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

Ladies and gentlemen, welcome to the conference call of Hutchison Port Holdings Trust 2020 interim results announcement for the period ended 30th of June 2020. Now I will hand over to Mr. Patrick Lam, the CEO of Hutchison Port Holdings Trust. Mr. Lam, please begin.

Yes. Good afternoon, ladies and gentleman, and our dear investors or friends. Now about the HPH Trust result for the second quarter. Actually, a lot of people focused pretty much on the COVID-19 impact. And as it was, they know that, that was broken out early in the first quarter 2020. And actually, that was also the hardest hit to the Trust business where you can see the supply chain were being disrupted and the consumption sentiment was down and the cities lockouts and economic contraction. Shipping lines also exercised blank sailings. But, well, in the second half of the second quarter, I will say that we see signs of picking up where demands are growing and shipping lines are -- I'm going to say that at least -- that part of it, that at least they reduced numbers of blank sailings. And that gives them -- which brought in more cargoes or volume for our trust ports, for example HIT and Yantian, where in June actually we also have some new services we launched. In HIT, we have 2 intra-Asia services launched. And in Yantian, we've got 5 covering U.S., Europe and intra-Asia as well. So -- well, for that quarter, to the results for the throughput in the year-to-date June 2020, the trust port throughput was 8% below last year compared to the first quarter 12%, slightly improved. Yantian's throughput was 12% down compared to 15% down in first quarter. And, well, the combined throughputs of HIT, COSCO-HIT or what we call Kwai Tsing was 3% down, below last year. So you can see that actually, the Yantian gained an export premium pop that was affected by the U.S. and the Europe export, while Kwai Tsing, being a r transshipment hub, was less impacted. So that just had 3% drop, and you see there's a lot of pickup from the first quarter, 8%. So probably, the global trade was still negatively impacted by the COVID-19. And while we hope that the momentum or the growth rate in June will carry on to the third quarter, at least in July we see a slightly pickup -- more pickup. And then probably, this year -- this month, we've got a very good enough throughput. And okay, for those numbers, I'll pass to Diana. And feel free to raise any questions and I will also answer as well. So Diana, our CFO. Thank you.

