COSCO SHIPPING Ports Limited (1199) Earnings Call Transcript & Summary

Good afternoon, everyone. This is the Chairman of the company, Feng Boming. First of all, I would like to welcome all of you for your attendance at our 2019 whole year performance presentation. I would like to achieve more exchanges with you, and hopefully, we can deepen your understanding of our company. First of all, I would like to introduce members of the management who are present. They include Managing Director, Mr. Zhang Dayu; Managing Deputy Directors, Mr. Deng Huangjun and Mr. Wong Tin Yau. We have 3 parts to our presentation: first, assurances; secondly, financial highlights for the year; and thirdly, business review. And that will be followed by the Q&A session. Thank you very much, members of the investment sector, for attending our presentation today. First of all, I would like to say that, as the Chairman of the Board, I am fully confident in our company. Since I took my position last year, we've seen many challenges, both internally and externally, and uncertainties, but our strong cash flow is going to ensure that the dividend payout for 2020 will be sustained. They include strong EBITDA, operating cash flow and also the cash flow coming from disposal. Up to the end of last year, we have cash on hand, USD 957 million. In February this year, we have divested the assets in Yangzhou and Zhangjiagang. Total number is USD 251 million in cash. At the same time this year, we are going to divest Taicang and Jiangsu Petrochemical equity. So our current cash flow is very solid and sufficient. That's why we are confident to maintain our dividend payout ratio at 40%, which is going to form the foundation of investor and shareholder return. Because of cash flow contribution from our mature terminals, our dividend yield has been higher than the industry average. We have sustained such a level since 2016. Even against the low interest rate environment, our dividend yield is still on the higher side. Therefore, we believe that in the capital market at the moment, there is very serious underestimation of our investment value. And also because of the panicking in the market, sometimes that is reflected on our stock. As the Chairman of the Board, I am still very confident in relation to our company's future. We have accumulated management capability of more than 26 years. And for many years, we have set up this global terminal network, together with market advantages in global shipping market. We will spare no effort with the management, and we are going to maintain stability of our business and grasp any opportunity for recovery. We will adhere to the mission of creating long-term shareholder value. While we are fully prepared for global market recovery, which will lead to rising demand, we also see certain recovery signs between the 15th and 19th of March 2020. Our throughput has only dropped by 3.4% concerning our subsidiaries compared to the first 2 months. In 2020, the drop is obviously moderating. Xiamen, Quanzhou, Nantong Jinjiang throughput have gradually returned to normal levels on top of that. Because of the synergy we achieved with OCEAN Alliance and other alliances, our throughput is predicted to start recovery as well, so we are confident and capable in grasping all the opportunities when the market demand resumes. The COVID-19 outbreak is now gradually under control in Mainland China. Factories have resumed work and productions. On the other hand, productivity in overseas markets are still being affected by the epidemic. So this is going to be one of the major uncertainties we face this year. We sincerely hope that all the countries will very quickly fight COVID-19, so that all our work and productions can gradually go back to normal. And we wish great health for other countries. Next, I'm going to invite Mr. Deng to talk about the financial highlights.

