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).

JC Fund + (JC Options Fund 2nd month review) - mistakes mistakes and more mistakes

As you can see Corning sell put option represents a high chance that it will be exercised. I sold put at 31 and as I am typing, the price has dipped to 29+. 

Lesson 1 - Never sell put/call into the earnings session unless I am very confident of the direction where it is heading. Even so, I should try to avoid at all cost because the stock price becomes very volatile.

Lesson 2 - I need to do more homework on the individual business.

Lesson 3 - I should create a shopping list just for options - income generating purpose only.

There is a high probability I need to standby some funds for Corning and UAA (why did I buy UAA and not UA?!). 

Another mistake I made this week is to sell out half of HPH Trust USD because the share price recovered to USD 0.46 after it ex-dividend. You can call it a mistake but I want to rebalance my portfolio and shift more of my funds into high ROE and ROIC companies. 

Well, I am going to be patient (as advised by a friend Mr Chia F.L. for me to take lesser bats like Warren Buffet) and hold some cash for a better opportunity before I take position. 

Hutchison Port Holdings 2nd Q 2017

Today was a painful day for HPH Trust, it dropped by more than 7% from a high of 0.48 yesterday. Yesterday after market closes, the results came out. June 2017 throughput of HPH Trust' deep-water ports was 5% above last year. YICT' throughput was 4% above last year. Combined throughput HIT, COSCO-HIT and ACT (collectively "HPHT Kwai Tsing") increased 4% yoy. YICT's throughput growth in the first six months of 2017 was mainly attributed to the growth in US and EU. The increase in HPHT Kwai Tsing's throughput was largely due to stronger transhipment.

However, Distribution Per Unit dropped to 9.5 HK cents from previous 14 HK cents. The high dividend yield is no longer sustainable. HPH Trust managers felt that freight rates are weak and shipping lines will continue to seek ways to reduce cost and become more efficient through the use of facilities and manpower synergy. Global trade is forecast to rebound in 2017, they felt this may be the bottom.

From the figure, it seems to be painting a better picture in terms of throughput volume. So what went wrong?

The Total Operating Expenses is reduced by 5% from 4,029 to 3,808 HKD million. The issues come from the Interest and other finance costs which was an increase of 17% from 346.4 to 403.9 HKD million. This is primarily due to HIBOR/LIBOR applied on the bank loans' interest rates. Share of profit/losses after tax of Associated Cos/JV is negative 15.3 HKD million. This reflect the share of HICT's result following the completion of the acquisition by HPH Trust at the end of 2016.

Taxation was higher than last year due to increase of YICT Phase III Expansion and West Port Phase I's tax rates following the expiry of their tax exemption period, but was partially offset by lower profit and tax savings from YICT Phase I & II as it qualified as "High and New Technology Enterprise" in November 2016, which entitles YICT Phase I & II to a preferential corporate income tax from 2016 to 2018.

Total Operating Profit was HKD 1663.9 million, HKD 425.9 million or 20.4% below last year. Overall, profit and profit attributable to unitholders of HPH Trust was HKD 937.6 million and HKD 436 million respectively. Excluding HIT's rent and rates refund in 2016, profit was HKD 130 million or 12.2% below last year and profit attributable to HPH Trust was HK 104.6 million or 19.3% below last year. 

From the above figure, there is one positive sign which is stronger free cash flow of HKD 1,206 million as compared to HKD 607.8 million for 2016 Q2. Overall HPH Trust is producing positive Operating Cash Flow and increasing free cash flow. I see this as a positive sign unless the company is trying to delay CAPEX. The notes explain that purchase of fixed asset, projects under development, leasehold land and land use right were HKD 462 million for the period ended 30 June 2017 whereas it was HKD 1,284.5 million for the period ended 30 June 2016. The decrease was mainly due to the capital expenditures incurred for West Port Phase II Project in 2016.

All the negative results cause the big reaction by shareholders today. Shareholders are punishing the stock. I queued at USD 0.47/share to clear half of my holdings but I was too slow to amend to USD 0.46/share. Then it plunges to USD 0.445/share by noon time. Let's wait a while but I am quite sure it will drop to USD 0.4/share in the short term and recover over time.

