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

Investors, analysts, good afternoon. Welcome to COSCO SHIPPING Ports 2022 First Half Results Investor Presentation. In attendance, we have from the management, Mr. Zhu Tao, General Manager; Mr. Fengnian Zhao; Mr. Zhao, Chief Accountant. Now we will ask Mr. Zhu to make the presentation for us. Mr. Zhu, please.

Good afternoon. I am [ Ricky ], General Manager, Zhu Tao. So on behalf of COSCO SHIPPING Ports, I would like to welcome you all to the first half results investor presentation. I hope to have more exchanges with you so that you have better understanding of our company. Today's presentation will cover 4 parts: one, key results highlights of first half 2022; two, financial performance; three, operational review; four, strategy and outlook. And then there will be a Q&A session. First, let me go over the company's highlights during the half of this year. So there were stable trade increase in China and there is RMB 9.8 trillion (sic) [ RMB 19.8 trillion ] overall and as such, exports RMB 11.14 trillion, up 13.2%. Import, RMB 8.66 trillion, up 4.2% (sic) [ 4.8% ] year-on-year. Given the company's leading position in the global terminal operator industry, we grasp opportunities in the shipping industry to continue to drive the company's development and expansion while improving our operational efficiency and the quality of our terminal operations. During first half of 2022, our terminal profits grew 0.9% year-on-year, reaching USD 219 million. As our company's operations become more efficient and our marketing strategies continue to achieve breakthrough as well as controlled costs, profitability of our subsidiary terminals have continued to rise. In the first half, subsidiary terminal profits grew 45.1% year-on-year to USD 58.3 million. Profits of subsidiary terminals in China rose 32.4%. Profit of overseas subsidiary terminals grew 81.5%. As for non-subsidiary terminals, profits decreased by 9.2% year-on-year to USD 161 million, a decrease of around [ $16.2 million ]. One reason is due to the effects of COVID-19 pandemic in the Yangtze River Delta region. Profits of non-subsidiary terminals in that region decreased by USD 5.11 million. [indiscernible] Terminal, a greenfield project that began operations last October, has started to incur fixed costs such as depreciation. Therefore, profit of that terminal decreased by around USD 3.04 million. In the future, as utilization rates of that terminal increases, we expect losses to decrease. In the second half, the company will continue to strengthen marketing strategies, increased revenue and efficiency and reduce costs in order to raise profitability of subsidiary terminals. Meanwhile, according to throughput figures for July announced by the company as many non-subsidiary terminals in the Yangtze River Delta region began to pick up growth again and recorded a year-on-year increase for the month of July, we expect revenue to grow further in the second half of the year. The equity throughput of the company during the second quarter rose by 4.5% year-on-year, while terminal profits decreased 2.4% year-on-year. For subsidiary terminals, equity throughput grew 28.5% year-on-year while profits increased by 35.6% year-on-year. Profits of subsidiary terminals in China increased by 16.4%. Profits of overseas subsidiary terminals grew significantly by 87.3%. For non-subsidiary terminals, equity throughput and profits decreased by 9.7% and 13.2%, respectively. This was mainly due to temporary effects of COVID-19 in the Yangtze River Delta. The rise in subsidiary terminal profits, especially the significant increase in profitability of overseas subsidiary terminals has mainly been due to an improvement in the management and control of these terminals. In the future, we will continue to seize growth opportunities and improve proactive marketing strategies to increase volume and efficiency, control costs and ultimately result in higher quality, more stable and sustainable growth. Now I will invite my colleague to introduce the company's financial performance.

