EUR 850.00 For Business Accounts Only

Morningstar | SIPG's First-Quarter Results In Line; Maintain CNY 6.50 FVE

We maintain our fair value estimate of CNY 6.50 per share for wide-moat Shanghai International Port, or SIPG, following the company’s in-line first-quarter results. We made few change to our 2019 net profit forecast of CNY 9.5 billion, and we expect the company’s net profit to grow at a 4% CAGR in our 10-year explicit forecast period. Our wide moat and stable moat trend remain intact. We think the shares, currently trading at 2.3 times price/book, are slightly overvalued.

SIPG’s container throughput rose by 7% year-over-year in the first quarter, compared with the 6.1% growth for nationwide average. This exceeded our expectation, and we think it is attributable to stronger volume growth at Yangshan deep-water port. We expect SIPG’s growth to be normalized during the next few quarters, and we project its full-year throughput growth to be stable at about 4%. While we see a risk of weaker shipping activity from slower economic growth and the US-China trade impasse, we expect that the monopoly the company has and the highly developed regional economy to keep the port's growth stable over the medium term. We project SIPG’s container throughput to grow at a 10-year CAGR of 3.7% between 2018 and 2028.

In addition to its decent operating performance, SIGP also boosted its bottom line by reducing costs and increasing investment income. Operating margin before investment income improved to 16.5% from 14.0% in the first quarter of 2018 because of lower business taxes and management costs. We believe the margin expanded because growth came from its core port business, rather than property sales in the first quarter. But this should normalize, and our cost assumptions therefore remain unchanged. In addition, profit contribution from SIPG’s noncore investment continues to rise, at CNY 1.1 billion investment income in the first quarter of 2019 (or 6% year-over-year growth), making up 44% of the company’s total profit before tax. We estimate SIPG will receive about CNY 4 billion in annual investment income from its 4.1% holdings in Postal Savings Bank of China and 7.3% holdings in the Bank of Shanghai. This, along with a few property projects in the pipeline, should also provide a buffer for the company. The increasing investment income adds potential volatility to the company’s bottom line but given decent returns so far, it is not detracting from our wide-moat rating.