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Singapore Company Focus

Hutchison Port Holdings Trust


Bloomberg: HPHT SP

Reuters: HPHT.SI

DBS Group Research . Equity

30 May 2011

BUY US$0.915 STI : 3,135.52


Price Target : 12-Month US$ 1.15 Reason for Report : Company Update Potential Catalyst: Stronger than expected throughput growth Analyst Paul YONG CFA +65 6398 7951 paulyong@dbsvickers.com Suvro SARKAR +65 6398 7973 suvro@dbsvickers.com

Smooth sailing so far


Year-to-date throughput numbers in HK and Yantian Port are largely on track with our expectations 7%-8% throughput growth along with modest improvement in rates to drive EBITDA growth in FY11 Maiden interim DPS of c. US 1.8cts projected when HPHT reports 1H11 earnings before mid August Maintain BUY and US$1.15 TP Throughput volumes on track with our projections. Throughput volumes for the first four months of 2011 rose by 5.7% y-o-y at Yantian Port, 7.9% at COSCOHIT, and we believe by between 6%-8% at HIT, which means that operations at HPH Trust are on track to meet our expectations for FY11. Firm prospects over the short and medium term. We like HPH Trust for its stable and growing earnings profile, which we believe will be driven by continued rising trade volumes into and out of the Pearl River Delta region, translating into an annual growth of 10% in distributions to unit-holders for the next few years. HPH Trust is due to report its interim results by mid-Aug, and we are expecting a DPS of c. 1.8UScts to be declared. Maintain BUY and US$1.15 TP. Given that HPH Trust seems to be well on its way to meet our projections in FY11/12, current FY11/12 yields look very attractive at 6.6%/7.2%; expect DPU CAGR of 10% up to 2013. Maintain BUY on the stock with a TP of US$1.15. This implies a total return potential in excess of 30% at current prices. Amongst Singapore listed REITs, Business Trusts and high yield plays, HPH Trust offers one of the highest combinations of yield and DPU growth.
At A Glance Issued Capital (m shrs) Mkt. Cap (US$m) Major Shareholders Hutchison Whampoa (%) PSA International (%) Capital Group (%) Free Float (%) Avg. Daily Vol.(000)

Price Relative
US$ 1 .1 0 1 .0 5 169 1 .0 0 0 .9 5 0 .9 0 69 0 .8 5 0 .8 0 M a r-11 19 11 9 R e la tiv e In d e x 219

H u tc h is o n P o r t H o ld in g s T r u s t ( L H S )

R e la tiv e S T I IN D E X ( R H S )

Forecasts and Valuation


FY Dec (HK$ m) 2010A 2011F 2012F 2013F

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (US cts.) EPS Pre Ex. (US cts.) EPS Gth Pre Ex (%) Diluted EPS (US cts.) Net DPS (US cts.) BV Per Share (US cts.) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus DPS (US cts.): Other Broker Recs:

11,408 7,013 3,592 2,131 2,131 3.1 3.1 N/A 3.1 0.0 101.0 29.1 29.1 13.1 15.1 0.0 0.9 0.3 3.1

12,491 7,497 4,061 2,293 2,293 3.4 3.4 8 3.4 6.0 101.4 27.0 27.0 12.3 14.0 6.5 0.9 0.3 3.3 5.1 B: 7

13,661 8,343 4,765 2,685 2,685 4.0 4.0 17 4.0 6.6 99.1 23.1 23.1 11.4 12.6 7.3 0.9 0.3 4.0 6.6 S: 5

14,837 9,198 5,625 3,149 3,149 4.6 4.6 17 4.6 7.2 96.8 19.7 19.7 10.5 11.5 7.9 0.9 0.3 4.7 6.9 H: 1

8,709 7,969 27.6 10.4 10.1 50.0 91,881

ICB Industry : Financials ICB Sector: Equity Investment Instruments Principal Business: HPH Trust owns deepwater container terminal assets in the Pearl River Delta region of China

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: YM

Company Focus Hutchison Port Holdings Trust

Year to date throughput estimates largely in line Based on reported numbers from COSCO-Pacific (HPH Trust does not disclose monthly operating statistics), throughput volumes at HPHTs COSCO-HIT terminals and Yantian Port rose by 3.7% y-o-y and 8.8% y-o-y respectively in the month of April. For the first four months of 2011, combined throughput at COSCO-HIT has increased by 7.9% and for Yantian Port, by 5.7%. Yantians throughput growth rate YTD in 2011 has been faster than the rest of the Shenzhen ports, which is in line with our assumption that Yantian will increase its market share in Shenzhen, going forward. Throughput Volumes at COSCO-HIT and Yantian
COSCOHIT 141,100 106,400 132,200 144,300 524,000 % Chg y-o-y 11.0% 5.6% 11.7% 3.7% 7.9% Yantian Port 934,500 569,400 773,500 776,100 3,053,500 % Chg y-o-y 17.2% -12.1% 5.8% 8.8% 5.7%