First, I will talk about the company's financial performance during the first half of the year. In the first half, our company's revenue reached USD 705 million, a year-on-year increase of 24.7%, gross profit increased by 33.3% to USD 198 million, while gross profit margin rose 1.8 percentage points to 28.1%. Excluding the contribution from Tianjin Container Terminal, which became a subsidiary terminal last December, throughput of our company's subsidiary terminals remained flat. Although there are many uncertain macroeconomic factors, ASP still increased by 8.3% compared to last year due to a series of measures such as improving sales and marketing to consumers or customers. We will continue to strengthen our communication with customers, improve service quality and increase our marketing power. As profits from joint ventures and associates decreased 8.5% annually to USD 160 million, net profit attributable to shareholders of the company only rose by 0.8% annually to USD 177 million. As for the interim dividend, the payout ratio remained at 40%, and the interim dividend per share is USD 2.128, an annual increase of 0.4% year-on-year. Now let's take a look at financial performance during the second quarter. Excluding the contribution from Tianjin Container Terminal, which became a subsidiary terminal last December, throughput of our company's subsidiary terminals fell by 3.1% year-on-year. However, we adopted better sales and marketing strategies and our ASP rose by 13% annually, with a markedly higher growth rate during the second quarter. During the second quarter, as profits from joint ventures and associates decreased significantly by USD 16.5 million to USD 77.7 million. Net profit attributable to shareholders also decreased slightly by USD 5.56 million or 0.5% to USD 102 million. However, as the company adopted measures to increase revenue and reduce costs at its subsidiary terminals, this helped offset the decrease in profit from JVs and associates. Now let's look at revenue and gross profits of our subsidiary terminals during the second quarter. Revenue of subsidiary terminals during the second quarter rose by 25.2% year-on-year. Subsidiary terminals in China continued to perform well, recording an annual increase of 38%. Xiamen terminal recorded a strong growth rate of 16.2%, posting a growth in volume and profits. Overseas subsidiary terminals revenue rose by 15.4% year-on-year. CSP Zeebrugge continued to experience high growth in volume, with throughput during the second quarter rising by 28.4% year-on-year. At the same time, there were also new customers with higher rates, resulting in an 82.6% increase in revenue year-on-year. Gross profit during Q2 rose by 35.3% year-on-year. Subsidiary terminals in China continued to show strong signs of growth, with gross profit up 30% year-on-year. The growth rate and the gross profit of overseas subsidiary terminals continued to increase in the second quarter with GP margin up 46% year-on-year. Gross profit margin during Q2 rose by 2.4 percentage points year-on-year to reach 31.2%. For overseas terminals, gross profit margin rose 4.5 percentage points year-on-year to 21.6%. We expect there to be further room for profit growth at overseas terminals, which will drive up overall profitability of the company. Now let's look at terminal profits. Our terminal profit during the second quarter decreased by 2.4% year-on-year. Profits of overseas terminals increased by 22.6% to USD 22.87 million, with the share of total profits contributed by overseas terminals rising from 15.1% during the second quarter last year to 19.1% this year. Profit of subsidiary terminals increased by 35.6% year-on-year to USD 36.83 million, with the share of total profits contributed by subsidiary terminals rising from 22.1% during the second quarter last year to 30.7% this year in Q2. Utilization rates at overseas terminals continued to rise, which has driven profitability. While the efficiency of subsidiary terminals has continued to increase, improving quality of our terminal assets. As for the company's balance sheet, as of the end of June 2022, our cash and bank balance maintained strong at USD 1.14 billion, which is at a healthy level. Meanwhile, the net debt-to-equity ratio was 28%, maintaining a solid debt level. For CapEx, as of the latest update to our investment plans, total expenditure in 2022 is expected to be USD 924 million, of which about 30% will be used for investments and the other 70% will be for PP&E at terminals. Actual CapEx during the first half of 2022 was USD 146 million. We'll continue to take advantage of low leverage level to acquire terminal projects with high growth potential going forward and to further improve our global terminal portfolio. Now I will ask Mr. Zhu to introduce our operational review.

