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Morningstar | Cosco Shipping Ports Reports in Line Third Quarter

No-moat Cosco Shipping Ports posted in line third-quarter performance, with core profit rising 9% year over year to USD 74 million. Despite rising uncertainty in global trade activities, Cosco continued to see a decent 11% organic throughput volume growth in the third quarter, with benefits from strong parent support and the Ocean Alliance. This is well on track to meet our full-year target, and we maintain our full-year 2018 earnings forecast of USD 265 million and our fair value estimate of HKD 9.80 per share. We think the shares are slightly undervalued currently, trading at only 0.6 times price/book, lower than our valuation and its five-year average of 0.7 times. We think the company’s low valuation and visible growth outlook that targets to increase its terminal assets by 50% by year-end 2021, is attractive.

Overseas ports continue to lead the growth, with throughput volume rising 37% in the third quarter, driven by initial contributions from Noatum Port in Spain and capacity expansion at COSCO-PSA Terminal in Singapore as well as strong throughput volume growth at Piraeus Terminals in Greece supported by the establishment of the Ocean Alliance. However, growth from domestic terminals slowed to 6% from a strong 9% in the first half, despite the traditional high season for China export in third quarter. This is in line with our expectation, reflecting a rising risk from the U.S.-China trade war. We expect the trade war is likely to be more prolonged, which will continue to add uncertainty to global trade in the coming year. In addition, we also see risks from foreign exchange movement, as Cosco derives the majority of its revenue in Chinese yuan and euro terms while its reporting currency is the U.S. dollar.

To address the uncertainty surrounding the U.S.-China trade war, management cut acquisitions and capital expenditures to no more than USD 751 million in 2018, down from the original plan of USD 3.3 billion, and also targets no more than USD 1.2 billion in 2019. We think the reduced investment plans will help to improve Cosco’s cash flows in 2018 and 2019, but this should have little impact to our throughput assumptions and earnings forecasts, which were made based on the company’s existing assets. However, we think this should be a postponement of investment, and we expect Cosco’s investment to pick up from 2020 to fulfill its growth commitment, which is to increase its terminal assets by 50% in 2021.