DBS Group Research analysts have maintained their &ldquo buy&rdquo call for Hutchison Port Holdings Trust (HPHT) P7VU 0.00% with a lower target price of 32 cents from 37 cents previously as they look forward to a &ldquo more promising&rdquo 2HFY2023 ending Dec 2023.

 

In their report dated July 26, analysts Paul Yong and Tabitha Foo note that 1HFY2023 was a &ldquo challenging period&rdquo for the leading port operator in Hong Kong and Shenzhen with lower throughput volumes, significant loss in storage income, a weaker Chinese Yuan and higher interest rates during the period.

 

HPHT reported 1HFY2023 net profit of HK$94.9 million ($16.1 million), forming only 8% of the analysts&rsquo full-year forecast. Revenue fell by 20% y-o-y to HK$5,183 million for the period from HK$6,472 million in 1HFY2022.

 

Additionally, the analysts note that HPHT saw higher expenses on cost initiatives, partially offset by the reduction of throughput volumes and the relaxation of Covid-19 measures, as well as higher interest costs that was mitigated by its debt repayment programme. Meanwhile,

taxation increased after the pandemic as some of the tax benefits at Yantian expired.

 

They have cut their FY2023 and FY2024 earnings estimates by 47% and 43%, respectively, mainly to reflect the underperformance in 1HFY2023. Their target price has been lowered accordingly to 32 cents based on a discounted cash flow (DCF) valuation, which features a 7.5% weighted average cost of capital (WACC) and 10.0% cost of equity.

 

Nonetheless, Yong and Foo say they believe that the &ldquo worst is over&rdquo and that they are optimistic on a pick-up in throughput volumes in 2H2023 as trade momentum improves.

 

&ldquo While export volumes from China to the EU are still contracting, the decline has been slowing and we anticipate a turnaround in 2H2023 as retailers have to replenish their inventory that has been depleting. Export volumes from China to the US could remain muted into 3Q2023 but will likely improve in 4Q2023,&rdquo they say.

 

However, they add the caveat that pace of recovery for Hong Kong ports will likely remain slow as volumes are still under pressure.

 

Expressing its management&rsquo s optimism on 2HFY2023, and especially on the last quarter of the year, HPHT maintained its dividend per unit (DPU) guidance at 14.5 HK cents for FY2023, the same as in FY2022. It announced an interim DPU of 5.5 HK cents in 1HFY2023 despite the sharp drop in 1HFY2023 net profit.

 

The analysts note that the company&rsquo s interim dividend DPU for the period was only marginally lower than the 6.5 HK cents issued for 1HFY2022 and therefore believe there is room for the company&rsquo s dividends per unit (DPU) to be raised in FY2024.

 

They have adjusted their DPU estimates down from 15 HK cents and 20 HK cents in FY2023 and FY2024 to 14.5 HK cents and 16.0 HK cents, respectively, which still imply attractive yields of 9.6% and 10.6%, respectively.

 

With strong cash flow generation and a rapidly improving balance sheet,Yong and Foo anticipate that HPHT still has the &ldquo capacity&rdquo to pay out more dividends as it deleverages to an all-time low. HPHT&rsquo s gearing ratio is projected to remain low at 2.3-2.5x in FY23F/24F following a multi-year debt repayment programme.

 

Although HPHT&rsquo s current berths are already operating at optimal levels, the analysts add that new capacity of around 3.4 million twenty-foot equivalent units (TEUs) from Yantian East Port &mdash in which HPHT holds a 38.73% effective stake &mdash will come on stream from 2025 onwards to support its long-term growth.

 

Hutchison Port Holdings Trust (HPHT) has reported earnings of HK$94.9 million ($16.2 million) for the 1HFY2023 ended June 30, 86.8% lower than earnings of HK$716.3 million in the corresponding period the year before.

 

Earnings per unit attributable to unitholders stood at 1.09 HK cents, down 86.8% y-o-y.

 

Revenue and other income fell by 19.9% y-o-y to HK$5.18 billion as combined container throughput of HIT, COSCO-HIT and ACT (collectively known as HPHT Kwai Tsing) fell by 18.2% y-o-y mainly due to lower local and transshipment cargoes.

 

HIT refers to Terminals 4, 6, 7 and two berths in Terminal 9 at Kwai Tsing in Hong Kong while COSCO-HIT refers to Terminal 8 East at Kwai Tsing. ACT refers to Terminal 8 West, also at Kwai Tsing.

 

During the 1HFY2023, the container throughput of Yantian International Container Terminals (YICT), fell by 12.4% y-o-y mainly due to the decrease in outbound cargos to the US and the European Union (EU) as well as empty cargoes. Outbound cargoes to the US and EU fell by 18% and 6% y-o-y respectively.

 

YICT comprises Yantian International Container Terminals Phases I & II, Phase III & Phase III Expansion, and Shenzhen Yantian West Port Terminals Phases I & II

 

Average revenue per twenty-foot equivalent unit (TEU) for Hong Kong and China stood lower y-o-y mainly due to lower storage income and the depreciation of the renminbi (RMB).

 

Throughput volume for the group fell by 15% y-o-y to 9.97 million TEUs.

 

Operating profit fell by 35.7% y-o-y to HK$1.58 billion due to lower revenue, lower other operating income and higher other operating expenses.

 

Share of losses after tax of joint ventures (JV) stood at HK$8.8 million compared to share of profits after tax of JVs of HK$47.2 million in the six-month period the year before.

 

Profit for the period fell by 55.4% y-o-y to HK$580.6 million.

 

For the period, HPHT announced an interim distribution per unit (DPU) of 5.50 HK cents, down from the 6.50 HK cents in DPU for the 1HFY2022.

 

Unitholders will receive their distributions on Sept 22.

 

As at June 30, cash and cash equivalents stood at HK$7.15 billion. As at the same period, 63% of the trust&rsquo s long-term debt are on fixed interest rates. &ldquo For every 50 basis point (bps) increase [in interest rates], the monthly interest expense would increase by HK$4.3 million based on the latest loan profile,&rdquo says the trust.

 

Looking ahead, the trust says it is seeing some easing in the drop in volume of exports to the US and EU. For instance, in YICT, China exports to the EU fell by around 11% y-o-y in the first three months of 2023 but has since eased to 9% in May and 6% by June.

 

&ldquo An increase in the number of empty containers coupled with a decrease in laden containers in our yard in recent months may also indicate the market is preparing for a pick-up in export orders in the second half of the year,&rdquo says the trust in its July 25 statement.

 

In Hong Kong, however, the trust says cargo volume has not seen a substantial recovery in the 1HFY2023 despite the relaxation of measures.

 

On sustainability, the trust has achieved and exceeded its target of reducing its overall emissions intensity by 5% between 2021 and 2026. The trust is now aiming to reduce emissions intensity by 30% between 2021 and 2030.

 

In a separate filing, HPHT announced the retirement of Chan Tze Leung, Robert from the board. Chan had been on the trust' s board for over nine years since Feb 14, 2011. Prior to his retirement, he had served as the trust' s independent non-executive director and chairman of its remuneration committee. Chan was also a member of the trust' s audit committee.

 

In his place, Lee Kah Lup has been appointed as an independent non-executive director of the trust. His appointment will take effect on July 26. Lee is currently an executive director at Clean Kinetics. In his previous roles, he was the vice-president in marketing at Singapore Technologies Engineering (ST Engineering).