Price Target: $0.75
Upgrading to OW, pessimism over the trust's outlook appears overdone
•HPHT has fallen by c20% since Nov (vs -4% for FTSTI) driven by concerns over the sustainability of its payout, given: (1) Yantian’s weak volume since the beginning of the peak season (throughput dropped 5% Y/Y during Aug-Oct); (2) Potential negative impact on HK's transshipment (“T/S”) with the upcoming formation of P3 network; (3) Challenges to HK’s status with China’s establishment of free trade zones, first started in Shanghai and to be rolled out to other major ports in the coming years.
•Recent sharp correction appears overdone as such concerns may have been overblown. In our view: (1) Yantian's throughput recovered strongly in November, up 7% Y/Y, driven by ladens (up 8% Y/Y) – a positive surprise; (2) The planned alliance among the world’s top three container shipping companies – Maersk, MSC and CMA CGM (expected to function from mid-2014), though potentially affecting HK’s T/S flow should benefit Yantian and hence the net impact may be neutral as estimated by HPHT’s mgmt and our industry contacts; (3) Despite high expectations on what China’s free trade zone can achieve, no concrete policies have yet been introduced, proving such plans could effectively promote free cross-border commodity and capital flows to hamper HK’s status. It is also unlikely that China will abolish the cabotage rule in the near future.
•Takeaways from the JPM infra & industrial CAD (held on Dec. 3-4): Though the Trust has not yet released its volume growth guidance for 2014, existing guidance of ASP increase of c2% has been maintained (to be driven by positive mix changes at HK and Yantian as well as continued conversion of billings at Yantian), offsetting the increase in operating expense (at 3~4%, driven by an estimated c7% rise in labor costs). Mgmt expressed optimism at the 3Q briefing towards achieving the lower end of the distribution target for this year, while noting its intent to keep distribution steady in coming years.
•Upgrade to OW: We make minor revisions (DPU changed by -2%/0% for FY13/14E), while keeping our Dec-2014 DCF-based PT unchanged at $0.75, which offers c20% potential upside from current levels. HPHT’s current yield of c8% appears compelling in our view. We hence upgrade to OW in light of the attractive risk-reward trade-off.
Publish date: 11/12/13