Okay, thank you, Patrick. Hello, everyone, and good afternoon. Probably to start with on numbers, we start with -- on Page 9. So as Patrick was saying, you see that overall, year-on-year volume was down 8% for the half year, of which, again, Kwai Tsing, our Hong Kong port, was only down, 3%; Yantian was down 12%. And with that 12%, U.S. actually was down 17%, of course, due to COVID and partly maybe due to the U.S.-China trade war impact as well. Europe was down 10%. So we had an increase in transshipments and imports to actually reduce the drop impact on our Yantian volume on an overall basis. And on Page 11, this is a page with revenue and other income. You see the 12% drop year-on-year on revenue. It doesn't mean that we had offered any big discounts at all. In fact, we didn't really do much in terms of giving out incentives or discounts that we don't normally do. The reason for the drop was from Hong Kong by the Yantian. Yantian was pretty much flattish in terms of our ASP. For Hong Kong, it was about month -- 4%, 5%, and that was just because firstly, transshipment volume, that's, of course, a lower revenue base type of cargo, actually increased to 78% in the half year comparing to previously 76% only. And also, we had some finalization of tariffs in the first half of 2019 and thus some release of our revenue provision in 2019 and thus a high rate comparing to this half. And thus, an overall drop in our ASP for our Kwai Tsing terminal. It was not due to any sort of discount that we offered. And segment information, you see that the mix has not had any change unlike the previous quarters, which means that Yantian actually did drop a bit more than Hong Kong. So pretty much stable in terms of the split between China and Hong Kong here. And on next page, Page 12, we didn't make this up. This just suddenly happens that we have the exact same amount in terms of our CapEx spend. And so this year, mainly maintenance, pretty much the same as last year. So we do expect full year, around HKD 600 million, HKD 700 million of CapEx. Of course, in this environment, we will try to tighten the CapEx that we spend. And half year, around HKD 288 million for our CapEx. Page 13, that's our overall financial position. And you will see that our total consolidated debt was at HKD 29.5 billion, and that's a reduction or decrease in our overall debt by about HKD 1 billion comparing to last year. And of course, that was the result of our HKD 1 billion debt repayment scheme that has been carried out for 4 years now, and thus the reduction. And total cash, around close to HKD 6.9 billion, as a whole pretty stable comparing to last year-end. Distribution-wise we are proposing a DPU of HKD 4.30 [indiscernible] of 2020. And the ex distribution date will be the 4th of August 2020. Lastly, for our P&L, you see that our throughput -- our revenues down 12%, as I explained earlier, where throughput was down 8% overall. And cost of services rendered, you see a savings of 18% despite our volume was down only 8%. The reason for the savings that we've had, of course, partly due to the cost saving initiative that we have been carrying out and also the savings that we have had from SPA, which is the Hong Kong Seaport Alliance arrangements, as we expected. But in there, we have included social security subsidy from our PLC unit, mainly Yantian, of about HKD 23 million. So this is -- in a way, you could -- you can look at it as the government subsidy from the PLC side. And similarly, we have some -- the same thing for the staff costs here of about HKD 3 million. So this is like the government subsidy. And of course, the rest of the savings were partly due to renminbi depreciation, which helped us, and also the control in the headcount and also some activities, et cetera, which helped us with the 13% savings in our staff costs that you see. In other operating income, you see a 51% increase. So it's around HKD 22 million. And about HKD 14 million actually was the ESS, the Hong Kong government -- the employee subsidy schemes that we have applied for, for June. Of course, we only booked both in the first half. And also, we had a disposal gain of some tractors of about HKD 5 million that's recorded in other operating income. So all in all, our operating expenses, we actually managed to reduce it by about 11%. And thus, our operating profit as a whole was down 15%. And you see that for interest costs, we actually managed to have a reduction of 22% absolutely as a -- as the various rate cuts that we had from last year to the first half of this year as well. So overall savings comparing to last year by 22%. And with the profit before tax, a drop of 11%. So that's mainly, of course, due to the drop in the revenue but set off against the cost of service rendered and staff cost savings and also the ESS that we had. Taxation, similar as previous years or as we expected. We have an expiry of the high-end new technology status for Yantian Phase III. And thus, the tax rate for Yantian Phase III has gone back to the standard rate of 25% from the 15% last year. So we were expecting higher taxation this year despite a lower profit before tax right now for the first half. So an increase of 11%. So overall, our profit after tax was down 17%. So for this half year, due to 2 reasons that the minority shareholders actually have taken more of the decrease in our profits. Firstly, because Yantian, as you know, because of the bigger volume drop year-on-year, actually was hit harder than Hong Kong -- our Hong Kong business. And secondly, the cost -- or the interest cost savings that we actually enjoyed for this first half of the year, over 95% actually belongs to the trust as a whole but not the minority shareholders. And because of that, our overall profit after tax attributable to unitholders was just down 9% year-on-year. So this is pretty comparable to our drop in our volume of 8% and revenue of 12%. That concludes my brief discussion on the numbers, and we'd like to take on any questions that you have. Thank you.

[Operator Instructions] Our first question, [ James ] of HSBC.

Patrick and Diana, I hope you are keeping well. My question is more around what sort of post-COVID recovery are you witnessing in your volumes, i.e. when we -- can you help us understand on a monthly basis? Was April the worst month or May the worst month? How has been June? And what have you seen perhaps in the first 3 weeks of July? And secondly, and the cost initiatives were pretty impressive. Can you help us understand, will this trend likely to -- likely to sustain going into the later half of the year? Or a lot of the cost savings were kind of a one-off in nature?

Sure, [ Jim ]. Thanks for your questions. Firstly, on the COVID impact on our volume. The way we looked at it was that in terms of just, say, year-on-year comparison in terms of the drop, I'll say that, of course, February was very hard hit because of the CNY, firstly, and also because of the closure of the factories in PRC. And then [indiscernible] continued in March. The worst month, I would say, was in April. Reason was that although China started to resume their production, but then there was -- due to the world lockdown, there were just not many orders for the production. And thus, year-on-year-wise, especially normal -- April should be a pretty normal month rather than if you look at like February or March with the CNY impact. So we were pretty hard hit by the April year-on-year comparison. Started to pick up, I would say, probably half -- second half of May, the impact actually eventually got better. And in fact, in June, and I would say -- so far, as Patrick was saying, in the first 2 weeks, 3 weeks of July, we have seen recovery, meaning that we actually have had growth in terms of our volume as a whole. So there's a pickup certainly. Whether that's a recovery, we cannot confirm. I would say that probably third quarter -- I'll pass it to Patrick if he has anything to add on the business, but third quarter, it is probably a better quarter in terms of picking up from the lockdown, et cetera, unless there's a really big wave from the COVID again worldwide. And what's unknown to us would be the fourth quarter, that we don't have much sense as to what's going to happen. So this is probably the basic -- what's going to happen for the remaining of the year in terms of the volume. And in terms of costs, I'll say that as you see, quite a lot of the cost savings from the -- or part of the cost savings, not a lot but part of the cost savings were from the subsidies like the social security subsidy from the PRC government, which we are not sure that it will be ongoing for the remaining of the year yet. But of course, with the ESS, that's from the Hong Kong government, so we do expect it will continue for the remaining 5 months. So that's July to November. So it really depends on the various sorts of subsidies. Part of it will continue into the second half, but part was still unknown at this stage. But as to cost saving-wise, like whatever we have been able to achieve from our Seaport Alliance, the SPA, the Hong Kong arrangement, we -- that will continue into the second half and other cost initiatives that we have carried out yet. So it will be on a partial basis. That will be ongoing. And of course, the renminbi depreciation helped us as well in terms of the Yantian costs as a whole. So I hope that answers your question. And Patrick may have something to add.