Thank you very much. Good afternoon. I'm going to take you through the performance on the financial side. In 2019, we have seen 2.7% increase for our revenue realizing USD 1.027 billion. If we do -- if we put aside the dilution of QPI, attributable profit is USD 330 million, higher than market expectation. Sales cost increased by 6.9% to USD 754 million, mainly because of larger operating scale. PCT investment has led to depreciation cost jumping from USD 24 million in 2018 to USD 32 million in 2019. Abu Dhabi investment also created USD 6 million depreciation costs. Nantong Tonghai Terminal created another USD 4 million depreciation cost. So for this segment, for fixed costs, because of operation of various terminals, depreciation cost went up. Labor cost has also increased from USD 210 million to USD 231 million. We have seen a drop of 8.5% for share of profit from JV and associates mainly because of the profit contribution from Euromax dropping by 45.7% to USD 4.9 million, and also the contribution from Shanghai Mingdong Terminal dropping from USD 18.4 million in 2018 to USD 12 million, which is a drop of 34.9%. Dividend announced USD 0.03928, which is about HKD 0.305 per share. Dividend payout ratio continues to be at 40%. Under our company, we have PCT Terminal, Xiamen and also Guangzhou Nansha Terminals. GP margin increased by 17.3%, 8.6% and 2.2%, respectively. These 3 terminals take up 63.4% of the company in 2019. We believe that recently acquired assets, including CSP Spain, Zeebrugge, Nantong and Abu Dhabi Terminals carry strong potential, and they will support our continuous growth in revenue. Now let's look at the regional breakdown. First of all, Bohai Rim area. QPI shows a flat trend, including Jinzhou Terminals, have gone through optimization of product mix, recording growth in throughput, creating new contribution to profit. For the Yangtze River Delta area, because of the impact from F '16 and a drop in government subsidies, Mingdong asset profit dropped by 34.6%. Shanghai Pudong Terminal, because of changes to the container mix, there's a drop of profit by 13.1%. Because Nanjing, Yangzhou and Zhangjiagang Terminal throughput contribution is rather small, we've decided to divest the equity for these three. Nantong Tonghai Terminal started operation in August 2018. For the whole year 2019, we reached 1.1 million TEU. We will continue to develop this business and continue to optimize the terminal layout for this area. For Southeast regions and other regions in Xiamen, we recorded 2% growth for profit. Quanzhou Terminal, because of the throughput dropping by 28.3% for bulk commodities, the profit level also dropped. Pearl River Delta, Guangzhou Nansha Terminal profit increased by 11.1%. Yantian performance is a flat trend. For Southwest regions, Qinzhou increased by 29.5% in profit. And Beibu one, the fair value recorded is USD 24.4 million. And we believe Beibu Gulf area will benefit from the economic growth from Southwest region. Equity level has been increased from 4.34% to 10.65%, and all these will be booked in 2020. For overseas markets, PCT and the new terminal has gone up by 20.2% and 31%. CSP Spain, profit dropped by 64.9%, mainly because of F '16 standards. Abu Dhabi started operating in April 2019 in the pilot manner, and official operations started in Q4. We have a deficit of USD 13.7 million, but, in 2019, TEU already reached 390,000. Zeebrugge Terminal performance improved. The losses narrowed from USD 45 million in 2018 to USD 9.5 million. Throughput increased by 23.2%, mainly driven by the picking up of momentum in the second half. In 2019, we see 77.5% contribution from the top 10 contributing terminals. PCT, Guangzhou Nansha, Xiamen, their contribution were 8.3%, 4.6% and 3.6%, respectively. Our targets. Net debt ratio continues to be between 50% and 60%; towards the end of last year, 34%. I should say that we still have strong borrowing capability so that our future investment can be supported. Cash management, our attitude is cautious. By the end of last year, cash at hand, USD 957 million. Now I will hand over to my colleague, Mr. Zhang, to take us through the business review.

