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

Dear investors and shareholders. Thank you very much for your attendance at the 2022 results presentation from COSCO SHIPPING Ports Limited. We have a hybrid model. For those attending, we have Mr. Juan Tino, Deputy Managing Director; Mr. Shane Panja, Deputy General Manager; and Mr. Fengnian Zhao Yang, our Chief Accountant. First of all, our management will take us through the performance highlights and then they will take your questions. Mr. Huang, please.

For those on site and online, dear investors, good afternoon. I am Juan Tao Zhu, Deputy Managing Director; from COSCO SHIPPING Ports Limited. First of all, I would like to welcome all of you to this results presentation. There are five parts including our key performance highlights, financial performance, operational review, company strategy and outlook to be followed by a Q&A session. First of all, I would like to introduce to you our performance highlights in '22. In 2022, the global economy faced many challenges, including high sustained inflation and rising geopolitical conflicts. Despite the uncertainties in the global economy, China's foreign trade, continue to grow at a healthy pace. According to the figures from the General Administration of Customs of China, the total value of foreign trade to and from China was RMB 4.07 trillion with a growth of 7.7%, among which exports amounted to RMB 23.97 trillion, up 10.5%. Imports, RMB 18.1 trillion, an increase year-on-year of 4.3%. The value of foreign trade exceeded RMB 40 trillion for the first time in history, despite of all the complex external forces and factors. And we remained first in the world for 6 consecutive years. We continue to work towards the 14 5-year plan as well as grasping opportunities brought by dual circulation development strategy. So we achieved all these great results under the leadership of COSCO SHIPPING Group and the Board. In '21 and '22, excluding the effects of fair value change of CB Beibu Gulf Port, Terminal profits in '22 rose by 5.6%, reaching USD 442 million. In particular, subsidiary terminals profits rose substantially by 53.7% year-on-year to USD 137 million, among which profits of subsidiary terminals in China rose by 42.4%, overseas rose by 79.2%, which is even more impressive. In the post-pandemic era, we will continue to grasp opportunities for development in the global market leveraging on our position as one of the world's leading terminal operators as well as explore investment opportunities at highly profitable non-subsidiary terminals and strategic subsidiary terminals and expand our operations even further. We will create greater values for all our shareholders and achieve sustainable development. I'll pass to my colleague, Mr. Zhao, to talk about financial highlights.

