Share Price S$0.90
Target Price S$1.25
Earnings driver from one of China’s top ten ports
• Maintain BUY and target price of S$1.25.
• We met with management recently to get an update on their plans for Changshu Xinghua Port (CXP) after completing the acquisition of an additional stake in the port.
• A proven profitable business. CXP serves some of China’s fastest growing industrial regions, like Suzhou, Wuxi and Changshu that still enjoyed GDP growth of more than 10% in 2012. Given its strategic location, CXP has been profitable for the last 12 years. From 2009 to 2012, CXP contributed steady net profits of S$6.4m-8.8m (16-31% of PUC’s net profit) based on Pan United’s (PUC) 51.3% interest in CXP then.
• More control, more profits, more diversification. Currently, PUC has an effective interest of 85.5% in CXP. Profit contribution from CXP would have risen from S$7.6m (16% of PUC’s net profit) to S$12.7m (26% of net profit) if the acquisition of the additional stake was completed at the start of 2012. This will reduce PUC’s reliance on the local construction sector, where contributions from basic building resources made up 63-82% of PUC’s net profit in the last three years.
• Entering the next phase of growth. Restricted by previous obligations to pay out dividends annually at the port level, there were insufficient resources to grow port operations aggressively. With a greater control over CXP, PUC now enjoys higher flexibility in extracting value from one of China’s top ten busiest ports.
• The growth driver. Warehousing and logistics currently forms about 4% of CXP’s revenue. CXP also stores cargo related to port operations. While there are presently 14 warehouses with an area of 107,300sqm, CXP still has additional yard storage of 608,147sqm. Given CXP’s strategic location and sunken land costs, PUC intends to grow its bottom line by building new warehouses to provide storage services not related to its port operations.
• A demand to support it. Business activities remain robust in Changshu with companies like UPM, Jaguar Land Rover and Chery looking to add new manufacturing facilities by 2014. The expansion of business activities around CXP will underpin the demand for additional warehouse storage in the area.
Publish date: 03/10/13