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

Cosco Shipping Ports, or CSP, has became a pure port operator following a successful restructure in 2016, by swapping the challenging container-leasing business with relative resilient port assets. It is now the world's fifth-largest container terminal operator and investor, with a total annual handling capacity of approximately 104 million twenty-foot equivalent units, or TEUs. The company has been expanding its investments in container terminals in both China and overseas in recent years, driving average annual terminal revenue growth to 25% during 2008-17. However, massive investment has seen net debt more than quintuple and returns fall by more than half. Returns should improve as fixed assets are leveraged by continued volume growth and new capacity is utilised. Until CSP's returns and competitive advantages strengthen, we don’t believe the company warrants an economic moat. CSP has a geographically diversified port network stretching across China's major coastline, and enjoys relatively higher throughput growth derived from its high-quality and favourably located assets. It has a higher exposure to the Bohai Rim, contributing 38% of the total throughput, which stands to benefit from fast-growing domestic and intra-Asia demands. Its investment in the Pearl River Delta, mostly contributed by Yantian Port--one of China's most efficient--also receives higher margins and throughput growth, owing to excellent natural condition and strong operating efficiency, well ahead of its peers in the region. With the strong support from parent China Cosco Group, China’s largest shipping fleet and the world's second-largest, CSP has also expanded its investments overseas, adding container terminal assets in Southeast Asia, Middle East, Europe and the Mediterranean.