Hutchison Port Holdings Trust (DBSVickers)

COSCO Pacific July 2011 operating data - implications for HPH Trust

BUY US$0.675 STI : 2,874.40

Price Target : 12-Month US$ 1.05

Operating statistics for ports co-owned by Cosco Pacific and HPH Trust indicate that Yantian throughput volumes fell 2.9% y-o-y in July 2011. This is in line with our expectations as we have already highlighted that y-o-y growth rates in July and August will not make for good reading, owing to the early onset of the peak shipping season in 2010. We expect the 2011 peak season to arrive later, end later and also be weaker than previously estimated, and have already reduced our fullyear FY11 volume growth projections for Yantian to 4% and HK to 5% from 6-7% previously, in our last report.

A look at the chart below illustrates the point about how we feel volumes will play out at Yantian Port in 2011, compared to 2010. As highlighted earlier, the peak in 2011 will be more traditional months of August to October, rather than the July-August peak we saw last year. July is already a much better month than June 2011, with volumes up 11% m-o-m.

The operating numbers also indicate that volumes at HPH Trust's HK JV (COSCO-HIT) grew an impressive 8.7% y-o-y, and YTD performance at COSCO-HIT is above expectations (YTD throughput growth of 7.6%). As to data from Hong Kong port, we note that throughput growth at Kwai Tsing terminals came in at 2.8% for July 2011, and YTD growth stands at 2.9%. Given that competitor MTL has seen Maersk volumes shift partly to Nansha, we estimate HIT throughput growth to be comfortably tracking our 5% growth rate assumption for FY11.

Thus, we would prefer to look beyond the near term weakness in Yantian Port's operating numbers and advise investors to accumulate the Trust at current bombed-out valuations (8.0% FY11 and 8.7% FY12 dividend yield). Current valuations seem to be implying negative trade growth and negative EBITDA growth of almost 20% in FY12, which we don't think is a realistic possibility even if the world goes into similar levels of recession as in 2008-09. All we are expecting at this point of time is potentially slower-than-previously estimated economic growth and trade growth in the near-to-medium term, which does not justify the sharp selldown in HPH Trust's shares. Maintain BUY with TP of S$1.05.