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

Good afternoon. I am Dayu Zhang, General Manager and Managing Director. On behalf of COSCO SHIPPING ports, I would like to welcome you all to the first half 2021 results presentation. I hope to have more exchanges and communication with you so that you have better understanding of our company. First, let me introduce to you our management in attendance: They are Deputy General Manager, Mr. Deng; Mr. Wong Tin Yau, Director and Deputy General Manager. Today's presentation will be divided into 4 parts: First, Q2 highlights; number two, financial performance; three, operational review; and four, strategy and outlook. Finally, there will be a Q&A session. First, let me introduce to you our Q2 businesses and result highlights. As global trade activities further returned to normal, China's import and export volumes during first half of 2021 were strong, leading to a recuperation in shipping volumes. Leveraging our leading position in the global port industry, we have adopted the dual strategies of enhancing global terminal network and lean operations in order to drive our business. So we hope to achieve growth both -- in terms of both scale and quality. Our equity throughout has grown since Q4 2020. And in Q2 this year, we -- our growth is faster, so up 8.2% year-on-year. Equity throughput reached 10.2 million TEU. Terminal profits in Q2 rose significantly by 49.3% year-on-year, reaching USD 123 million, this is the highest quarterly profit since last year. The lean operation strategy has had a significant effect on quality of profitability. Terminal profits grew faster than throughput growth, leading to better and more sustainable profitability. As global economy continues to recover, our efforts to increase revenue and reduce costs continued to yield results. Driving second quarter and first half terminal profits to a record high since our restructuring in 2016. As the industry enters an upward cycle, we seized the opportunities for development. And we actually expanded our scale, and we deepened operation -- lean operations management with the aim to enhancing the quality of earnings. We are confident that we can create long-term value and return for our shareholders. Now let me ask Mr. Deng to introduce our financial performance.

Thank you, Mr. Zhang. Now I'm going to take you through our company's first half financial performance. Now let's take a look at the second quarter results. Overall speaking, we continued the strong growth momentum in the first quarter. In the second quarter, our consolidated throughput from subsidiary terminals reached 5.9 million TEU, up 11% year-on-year. Revenue increased significantly by 29% year-on-year to USD 299.5 million. This shows that revenue growth outpaces throughput growth with further improvement in revenue per TEU. At the same time, we -- our cost control measures are effective. Gross profit went up a lot by 61.2% year-on-year, and gross profit margin increased by 5.7 percentage points. Excluding one-off items in second quarter, net profit attributable to shareholders in Q2 was USD 102.6 million, up 59.3% year-on-year. So our effect of enhancing efficiency and lowering cost is significant. The overall performance -- financial performance in first half of the year was good, with throughputs from subsidiary terminals reaching 11.4 million TEU, up 8.2% year-on-year, while revenue grew 24.8% year-on-year to USD 565 million, with continuous improvement in revenue per TEU. Together with effective cost control, gross profit rose by 49.6% year-on-year to USD 148 million. GP margin further improved to 26.3%, up 4.4 percentage points year-on-year. Excluding one-off items in the first half of this year, net profit attributable to shareholders for the first half increased significantly by 85.2% to USD 175.6 million. The interim dividend is USD 0.0212, up 2.5% year-on-year and dividend payout remains unchanged at 40%. Next, let's turn to the revenue and cost of subsidiary terminals. In Q2, revenue rose 29% year-on-year. Revenue from Greater China region continues the growth momentum of the first quarter, up 31% year-on-year. In overseas regions, revenue was up 27.6% year-on-year as PCT, CSP Spain and Zeebrugge terminals continued to improve their volume and revenue per TEU. In Q2, cost of sales increased by 19.4% year-on-year, with cost of sales from Greater China, up 23.1% year-on-year, while cost of sales from overseas increased by 17.6% year-on-year. Revenue growth rate was higher than that of cost of sales, mainly because we continued to allocate resources to sales and marketing and successfully introduced a number of new domestic and foreign shipping routes. We continue to optimize customer portfolio, enhance our bargaining power, driving the volume growth and price increase. In addition, our cost control measures have been effective, leading to enhancement in net profits. Our company's gross profit and gross profit margin improved further in the second quarter as revenue increased and cost reduction measures were effective. Overall gross profit for the second quarter improved 61.2% year-on-year to USD 86.3 million. Gross profit margin rose 5.8 percentage points to 28.8%. Gross profit in the Greater China area increased by 42.4% year-on-year, and gross profit margin rose by 3.5 percentage points to 44.1%. Profitability in Greater China continued the strong momentum in recent quarters. We are going to continue to go deeper into the Greater China region, so as to drive growth momentum. Revenue from overseas also increased significantly by 118.3% year-on-year. Gross profit margin improved by 7.1 percentage points to 17.1%. In the future, with utilization rates of overseas terminals, being -- going to increase further in the future, together with continued efforts to improve quality and efficiency, the future growth potential of overseas subsidiary terminals is quite prospective, which will play a key role in driving overall profitability of our company's portfolio. Now let's take a look at terminal profits. In Q2, terminal profits rose 49.3% year-on-year to USD 123 million. Terminal profits in all 5 regions in the greater China as well as overseas terminals increased by different degrees. In particular, in overseas regions, with gradual recovery of global trade demand, business increases, and our lean operation strategy is important in improving performance of overseas terminals. As for profits of subsidiary terminals, they are expected to continue to increase, mainly benefiting from improvement in business structure and further enhancement and quality. Then referring to our balance sheet. As at the end of June 2021, we held cash and cash equivalents of USD 1.19 billion, which is at a healthy level. Meanwhile, the net debt-to-equity ratio was 27.3%, maintaining a solid debt level. We will continue to take advantage of our low leverage to identify projects with good growth potential and continue to improve our global terminal portfolio. And then regarding CapEx, for the whole year, expected CapEx is USD 1.09 billion, of which USD 530 million will be spent on acquisition and investments and the remaining USD 560 million will be on PP&E. And then in the first half, expenses was USD 100 million. In the second half, we'll continue to look for new projects and complete new projects, including the RSGT terminal, which was completed on July 14, and the Tianjin Container Terminal, which is expected to be completed this year. Now I will defer to my colleague to introduce our operational performance.

