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

Fellow investors, analysts and friends from the media, good afternoon. Very thankful for your presence at the first half 2023 result presentation of COSCO SHIPPING Ports Limited. We will do this from the physical location as well as online. We have Mr. Zhu Tao, Managing Director, with us today, and Mr. Kelvin Wong, Deputy Managing Director; Mr. Chen Yipeng, Deputy General Manager; and our Chief Accountant, Mr. ZHAO Fengnian. In today's presentation, we will have our management walk through the key highlights, financial performance, operating review as well as strategy, and then we'll have a Q&A session. Mr. Zhu, please.

Fellow friends and investors, good afternoon. I am Managing Director, Zhu Tao, of the company. First of all, welcome to the 2023 H1 -- first half results of our company. May I express our welcome to all of you and thank you for the long-term support to our company. And I also hope to take this opportunity to communicate with and have this exchanges with you. Our briefing comes in 5 parts today. First is the key highlights and financial performance and then thirdly, operational review and fourthly, strategy and outlook. And last but not least, we will move into a Q&A session. First of all, I will walk you through the first half performance. In the first half of 2023, United States and Europe has slowed down and decreased demand. In addition to geopolitical tensions, we are under a lot of pressure. Despite that -- all these pressures, our China foreign trade is characterized by strong resilience and vitality. According to the China's General Administration of Customs data, total value of foreign trade is RMB 20.1 trillion. That's an increase of 2.1%. And based on Ministry of Transportation and Communications data, our container throughput is at 100 million -- 150 million TEUs, that's an increase of 4.8% year-on-year and the external environment is being more and more complex and severe. Under our leadership and following the 14th 5-year plan an opportunity was brought forward by the dual circulation development strategy and [ 2-wheel ] drive strategy. We insist on seeking progress while maintaining stability. In the first half of the year, our terminal profit has a slight decline of 2.2% year-on-year, of which our terminal in China has come down by 2.1% and subsidiary terminals rise by 8.3%. Profit from non-subsidiary terminals declined by 4.9%, mainly because of Yantian and Hong Kong terminals. As for overseas terminals, profits fell by 2.8%, of which holding terminals fell by 28%, non-subsidiary terminals rose by 27.8%. And that's main -- now the rise in profit mainly is because of Suez Canal Terminal, Kumport Terminal and RSGT, which partially offset the decline in profit from Spain and Zeebrugge. And in the second half, the company's terminal profit increased by 1.3% year-on-year, outperforming the 6.3% of the first quarter, a 6.3% decline in the first quarter. China terminal port increased by 3.8%. Subsidiary terminals rose by 11%. The non-subsidiary terminals rose by 1.6%. In overseas, the terminal profits dropped by 9.5%, subsidiary terminals down by 36.9%, non-holding terminals up by 30.8%. The rise in -- that's mainly due to the rising throughput of the Suez Canal and RSGT. And above -- in terms of the subsidiary terminals, the decline in profits of CSP Spain and Zeebrugge Terminals affected our overall profit performance. Although the global economic growth will continue to face challenges, we continue to see new opportunities in ASEAN and Africa, and COSCO SHIPPING Ports will continue to develop our opportunities in strategically important subsidiary terminals and highly profited non-subsidiary reruns. We rely on Lean Operations strategy and to improve the efficiency of the terminals and to create a corporate value creation and a long-term sustainable development path. Now may invite the company's Chief Accountant to walk us through the financial performance.

