Friday, October 18, 2013

Pan-United Corporation : CXP earnings are sustainable(DBSV)

Pan-United Corporation
BUY S$0.94 STI : 3,174.03
Price Target : 12-Month S$ 1.21

CXP earnings are sustainable
• CXP contributes > 25% to earnings post acquisition
• CXP earnings are sustainable, group earnings still driven by ready-mixed concrete segment
• Maintain BUY and S$1.21 TP

Port visit provides confidence that earnings are sustainable. Post acquisition of MIIF’s 34.2% stake for S$101m (out of MIIF’s 38% in CXP), CXP now contributes more significantly to PAN’s earnings (27% vs 18% previously). Based on our estimates, the acquisition is earnings accretive and will improve FY14F’s earnings by 10%. We visited CXP port to gain further insight to its operations and have confidence that CXP is capable of contributing a sustainable stream of earnings to PAN going forward.


Efficient operations, sustainable earnings. CXP is strategically located along the Yangtze River and is capable of serving 100,000 dwt vessels. CXP enjoys a low 30% breakeven utilisation for its operations with port operational functions outsourced to third parties. Cargo volumes have grown at 9% CAGR since 2005. We expect cargo volumes to be supported by robust log demand and expansion of steel and paper mills in the area. As there is no longer a requirement that was made by MIIF to pay out 100% of earnings as dividends
at CXP’s level, management has more financial resources available to further develop the port in areas such as warehousing.

Maintain BUY, TP S$1.21. The CXP visit has given us confidence that earnings will be sustainable going forward. We have not made any major changes to our forecast and outlook for now. PAN should be able to maintain DPS despite retaining some portion of CXP’s earnings for port development. Reiterate BUY and S$1.21 TP.

Port visit gives us confidence that CXP can deliver sustainable earnings to PAN
More optimistic post CXP visit. We visited PAN’s Xinghua Port in Changshu (CXP) recently and gained further insights to the port’s operations. We are confident that CXP is capable of contributing sustainable earnings to PAN going forward.

CXP is now a bigger earnings contributor
CXP now contributes more than 25% of PAN’s earnings. CXP is now a more significant earnings contributor to PAN post acquisition of MIIF’s stake. After acquiring 34.2% (of MIIF’s 38% effective stake) in CXP for S$101m in August, CXP now accounts for approximately 27% of PAN’s earnings. This compares to only 18% before the acquisition.

Background of CXP
Multipurpose port in Changshu, Jiangsu province. CXP is a multipurpose cargo port strategically located within the Yangtze River Delta industrial zone, close to Suzhou, Wuxi Changshu and Shanghai. The port handles four key types of cargo from logs, steel, pulp to container. In FY12, CXP handled 7.3m tonnes of cargo and 90,000 TEUs of containers.

#1 Strategic location
Deep enough to accommodate vessels of up to 100,000 dwt. Trade along the Yangtze River continues to thrive with shipping volumes in the past decade increasing fourfold to 1.78bn tonnes in 2012. CXP is strategically located along the Yangtze River. CXP’s position is located downstream, 54 nautical miles from the mouth of the Yangtze River. The port is deep enough to accommodate vessels of up to 100,000 dwt. While ports that are located upstream of the Yangtze River such as Wuhan and Chongqing facilitate delivery into inland destinations better, a shallower depth restricts them from handling larger vessels (< 10,000 dwt vessels). Serves central China. CXP serves mainly central China. Ports and logistic centres near the Pearl River Delta would serve southern China, while Dalian, Tianjin and Qingdao ports facilitate trade in northern China. CXP’s customers are located as far as Chongqing.

