Sunday, November 17, 2013

Initiate position on HPHT at 85 cents



Me bad, I couldn't wait for 84 cents.

I am willing to accumulate further if it drop further.

Why I am buying and what should you be concerned with:

1) Labor costs will not cause a dent to earnings even if you give an 20% increase in staff cost, as staff cost is small. Inflation will be a bigger scourge. Staff cost just make up 2% of revenue.

2) Quality of assets. This is more qualitative than quantitative, the shortest concession is 30 years for Yantian Phase 2 ports, Hong Kong ports have 34 years concession, better than some of the industrial properties leases. Yantian is the biggest port in Shenzhen, and I seriously do not think trading at 2 such places will be dying anytime soon. If economy of US and Europe improve, these 2 ports should improve. Ports are evergreen industry, it is choosing the winner ports that are important. Forget about the fast growth in both Yantian and Hong Kong though, Billionaire Li will not sell them if they are still fast growing like Shanghai, but it should get better with better economic numbers.

Also,  "Guangdong, is applying to establish a Guangdong-Hong Kong-Macau free trade zone, which is likely to be approved by Beijing by the end of this year. Different from the newly established Shanghai free trade zone, the Guangdong-Hong Kong-Macau free trade zone will cover multiple cities at the Pearl River delta." (source: sino-shipping news http://www.sinoshipnews.com/news_content.php?fid=3w3c1989). Yantian should benefit from such development

Yantian still attracting looping calls from P3 shipping companies despite not owned by any of the P3 shipping companies. (Source: http://www.hellenicshippingnews.com/News.aspx?ElementId=f399e77e-3694-4f39-b5c6-a4bbe764cf14 Hellenicsshipping news), losing only to Shanghai  and equaling Singapore.

In short, I felt the worst in terms of operating numbers for the ports should be near, barring economic crisis.

3) Price paid, I am paying for a 7% yield at current price, using the conservative DPU of 36 cents. No brokerage houses  IIRC forecast a DPU as low as mine. If they are right, I am happy. To pay this amount, they need to payout about 3.6 billion HKD. 9 months OCF is already about 3.7 billion. If you annualized it, you should get  4.9 billion. To have a FCF of 3.6 billion is not a tall order, accounting for capex of 1.3 billion in for the whole of 2013 would mean a capex of about 700 million in 4th quarter, not too liberal in my view, given that 9months capex is only 584 million. Even if capex increase to 1 billion, yield will still be above 6.5%. To me, a 6.5% -7% yield is sustainable in current circumstances for years to come, with potential for upside.

4) They refinance their 3 billion USD loan recently, there is no information of tenture of loans, will have to wait for AR2013 to study them, but risk of interest rate hike impact earnings should be few years down the road.

5) Unlike reits who can buy and sell properties to renew that overall leases, HPHT has a fix concession to ports assets, so one should treat the investment as a return to capital type of investment. It is not an investment whereby you can sleep on it for passive income for decades.

6) Selling pressures from Capital Group. Capital group do not own HPHT directly but act as manager for their clients and their funds, apparently, they do not like HPHT, and they have been selling down since IPO. They only bought once, and is a forgettable amount. DBS is a net seller, although it bought recently at 72 USD cents.

This is not a buy call, I have no idea the price movement over the next few weeks. If it fall below 80 cents, I might buy further. Its your money, take care. Just sharing my thoughts and doing some "advertisements", you need to do your own research, I will not be liable for any losses.

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