Throughput Volumes at Yantian port


1,200 1,100 1,000 '000 T E Us 900 800 700 600 500 400 Mar Sep May Aug Nov
Nov

2010

2011

Source: COSCO Pacific

TEUs Jan-11 Feb-11 Mar-11 Apr-11 YTD

Throughput Volumes at COSCO-HIT Terminal


160 150 140 '000 T E Us 130 120 110 100 90 80 Mar Sep May Aug Dec Jan Feb Oct Apr Jun Jul 2010 2011

Source: COSCO Pacific

Meanwhile, throughput volumes at Kwai-Tsing Terminals, which includes HIT, COSCO-HIT and MTL (Modern Terminals) grew by 6.7% y-o-y in April and by 4.5% y-o-y for the first four months of 2011. This is higher than the overall growth rate in HK Port (which includes river ports and mid-ocean terminals). Taking into account the fact that competitor Modern Terminals lost some volumes when Maersk Lines shifted some of their handling requirements to Nansha Port, Guangzhou, we believe HITs throughput volumes would have grown at a faster pace than Kwai-Tsing Terminals as a whole at around 6%-8% for the first four months of 2011. Throughput Volumes at HK Port and Kwai-Tsing Terminals
Hong Kong Port 2,097,000 1,529,000 1,968,000 2,023,000 7,617,000 % Chg YoY 5.4% -1.5% 3.1% 3.6% 2.9% Kwai-Tsing Terminals 1,514,000 1,157,000 1,418,000 1,483,000 5,572,000 % Chg YoY 6.0% -2.3% 6.5% 6.7% 4.5%

Source: COSCO Pacific

Throughput Volumes at COSCO-HIT Terminal


1,800 1,700 1,600 '000 T E Us 1,500 1,400 1,300 1,200 1,100 1,000 Mar Sep May Aug Nov Dec Jan Feb Apr Oct Jun Jul 2010 2011

TEUs Jan-11 Feb-11 Mar-11 Apr-11 YTD

Source: Hong Kong Marine Department

Source: Hong Kong Marine Department

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Dec

Jan

Feb

Oct

Apr

Jun

Jul

Company Focus Hutchison Port Holdings Trust

Forecasts remain unchanged Based on 7% throughput growth in Hong Kong and 8% throughput growth in Yantian in FY11, and 1% - 2.5% improvement in revenue per TEU, we project HPHTs (annualised proforma) EBITDA to grow by 7.4% in FY11. Key Assumptions for FY11
Throughput growth Change in Rev/ TEU HIT 7.0% 1.2% Yantian Port 8.0% 2.5%

grow at an average CAGR of 2.7%, given that the assets are largely mature. Has underperfomed the index as well as industry peers Since listing, the stock is down 10%, compared to a 7% rise in the STI index and a 7% rise in the share price of other port stocks in the region like China Merchants and COSCO Pacific. While it is partly attributable to the fact that the IPO issue was priced before the Japan earthquake crisis, we believe that the extent of underperformance is not warranted, given that operations seem to be on track with our projections and thus, we feel this presents a good buying opportunity. Relative share price performance of HPHT vs. peers and index
140 HPHT CMHI CP SIPG STI

Source: DBS Vickers

Interim dividend to be declared before mid August HPHTs full year (annualised proforma) distributable income is estimated at HK$6,179.5m, translating to a DPU of 5.95UScts for FY11. However, as the income only accrues to its unitholders from March 17th (the date of its IPO) onwards, actual DPU for FY11 is projected to be c. 4.85UScts (5.95UScts x 0.815x), of which we expect around 1.8UScts will be declared for the first half of 2011 to shareholders. HPH Trust is expected to announce results for the period ending June 2011, sometime before mid August. HPH Trust trading at a wide discount to other yield plays In our initiation report, we had indicated that comparisons to entities with high dividend payouts such as REITs and other high yield plays can be used as a relative benchmark for HPH Trusts valuation. However, at current prices, we feel the Trust is unjustifiably undervalued at 6.6-7.3% yield for FY11/12, compared to the overall average of ~6% yield for office and retail REITs in Singapore. Compared to the larger market cap REITs with high quality assets like CMT, CCT and K-REIT which are trading at between 4.6-5.6% on FY11/12 the valuation gap is even wider. Compared to the high yield stocks in Singapore, which include telecom, infrastructure, MRO, media and land transport companies, we come to the same conclusion as above. While promising much higher DPU growth prospects We project HPH Trust could grow its distributions by about 10% over the next 2 years. This compares very favourably with the expected DPU growth for the REITs and other yield plays, as evident in the table below. While the office REIT DPU is expected to grow at 1.5% CAGR over FY10-12, retail/mixed REIT DPU is expected to grow at an average 2.9% CAGR and that for high yield plays is expected to