#2 Operates efficiently
Serves 50 customers. CXP serves around 50 customers; its top five customers contribute to approximately two thirds of total revenue. CXP’s customers are mainly receivers (importers), mainly the paper, saw and steel mills in the area. 80% of CXP’s business is derived outside of its captive market (20km radius), but within the Yangtze River Delta. Low breakeven point of 30% utilisation. CXP enjoys a low 30% breakeven utilisation for its operations. Management has achieved this by outsourcing and sub-contracting port operational functions. CXP hires its own staff for port management functions, while sub-contracting port execution operations. Sub-contracting costs are volume-based, and reduce the high fixed costs involved in port operations. We believe this efficient cost structure puts CXP in a strong position to compete if and when competition becomes more intense.

Healthy utilisation and cargo growth. Port utilization has been > 60% based on number of berth days. Cargo volumes have grown at a CAGR of 9% from 2005 to 2012.

Competes on capacity and service quality. We note that CXP is the only privately owned port available for public use in Changshu. Neighbouring ports are either state owned or have much smaller handling capacities. Other ports in the area are privately owned and are for exclusive use. Although it is not the cheapest port in Changshu, CXP competes on capacity and service quality. CXP’s average turnover for cargo is five days. Apart from providing stevedore services, CXP value adds its services by sorting cargo for its customers. CXP’s seamless and efficient operations help in customer retention.

#3 Earnings are sustainable
Earnings will be sustainable supported by mill expansion in the area. We believe freight volumes will continue to remain healthy. Since 2006, CXP has developed its log cargo business in addition to steel, pulp and container cargo. Management is currently exploring the possibility of handling a fifth type of cargo. For now, we expect cargo volumes to be sustainable, supported by robust log demand and expansion of steel and paper mills in the area.

Warehousing revenue could develop. Currently CXP offers warehousing facilities for Borax with Rio Tinto and warehouse services for Europort. These currently contribute 4% to CXP’s revenue. As there is now no longer the requirement that was made by MIIF to pay out 100% of earnings as dividends, earnings can now be retained by management to develop its port business such as the warehouse segment going forward

Key Risks
Loss of customers to other competing ports. We identify the port’s key risk to be the loss of volumes from customers changing ports. However, we do not foresee that this risk is high. Customers risk facing a change in operating efficiencies apart from switching based on costs should they decide to move ports. In terms of services, the capacities of most of the neighboring ports are relatively smaller. Furthermore, being privately as opposed to state owned, CXP has relatively better service efficiencies that would enable it to lock in existing customers. Higher port development costs mean that newer competing ports may not be able to lower their rates significantly in order to be profitable. In contrast, CXP’s 30% breakeven utilisation rate provides it with room to lower rates when required. Besides, the decision to change ports is not solely dependent on the receiver, as the shipping lines and shipping agents play a part in this decision as well.

Group earnings still driven by RMC business
RMC continues to be key earnings contributor. Despite increasing its stake in CXP, RMC segment is still PAN’s largest earnings contributor at 65%. PAN’s outlook will continue to be driven by construction activities in Singapore.

Bright outlook for Singapore construction. The Land Transport Authority (LTA) will create more rail connections through the construction of two new rail lines (Cross Island Line and Jurong Regional Line) and three new extensions (Circle Line, Downtown Line, North-East Line) as part of the Land Transport Master Plan 2013. The rail network will be expanded every year from now till 2021, with further developments between 2020 and 2030. By 2030, Singapore’s rail network would have doubled from the existing 178km to about 360km. Eight in 10 homes will be located within a 10- minute walk from a train station. We expect PAN to benefit from this trend as it has been a key RMC supplier to the existing Downtown Line MRT projects.

Expect Downtown lines 2 and 3, Thomson Line to support growth. Revenue and earnings growth going forward will continue to be supported by work on MRT construction projects –Downtown Lines 2 and 3 - for the coming quarters as well as Thomson Line for next year. We are expecting raw material costs to trend slightly higher, but believe margins will remain manageable.

Valuation
Maintain BUY, TP S$1.21. The CXP visit has given us confidence that port earnings will be sustainable going forward. We have not made any major changes to forecast and outlook for now. PAN should be able to maintain DPS despite retaining some portion of CXP’s earnings for port
development. Reiterate BUY and S$1.21 TP.


Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 17/10/13

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