Good afternoon. I'm going to take you through the business review for 2019. During the year, our company achieved throughput increase of 5.5%. Share controlling terminals throughput increased by 11.5%, and our equity throughput increased by 7%. Equity controlling terminal throughput increased by 20 -- 12.8%. So the performance for our subsidiaries is better than nonsubsidiaries. We continue to move towards globalization. We have more and more contribution from overseas terminals. The ratio has increased from 29% in 2018 to 32%. Beginning from 2016, we completed our reorganization, and we established 3 major strategies: globalization, synergy and enhanced control. All these strategies have been proven very effective. Overseas equity throughput takes up 31.9% in 2019 and contribution from alliances for 84%. We continue to strengthen our port and terminal business in terms of control and management capability. We use standardized management to coordinate the performance of various terminals and enhance the value of investment projects. Subsidiary throughput in 2019 took up 40.5%. We'll continue to look for acquisition projects so that we can create greater values for our shareholders. Equity throughput increased from 29.4 million TEU in 2016 to 39.67 million, CAGR growth of 10.4%. Because of our rich experience in management of terminal, PCT achieved a breakthrough of 5 million TEU in 2019, becoming the biggest container terminal in the Mediterranean, setting a very good role model. In 2019, among 7 subsidiaries, the TEU increased by 9.4% coming from OCEAN Alliance, 2M, THE Alliance. We continue to achieve synergy with OCEAN Alliance. The volume coming from this alliance takes up about 52.3%.; from 2M and THE Alliance, 31.7%. In 2019, PCT, Zeebrugge and Abu Dhabi enjoyed substantial growth of volume by 39.4%. Volume from 2M and THE Alliance increased by 8.8%, mainly driven by the growth from Hapag-Lloyd. We will continue to achieve greater synergies with various alliances and drive the growth of throughput. We are actively using Navis N4 operating system. We believe that this is going to enhance efficiency and lower cost. Zeebrugge has started using Navis N4 system in July 2019. Throughput gradually grew. Then Lianyungang started using Navis N4 in December 2019. Efficiency for the vessels grew from per hour 58.69 TEU in December to 59.8 TEU in February this year. We are going to apply Navis N4 system in more of our assets. Our company is very professional and experienced in terminal operations. Our senior management members have more than 2 decades of relevant experience. We are enhancing operational and management capability, improving customer services. We're going to apply Navis N4 system to further enhance efficiency and have better cost control. Number three, we are going to speed up extension business for terminals, create supply chain platform for the ports and develop medium to high-end storage facilities. We are planning to, in Guangzhou, Abu Dhabi, Nantong, Xiamen, Wuhan, et cetera, to start such extended services, so that we can further enhance our profitability. Because of our experience in terminal operation, we effectively enhanced the quality of projects. And we have PCT and Xiamen asset as success stories. We actively acquire quality projects and strategically divest our assets. We have sold Nanjing Longtan asset, Yangzhou Yuanyang Terminal and Zhangjiagang Terminal to enhance our profitability. In 2019, on the 18th of September, we have announced the divestment of Nanjing Longtan Terminal, Yangzhou Yuanyang Terminal and Zhangjiagang. The 3 contributed to the company in terms of profit USD 5.57 million, which is 1.6% for overall terminal profit contribution, which is rather small. After the transaction, cash was -- the cash consideration was USD 335 million (sic) [ USD 330.5 million ]. We sold the equity for Longtan Terminal in December last year. The return was USD 27.4 million. In February of this year, we have sold Yangzhou Yuanyang Terminal and Zhangjiagang. We believe that will bring about USD 61 million, and it is 1.7x in terms of PB ratio. We may sell Taicang and Jiangsu Petrochemical. The contribution was rather small, only USD 2.3 million. We are going to continue to optimize the terminal mix for Yangtze River Delta and strengthen Nantong and CSP Wuhan development. Concerning the coronavirus that has been spreading around the world, in the shorter term, it has created some adverse impact on economic and trading environment. Q1 throughput in 2020 suffered to a certain extent. Now we have resumed operations. Demand is climbing. Throughput will increase as well. There are potential M&A opportunities in the market. There is a low interest rate environment. After the epidemic, we believe there will be a strong rebound of demand. We are well prepared. Macroeconomic environment is still challenging and uncertain, but I believe we have the capability to tackle the new situation. We now welcome questions from you. Please tell us your name and who you represent before you raise the questions.

[Operator Instructions] [Interpreted] The first question comes from Goldman Sachs.

What is the return concerning your divestment of your assets this year? What is the return of proceeds coming from divestment of Taicang and Jiangsu Petrochemical?

[Interpreted] Thank you very much for your questions. Concerning the divestment plans, indeed, I think that will be...

[Interpreted] Thank you very much for your question. Concerning the overall debt situation this year, we will have another round of refinancing plans, and our focus will be first on the repaying of old debt.

[Interpreted] The final question from the same investor concerns the reorganization effort that was carried out in 2016. At that time, you announced a 5-year plan. So what is the update on the implementation of this 5-year plan?

[Interpreted] Thank you very much for your question. Allow me to answer part of your question first. In relation to our 5-year plan, we have set out a number of important parameters or indicators. They refer to operations, volume of our business, our global network expansion and also in relation to corporate governance. So right now, we are in the process of reviewing the implementation details of the last 5-year plan, and at the same time, we are already beginning to work on our next 5-year plan. So I can tell you, in terms of scale expansion, synergy achieved with our mother company and also expansion of our global network, we have all reached our development targets. So concerning the financial figures, I will pass the floor to my colleague, Mr. Deng.

[Interpreted] Thank you very much. Concerning the plan we proposed in 2016, we have presented certain targets at the time. For example, our targets included an increase of 60% in relation to overall throughput, increase of 50% for total asset and also increase of 100% for our net profit. At the moment, I can tell you, we have reached or even exceeded all of these targets. For example, the total asset level is standing at 1.0 -- USD 10.4 billion, and the net profit is standing at USD 330 million. [Interpreted] And I will pass the time now to my colleague, Mr. Wong, who is responsible for formulating the next 5-year plan.