Hutchison Port Holdings Trust FY 2017

Overview
Global trade outlook remains positive due to continued growth in economic activities in the US, Europe, China and India. Shipping lines are moving into mega vessels to attain capacity and fleet optimization to achieve cost efficiency. In addition, focus has shifted from port performance to supply chain performance to drive competitiveness and operational efficiency. Hong Kong remains a strategic transshipment hub and a preferred gateway to the Pearl River.

Financial Performance
Revenue in 2017 dropped 3%, HKD 11, 551 million compared to HKD 11,912 million in 2016. In 2017, 64% of the revenue is derived from China.

The total CAPEX sheds by 52% to HKD 841 million in 2017 compared to HKD 1,765 million in 2016.  The CAPEX in 2015 was HKD 2,042 million. In 2014, the CAPEX was HKD 1,106 million. I think the CAPEX should be considered a normal level at HKD 1,000 million level.

The Distribution Per Unit (DPU) has dropped to HKD 20.6 for the overall year.

From the Income Statement, the key item for me is the Interest and other Finance Costs, it has increased by 22% from HKD 701.2 million to HKD 856.9 million. The overall operation is seen to be undergoing cost cutting measures but the profit is still lower than previous year. The Profit after Tax drops by 30% to HKD 944.2 million from HKD 1,356.6 million. Rising interest rates environment coupled with increased new borrowings (FY 2017 was HKD 11,736.8 million and FY 2016 was HKD 9,426.6 million).

1. Payout Ratio is 200%.
2. Dividend will continue to drop as revenue drops and interest expenses increase. Double whammy situation.

7% price correction on 2nd February is too steep

Based on 1st February 2018, the National Development and Reform Commission has reduced the tariff rate for origin and destination foreign trade containers at Shenzhen - Yantian ports from RMB 1400/TEU to RMB 980/TEU. Through Yantian International Container Terminals which contributes 64% of HPH Trust's revenue, it contributes less to the bottom line as a 50+% owned subsidiary of HPH Trust. YICT's Average Selling Price is already lower than the new tariff rates, this will allow the port operator to negotiate for better terms. I don't think this will affect HPH Trust.

I will conduct a study on the China ports to understand the competition HPH Trust is up against. I will dispose HPH Trust when the price has reverted back to the mean (when my losses are less significant).