Now let me talk about our business. During Q2 of 2022, total throughput reached 32.92 million TEU, up 1.2% year-on-year. Subsidiary terminals total throughput was 8.19 million TEU, rising 36.6% year-on-year. The share of total throughput from subsidiaries increased by 6.5 percentage points to 24.9%. Total throughput of non-subsidiary terminals decreased by 6.8% year-on-year to 24.73 million TEU with a share of total throughput dropping to 75.1%. As for equity throughput, it rose by 4.5% in the second quarter year-on-year and reached 10.64 million TEU. Subsidiary terminals equity throughput was 4.86 million TEU, rising 28.5% year-on-year. The share of equity throughput from subsidiaries increased by 8.5 percentage points to 45.7%. Equity throughput of non-subsidiary terminals decreased 9.7% year-on-year to 5.77 million TEU, with share of equity throughput dropping to 54.3%. We'll continue to benefit from new opportunities to expand our global terminal network and provide high-quality services for the industry chain. Total throughputs at our 8 major subsidiary terminals in the second quarter of 2022 rose by 17.7% year-on-year. So this is a rapid growth. CSP Abu Dhabi and CSP Zeebrugge recorded the highest growth rates, with year-on-year increases of 22.9% and 28.4%, respectively. CSP Abu Dhabi mainly benefited from increased volume from COSCO shipping lines, OOCL and other non-alliance customers with volume increasing by 47.3%, 29.1% and 41.6%, respectively, for each of the 3 types of customers. CSP Zeebrugge mainly benefited from 2M Alliance with an annual growth rate of 259.5% in throughput. We have always been committed to improving globalization strategy and expand our network across the world and to benefit from closed relations with major shipping alliances to increase synergy and maximize value. So we'd like to achieve maximization of value and win-win for all parties. In terms of supply chain projects, we are developing high-end warehousing services and establishing 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. The following are some of the major achievements of our terminals supply chain projects. One, CFS Phase 1 at Abu Dhabi Terminal, equipped with the latest IT systems and infrastructure was put into operation in October 2021. This project is equipped with the newest equipment and IT technology. Two, we are improving efficiency in our supply chain projects the Zeebrugge CFS project, which is already in operation, has warehouse area of 42,000 square meters and current warehouse utilization rate reached 100%. Three, we are continuing to push forward construction of new projects. Xiamen terminal is currently developing high-end warehousing services to be completed by 2023. Four, In addition, we are continuing to proceed with logistics chain projects at Pudong Shanghai Terminal and other subsidiary terminals to build a new platform for port supply chain. For technological innovation, we strive to adopt new technology to improve efficiency and overall level and quality of automation and logistics chain in the industry. We have adopted the following 5 measures. One, we are accelerating development of 5G smart ports. Xiamen Terminal is equipped with unmanned trucks which can now be used for multi-lane loading and unloading in unenclosed areas. We will also promote the use of 5G smart pod technology at Wuhan Terminal. Two, we are pushing forward with the implementation of the Navis N4 system to increase quality and quantity of data collection and we'll perform a switch in systems in suitable terminals in order to increase operational efficiency. To further enhance our IT infrastructure, CSP portal for GSBN, which we have developed ourselves, is nearly complete. In the first half of the year, Quanzhou, Jinjiang, Lianyungang and PCT terminals began stable and continuous testing procedures to synchronize container status on to the blockchain, symbolizing a new page in the industry's development. Four, the company is rapidly advancing the construction of a full life cycle asset management system, EAM, which will allow for the equipment and supplies of all subsidiary terminals to be managed centrally on one single platform. After it is implemented, we expect further improvements in the management of terminal equipment, supplies and spare parts. Five, the company is also constructing an MIS system which will allow for statistical data to be collected in a unified procedure, gradually improving accuracy of operation analysis and the quality of management. We will continue to drive development of new technology and digitalization while improving the synergy between different terminal resources. Now I will move on to our company's strategic plan and outlook. Regarding our globalized layout, regarding our global terminal network, although the company has grown significantly the past few years, we'll continue to improve global terminal network and provide better services to shipping lines. This year, we'll continue to focus on key projects, upgrade existing terminals and work hard to expand our network. As for our company's lean operations strategy, we continue to promote the concept of creating value, mainly by 2 different ways: one, to improve marketing work, benefit from network advantages, actively search for new markets and increase the number of routes and volume. Second, we will optimize the implementation of lean operation strategy to