Yes, let me go through our business. In the first half this year, the global economy and trade continued to recover, global shipping and port industry also continued to recover. In Q2, our total throughput reached 32.5 million TEU, up 7.9% year-on-year. Specifically, for subsidiary terminals, total throughput was 6 million TEU, up 11% year-on-year, showing a strong upward trend over the last few quarters. For non-subsidiary terminals, actually in May and June, there was a pandemic impact in Pearl River Delta. And so comparing with the first quarter, throughput growth rates came down a bit; however, there is still a 7.2% year-on-year increase. In terms of regions, for overseas, total throughput was about 7.3 million TEU, up 7.5% year-on-year, with significantly faster year-on-year growth rates. For Greater Bay region, growth is maintained, so we are up 8% year-on-year. Looking into the second half of the year, the global container shipping market and port container throughputs are expected to continue to recover. And in the second half of the year for our China and overseas terminal throughput, well, we are going to maintain relatively fast growth. And then in terms of equity throughput, we reached 10.2 million TEU in the second quarter, up 8.2% year-on-year. Equity throughput of subsidiary terminals was 3.8 million TEU, up 9.4% year-on-year. For overseas equity terminals, equity throughput was 3.2 million TEU, with growth rate turning from negative to positive in Q2, up 5.6% year-on-year. Among them, in terms of subsidiary terminals for Greater China region, Xiamen Terminal performed well. In Q2, equity throughput recorded 46.5% year-on-year increase. This was mainly due to increased capacity from shipping lines and an increase in vessel loading rates, which drives overall trends of foreign trade business to be quite positive. For overseas subsidiary terminal, the best performer was Zeebrugge terminal, with a number of new routes being launched there due to congestion at many other ports caused by the pandemic. Well, we have increased a number of temporary vessel calls, recording significant increase of 54.6% year-on-year in Q2. We'll continue to seize opportunities to expand our global subsidiary terminal network and provide better services to upstream and downstream players in the industries. We are committed to expanding our global network and maximizing synergy and value by leveraging our synergies with shipping alliances. In Q2, for major subsidiary terminals, throughput maintained good growth trend, up 13.3% year-on-year. Volume from COSCO SHIPPING Lines and OOCL increased by 24.9% and 25.8% year-on-year, respectively. While throughput from OCEAN Alliance increased by 20.7% year-on-year and 2M and THE Alliance increased by 4.1% year-on-year. In the future, we will continue to leverage our global terminal network to build a diversified customer portfolio. According to Drewry's global container terminal operators annual review 2021, COSCO SHIPPING continued to rank #1 globally in terms of total throughput in 2020. We will continue to seize opportunities, such as M&A of global terminal assets, focusing on new terminal projects in Southeast Asia, the Middle East, Africa and South America to accelerate the scale of portfolio expansion. When acquiring projects, the IRR will be at least low double digits, so as to create investment value for shareholders. Our recent new projects include: Beibu Gulf Terminal, it will benefit from the long-term economic and trade development in Southwest China and Southeast Asia, and the project was completed in November 2020. Two, located in the Red Sea region, there is RSGT, which has an annual handling capacity of 5.2 million TEU. This terminal covers the Middle East and East African container markets and will benefit from future growth, helping our company enhance our overall volume and profitability. In July this year, this project was completed. Three, Tianjin Container Terminal. It will further enhance the synergy between our company and OCEAN Alliance and will also strengthen the cooperation between us and Tianjin port's development. The project is expected to be completed within this year. We are also actively disposing terminals of low strategic importance and those with less attractive returns. For example, the 3 terminals that were sold within this year, the PB ratio was 1.5 to 1.7x. Comparing to our current PB ratio of 0.5x for our share price, we believe that disposal of noncore assets at high-value is expected to contribute to a revaluation of our company's share price. In addition, for Taicang Terminal, it is expected to be sold within this year. Then about technological innovation, we strive to adopt new technology to enhance our lean operation strategy. We expect the Navis N4 system to be in place. In most of our subsidiary terminals in the next 3 to 4 years to help our company improve operational quality and efficiency. To further enhance our IT infrastructure, we have joined the global shipping business network, GSBN blockchain alliance to build the first blockchain alliance in the industry in an open and collaborative manner, to jointly promote the transformation of traditional processes and the development of the industry. At the same time, we continue to promote 5G smart ports. Xiamen Terminal, as our demonstration ports for 5G smart ports, has been actively researching the application of unmanned trucks and will continue to promote it in suitable subsidiary terminals in the future. The company is rapidly advancing the construction of a full life cycle asset management system, EAM, which will help effectively manage equipment procurements and maintenance costs through information technology, in order to effectively achieve a breakthrough in the further reduction of cost per TEU. The company is also constructing an MIS system simultaneously, and gradually improving accuracy of operation analysis through unified data standards and processes and providing auxiliary decision-making for the transparency of production and operation management. We'll continue to promote the development of new technology, accelerate construction of IT systems, unified terminal operating systems, promote terminal automation and improve ability to collaborate and allocate port supply chain resources. Now let's turn to our company strategies and outlook. We are actively implementing development strategies of enhancing global terminal network and lean operations. We seize development opportunities around the world and expand scale of our business, while we continue to reduce costs and achieve higher efficiency. At the same time, we will accelerate the expansion of supply chain extension projects to provide new engines for profit growth, and we are committed to achieving the strategic goal of becoming a leading global integrated port operator. First, regarding global network. We'll continue to explore investment opportunities in subsidiaries with strategic importance and non-subsidiaries with