In the second quarter, our revenue came down by 3.8%. Gross profit decreased by 11.1% year-on-year. And the profit attributable to equity holders of the company declined by 13.6% year-on-year despite that profit from joint ventures and associates increased by 8.9%. And let's take a look at the revenue in the first half. Our revenue came down by 2.2% year-on-year. Our gross profit decreased by 2%, and our gross profit margin was flat. And the joint ventures and associates profit came down by 4.1%. Overall, operating profit remained stable. However, terminal profits in the first half of the year fell only slightly by 2.2%. Our average borrowing cost, bank borrowing costs because of interest hikes in Europe and the United States have caused our -- that cost to go by 31.9%. And that had caused our profit attributable to shareholders to come down. As far as payout is concerned, the dividend payout ratio remains unchanged at 40%, and the first half would be USD 1.744 per share. And through revenue enhancement, and we will actively increase our rates optimize the terms of our storage and also work on additional revenue sources and cost reduction. We will also promote the improvement of efficiency of the terminal frontline operations and also to control the cost per TEU in order to enhance the overall profitability of the company. Now let's take a look at the revenue and gross profit margin of the second quarter. China terminals came down by 2.5%. However, the gross profit margin remained at a high level of 39.5% and impacted by a downward pressure of global economy. Xiamen Ocean Gate Terminals revenue came down by 2.1%. However, compared to the second quarter -- compared to that of the first quarter that is an improvement. In the next half, we will continue to build the [ port plus ] supply chain strategy, new model between Xiamen Ocean Gate Terminal and Xiamen Haitou Supply Chain in order to build a one-stop integrated logistics service to our customers. With our Tianjin Container Terminal profit margin go up by 1.2% and we will continue to capture opportunities from the hinterland as well as the northern region. As far as overseas subsidiary terminals, revenue fell down by 5%, and the gross profit margin was at 18.7%, benefiting from Abu Dhabi Terminals and a dual brand strategy. Our throughput climbed by -- climbed to 6%. And revenue and gross profit margin rose, respectively, by 53.8% and 25.4%. And also, as far as the global demand is concerned, it's shrinking. The PCT continues to be stable as far as the throughput is concerned. Into the next half of the year, we will continue to manage well and control our cost and enhance efficiency. We are committed to optimizing our portfolio of global terminal assets, actively participating in the integration of domestic port resources. For example, in the first half, we increased our stake in Xiamen Ocean Gate Terminal by 30%, which has now become a wholly-owned subsidiary of ours. As far as overseas is concerned, we expect the growth potential of our overseas subsidiary terminals to be gradually released in the future, especially Abu Dhabi Terminal. And that will improve our overall profitability. Now let's take a look at the second quarter terminal profit. Because of the dual circulation strategy, the terminal profit in China rose by 3.8% in the second quarter. When compared to the first half, that's a decline of 8.6%. And this is a huge improvement. Now let me give you a regional analysis. In the Bohai Rim, it went up by 13.7%. That's accounting for 38.1% of total. That's a 4.2 percent point -- percentage points increase year-on-year. That's the largest contributor of the company's profit. That's mainly because of the Tianjin Container Terminal. And in the future, we continue to grab the opportunity of increasing the proportion of trade in the northern region. With the Yangtze River Delta region, it rose by 41.6% year-on-year and is a contributor of 9.4 and that's because of the Shanghai Pudong and Mingdong terminals that have drove a sharp rise in the profit. With the Southeast Coast region, the profit from terminals went up by 55.8% accounting for an 11.1% of total. That's an increase of 3.9 percentage points. That's mainly because of our additional stake in the Xiamen Ocean Gate Terminal. Now if we compare our internal growth, the additional 30% of Xiamen Terminals' profit and the Haitou Supply Chain project, the profit rose year-on-year by 8.7%. In the Pearl River Delta, our profit came down by 25.9%. That's a 7 percentage points downwards to 19.2% contributor. That's mainly because of the destocking in Europe and the United States. In the Southwest Coast region, the profit came down by 22.6% year-on-year and it's a smaller contributor at 5.4%. That's mainly because of Beibu Gulf convertible bonds fair value changes. And if taken that out, the Southwest Coast regions terminals profit increased by 16.7%. In the future, we believe that with RCEP and the opportunities in the hinterland, the profitability of this region will improve. As far as overseas region is concerned, terminal profit declined by 9.5% year-on-year. And the share dropped slightly by 2 percentage points to 16.8%. That's mainly because of the decline in throughput and profit in CSP Spain and Zeebrugge. In the future, we will continue to cultivate the China -- Chinese market and see progress while expanding our overseas market, with a gradual increase in the utilization rates of our overseas terminals, we expect overall profitability to grow in the future. As far as our balance sheet is concerned by end of June this year, our deposits and cash at -- is at $920 million. That is a healthy level, of which RMB 47%, euro 19%, USD 29% and other currencies composes of 5%. As far as loan is concerned, the balance of loans accounted to approximately $2.98 billion of which RMB is 25%, euro 21%, USD 51% and other currencies, 3%. With the U.S. going into the rate hike cycle in March 2022, there had been 10 rounds of interest hikes and a total of 500 basis points. And with the European Central Bank, as of June of 2023, they have hiked the rates for 8x a total of 400 basis points. That increased the company's overall financing costs. And the borrowing cost has gone from 2.91% in the first half of 2022 to 4.97% in the first half of this year. Against this background, the country would focus on controlling the size of our debt and to expand our finance channels and efficiency of capital. In order to buffer the negative impact of the increased capital cost. As far as the net debt to equity ratio is concerned, it has been kept a low level in the first half, 30.9%. In the future, we will continue to take the advantage of a low leverage and to identify investment projects with good development potential, in order to promote sustainable development. As far as capital expenditure is concerned, in the first half, it's at $437 million, of which equities is $267 million. That includes $121 million of the Xiamen Ocean Gate Terminal 30% stake. And the Xiamen Haitou Supply Chain project is $94.41 million. And the Hamburg CCT project cost us $50.59 million. As far as fixed asset investment, it's a $115 million that includes the existing subsidiary terminal of Chancay in Peru, and $13.91 million in Guangzhou terminal new equipment purchases and other expenditures. Now may I invite Mr. Chen to walk you through our operational results.