further control costs while improving quality of operational management, resulting in an improvement of both quantity and quality of the company's terminal assets. In terms of enhancing revenue, we will continue to improve marketing structure and systematically build better networks between terminals and shipping companies. Our subsidiary terminals added 6 new routes in the second quarter and 11 new routes in total during the first half of 2022. As for ASP as our subsidiary terminals, during the second quarter growth rate was 13% year-on-year while during the first half, ASP increased 8.3% annually. We will take every opportunity to increase rates into longer-term contracts. Some terminals have negotiated a growth in rates in a high single digit to double digits, and we expect ASP to continue to increase in the future. We'll continue to strengthen marketing efforts to diversify our customer base and attract shipping companies to transfer routes to our terminals. We will also grasp the opportunities in Chinese ports due to the increase in published rates to further increase our position in the industry. As we facilitate business development, we strive to mitigate the challenges brought by climate change. To this end, we are committed to driving our subsidiaries to achieve carbon neutrality no later than 2060. In the short run, we target to reduce GHG Scope 1 and Scope 2 emission intensity of our subsidiaries by 20% in 2030, setting 2020 as the base year. We will continue to facilitate the diesel to electric conversion of terminal infrastructure and the use of green lighting. Besides our subsidiaries in Mainland China have all completed shore power installation. We will continue to enhance the use of shore power by vessels at berth to assist shipping companies in reducing the emissions to facilitate development of green shipping and green ports. Going forward, we will also conduct research in and promote use of renewable energy at our subsidiaries. CSP Spain has initiated a photovoltaic power generation project, and we'll install solar panels in the port area in the future, while CSP Zeebrugge has started conducting a feasibility study on wind power with a view to promoting the use of renewable energy. In the short run, we target to reduce energy consumption intensity of our subsidiaries by 15% in 2030, setting 2020 as the base year. In the meantime, we also endeavor to conserve natural resources and protect ecological environment with the aim of minimizing potential impact brought by our business operations. In an effort to effectively optimize use and management of water resources, we are committed to enhancing management of water resources and improve water use efficiency. We'll continue to encourage subsidiaries to strengthen water-saving measures such as conducting regular inspections of water supply networks, water-saving equipment and system and monitoring water consumption levels to ensure promised repairment of leak spots and avoid wastage. To optimize waste disposal and management will continue to maintain 100% hazard-free disposal of hazardous waste at our subsidiary level, while encouraging them to reduce domestic waste and in the long term, achieve the goal of zero domestic waste sent to the landfill. We actively implement global terminal network and lean operations management as our main strategy to expand our scale and improve efficiency and quality of our assets for long-term development. We are confident in becoming a leading global terminal operator under the management of our Board and ESG Committee. Although there are uncertainties and challenges to global trade such as COVID-19 pandemic, rising inflation and interest rates and increasing geopolitical conflicts, China's economic development is still at an important stage with strategic opportunities. A resilient economy, a strong domestic market and a robust supply chain will provide support for China's economy, which will continue to grow in the long run. We also see other opportunities in emerging markets, such as RCEP, which will drive further growth in the logistics and ports industry in Asia. Looking forward to the second half of this year, facing both external and internal challenges and pressure, the company will continue to grasp a wide range of opportunities. We will strengthen our terminal network in emerging markets, participate in consolidation of ports in China while pushing forward throughput growth in terminals worldwide and expanding our assets. We will take advantage of our synergy with shipping companies, establish focused marketing targets, increased revenue and efficiency while controlling costs. We will continue to improve management of our assets and finances, especially cash flow and liquidity. As we increase income from interest, we will also reduce interest costs in order to maximize return on assets. We will push forward with supply chain expansion projects to create new growth opportunities. We will seize opportunities in ports by green, low carbon and smart port concepts to accelerate our development and transformation. COSCO SHIPPING Ports remains committed to sustainable development, and we will push forward high-quality development in the long run, achieving our strategic goal of becoming a leading world-class comprehensive ports operator. That concludes our presentation for today. Now we will start Q&A session. Please feel free to ask questions.