Okay. [ James ], thank you for the question. And actually, about the business in -- under this COVID situation, I think there's still a lot of risk but as well as some opportunity. As you all know, that there is a blank sailings from the shipping lines. They cut their capacity to maintain their fleet. And so far, it stand very firm. And due to this practice, actually HIT and Yantian has -- take some sort of advantage from this blank sailing because, well, simply, if they take the blank sailing to cut some of the cargo from my competitors, that means they have to divert some traffic or cargoes to those ports which they must call. What I mean must call is HIT for transshipment because this is very strong in all the global network. So HIT has not much been cut from the blank sailing. And same for Yantian, for the export hub. They have enough O&D cargo there, so they must call Yantian. In that sense, actually, they did do another sort of feeder network for us. So in the past 2 months, actually we have a big volume increase in the barges and the railway. So we suffered the traditional low traffic because of the COVID influence. So probably, they take the barges and the railway as the new model for this and cargoes connecting Yantian and/or to HIT from the Pearl River Delta. So in that sense actually, we have gained some sort of new cargo from there. As I mentioned, in June, HIT gained new -- 2 new services, where Yantian had 5 new services covering from -- for Yantian, it's from U.S., Europe and then intra-Asia. But for HIT mainly it's from -- one is from Middle East, the other is intra-Asia. So you can see that -- well, this -- due to the COVID influence then for Yantian, we took a very proactive marketing strategy to offer this -- shipping lines to make sure that HIT and Yantian will not be in their list for the blank sailings, that -- well, we will become a must-call port, and we can guarantee this volume. So this -- I would love to share with you on this, right? Okay? Thank you.

[Operator Instructions] Our next question, Simon from Goldman Sachs.

I guess 2 questions here. One, in relation to what you've seen, the pickup on the volume, particularly in June and July, can you let us know what was the driver for that? Was that a U.S.-Europe recovery? You've seen a noticeable recovery from Europe. Was that 18% run rate that you have seen in the first half? Or was that very much driven by, as you earlier mentioned, more like transshipment or intra-Asia volume? And the implication on the ASP as well? That's the first question. The second question is, remember your full year dividend guidance was HKD 0.08 to HKD 0.11, and you paid HKD 0.043 in this first half. Are you maintaining that guidance? And that's -- if I look at last year, your free cash flow generation, you haven't really paid out entirely all your free cash flows. What should we expect for this year? If you're generating HKD 100 cash flow, are you -- are we expecting that HKD 100 are going to be fully distributed to a [indiscernible]?

Thanks, Simon.

