Saturday, December 14, 2013

HPHT- Betting on Yantian to deliver

Readers would know that I have accumulate HPHT, when the price is beaten down recently. Let us look at the numbers again.


Capex for 2012 and 2013 thus far.

~598 mio HKD and 584 mio HKD

From prospectus,

"West Port Phase II has incurred approximately HK$0.2 billion in construction costs, with approximately HK$3
billion more required to complete construction., to be completed by 2015", and

"The Trustee-Manager anticipates that the total capital expenditure of HPH Trust in 2011 and 2012
will be approximately HK$1,986.9 million and HK$1,172.1 million"

Given Yantian phase 3 is completed by mid-2011, we can assume development capex is for West Port Phase 2 and they are still about 1.8 billion HKD short to complete it in 2015. (Maintenance capex is in the low of 150 million only )

At such, my preliminary estimate of 1.3 billion of capex every year is rather high. We can assume 1 billion capex barring cost overrun and HPHT can still complete the project in 2015.

Thereafter, 2015, there is East Port phase1, but there is no confirmation and HPHT has no stake in it as of yet, just general agreement to the rights to development, and not concession yet.

Capex is not such a big monster afterall.

Labor costs

I wrongly assume labor costs to = staff costs

My mistake, according to prospectus, the contract workers costs is under direct costs of costs of services rendered. Now lets work the numbers a bit.

From prospectus:

"Direct charges amounted to 50.5%, 45.1% and 50.4% of the cost of services rendered of HIT in
2008, 2009 and 2010, respectively. Staff costs for operational staff amounted to 26.8%, 34.0% and
28.8%, respectively, of the cost of services rendered of HIT for the same periods"

Assume 30% of cost rendered is staff cost, and this will face a 9.8% increase due to workers strike demand

And for Yantian, 25% of cost rendered is staff cost, and this will face a 30% increase (From figure from news)

Annualised 2013 figures, cost of service rendered is 4.4 billion, est 230 million mio increase in costs. There is about 5% increase in overall costs.

Expiry of TAX holiday- insignificant

FCF =OCF *0.65 - 1

= 3.1 billion -1

=  2.1 billion

Sustainability of good distribution is still dismayed.

The only hope is that Yantian which generates more revenue from moving O&D containers will be well-placed to take advantage in any US economic recovery, the recent PMI figure of 51.4 in china and trade figures in China for Dec also show both Imports and Exports to be improving.

In fact, due to the above mentioned better figures and the development of free trade zones(speculate to be either in Guangzhou or Tianjin) in China "Share prices of Chinese operators witnessed a sharp rebound in 2H 13. For instance, Cosco Pacific (1199 HK), CMHI (144 HK) and Tianjin Port Dev. (3382 HK) rose by 20%, 19% and 38% respectively, compared to drops of 9%, 3% and 8% in 1H 13. The Chinese economy has reacted well to the stimulus announced by the Government at the end 1H 13, which focuses on improving small businesses, exporters and railway development plans.  China’s official Purchasing Managers Index (PMI) recovered from a low of 50.1 in June to 51.4 in November, and monthly import growth has also gathered pace since its low in the middle of this year." (source:

Yet, HPHT has fallen 14%. Although HPHT might be more expensive than its HK peers in terms of PER, the performance is too drastic, it is not just stagnant, it is falling by a Hugh percentage of 14% when its HK peers race ahead due to better numbers from China, it is as if, HPHT ports will not benefit from the better numbers. I do not think that is justifiable.  In fact, the report mention strong optimism for Tianjin Port due to the possibility of free trade zone in that area, when the guangzhou area is the forerunning to be the next free-trade zone after Shanghai, why is the optimism only absent in HPHT? I felt there is just too much pessimism in HPHT. The article always felt Yantian will benefit from better trading in US and Europe.

This is not a buy call, but a writing to crystallise my thoughts why I am still buying:

In conclusion:

1) Capex is not such a big monster since they need only 1.8 billion to finish West Port Phase 2 by 2015

2) Labor cost increase in manageable

3) Expiry of tax holiday is insignificant

4) Positive development of the broader market (Free trade zone, and improving trade numbers and manufacturing numbers)

5) Relative shares' performance compared to other china port plays. (Time for catching up after capital group finish their sell-down?)

6) Management short but 2 years record of keeping to their projected distributions. They need to distribute 22 HKD cents for 2H.

I believe 4) and 5) to be the short term catalysts.

P.S. (I am still waiting for IR reply regarding some questions on APTT, when I received it, I will blog in details about it.The second of trusts that I bought recently)

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