120

100

80 17-Mar 24-Mar 31-Mar 12-May 19-May 26-May 14-Apr 21-Apr 28-Apr 5-May 7-Apr

Source: Bloomberg, DBS Vickers

While we feel that comparing with industry peers on a range of earnings multiple based valuations is less relevant, given the difference in corporate structure, usage of free cash flow and payout ratios between HPH Trust and other listed container port companies, we have included other port players in the list below for comparison. It is evident that EV/EBITDA multiple premium between HPH Trust and closest peer CMHI has shrunk and is almost at par, while we look for at least a 10% premium given the higher EBITDA margins generated by HPH Trust and the better visibility and transparency of cash flows accruing to shareholders. Maintain BUY and TP of US$1.15. (DCF-based). Given that the Trust seems to be well on its way to met our projections in FY11/12F, current FY11/12 yields look very attractive at 6.6-7.3%, and coupled with decent growth prospects of ~10%, we maintain our BUY call on the stock with a TP of US$1.15. This implies total return potential in excess of 30% at current prices. Our target price of US$1.15 is based on a 3stage DCF model with a WACC of 7.2% and terminal growth of 1%.

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Company Focus Hutchison Port Holdings Trust

Peer Valuation Summary


Share Price Comparable SG Office REITs Frasers Commercial Trust CapitaCommercial Trust K-REIT Average SG Retail/Mixed REITs CapitaMall Trust CapitaRetail China Trust Frasers Centrepoint Trust Starhill Global Reit Suntec REIT Average SG High Yield SP Ausnet SingTel Starhub ST Engineering SPH SMRT Average Port Operators China Merchants Int'l Cosco Pacific Shanghai Int'l Port Shenzhen Chiwan Wharf DP World Average HPH Trust US$ 0.91 7882 5.9 6.6 33.30 14.94 3.88 12.21 13.30 10523 5206 13601 1360 11039 83.0 49.0 11.8 53.5 18.6 93.0 54.0 13.5 61.0 22.0 2.5% 3.3% 3.0% 4.4% 1.4% 2.9% 6.6% 2.8% 3.6% 3.5% 5.0% 1.7% 3.3% 7.3% 0.8 9.9% 2.1 1.6 2.2 2.0 1.4 -5.0% 8.3% 11.8% 14.8% 13.1% 13.5 10.5 8.9 7.2 13.1 10.6 14.0 12.3 8.9 8.0 6.7 11.7 9.5 12.6 54.6 49.2 46.1 61.1 33.9 49.0 59.3 1.23 3.13 2.74 2.97 3.82 1.90 2747 40079 3775 7284 4896 2319 8.0 18.3 19.9 15.1 24.0 8.5 8.2 18.2 19.9 17.1 25.0 8.8 6.5% 5.8% 7.3% 5.1% 6.3% 4.5% 5.9% 6.7% 5.8% 7.3% 5.8% 6.5% 4.6% 6.1% N/A 2.1 39.0 5.2 2.9 3.6 1.2% 7.3% -0.3% 10.1% -3.8% 1.7% 2.7% 9.9 8.9 7.7 10.8 12.0 8.3 9.6 9.4 8.6 7.3 10.1 11.4 7.6 9.1 61.5 25.4 27.1 12.2 46.5 32.7 34.2 1.93 1.24 1.49 0.64 1.51 4940 624 922 991 2686 9.7 8.6 8.4 4.3 9.0 10.9 8.8 8.8 4.6 9.0 5.0% 6.9% 5.6% 6.8% 6.0% 6.1% 5.6% 7.1% 5.9% 7.2% 6.0% 6.4% 1.2 1.1 1.2 0.7 0.8 8.3% 2.6% 3.6% 4.7% -4.7% 2.9% 23.0 16.6 22.7 17.0 31.6 22.2 21.3 15.4 21.5 15.9 28.2 20.5 19.8 14.4 19.7 15.6 27.7 19.5 0.82 1.46 1.28 411 3317 1398 6.1 6.7 7.2 6.4 6.7 6.8 7.5% 4.6% 5.6% 5.9% 7.9% 4.6% 5.3% 5.9% 0.4 1.0 0.9 7.9% -7.3% 3.9% 1.5% 15.0 20.1 40.5 25.2 14.5 20.6 47.9 27.7 13.8 20.2 55.3 29.8 (local $) Mkt Cap (US$m) DPU FY11 (local cts) DPU FY12 (local cts) Yield FY11 Yield FY12 P/B (x) DPU CAGR EV/EBITDA FY11 FY12 EBITDA Margin (%)

