Hutchison Port Holdings Trust (NS8U) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of Hutchinson Port Holdings Trust 2019 annual results announcement for the year ended 31st December, 2019. Now I will hand over to Mr. Patrick Lam, the CEO of Hutchinson Port Holdings Trust. Mr. Lam, please begin.

Thank you. Hi, everyone. This is Diana Lee, the CFO of Trust. And prior -- before handing it over to Patrick, I'll just like to apologize that there's some technical problem with our Singapore Company Secretary, and we have not been able to upload the file yet. They're saying that it will be ready by -- in 5 minutes. So I apologize for that. I'll probably just read through the numbers in case if it still doesn't come in 5 minutes. To start with, I'll pass the phone to Patrick to actually start with the business update. Thank you.

Hi, and good afternoon. First of all, again, apologize for the file upload error, our system problem. But anyway, but -- maybe it's being affected by the coronavirus as well. Anyway, for the 2019 result. I will have this point out for you first. Number one, 2019 actually is a very challenging year. The landscape's really tough, especially on the China-U.S. trade dispute, which softened the demand. Everybody knows that the high tariff has drive some pressure to ship some of the manufacturing outside China. But of course, the volume is not big. And -- but it really weakened the Chinese export, especially for Yantian, it was down 9% in the U.S. trade. And well, of course, it is also affecting Hong Kong for the [ IA ] and the transshipment. Actually, the -- I would say the whole maritime industry in last year is not doing too good, especially the trade dispute effecting over, not just between China and U.S. And so our management team have already did something to complement or to compensate what we expected to be lost in this U.S. trade sector. For example, in Yantian, we have built up a lot of new initiative in marketing activities. For example, our port alliance with Huizhou, [ Wushan ] strengthened the cargo carrying -- the ability between the Huizhou and Yantian. And second, the sea-rail intermodal. Actually, last year, in Yantian, carrying a very encouraging results, the volume has go up from 140,000 to 200,000. I think the rail cargo in China is picking up, but of course, still not to affect the economic scale. And then third, for both Yantian and Hong Kong HIT, we also build quite number of software, the new feeder services. The aim is to protect or to increase the cargo volume as well as to build more service for Yantian and HIT. And for HIT or the Kwai Tsing as a whole, you know that the Seaport Alliance is actually delivering a very good saving -- cost saving result. Later, Diana will give you the numbers. And also in terms of the terminal efficiency, it also give a very positive number, encouraging results to those shipping alliance. So as a result, I will say that the shipping alliances, they really welcome this idea and also especially for the South China area. I would say the Hutchison Port Trust will gain more services from the shipping alliance. Of course, maybe Yantian will be focusing more export, while Hong Kong, we have to keep working hard. And -- but for the 2019, the last year result, well, compared to the budget, we'll meet the budget or in some area they sit. But compared to last year, there's some areas where we have the job. So later, we'll come on to questions. And in the meantime, may I pass to Diana to go through those numbers. But make sure there are -- I hope you all guys get the presentation or the files for view, okay? So they got it, right? Okay, Diana, please?

