminals, and Modern Terminals. We remain optimistic on the commission’s ruling, but we think the impact would be minimal to CSP even if the commission determines that the Seaport Alliance is a violation of the competition ordinance. CSP currently operates COSCO-HIT and Asia Container terminals in Hong Kong. Profit contribution from the two terminals only makes up 3.5% of the total, and hence we see limited downside.