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Morningstar | Shanghai Int'l Port's Results Below Expectations; Port Earnings to Slow Down Amid Weak Economy

Wide moat Shanghai International Port’s preliminary 2018 results were below our expectations, with revenue and operating profit rising 2% and 7% year over year to CNY 38.2 and CNY 14.2 billion, respectively. We think the shortfall was driven by noncore items as its core port operations were on track with our estimates, with container throughput rising 4.4% to 42 million TEU and dry bulk volume remaining flat at 561 million tons. We leave our fair value estimate unchanged for now while waiting for more guidance from the full annual results due out on March 28.

The company's container throughput growth slowed to 4.4% in 2018 from 8.4% in 2017. This is consistent with China’s slowdown in port activities, reflecting easing global economic growth amid indirect impact from the U.S.-China trade war, despite no apparent drop in U.S. trade so far. There are signs that traders have brought forward purchases and sales in case of higher tariffs. Seasonal activity tends to slow in December, but shipments to the U.S. did not abate, with the freight rates on U.S.-East and U.S.-West Lines staying high. This is also reflected in the decent 5.8% throughput growth in December, despite a high base a year ago. However, we think port activity growth should slow in 2019 alongside weaker global growth.

We forecast port-related revenue to grow slightly in 2019 based on our assumptions of 2.5% container throughput growth and flat handling tariffs. But we think the operating margin will fall slightly due to cost inflation. However, we believe the headwind in port business will be mitigated by earnings from non-port investments. With two property projects in the sales pipeline, we project the company’s property investment to contribute more than CNY 2 billion profit over the next three years. However, we expect the contribution to fall sharply afterward since the company has very limited land reserves. Its investments in Bank of Shanghai and Postal Savings Bank of China should also provide some buffer for the company with estimated combined annual dividend income of around CNY 700 million over the next five years.