Good afternoon. First, let me introduce full year financial performance. Although there were many uncertain macro conditions, we continue to achieve positive growth in revenue through good marketing strategies, expansion of routes and volume and an increase in non-alliance customers. Total revenue in '22 was USD 1.44 billion up 19.3%. As we continue to implement lean operation strategies to control our cost, gross profit of subsidiary terminals continue to increase recording a growth of 32.1% reaching USD 430 million. Gross profit margin increased to 29.8%, an increase of 2.9 percentage points. Profit attributable to equity holders was USD 305 million, down 14%. Excluding one-off items, the figure should be RMB 307.8 million, a drop of 5%. One-off items included after-tax disposal gain of USD 11.5 million from Tianjin Euro Asia in '21. Gain on remeasurement of 16.01% of TCT producing USD 10.7 million. Third, Beibu gulf port, [CB] fair value gain of USD 8.52 million in 2021 and CBF value loss of USD 2.6 million in '22. Hence, the total amount of USD 11.2 million for net fair value change of CB was excluded. As for annual dividend payout, ratio maintained unchanged at 40%. Dividend per share USD 0.3632. In the future, we will continue to strengthen our analysis of customer value and market conditions to improve our service quality. In terms of reducing costs, we will control cost per TEU further, pinpointing cost saving measures to increase our cost advantage as well as push forward with our COE team to improve operational efficiency and equipment maintenance at subsidiary terminals, ultimately resulting in higher profitability. Next, let's turn to our revenue situation. Revenue of subsidiary terminals in '22 rose by 19.3%, reaching USD 1.44 billion. Revenue at subsidiary terminals in China continued growth momentum and recorded 33.9% growth. In particular, Xiamen Ocean Gate terminal benefited from a continuous improvement of business and marketing strategies throughput and revenue rose by 7.9% and 12.7%, respectively. We have actively participated in the consolidation of port resources and increased our shareholding in Xiamen Ocean Gate terminal by another 30%. It is now our fully owned subsidiary terminal further optimizing our terminal structure. We expect terminal to act as a hub and overseas subsidiary terminals recorded an 8.1% annual growth, CSP Zeebrugge terminal recorded increase of 15% in throughput and a 33.7% in revenue. We're committing to optimizing our global terminal network and therefore, we increased our shareholding in CSP Zeebrugge terminal to 90%. At the same time, we extended the concession period for Zeebrugge terminal for 15 years to 2055. Gross profit margin in '22 grew by 2.9 percentage points, reaching 29.8%. GPM China terminals continue to show upward trend with margin remaining stable over the last few quarters at around 35% to 40%. We will continue to develop greater China market. Overseas terminals also showed strong size of growth and increased by 2.9 percentage points to 20.5%. This was mainly due to improved management at overseas terminals to increase efficiency and cost controls. In future, we foresee that overseas terminals, we have more room for growth and increase revenue, especially Abu Dhabi Terminal. In '22, it experienced rapid growth with its throughput increasing by 46.1% year-on-year. For the last few years, we have continued to build high-quality terminal assets. For example, Zeebrugge terminals throughput rose from 484,000 TEUs in 2019 to 1.07 million in '22, CAGR growth being 30.3%. In addition, in terms of profitability, the Zeebrugge terminal turned a profit for the first time in 2020, going from a loss of USD 9.54 million in 2019 to a profit of USD 8.68 million in '22, achieving excellent results overall. We will replicate the formula of success at other terminals. And as the utilization rate and efficiency at overseas terminals continue to increase, overall profitability of our portfolio will also increase further. Now let's dive deeper into a terminal profit for '22. Excluding the fair value change of CB at Beibu Gulf Port, company's terminal profit rose by 5.6% year-on-year. First, I'll provide a breakdown by region. Terminal profits of Bohai Rim rose by 10.3% and contributed to 35.1% of total profit, an increase of 1.5 points. This is the most important region in terms of terminal profit contribution. It is mainly due to recent addition in shareholding of TCT, which made it a subsidiary terminal of the company. In the future, we will continue to work on developing TCT project to reshape it into an international logistics hub in Northern China. In Yangtze River Delta, profit decreased by 17.1%, its share decreased by 2.2 percentage points to 8%, mainly due to effects of the pandemic in '22 and economic slowdown in Europe and U.S. with the equity throughput in the region decreasing by 6.3%. Southeast Coast area, profit increased by 19.5% and contribution at 9.5%, an increase of 1.2 points. Salmon Ocean Gate terminal has recently become a fully owned subsidiary. We expect share of profits to increase further. For PRT, a decrease of 14.4%, its share decreased by 5.5 points to 23.5%, mainly again because of destocking operations in Europe and America and also the pandemic. Although the equity throughput of the region only decreased by 3.8%, terminals, for example, in Yantian, the volume affected were greater in Southwest Coast, terminal profits went down by 3.6%, contribution only at 4.8% of total profits. In the future, we believe this region will continue to develop and trade with Southeast Asia will grow stronger. Overseas terminals profit rose by 48.5%. Share of profit rising by 5.6 points to 19.2%. This is due to the increased profitability of terminals such as PCT, Zeebrugge and Spain. As the utilization rate of overseas terminals increasing further, room for further growth remains high and drive company's overall profitability. As for subsidiary and non-subsidiary terminals, profits from the latter decreased by 7.4%, its share decreased by 9.7 points to 69.1%, mainly because of the pandemic and also slowdown in Europe and the U.S. subsidiary terminals recorded impressive growth of 53.7%. Its share rose by 9.7 points to 30.9%. Operational efficiency has increased continuously. And of the top 15 terminal profit contributors, 7 are subsidiaries compared to only 4 back in 2021 -- will continue to expand the percentage of contribution, will continue to develop Chinese market and seek stable growth and expand our overseas market and inject new energies. We will better balance between strategic subsidiary terminals and highly profitable non-subsidiary terminals to improve our global portfolio. In terms of our balance sheet, at the end of December '22, we have cash and cash equivalent of USD 1.07 billion, which is a healthy level, about 50% in renminbi, 26% in euros and 26% in USD, other currencies totaling 3%. For total debt, the amount is around USD 2.91 billion, 3.4% borrowing cost, which is slightly higher than previous years. But with a backdrop of higher interest rates in most economies, our strategy in asset and financial management is sound. While the average borrowing cost has risen from 2.92% in 2021, it is still lower than 3.58% in 2018 and 3.77% in 2019. So we're doing quite well in terms of asset management. Net debt to equity ratio, we have maintained it at a rather low level. In '22, it was 27.1%. We will continue to take a financial of low leverage level to acquire potential terminal projects going forward, driving long-term sustainable growth. As for CapEx, total expenditure in '22 was USD 366 million, $13.2 million used for investments $3.44 million for the new acquisition of 4.55% of shares of the Zeebrugge terminal and $8.36 million for the Lianyungang project. The remaining $350 million was used for PP&E terminals, including $155 million in Peru terminal and $30.8 million at Wuhan Terminal in terms of acquisition of new equipment. For '23, we expect full year CapEx to be $1.4 billion. 40% will go into investments and 60% in PP&E investment at the terminals. Now Mr. Chen will take you through the performance review.

