EUR 850.00 For Business Accounts Only

Morningstar | 600018 Updated Forecasts and Estimates from 28 Mar 2019

We made minimal changes to our profit forecast for wide-moat Shanghai International Port following fourth-quarter core operating performance that was largely within our expectations. As a result, our fair value estimate remains unchanged at CNY 6.50. While the 2018 bottom line was short of our forecast, it is due to noncore non-operating income and this does not change our outlook for the firm. We think the shares are slightly overvalued presently. We estimate net income of 3.9% CAGR in our 10-year explicit forecast period, but we expect negative net income growth in 2019 due to higher one-time asset disposal gains in 2018, slower economic growth in China, and U.S.-China trade uncertainties. As cyclical issues impact the industry at large, our wide moat rating and stable moat trend remain intact.

China Customs data shows that February exports fell sharply by 20.8% year over year, suggesting weakening global confidence heightened by U.S.-China trade uncertainty. Although we think the firm is more resilient compared with other China port operators given Shanghai port’s monopoly advantage, we remain cautious on its first-quarter performance but expect growth to pick up in the second half after factoring in a probable trade agreement between the U.S. and China toward the middle of the year. Overall, we forecast lower-single-digit growth in container handling volumes in 2019. Container handling tariffs only fell slightly by negative 1.7% as expected after NDRC instructed a negative 19.4% tariff cut for foreign trade container throughput in Shanghai port. We believe that is because the firm offers volume-based discounts to shipping companies, which is common among port operators, and the effective tariff was already much lower than the NDRC’s guidance before the tariff cut. We expect container handling tariffs to remain flat in 2019 amid weak demand and tariff cut pressure from the government.

We think the company might see margin pressure in its core port operations, but we expect the headwind to be mitigated by its noncore investments. The disposal of Star Harbor property in 2018 contributed CNY 1.17 billion net income. We expect Shanghai International Port to derive more than CNY 2 billion net income in the next three years from the other two commercial property projects in pipeline. However, we believe earnings from property sales are non-recurring afterward as the company has very limited land reserves. In addition, we estimate the company to book CNY 4 billion annual investment income over the next five years from its 4.13% stake in Postal Savings Bank of China and 7.34% stake in Bank of Shanghai. That should also provide some buffer for the company.