Source: Company, DBS Vickers

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Company Focus Hutchison Port Holdings Trust

Segmental Breakdown
FY Dec 2010A 2011F 2012F 2013F

Revenues (HK$ m) Hong Kong PRC Others

5,434 5,905 69

5,884 6,537 70

6,359 7,232 70

6,840 7,928 70 PRC revenues expected to grow at a faster pace

Total

11,408

12,491

13,661

14,837

Income Statement (HK$ m)


FY Dec 2010A 2011F 2012F 2013F

Margins Trend 11,408 (3,692) 7,717 (3,642) 4,074 0 167 (649) 0 3,592 (253) (1,208) 0 2,131 2,131 7,013 N/A N/A N/A N/A 67.6 35.7 18.7 3.1 1.5 2.9 0.0 6.3 12,491 (4,124) 8,367 (3,876) 4,491 0 126 (555) 0 4,061 (392) (1,376) 0 2,293 2,293 7,497 9.5 6.9 10.2 7.6 67.0 36.0 18.4 3.3 1.6 3.1 176.0 8.1 13,661 (4,444) 9,217 (3,914) 5,302 0 139 (677) 0 4,765 (570) (1,510) 0 2,685 2,685 8,343 9.4 11.3 18.1 17.1 67.5 38.8 19.7 4.0 1.9 3.6 167.4 7.8 14,837 (4,755) 10,082 (3,931) 6,152 0 153 (680) 0 5,625 (780) (1,696) 0 3,149 3,149 9,198 8.6 10.2 16.0 17.3 68.0 41.5 21.2 4.7 2.3 4.1 154.8 9.1
37.0% 32.0% 27.0% 22.0% 17.0% 2010A
Operating Margin %

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2011F

2012F

Net Income Margin %

Tax rates to increase as tax concessions are removed in a phased manner at Yantian Port

Source: Company, DBS Vickers

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Company Focus Hutchison Port Holdings Trust

Balance Sheet (HK$ m)


FY Dec 2010A 2011F 2012F 2013F

Asset Breakdown 78,356 2,950 50,512 4,571 141 2,576 3 139,109 2,775 8,488 26,126 13,659 68,442 19,621 139,109 (5,768) (24,329) 82.4 3,264.8 55.9 0.1 0.6 0.6 0.3 0.4 216.5 NA 77,693 2,902 50,281 5,641 169 2,875 379 139,940 2,775 8,739 26,126 13,659 68,717 19,924 139,940 (5,316) (23,259) 79.6 2,451.7 45.6 0.1 0.8 0.7 0.3 0.3 6.9 NA 76,195 2,853 50,049 4,677 177 2,957 755 137,664 2,775 8,789 26,126 13,659 67,137 19,179 137,664 (4,900) (24,223) 77.9 2,010.5 40.9 0.1 0.7 0.7 0.3 0.4 4.1 NA 74,634 2,805 49,818 3,807 195 3,171 1,132 135,561 2,775 8,994 26,126 13,659 65,601 18,407 135,561 (4,496) (25,093) 75.4 1,690.9 36.5 0.1 0.7 0.6 0.3 0.4 3.8 NA

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Bank, Cash and Liquid Assets 5.2% Associates'/JVs 3.3%

Inventory - 0.2% Debtors - 2.9%

Net Fixed Assets 88.4%

Net gearing to increase at a very mild pace

Cash Flow Statement (HK$ m)


FY Dec 2010A 2011F 2012F 2013F

Capital Expenditure
70000

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (HK cts) Free CFPS (HK cts)

3,592 2,774 (508) (167) (919) 993 5,767 (62,574) 936 0 197 229 (61,212) (909) 17,991 42,536 401 60,019 0 4,573 76.8 (652.3)

4,061 2,884 (768) (126) (76) 0 5,976 (1,987) 0 0 174 0 (1,813) (2,018) 0 0 0 (2,018) 0 2,145 69.5 45.8

4,765 2,905 (946) (139) (39) 0 6,546 (1,172) 0 0 188 0 (984) (4,265) 0 0 0 (4,265) 0 1,296 75.6 61.7

5,625 2,898 (1,157) (153) (27) 0 7,186 (1,100) 0 0 202 0 (898) (4,685) 0 0 0 (4,685) 0 1,603 82.8 69.9

60000 50000 40000 30000 20000 10000 0 2010A 2011F


Capital Expenditure (-)

2012F

Pre-funded at IPO

Source: Company, DBS Vickers

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Company Focus Hutchison Port Holdings Trust

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends


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Company Focus Hutchison Port Holdings Trust

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