Thank you, Mr. Zhao. Dear investors, good afternoon. I am Chen Yipeng, Deputy General Manager. I will take you through our operational performance, our focus on three things: expansion, innovation and expansion of our supply chain. In '22, total throughput of the company increased by 0.6% to reach more than 130 million TEU. Total throughput of subsidiary terminal, 31.63 million TEU, up by 35.3% with its share of total throughput increasing by 6.2 points to 24.3%. Non-subsidiary terminals throughput decreased by 7% to 98.5 million TEU share of total throughput decreasing by 6.2 percentage points to 75.7%. Equity throughput increased by 5.5% to reach more than 42 million TEU. Equity throughput of subsidiary terminals was 18.87 million TEU, up 28.5%. Its share increased by 8 points to 44.9%. Non-subsidiary terminals equity throughput decreased by 7% to 98.5 million TEU. Its share decreased to 55.1%. In '22, almost half of total equity throughput came from subsidiary terminals with the share of throughput continuing to rise. Increasing the share of throughput from subsidiary terminals is crucial to the company in implementing its lean operation strategies and enhancement in efficiency overall. We will copy such success to other places, including Abu Dhabi, Wuhan and Peru so that we can fully enhance our level of competitiveness. Total throughput at our eight major subsidiary terminals in '22 rows by 22.1%, maintaining rapid growth. Increase in throughput was hired at Abu Dhabi and Zeebrugge, going up by 46.1% and 15%, respectively. We will continue to focus on customer needs and expand our market. After TCT became a subsidiary terminal, the proportion of nonalliance customers increased greatly, and we will continue to leverage on the advantage of our global terminal network to build a diverse customer base. In '22, our subsidiary terminals introduced 19 new routes, which contributed around 173,000 TEU. As for ASP in local currency terms, SP of Chinese subsidiary terminals increased by 2.4% year-on-year, where European subsidiary terminals increased by 23%. We will continue to leverage on our close relations and synergy with major shipping alliances to increase the number of routes, calling at our terminals as well as to provide better services to upstream and downstream industries to maximize value for all parties. Regarding technological innovation, we've pushed forward with our automated and smart projects to improve efficiency and overall level and quality of automation and logistics chain in the industry. We have adopted the following major measures to achieve technological transformation. We have successfully replicated the construction of automated terminals Xiamen terminal is equipped within unmanned trucks with a multilink loading and unloading in enclosed areas. Abu Dhabi Terminals are first in Middle East to implement automated trucks. TCT has completed the upgrading from conventional to fully automated terminal. Wuhan Terminal implemented a use of automated trucks, and we will develop automated terminals elsewhere as appropriate. Secondly, to further enhance our IT infrastructure, we have developed CSP portal for GSBN. We have launched it at 8 subsidiary terminals, which will help innovate the traditional workflow and processes. The company is continuously improving the full cycle asset management system, EAM, which is currently operational at all subsidiary terminals in China as well as Abu Dhabi. It is an important tool for terminals in the management of terminal equipment supplies and spare parts and will reduce costs. Fourthly, we continue to work towards digitalization. The MIS system has been put in place in the headquarters, which allows connections between TOS and SAP data at all subsidiary terminals. And it's an important tool to improve the overall management of the terminals. We will continue to push forward with technological innovation and digitalization to upgrade the quality of our terminals and achieve our board of smart ports. In terms of supply chain projects, we're developing high-end warehouses and establishing a comprehensive logistics network to more effectively retain existing customers and attract new ones to use these services, bringing new sources of profit growth for the company. Our main supply chain projects at the terminals have achieved great progress. First, CFS Phase 1 at Abu Dhabi, we're actively working together with our companies in the group to improve marketing work for CFS. We strengthened our relationship with niche clients such as SAIC Motor. We have also at Zeebrugge CFS used overseas transit warehousing and goods unpacking and it is now operating at full capacity. We are also actively acquiring new projects. The acquisition of Xiamen Hato supply chain will increase surface capabilities of Xiamen Ocean Gate terminal and develop it into a hotpot. We have already completed the delivery of the project. Fourthly, other CFS project at Xiamen Ocean gate terminal is expected to enter into operation this year. And Peru terminal and other subsidiary terminals are also preparing to develop logistics chain services. We expect continuous growth in the import and export of high-end goods, including electric vehicle and solar panels at Zeebrugge, Xiamen ocean gate and Abu Dhabi. We'll continue to improve supply chain resources at these terminals. We'll also inject new life into the supply chain so that we can be more equipped to create a new ecology. Now [indiscernible] will take you through the company's strategic plan and outlook. Thank you.