Thank you. Now let me walk you through this. In 2023, second half, the total throughput reached 34.27 million TEUs. That's up by 4.1% year-on-year. When compared to the first quarter, which was flat, we saw some gradual recovery in the second quarter, of which the subsidiary terminals had 8.08 million of TEUs that's down by 1.4% year-on-year and accounting for 23.6% of total throughput. Those non-subsidiary terminals totaled 26.19 million TEUs. That's up by 5.9% and accounting for 76.4% of total throughput. Equity throughput reached 11.14 million TEUs, up by 4.8% year-on-year, when compared to the first quarter, when equity throughput dropped by 2.5%. The performance in the second quarter was significantly better amongst that, the equity throughput was 5 million TEUs, up by 3% year-on-year, acted as a 44.9% contributor of total equity throughput. For the non-subsidiary terminals, it was 6.14 million TEUs. That's an increase of 6.3 million year-on-year accounting for 55.1% of total equity. In the future, we will continue to increase the share of container throughput in our subsidiary terminals and to deepen our lean operating strategy and improve the quality and efficiency of our terminal asset portfolio. We will continue to strengthen our control capabilities and build and replicate the successful model into other terminals, such as the Abu Dhabi Terminal, which have a core competitiveness that has been increasing and its throughput and efficiency have achieved very fruitful results. And in the second half of 2023, our 8 major subsidiary terminals have recorded a 2.8% year-on-year increase of which Abu Dhabi and PCT had reported a 66.2% and 14.5%, respectively. In 2023 first half, we have already introduced 38 new routes. And with 661,000 TEUs, our ASP in local currencies -- our China subsidiary terminals increased by 5.85% and European subsidiary terminals improved by 5.6%. We will continue to fully utilize the advantage of our links and our major shipping alliance to further expand our global rights and strengthen win-win cooperation to provide better services for upstream and downstream industries and to build and to maximize values for all. As far as technology is concerned, we continue to push for transforming our digital and intelligent transformation and promote high-quality development and to further set industry standards and to create value for -- we strive to be at the forefront of technological transformation and upgrading through the following measures. The smart ports construction of Xiamen Ocean Gate Terminal and put it in using a larger commercial sense. And Abu Dhabi Terminal has been successful. We want to replicate that in commercial operations. The Tianjin TCT terminal has constructed world's first plus automated, upgrading and transformation project with 31 sets of automated gantry cranes and 12 sets of automated quay cranes. In the future, we will carry out similar projects in Wuhan and Jinzhou and other subsidiary terminals. In order to further enhance the company's information system, we will continue to explore the real-life use of GSPN in terminals and also to promote implementation of it in terminals in non-subsidiary terminals. Thirdly, the company continues to improve EAM, equipment asset management system. And to reduce the cost of equipment procurement, operation and maintenance, we have already completed such in the Abu Dhabi and the Chinese subsidiary terminals. In the future, we will continue to build that in overseas subsidiary terminals. Fourthly, the company continued to develop and apply MIS systems in portable terminals. We will continue to analyze that with revenue and cost data and to improve the quality of our management. We will continue to promote to use science and technology innovation and lead the upgrading of the ecosystem and to build this as our advantage. As far as the supply chain business, we are developing a global logistics network and building a comprehensive supply chain and new logistics supply chain networks. This is a progress that we have been -- we have made recently. Our newly acquired project, the Haitou CFS project will undergo asset optimization and business upgrading. We will introduce e-commerce and the Central Asian electrical vehicle overland export corridor. And secondly, we are actually pushing for CFS project, the Haicang CFS project is put into operation this year. Thirdly, in the first phase of Abu Dhabi CFS project, we're actively strengthening marketing and promoting with other companies in the group. Fourthly, with the Zeebrugge CFS, it's mainly used overseas transshipment warehouses and related businesses, including the [ Taicang ] international overseas warehouse and solar energy projects in Europe. This new growth drivers for the company. We will continue to improve the synergistic location of our resources and foster a relationship between the ports and supply chain businesses and push for other -- the second phase of Abu Dhabi and Peru Chancay CFS as well as other projects. Now may I invite Mr. Chen to talk about our strategy and outlook.

