EUR 850.00 For Business Accounts Only

Morningstar | CSP's 1Q Results Disappoint; Lowering FVE to HKD 9.30

We lower our fair value estimate for no-moat Cosco Shipping Ports to HKD 9.30 from HKD 9.80 following a disappointing first quarter that missed our expectations. We think the miss is largely attributable to lower-than-expected handling tariffs, due to an unfavorable throughput mix, with lower-valued transshipment volume outpacing overall throughput growth. We’re reducing our full-year tariff assumption to a 3% decline from the original forecast of a flat tariff. Accordingly, we lower our full-year 2019 net profit forecast by 12% to USD 320 million, which also incorporates the one-off disposal loss from reduced effective interest in Qingdao Port International following its A-share listing. The one-off item has no impact on our cash-flow-driven fair value, given that it’s a noncash item.

Despite the weak first-quarter performance, we believe CSP is still on track to meet its five-year target of doubling net profit by 2021. CSP has increased net profit 79.4% in the past two years, which means it can achieve the target with 3.6% CAGR in the next three years. We believe it can be achieved through organic growth, given the strong support from its parent company and the Ocean Alliance. However, we think CSP needs more acquisitions to meet its 60% equity throughput growth target.

The drop in average handling price is primarily attributable to a higher weighting of throughput from transshipment, which has lower handling fees. Freight growth was relatively lackluster, as shipments were front-loaded to fourth-quarter 2018 as purchasers stocked up to avoid the risk of higher trade tariffs between the U.S. and China. This was further dampened by the adjustment or cancellation of routes by shipping companies amid weak demand. Hence the higher weighting of transshipment throughput and lower average handling tariffs in CSP’s terminals. We expect throughput growth to recover in the second half, but the average tariff will fall short of our original assumption.