In terms of global layout. Our global network scale has developed at a rapid speed in recent years. By the end of '22, we have 46 terminals, 15 are subsidiaries. Despite of that, we need to continue to expand and innovate and grasp opportunities to expand our global terminal network. This year, we will continue to focus on key projects, improve and optimize global terminal network layout, diversify our portfolio in different regions and achieved new breakthroughs in scale expansion. In relation to lean operation strategies, we'll continue to promote value creation by two different ways. First is to leverage our network advantages to search for new markets and increased number of goods and volume on top of our existing throughput volume. We strengthened our marketing effort to continue to create synergy. Second, we'll optimize implementation of the lean operation strategy to further increase efficiency and control costs while improving the quality of operational management, promoting an improvement of both quantity and quality of our terminal assets. Next page. As we facilitate business development, we strive to mitigate the challenges brought by climate change. To this end, we're committed to driving our subsidiaries to achieve carbon neutrality by 2060. In the shorter term, we target to reduce GHG both Scope 1 and Scope 2 emission intensity of our subsidiaries by 20% in -- by 2030 and reduce energy consumption intensity by 15% by 2030. Going forward, we will continue our efforts to facilitate the diesel to electric conversion of terminal infrastructure and the use of green lightings and enhanced use of shore power by vessels at work to assist shipping companies to achieve full automation in port construction. In '22, such work in terms of energy saving is moving forward very -- in a very orderly manner and GHG emission level has dropped at our subsidiary terminals. We are also dedicated to the protection of ecological environment to minimize potential impact brought by our business operations. We want to optimize the user management of water resources. We're committed to continue to encourage our subsidiaries to strengthen water saving measures such as conducing regular inspections of water supply networks. We also undertake to continuously optimize with disposal management to better protect our environment. We're confident in becoming a green port operator under the management of our Board and ESG Committee. Despite the uncertainty factors such as rising inflation and interest rates and geopolitical conflicts which are still posing challenges to global economic and trade activities. China's development is in an important strategic period. Resilience of economic development, strong domestic market and a well-developed supply system will underpin China's economy and the longer-term fundamentals of China's economy remain positive and unchanged. At the same time, new market opportunities represented by regional comprehensive economic partnership [indiscernible] CEP and other emerging markets will drive new momentum into logistics and port business in the Asian region. In '22, China's total import and export with the 14 member countries amounted to RMB 12.95 trillion, up 7.5%. China's import and export with Asian amounted to RMB 6.52 trillion increase of 15%. Asia continued to be our biggest trading partner accounting for 15.5% of total fund trade value. Our trade structure continued to be optimized. Looking ahead, facing internal external challenges will actively seize development opportunities. Firstly, we further strengthen our network layout in emerging markets, actively participating in the integration of domestic port resources, promote growth of our global port business volume and asset scale expansion. Secondly, we'll continue to strengthen coordination between ports and shipping services, precise marketing, revenue increase and improved lean operation management, improved efficiency and cost control, increase our revenue to achieve win-win and diversify our customer mix, perfect our management system. And thirdly, we will accelerate expansion of our supply chain and drive new growth. Fourthly, we will seize opportunities for greening, low carbon and SmartPort development and [accelerate] our own transformation and upgrading. 2023 is a year of continuity for us to implement the 14 5-year plan. The dual circulation strategy brings new development opportunities with the leading position of COSCO SHIPPING and the global port operating industry will continue to grasp strategic opportunities and strive to achieve more sustainable development with core competencies and accelerate towards the goal of building a global leading comprehensive port operator for all customers. That concludes our presentation for today and also outlook for '23. We will now invite investors to ask questions.