In the recent years, the global network of the company has seen some rapid development. As of June 2023, we have a total of 47 terminal companies of which 15 are subsidiaries. However, we still need to strengthen our solid foundation for further development. Firstly, we'll continue to optimize and improve structure of the global terminal network and to enhance balance in our portfolio to explore investment and opportunities in key hub ports. And secondly, we will continue to improve our globalized port management capabilities to enhance our operating and management capabilities and resilience. As far as Lean Operations is concerned, we will adhere to value creation. First, prove focusing on stabilizing volume and promoting growth to implement precise marketing to promote introduction of new routes and new quality business and to increase market development. Secondly, as we will improve efficiency and reduce cost and make new breakthroughs in upgrade of timely services, we will continue to consolidate and improve the implementation with cost control measures and continue to control our costs and reduce it and to improve the quality and quantity of terminal asset portfolios. And since the second quarter, the downward momentum of the global economy has slowed down. And based on the latest IMF forecast, the latest growth rate of world trade will drop to 2%. And in the second half, we will face all kinds of different uncertainties like the geographic and inflation risk. And on China, the tenacity of China's economic development and a strong domestic market and a strong demand structure will support our economy. With the Asian Development Bank, the estimation, Asia Pacific regions would grow by 4.8% this year to unleash new growth opportunities. And also, in addition, RCEP would continue to promote member states to have a higher and deeper level of cooperation. ASEAN countries export can maintain a faster growth. And we'll open up new markets for the company's businesses. Looking further into this year, we'll continue to actively grab the development opportunities. Firstly, we will focus on global deployment apart from participating in domestic port integration, port resources integration. We will continue to optimize the control of global terminal assets, and continue to improve our network. Secondly, we are committed to Lean Operation and management, leveraging on the synergistic effect of our dual brand business with COSCO SHIPPING lines and also to expand -- to tap on the potential and increase growth and also to build lean management. Third is to vigorously promote the development of supply chains to lean on our own advantage to broaden the investment and development channels of core supply to strive to make new breakthrough in the whole service supply -- service supply chain. Fourthly, we will accelerate digital, intelligent, green and low-carbon transformation. In 2023 is a continuity year for the implementation of 14th 5-year plan. The dual circulation strategy will bring new opportunities with the leading position of COSCO SHIPPING Ports in the global port operator industry, we'll continue to base ourselves in the 2 drivers of global layout and Lean Operations and strive to be a high -- a leading comprehensive operator and a sustainable world leader. Now let us take some questions, please.