Yes. Thank you, Patrick. Yes, everyone, I understand that the file has been uploaded. So please take a look if you could. If -- for those who have the file in hand, I'm actually looking at Page 8 of the PowerPoint just to start with the general trend for our volume, and as Patrick was saying, overall, year-on-year, 3% drop. But that's composed by Hong Kong, Kwai Tsing, overall 6% drop. And Yantian as a whole, minus 1% for the full year. If you recall, Yantian was along the trend of increasing its volume up to the end of September. And as we did say earlier, we were expecting a very poor fourth quarter, simply because the 2018 fourth quarter, we -- it was at a very high base because of the frontloading impact for the U.S.-China trade war and anticipation of tariff implementation in January 2019. And of course, it didn't take place at the end. And so eventually, Yantian ended up being minus 1% overall, with U.S. volumes drop by 9%. Europe, on the other hand, increased by 4%. And of course, with the help of empties and transshipment increase, so overall minus 1%. And on Page 10, you see a breakdown of Hong Kong and China. And of course, the percentage of China's contribution continues to increase, mainly because Hong Kong's volume drop comparing to Yantian's relatively stable volume in the past few years. And in terms of revenue, an overall 3% drop, which is in line with the volume drop. So our ASP during last year was pretty flattish. No big discounts that we gave up and, thus, pretty flattish on an overall basis. And on Page 11, we see that the total CapEx. We actually had some savings in our CapEx, which is close to HKD 600 million last year. And that gives nearly all maintenance CapEx, which is around HKD 600 million, HKD 700 million per annum for HPH Trust. And on Page 12, that just a summary of the debt that we have. Total debt, HKD 30.68 billion. And versus prior year 2018, we did have a HKD 1 billion decrease in our debt level, which actually was in line with the debt reduction plan that we had of HKD 1 billion per annum for 5 years. And then in terms of the short-term debt, we do have a bond expiring in March this year through 2020. And of course, we have lined up the bank loan for the redemption of the bond. And thus, we have an increase in our short-term debt assets at 31st December, 2019. And next page, Page 15. You see that with our 4 quarter DPU, the -- for the second half of 2019, we are distributing HKD 0.05. So together with the first half of HKD 0.06, it's HKD 0.11 in total. And with the HKD 0.11 comparing to the year-end market price of our units, so that's USD 0.172. The yield is actually about 8.2%. And I'll have to say that our total distributable cash earned during the period was about HKD 0.138. But then we are only distributing HKD 0.11 here from last year. And we are saving the DPU of about HKD 0.028 and very likely for additional debt repayments, and that would total to be about HKD 250 million. So that's the cash that we earned. We are planning for additional debt repayment that we will do this year of about HKD 250 million. And in terms of the numbers, Page 14, just quickly go through them. Revenue was down 3%. Cost of service rendered, we had a decrease of 6%. And of course, a major part actually came from the Seaport Alliance arrangement that we had the cost savings. And that's the saving of 6%. Actually, that actually absorbs the inflation cost of our labor as well. And overall, the operating profit because of the drop in the revenue was down 3% for 2019. Interest costs actually increased by 5%. And despite we had 3 rate cuts in 2019, but then they were still the full year impact of the 4 rate hikes from 2018, so on an overall basis, interest cost still increased by 5% last year. And taxation, as we mentioned in the past 3 quarters, we had an expiry of our Yantian Phase 1 and 2, the high and new technology status. So our tax rate increased from 15% to 25%, and that's an increase in taxation by 10%. So all in all, our profit after tax actually dropped by 11% as a whole, that's prior to the impairment loss that we made in 2018. And lastly, on just the fourth quarter alone numbers on the next page, Page 15. We actually did expect a very poor fourth quarter. So you see that in terms of volume, both Hong Kong and Yantian had a 9% drop in our volume. And also for Yantian, if we just looked at the U.S. volume, it was actually down for the fourth quarter alone, 19%. And that's actually a very big number, and a part of it was definitely due to the frontloading impact that 2018 had. Because back into 2018 fourth quarter, U.S. trade actually increased by 11%. And despite we still continue to have some cost savings, a reduction of 15% in terms of costs, but because revenue was down 11%, so overall, our operating profit was down by 17%. And interest costs, on the other hand for the last quarter, we actually managed to have a reduction by 2%. And with the increase in taxation, our profit after tax actually had a 29% drop for the fourth quarter. And that probably concludes my report on the numbers. And we welcome any questions that you may have. Thank you.

[Operator Instructions] Our first question, Allen Huang from Goldman Sachs.

I just have [ 1 ] question. So first of all, thank you very much for doing the presentation. I just wanted to have a little bit sense in terms of how do you think about in terms of the volume outlook, in particular, in terms of the coronavirus impact and also the Phase 1 deals between U.S. and China? Like how do you sort of foresee the volume outlook for this year?

Sure, Allen. Thank you. Your question is on volume outlook, right?

Yes.

Okay, sure. I'll pass it to Patrick.

Okay. So yes, I think you're asking for the year 2020, especially now the South China or the whole China is under the coronavirus. Only 2 things. First in the [ South China ], we are talking about January or February results. I think the Chinese New Year had been factored because usually during Chinese New Year, the factory in China doesn't operate. So this is one factor. And I think for -- especially about the coronavirus impact on the coming cargo impact, I would say that the even though we cover not too long time not turning around industry in a soft time, like in 2003, the SARS experience, I think that year you can see that, within a few months, and then actually, if anything, remaining months of that year, we have recovered most of the cargo or the volume. But for this one, so far, I would say that we don't have the experience on this virus [ pattern ], especially the severity of the government taking measures in holding up most of the productions of the factories and even some daily activities. So I would try to put it in 2 way. Even China will be covered within a month or 2, then I think for the remaining months, the export will pick up to -- or the post deferred order will get picked up, and then for those shelf replenishment or restocking. And it will take a long time. And of course, I can't say that while whether they will change some of their sourcing center or change some of their production orders. And in this moment, I don't have any -- a very clear idea on this, because most of the focus today is still putting on -- all the control the health of the staff or every people here. So I think this is a very reasonable question and a good question, but I need some time to sort it out. Yes. I'll probably answer you.