[Operator Instructions] We'll take questions from online participants. JPMorgan analyst is asking two questions first.

'23 throughput outlook, where are you going to add new routes? First half, second half throughput prediction for this year. Mr. Chen, would you like to respond?

Yes, thank you our friend from JPMorgan. Concerning throughput projection for '23. According to industry analysis, overall speaking, it will continue to be rather positive, and we are confident that the throughput level compared to 2022, there will be net increase. The projection for TEU growth globally will be at 0.8%. I believe we will perform better than our peers. In terms of introduction of new routes that will focus on a number of areas, including the Middle East and Abu Dhabi, we are actively establishing Abu Dhabi as a hub, and they have gone through 1 million throughput in 2020 already. So this year, we believe it will maintain strong growth as well.

The second question was about 2022, the per TEU revenue and also projection for '23. I think the first half, Mr. Zhao, out Chief Accounting can respond. But when it comes to projections, we can't be too specific. But the industry and customer situation, perhaps Mr. Chen, can respond.

All right. Thank you for your concern for the company. Just a brief response to your question. Average party EU revenue in RMB, 2021 special factors are taken out. So that was this newly attention terminal. If we take that aside for 2022, the per TEU revenue year-on-year increased by 2.4%. In the past year, in various places, we see higher cost and expenses. So we have done active follow-up and we gain a deep understanding of the available opportunity to lock down contracted prices early on. So per TEU revenue will continue to improve.

Mr. Chen, allow me to supplement. The projection per TEU revenue for 23%. Our judgment is that things will look very bright. In overseas markets, we will maintain a growth lower than the CPI growth for subsidiary terminals. Domestically, we will consolidate our routes together with other optimization measures, we will continuously improve our per TEU revenue.

Next, from HSBC, the investor's question is about domestic and overseas terminals, concerning existing contracts and newly signed contracts. What is the situation? And how are you going to continuously improve per TEU revenue?

Well, it sounds a bit similar to the second part of the first question, but I will ask Mr. Chen to provide a response.

Yes, it is quite repetitive. Basically, the situation is, our contracts -- our annual contracts. That is our usual practice. But of course, we do have some new clients and sometimes there will be newly added or supplementary contracts. For the additional measures I have already informed you, we'll use COA, COD, a number of optimization methods to improve per TEU revenue.