[Operator Instructions] Perhaps I'll first ask for any questions from on-site here. There's an online question. That's from UOB analyst. He has 2 questions. One is about based on management data, some of the throughput of the terminals have come down of which Xiamen, Nansha, Guangzhou, and also the Zeebrugge and the Spain terminals have suffered some evident decline. What is your view about the operations? And do you anticipate things to improve? Now there are 4 ports that they are asking that is Xiamen, Nansha, Zeebrugge as well as the Spanish ports. Mr. Chen, could you take that question, please?

Thank you for your concern. Indeed, like your question, the 4 terminals, we have seen some different levels of decline. Now this has to do with the economic trend of that we see. For example, the Xiamen and the Nansha terminals, the -- their business is mainly focused on Europe and the U.S.A. Now impacted by the macroeconomic trends, we did see some decline. And we also saw in the second quarter, it is already better than the first quarter. So we believe that with the third quarter, which is a traditional high season, the business of these terminals would improve.

The second question is with international trade slowing down, what is the outlook for this year as far as business growth and throughput?

Let me take this question. I feel that by 2023, throughput of global throughput as -- we continue to anticipate a weak growth in global throughput. It is only expected to be at 1%. As you can see in the first half, it's very weak, we anticipate in the second half, global demand can have a small growth, and this is because of the inventory spend has been quite big with the first half, and also in the second half with the traditional festivities in Europe and U.S.A., we may see a little bit of improvement. However, we continue to insist of -- insist in the optimization of our customers and to build new routes and new services. We anticipate that our holding terminal as well as non-subsidiary terminals would improve and steadily. We will continue to enhance our customer service level, especially strengthening on third party, which is the COSCO SHIPPING companies, the synergies with these companies. And in order to capture the opportunities of the various policies that the Chinese government is launching. So hopefully, in the next half of the year, we can enhance our throughput and our business size.

There is an HSBC analyst asking 2 questions. The first 1 is wanting to -- the destocking of Europe and U.S.A., what's the impact, including the Pearl River Delta in terminals and also with the [indiscernible] RSGT. So these -- this port is doing well and wanted to understand the reason behind that.

Can you repeat the question a bit, please?

This investor wanted to ask about the impact to some holding terminals as -- because of the destocking of the U.S. and Europe. And also like to understand the impact to the terminals in Turkey and Saudi Arabia.

With the Hong Kong terminal, the value change is mainly because of prior to last year because of a jam in the terminal, there are some transfer cargoes accumulating. This year with the global jam softening. So this has been alleviated. So this impact is quite big for the Hong Kong terminals. Now as for Saudi Arabia, the business growth was because mainly of the UAE and China import increasing, especially with the consumers food stuff and consumer goods increase. This has caused the RSGT growth. And with the -- this is also a result of our marketing results. With the -- when we compare our throughput for transfer cargo, we see some huge improvement there.

The second question is about the 5-year plan of the company. How do you -- we decline? How do we cut down control on the per TEU cost?

Per TEU cost. Can you repeat, please?

This analyst would like to ask about the 5-year plan of the company. As it relates to measures to cut per TEU cost as well as outlook.

Mainly several areas. First is with digital transformation. We have already reported that through building EAM systems, through a digitized control, management control, we improved the maintenance of equipment of -- as well as cost control of our terminal network on a global basis. So with this improvement, we observed that the cost of various terminals have been able to improve by 10% or more. So we continue to push for data-based [ CEM ] management and also to realize our cost control targets.

So maybe we invite some questions from friends on site. Do you have any questions?

I'm from Hong Kong. My name is Kong. You have mentioned that the growth and the new lines would grow in the next half. So where does the growth drive come from, which region? And you were talking about new lines. Where are the new lines? And also you -- I also like to ask what is your -- what is the interest rate then your capital cost with the high interest rate? How -- what is your anticipation about the capital cost in the second half of the year?