Pan United Corp
Target Price (SGD) 1.270
- Previous Target Price (SGD) 1.210
Visit to Changshu Xinghua Port
Pan United’s Building Materials business commands a one-third market share in both cement and ready mixed concrete in Singapore. Its Ports & Logistics division owns 85.3% of CXP, a top 10 multi-cargo river port in China. The company also operates a Shipping fleet of 10 tug & barge pairs.
Oct 2013 Port Visit to CXP
• We paid a visit to Changshu Xinghua Port (CXP), Pan United’s jewel of an asset that generates >40% ebitda margins and has a capacity breakeven utilization rate of 30%.
• The visit helped us to appreciate the port business a lot more and confirms to us that Pan United has the management capability to maximize the returns on CXP.
• The natural advantages of CXP in terms on location, depth and size are well known, in this trip we appreciated how management positions CXP to be a “comfortable port” to enhance customer stickability by being a one-stop service of stevedoring, full-range of logistic serves, and all the requisite government bureaus.
• Management also affirms that it is looking into expanding the warehousing business of CXP, and of diversifying into a 5th cargo.
We maintain our earnings forecasts and TP of $1.27 on an Accumulate rating. At S$0.975, Pan United is trading at 11x FY13e earnings, 4.5% forecast yield. We believe the company remains a long term buy given its 30% market dominance in the ready mixed concrete market in Singapore making it a compelling proxy to Singapore’s multi-year infrastructure boom, as well as CXP being a good proxy to China’s economic growth.
For a more detailed description of PUC’s business units, please refer to our initiation report dated 24th Dec 2012.
Recent visit to Changshu Xinghua Port confirms it as a key driver for the group going forward Natural Advantages:
• The natural advantages of CXP are well known, but it would be good to revisit them to appreciate the economic moat of the asset:
1. CXP is the western most port on the Yangzte River with an ocean-going depth of 13.3m (no silting!) capable of taking 100k dwt vessels.
a. The depth means that large ocean going vessels can load/unload without the need for smaller vessels thus removing extra logistics costs/risk and cutting down on pilfering.
b. The location captures 2 sets of audiences: it an ideal gateway to the central hinterland of China for large ocean going vessels to load/unload, and it has a captive audience in the Changshu-Wuxi- Suzhou industrial region (20% China’s GDP) at its doorstep.
2. The size of CXP (long 1.7km berth length, 1mil sqm land, 105k sqm warehouse, 600k sqm yard space) means that there is ample capacity to load/unload at one port alone, again cutting down on logistical risks and added costs.
• Having natural advantages is important, but the other takeaway we got was that management has established CXP as a “comfortable port” where business can be conducted with “peace of mind” in a “low risk” environment. In other words, stickability allows CXP to be, in management’s own words “not the cheapest port around” – working backwards to derive revenue per ton we notice that CXP is able to drive the metric, even after adjusting for changing product mix.
•To achieve stickability, 3 other key stakeholders in the import/export process have to be satisfied: shipowners, importers, and exporters. Shipowners seek to berth for the minimum amount of time. Exporters and Importers seek to load/unload goods as quickly as possible to avoid demurrage (charges related to time exceeded for loading/unloading is born by charterers). To achieve this CXP is a One-Stop Logistics Service:
1. Stevedoring (loading/unloading) services:
a. Containerized General Cargoes
b. General Cargoes in breakbulk and bulk
c. Refrigerated, liquid and dangerous cargoes
d. Project Cargoes
2. Full range of logistics services:
b. Value-added processing (sorting)
c. Stuffing and unstuffing
e. Port-to-port distribution
3. All requisite government bureaus located within CXP
b. Frontier inspection
c. Commodity inspection
d. Animal & plant quarantine
e. Health quarantine
f. Harbour master
g. Port Administration Office
h. Pilot Station
4. SIZE matters. In order to be a One-Stop Logistics Service, capacity matters – berth length, land, warehousing, yard space – all of which CXP has to complete the full set of advantages.
•CXP has positioned itself as a premium services port. But in the off chance of price competition, CXP’s low breakeven utilization rate of 30% remains a deterrent as it is quite likely none of the competing neighbouring ports can operate at that level.
Earnings: Throughput, Warehousing, a 5th Cargo.
• Throughput: Although we talk of capacity utilization, for a Port, this is really not the best way to measure utilization, throughput is more accurate – as rates charged are in revenue per ton, the faster goods move thru the port, the more goods can be pushed thru. The maximum limit, therefore, of how many tons CXP can move over a given frame of time, therefore, is function of efficiency and size. The more efficient you are, the more goods can be pushed thru, the more revenue. You actually don’t want goods to linger even if that results in storage revenue. It is therefore crucial to monitor volumes moved over a given time frame. From the table below, volumes through the port have been increasing (we estimate average 9% growth per year since FY05), while average revenue per ton has also increased.
•Warehousing: When Macquarie Infrastructure Fund was a major shareholder, CXP had to payout the majority of its earnings as dividend back to the fund rather than retain them for reinvestment. Now that it is no longer a shareholder, CXP has greater leeway to explore expanding its warehousing facilities as a new earnings driver. Currently it provides warehousing facilities to Europort and Rio Tinto for storing borax.
•5th Cargo: Changshu’s major industries are textiles, paper-making, fine chemicals, machinery, steel and forestry. CXP is already heavily involved in paper (~19% China’s imports), steel, and forestry (logs, ~11% China’s imports), and we expect this to continue given Changshu’s leadership in these industries. Along with containers, Management reveals that it is exploring handling a 5th cargo, which it is keeping under wraps at the moment. Our own speculation is that it could be in textiles, chemicals, or machinery, the other 3 major Changshu industries which CXP has yet to establish a major presence in. We eagerly await a 5th cargo as a new earnings driver.
Basic Building Materials business (cement & ready mixed concrete) market leader in size (30% SG), innovation, vertical integration, track record
Changshu Xinghua Port has location, depth, and size that gives it a competitive advantage. Location: gateway to the western hinterland and a captive audience in the Suzhou-Wuxi-Changshu industrial region (20% of China’s GDP) at its doorstep. Depth: 13.3m, good for 100k dwt vessels. Size: 1.7km berth, 1mil sqm land, >100k sqm warehouse, >600k sqm yard space.
Pan United’s management has strong track record of creating shareholder value and rewarding shareholders
Shipping business has little economic moat (but completes vertical integration of BBM)
BBM earnings can be volatile with construction cycles, but we note that SG public works demand is in a new era – 2012 white paper reckons 5 to 10 years construction required to close the infrastructure gap for the current 5.3m residents, what more if the population expands to 6m?
SG multiyear infrastructure boom. 2014 sees the S$18b Thomson Line, East West Regional Line, S$8b North South Expressway, Terminal 4 Changi Airport, continued expansion of Tuas Megaport. Having 30% market share proxies this opportunity very well.
CXP to continue to entrench its position serving an important industrial heartland of China.
Global players in ready mixed concrete could enter the SG market aggressively and challenge Pan United’s BBM dominance.
Publish date: 31/10/13