[Operator Instructions] First question. [indiscernible] Securities.

The question is, in 2022 first half, for container shipping markets, global economy will bring what kind of impact to port throughput? And what is your future outlook, please?

Okay. In 2022, second half, our judgment is that there would be some increased pressure in terms of demand. So when it comes to the transport capacity when the market is at a downturn, well, we have to find a new balance between demand and also capacity. And this will be very critical to determine the future. In second half 2022, freight rates will see some change. But then there are shipping companies high-price contracts. So overall, freight rates can remain at a high level. For 2022, I think there will still be 37% increase in overall freight rates. That will be the chance of a historical high level. In 2023, when the overall situation normalizes, and then with 2 years of growth, in the past 2 years in 2023, our judgment is that there would be a big pressure in terms of downturn in container business. And then in shipping ports, I think for a longer period of time, the same trend will continue. In 2022, global throughput increase would be 4%. That was the estimate in March. It will come down to 2.2%. For our whole year throughput, it grew by 5.3%. So this is bigger than the overall -- whole year estimate of 2.3% of the overall industry. There are a lot of challenges in the macro economy and freight rate will continue to be volatile. We will continue to deepen our operation and strategies in order to maintain our existing volume and strive for increase. In the second half, there would be some new routes and at Zeebrugge, I think there would be a new routes for the Alliance and for Abu Dhabi, there will be some new shipping lines support. For the whole year, there would be increase amidst stability, and we will seize opportunities to go for price increase. Right now, at some terminals in the customers' agreement, there is high single-digit or even double-digit increase. So we expect that in the future, for port companies, I think ASP will continue to rise. Thank you.

Thank you, Mr. Zhu for your questions (sic) [ answer ]. The next question is being asked by many analysts. It is port congestion in China as well as overseas. So in the coming few quarters, do you think this problem will continue or will it be improved? Then concerning your throughput and price, what kind of impact will be caused?

Well, concerning geopolitical conflicts recently, and also the strikes in some European ports, actually, the whole year situation is being affected. In 2022, I think congestion at ports will continue for some period of time. Now we think that for ports, especially for top companies in ports and also ports with global layout, I think there will be opportunity. We will seize the opportunities to enhance our revenue and our efficiency. And we would like to create value for our customers. Apart from our daily business enhancement, we will look at the second half of the year circumstances. And for instance, we will make arrangements for additional service. And then for our turnover, we will also put in place some strategies in order to improve the situation. And all these will lead to additional revenue increase, we hope.

Next question is ASP of your terminals in China and overseas for your terminals. What about the newly signed contracts in first half 2022? What about contract renewal? How -- what is the percentage of the total contracts signed in '22? What is the ASP level for contracts signed? Comparing with last year's ASP on a year-on-year basis, has there been an increase?

For subsidiary terminals in China, the contracts renewed every year. In the past 1 year, in many places of the Mainland, ASP is being adjusted. So we need to actively follow things up. And looking at last year, whole year, if you look at the overall operations of the industry, it is very good for some terminals. When contract is renewed, we are able to achieve a high single digit to double-digit increase. So that means at least 5% to a double-digit increase. Based on the current situation for subsidiary terminals in Mainland, I think, well, there are better strength. For overseas subsidiaries, we seize opportunities to raise price, and we hope to lock in some long-term contracts. For some terminals, when we renew agreements with shipping lines, we achieved high single-digit and double-digit increase in ASP. In the future, for our ASP, it will continue to rise. In 2021, in the market -- when the market was better, we completed the signing of some long-term agreements. So in 2022, there were fewer renewals. So we are seizing the window in the market. So we look into terms to optimize or enhance the existing contracts. And there are miscellaneous revenue. And we enhance our customer profile or mix in order to increase ASP further. Thank you.