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Morningstar | Nationwide Container Throughput Growth Accelerated in 4Q; But Greater Risks in 2019

Nationwide container throughput growth accelerated to 7.5% year over year in fourth-quarter 2018, from 4.9% in the first three quarters, despite the quarterly GDP dipping to 6.4%, a historical low over the past decade. We think this should be largely driven by traders pushing through purchases and sales in case tariffs escalate. However, a sharp fall in China’s exports and imports value in February suggests risks amid a slowing economy in China and still-fragile global trade environment, as well as the U.S.-China trade impasse. We expect average throughput growth for domestic terminals to slow to low-single digits in first-quarter 2019, compared with 13.8% a year ago and a five-year average of 7.5%, which we think will dampen port operators’ earnings in first quarter.

We leave our earnings forecasts and our fair value estimates unchanged: HKD 22.00 per share for China Merchants Port, or CMP; HKD 9.80 for Cosco Shipping Ports, or CSP; and CNY 6.50 for Shanghai International Port Group, or SIPG, ahead of annual results due in late March, but expect 5-10% downside risk to our 2019 earnings forecasts. At current levels, we think shares of CMP and CSP are slightly undervalued, trading at 0.6-0.7 times price/book; while we think shares of SIPG are slightly overvalued, following the recent share price rally driven by the catalysts of free trade port and further integration of Yangtze River Delta, given they are trading at 2.3 times price/book.

China’s February trade statistics are disappointing, with export value falling sharply by 20.7% and import value down 5.2% in U.S. dollar terms. While an earlier Chinese New Year holiday in 2019 should have put on some seasonal effects, we think combined January-February data also points to a slowing economy in China. In addition, China’s major trade partners, EU and Japan, also saw slowdowns with PMIs below 50% in February. These, along with the U.S.-China trade impasse should see greater challenges for port operators in 2019.

We think CMP is better positioned amid the challenges, given the company’s overseas expansions are focusing more on terminals along the one-belt-one-road route, which see better trade flow and exposure to higher growth potential. While SIPG is focusing on domestic terminals, we think the company’s wide moat is underpinned by its monopoly operation in Shanghai and the highly developed regional economy should help the company passing through the near-term challenges and keep it on a stable growth pace over the midterm. For CSP, we expect the company’s throughput growth to continue to benefit from strong support from its parent and Ocean Alliance, while its five-year plan that targets to double its 2016 recurring profit by the end of 2021 implies a CAGR of 12.2% between 2017 and 2021, which we think is a bit aggressive.