high returns to build a balanced global terminal network. In addition, we have been actively participating in the integration of domestic port resources to enhance the quality of our assets in the Greater China region. At the same time, we will continue to improve our global terminal portfolio and enhance overall value of our company by actively disposing assets strategically. Strategically, we will further strengthen the company's operational control system, which is based on lean operations and control system and promote the quality and efficiency of our terminal portfolio, mainly through the following 3 major dimensions: One, to increase revenue. We continue to innovate new operational ideas. We are making attempts to change from a single terminal service provider to an entire network so that we can provide low-cost and high-efficiency terminal service for shipping companies. And then horizontally speaking, we also seek more cooperation opportunities with global peers to reduce costs and increase efficiency and to increase our sale in the industry. In terms of cost reduction, we focus on lowering cost per TEU as the entry point to enhance our cost competitive advantage. Finally, we set up a COE team to improve quality of operational management at our terminals and to increase the efficiency. In terms of enhancing revenue, we will continue to improve marketing structure and systematically build better networks between terminals and shipping companies. In the first half, our subsidiary terminals added 20 new routes. An average contract ASP from our subsidiary terminals increased by about 5% year-on-year. We will continue to diversify our customer base, expand our influence in the industry, achieve growth in both volume and price and drive sustained overall revenue growth. We attach a lot of importance to cost control and have introduced a series of specific measures, including we have established a cost management system and introduced cost per TEU into the terminals KPI assessment to enhance cost competitiveness and achieve the purpose of cost reduction. We actively adopt new IT systems to unify terminal operating systems, build the company's management information system and promote the construction of automated terminals in order to achieve the purpose of improving quality and increasing efficiency. And then for supply chain extension projects, we develop high-end warehouses and establish a comprehensive logistics network to more effectively retain existing customers and attract new customers to use these extension services, bringing new sources of profit growth for our company. Our recent projects include: one, CFS Phase 1 at Abu Dhabi Terminal, with storage area of about 51,000 square meters, equipped with the latest facilities and IT systems, was put into operation in first half this year. Two, the Zeebrugge CFS project, which is in operation. It has a warehouse area of 41,000 square meters, and the current warehouse utilization rate has reached 100%. In addition, high-end warehousing services are being developed in Xiamen Ocean Gate Terminal, which are expected to enter into operation in 2022. Besides terminals in Nantong, Wuhan and other subsidiary terminals are also preparing to develop terminal extended services. And then in relation to construction of back-end supply chain platforms, we are actively accelerating the construction. We will continue to make good use of the core competencies from our subsidiary terminals to bring better service experience to customers. On August 1 this year, the water-rail Intermodal project at Wuhan Yangluo International Port commenced operation. Total investment was about RMB 2.7 billion. The target to be achieved within 3 years is an annual throughput of 1 million TEU and an annual water-rail intermodal volume of 500,000 TEU. This project is expected to significantly reduce the last mile logistics cost of intermodal transportation through 5G network, covering the whole port area. The project fully utilizes the application of Driverless Container Vehicle and other technologies to create the first automatic water rail intermodal terminal on the Yangtze River. In 2020, Wuhan ranked 9th among all cities in China in terms of GDP, with total economic volume of RMB 1.56 trillion, making it the economic hub in Central China. The opening of the Wuhan Terminal will optimize the network of our terminal portfolio in the Yangtze River region and create synergy with our other terminals. In addition, Wuhan Terminal is expected to become a gateway hub to the world for Hubei as well as Central and Western regions of China. Looking ahead to this year, although challenges such as COVID-19 pandemic, rising inflation and international relations bring uncertainty to global economic and trade activities, the upward trends of vaccination rates will give further impetus to economic recovery. Global trade is expected to continue to recover together with the international container shipping market. As such, global port container throughput is expected to grow at a relatively rapid rate in 2021. We will actively develop our overseas terminal network, especially in emerging markets, actively participate in the integration of domestic port resources and continue to drive volume growth in Greater China and overseas regions. Based on our development strategy, we aim to outperform our industry peers in terms of total throughput growth in 2021. At the same time, we'll strengthen our existing terminal portfolio with lean operations strategy to achieve better and sustainable profitability. According to Drewry's 2021 terminal operators annual report, in the coming 5 years, global container port throughput is forecast to increase from 790 million TEUs in 2020 to 1.01 billion TEUs in 2025 over the next 5 years, with a 5-year CAGR of about 5%. Average utilization rate of global terminals will increase from 67% in 2020 to over 75%, further improving terminal efficiency. Based on the current macroeconomic environment and industry trends, we have formulated a 5-year development plan. Through the effective implementation of the strategic plan, our equity throughput is projected to increase by 48% by the end of 2025 compared to 2020, representing a 5-year CAGR of 8.2%, which is faster than the global throughput growth rate and will support our company to continue to increase our global market share. In addition, the operational cost per TEU will be reduced by 15% to 20% in the next 5 years, an average annual reduction rate of 3% to 4%. This will lead to better economies of scale, increase both revenue and efficiency and bring better returns to shareholders. Looking ahead as a leading global integrated port operator, we'll continue to strive to become "The Ports for ALL" to bring better returns to shareholders and create value to our stakeholders on a continuous basis. Now you are most welcome to ask questions. To facilitate communication, before you speak, please introduce your name and your company name. Thank you.