Okay. Maybe I'll first answer those on the business side, and then later Diana will give you about the dividend issue. Okay. First of all, the June and July pickup. First, as we all know, that the cities lockdown last a very long time. And then some of the economies, for example, those in Europe and the U.S., they tried to reopen their city and then they focus on the recovery for their economy. So for the U.S. export, actually there is an increase. In fact, today, we are close to 1 -- just the -- I think it's about 11% drop compared to last year instead of -- in the first quarter, there was 21% drop in the U.S. export. So today, catch up a lot. And interesting enough in cargoes, mainly the garden furniture because of people being, well, quarantined at home. So maybe they want to enjoy the their life more in their garden. So chillers and then the garden furniture are the main cargo export to the U.S. And other than those, there was scheduled sailing. Like I said, they have -- already have the blank sailing. Actually, the shipping lines, they spend -- they send a lot of extra loaders to load this cargo to U.S. but not a scheduled sailing. And then for the import actually for China, for Yantian, I would say both Yantian and HIT gained import. Now we all know that HIT actually is very strong in Southeast Asia imports. So for this reason, as I mentioned, about the blank sailing, so a lot of cargoes go through Hong Kong and then get -- go and transship to the Pearl River Delta for import. And also, Yantian actually account for another 30% to 40% of the imports in South China. So the import in Yantian into mainland has also increased. And as I mentioned, the traditional model for the road traffic has turned into barges and railway. So the transshipment, you can see that for HIT, they have a very good -- what I mean, because in transshipment, same as Yantian. We recorded a double-digit Yantian growth. While in Hong Kong, also have double digit because, well, Hong Kong still maintain the most densely network for the intra-Asia. So today as of, the -- under the COVID situation or scenario, most shipping lines, they shut down or they're blank sailing. Those are going to intra-Asia. Instead, they use their -- these are sent to Hong Kong and then onboard those U.S. ships. So you can see the transshipment for Yantian and HIT also came from this. As I said, we take one -- we have a very preferential position to maintain HIT as a transshipment hub while YICT as an export hub. And to free up all this business, of course shipping lines have to maintain their empty inventory in these terminals. So both HIT or Yantian at a high level of empty index, more than 0.8 or 0.9. That means near to 1:1 ratio. So you can see that we saw this pickup. But as Diana said, I will say that according to our dialogue or intelligence with our shipping lines, quarter 3 will be okay, but there is still a very high uncertainty in quarter 4. So this is about the business. Hope this answered you, Simon. And Diana will go along with you on those dividends.

Okay. Sure. Thanks, Patrick. And the -- for DPUs, yes, we are maintaining our guidance of HKD 0.08 to HKD 0.11. And currently, the distribution, we are saving a bit of the cash for the -- from -- other than just like distributing the HKD 0.043, yes.

Understood. Well, may I just have one quick follow-up? Given what you've seen on the distributions and the global supply chains after the COVID-19, and obviously you've gained a bit of a transshipment market share, and I think that has been the same for your company over the last, I think, 2, 3 years where you have the top line basically growing slower than your volume in such a way that there were a bit of dilution on the margins and the ASP as well. Is that the trend that we should be expecting over the next, I don't know, call it, 4, 5 years? I.e. if I were to think about earnings, volume and ASP, how should we think about in the -- perhaps in the next 3 to 5 years?

Okay. I'll just probably have to correct you a bit. For our ASP in the past 2 years, it actually has been quite stable in general. But we did have a quite some ASP drop that was probably back in like 2017 or something like that when we had a -- I don't know if the right word would be a little price war particularly in Hong Kong. But after that, even in the difficult time even right now, we are not offering any sort of major discounts or anything to attract the volume. Maybe there's a slight drop in our ASP just because with the increased volume, with the volume incentive so that the highest layer could be at a relatively less -- lower price. And that could have some minor impact. And also, as I said, for example, for Hong Kong this 6 months, the transshipment volume or percentage actually increased to 78% from 76%. So it is a mix rather than a sort of a drop in prices as a result of any discount offers. I'll say luckily, in a way, our pricing -- and we do anticipate our ASP to maintain, but that should be quite stable unless we do have quite some volume increase, and that would be a result of the higher tier sort of volume that we attract as a whole.

What we've done…

Maybe I -- as a -- yes. Sorry, sorry. Go ahead.

One point I'd like to add is, well, for the -- actually, we took it in 2 perspective. One, on the -- this COVID situation, actually I will say that the terminal business still had a very consistent performance, not much being affected. And then second, I'm quite -- I have different view with you. For Yantian actually, when we go into more detail, we'll see that the export for Yantian actually is increasing compared to the business mix, and -- which for the shipping lines, they keep on just blank sailing or they understand our experience to control the capacity. We'll give them more higher profitability. Then I think we are on the same line for Yantian. We have -- are at a very good position to actually maintain the only port or the must-call port in a blank sailing. Then actually, we are in a good position. And as Diana also mentioned, actually, in the past few years for Yantian actually, we don't have any reduction in the tariff at BU. But of course, for Hong Kong, the situation changed. And, well, I will say that if we have a good synergy between Hong Kong and Yantian, one is for transshipment, the other is for export. And I will say that, that will be a very good combination for the shipping line to consider, whether they should permanently reduce the frequent or the double course in South China. So I think there's a very good chance that everybody have to reveal their shipping pattern. And so today, we want to prove them, if you call less port, but it doesn't mean that you have less volume. So let's make it. Yes, we are on the way. Thank you.

Our next question, Parash Jain from HSBC.