And just to follow up on that. And you like -- you sort of mentioned like U.S.-China trade war also picked up in 2019. But now that we have sort of a Phase 1 deal and then some of the tariff cuts kind of implementing, so wondering like how do you take that. Is it going to cause incremental more positive outlook looking into like 2020? Or like do you think that that's sort of something not very certain?

I think the key attribute is still the U.S.-China trade war. And if not, especially the first Phase 1 deal is being signed. And actually, nobody knows after the deal will sign and then immediately the outbreak of this virus issue. Otherwise, we're having it be reported to quite normal or to a certain extent we say that it's going quite a good time for us to pick up something. But now it's changed a lot that the marketing efforts, activities has been held up. So -- and then [ Tianjin ], we try to eliminate those business stoppage. And then we try to keep the -- our people still running on those operations. First of all, I would say that the terminal is still in operation throughout this period, 7 time 24. And for Kwai Tsing or the [ cultural ] so far, both in Hong Kong or in Yantian, we don't have any reported case on this infection. And -- but no matter how, I would say that the -- once the SARS -- or the virus gone, and then the executions of the Phase 1 deal will be coming again, and especially, we will have to keep increasing the import. I will see that. Because well, for China, they have already won sort of a lot of operations. And they -- those commodity, they -- although they are a very self-contained country, now they need to buy in a lot of things. And also, they have a certain commitment in the deal. So in this 2 aspect, I would say that the import will grow a lot. And for those exports, I still emphasize, even though some of their manufacturing shift, for example, I quote you a number. For China, last year has dropped 6.5% export. But the whole Southeast Asian country, the ASEAN country, they have 41% or 9% up, 41% in Vietnam, 9% in Thailand. I think they are very close to situation, so still, China will remain the figures of factory in the world. And Hong Kong will remain the most flexible transshipment hub in the -- in the whole of China. So I will say, I will treat this as my marketing mission. Yes. Okay?

Okay. Great. And then just, we've also talked about the -- kind of like the Seaport Alliance. In my recollection that we talked a little bit in terms of sort of pushing down the price so that we can attract more volume, and then sort of just wanted to know, like, is there any tangible plans for [ navigating ] Seaport Alliance to sort of cut our ASP to attract more volumes target this year?

Okay. I guess for our Seaport Alliance, what we have achieved so far mainly on the cost savings side. So we did manage to have cost synergies with the combination of the 23 berths operating as one. And thus, you see how it's reflected in the cost of service rendered numbers there. In terms of marketing or in driving up our revenue, there's what should have -- we have done at Seaport Alliance, and in fact, as a whole. Reason is that we are still being renewed by the competition commission at this stage. They did actually mentioned that they expect to have an outcome by first quarter. And currently, this is still in the pipeline, probably end of first quarter, if not early second quarter. Hopefully, they will have a conclusion or some comments on the view on the Seaport Alliance. So because of that -- and we are being very cautious -- and we're not actually carrying out any marketing activities together in the name of the Seaport Alliance. And hopefully, of course, with the increase in the competitiveness of Hong Kong port as a whole, we actually do hope that we are able to attract more business from a [ buy, buy, buy, ] having the Seaport Alliance arrangement. So far, mainly on cost that we see how it benefits us, hopefully, we can have some select benefits from the rest of [ deals ] as well.

Sure. That's super helpful. Yes, my last question is just, can you talk a little about the DPU guidance? And then like how do you think about the trade out between dividend payoff versus sort of the average payment? And that will be my last question.

Sure. Sure. Thank you. And I guess, on an overall basis, with the uncertainties that we are facing right now, just trying to trade what to start with. And then now with the coronavirus, I think the Board would like to keep it more -- very prudent. And -- but we ended up sort of distributing a total of HKD 0.11, given that this actually yields an 8% based on the year-end price. And with the remaining cash, that's why we would like to repay at [indiscernible] and although it's not a big amount, but we think that if we do have the cash, maybe we can use that to reduce our debt to mostly from the prudent side of things, in particular, in the current environment.

Our next question, Calvin Wong from JPMorgan.