[Operator Instructions]

The first question is, for this year for domestic and international terminals, in terms of throughput, what is the trend? And what is the current position?

So let me answer this question. If you look at the terminal throughput, the second half of the year is not much different from the first half. In the second half of the year, we believe that throughput will increase steadily. In January to June, we have already added 20 new routes. And if you refer to the Zeebrugge Terminal and also Xiamen Ocean Gate Terminal, because of the crowdedness and excess utilization of neighboring nearby ports, actually, there were many temporary costs at Zeebrugge and Xiamen terminals. So as a result, in the first half of the year, there was a year-on-year growth of 39% and 48%, respectively, for these two terminals. So for the whole year throughput, we hope that we will be able to be better than our other peers in the industry.

We can see the recovery of the global shipping industry and market. And as a result, there is also congestion and overcrowdedness in many of the ports in different parts of the world. So in terms of loading and unloading fee, do you think that there will be any chance of price adjustments?

In terms of the congestion problem at various ports, it is true. And in fact, the time, the duration of containers staying in the terminals has been lengthened as a result. The handling fee or cargo handling fee is only a small part of our income per TEU; however, we have still seen double-digit growth in the fee and in some cases, even an increase in [ FAK. ] Starting from the third quarter, we believe that the congestion problem will continue, and it will continue onwards. So for different parts of the ports because the main ports are very congested, so we have made use of the additional vessel services, which are actually temporary services, in order to make sure that the vessels can make temporary costs at the Brazil and Xiamen Terminals. So as a result, both the number of containers and also efficiency at these 2 ports improved. And we are trying to achieve synergy by cooperating with various shipping lines and alliance. We hope that the temporary vessels or the temporary services can be converted into long-term cooperation with these shipping lines and alliances so that we can strengthen the synergy in between us to maximize value to stakeholders. And since last year-end, in fact, we have been actually carrying cost control work. And in the first half of the year, we have seen some achievements, and we will definitely continue such work in the second half of the year. Thank you.

My question is within this year, if you refer to Chinese as well the overseas part, how is the trend in terms of your contracted loading and unloading fees? Is there any room for price increase? And what about the income per TEU? What is the trend in the coming period when you go forward?