HPH Trust FY 2016

Overview

2016 full year throughput of HPH Trust’s deep-water ports was 6% below last year. YICT’s throughput was 4% below last year. Combined throughput of HIT, COSCOHIT and ACT dropped 8% yoy. Although outbound cargoes to US and EU showed a positive trajectory in 2016 and grew at a faster rate in the fourth quarter of 2016, YICT’s throughput overall declined compared to 2015 as it was adversely impacted by the decrease in empty and transshipment cargoes. The decline in HIT’s throughput was mainly attributed to weaker intra-Asia and transshipment cargoes. Revenue and other income was HK$11,912.3 million, HK$700.5 million or 6% below last year. 2016 full year NPAT was HK$2,954.0 million, HK$90.6 million or 3% below last year. NPAT attributable to unitholders was HK$1,713.6 million, HK$31.3 million or 2% below last year.

Outlook and Prospects

As a result of the strong rebound in economic activity in the US in the second half of 2016 supported by robust employment data, outbound cargoes to the US escalated in the fourth quarter of 2016. However, there remains a high level of uncertainty on the policy stance of the new US administration and its domestic and global ramifications on the US economy and trade in 2017.

The moderate uplift in outbound cargoes to Europe when compared to 2015 is largely supported by the stable, albeit slower pace of growth of the European economies in 2016. However, continued weak consumer sentiment and high unemployment rate is expected to hinder the speed of economic recovery in Europe and the pickup of the European trade in 2017.

In addition to the economic performances of the US and Europe, HPH Trust's performance is also impacted by the outcomes of the structural consolidation within the container shipping industry. The service rationalization of various global shipping alliances has negatively impacted the transshipment volume of both HIT and YICT in 2016.

Shipping lines continue to deploy mega-vessels to achieve economies of scale, reform their carrier alliances to improve efficiency, control costs and expand the coverage of vessel-sharing schemes to enhance competitiveness as seen by the recent announcement by Japan’s big three shipping groups, Kline, MOL and NYK to merge their container shipping businesses. HPH Trust is well positioned to be the preferred port of call for mega-vessels given its natural deep-water channels and unparalleled mega-vessel handling capabilities. The recently signed co-management arrangement for the 16 berths across Terminals 4, 6, 7, 8 and 9 in Kwai Tsing, Hong Kong is expected to deliver cost and operational synergies as a result of a more efficient use of the facilities and manpower resources which will enhance the overall competitiveness of the services offered by HPH Trust in 2017. The acquisition of HICT in 2016 is expected to provide additional handling capacity and generate operational synergies with Yantian International Container Terminals through sharing of resources and better utilization of port and related facilities in 2017.

Key Business Update

Revenue 

Total Capex - Need to explore throughout all the years

Distribution

DPU for the year ended 31 December 2016 is 30.60 HK cents which is about 9% yield based on USD 0.435 market price. 

Financial Results

Due to changes in depreciation to a shorter duration, the depreciation amount is increased. Staff costs decreased from 306.6 to 297.4 in 2016 which is 3% improvement. I look at Singapore companies such as SIA engineering, they increase staff cost at the expense of shareholders whereas HK and US companies will run their company more prudently by keeping cost low. Such is the typical lives of employees. 

The Profit after Tax for FY 2016 in my context (prudent) = 2954 - 70.5 - 357 = 2526.5

Profit after Tax for FY 2015 = 3044.6 - 155.5 = 2889.1 

We see a decrease of 12.5%

I see that both current liabilities and non-current liabilities increase by approximately 14%.

Cashflow Statements -> Operating Cashflow increases but it is due to tax savings. Nonetheless, the cash generated from operations is flat compared to the year before. It is good sign to see that CAPEX is been reduced but there can be a limit before the equipment needs to be renewed/repaired/replaced. 

It is interesting to see that the total borrowings for FY 2016 is lesser than FY 2015. Is it a sign that things are turning around? HPH Trust USD has higher free cash flow than last year.

Conclusion

I believe the company has sufficient cash to continue to pay dividend.