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

Ladies and gentlemen, welcome to the conference call of Hutchinson Port Holdings Trust annual results announcement for the year ended December 31, 2020. Now I'll hand over to Mr. Patrick Lam, the CEO of Hutchison Port Holdings Trust. Mr. Lam, please begin.

Okay. Good evening, all analysts. Well, year 2020, I think everybody knows that there's a lot fully under the COVID impact as it is a year full of uncertainty. And now for the -- the COVID also of brought forth a lot of changes, including the customer behaviors and also some of the cities or productions are being locked down. So the global economies of entirely stood up. And while, for our business in last year, actually, the first half is a little bit poor because it's subject to the impacts of COVID. And the second half, it flies high because of the home economies that brought up a lot of demand. And the South China region is -- I think the economy of South China is specially good for those e-commerce or those who made order for the PPE, the personal protection equipment, or even those furnitures, kitchenwares who want to improve their family or their home facility during the COVID period. So that's leading to some sort of changes. If the first half is lower, then the second half is high. So when we take a look at the port, the Trust's port throughput last year is 2% up compared to the previous year, and Yantian 2% up, Hong Kong also 1% up. And for Yantian, mainly focused in U.S. export and the Europe export. That give a very quick pacing in the fourth quarter, thus ranging from -- for U.S. export, it's 33% number, and for Europe is 24% up. And as a total, they export for the whole 2020 is 5% up. And as I mentioned, for Yantian, quite focused on the export hub and for Kwai Tsing is the transshipment hub. The full year NPAT was 10% above last year, while the attributable to unitholders was 57% above last year. For the details later, Diana will give you those numbers. Okay. And well, for the outlook and prospects, I keep it later for, if any questions over there, then I'll try to answer. So meanwhile, I think you are eager to know more about those numbers. Diana, please?

Sure. Thanks, Patrick. Probably to start with, I'll just briefly go through the key numbers. If we could start on the PowerPoint, Page 8, down at the bottom left-hand corner. So that's a bar graph with the volume over the year. And you see that in general, each fixed cost had a 2% increase in our volume, and that contributed by 1% from Hong Kong. So that's our Kwai Tsing terminal, and then 2% from Yantian as a whole. The 2% from Yantian, a big portion of it actually came from exports to U.S. and Europe, which increased by 5% for both U.S. and Europe exports out of Yantian last year. We had a drop in our empties because you know that there was quite a shortage of empty boxes in South China, in Mainland China last year. And therefore, Hong Kong actually had a higher empty percentage for last year. And on Page 10, that's a page with the revenue. And you see that despite we had a growth in our volume by 2%, our overall revenue, we had a 4% drop. And that was because of the drop in our empty revenue per TEU. For both Hong Kong and Yantian, we had a drop of 3%. It was not because of any discounts that we gave up. We didn't give out any significant amount of discount, but mainly because of the mix. So for Hong Kong, as I was saying earlier, empties actually increased. The percentage actually increased from 21% in 2019 to 29% in 2020, just because mainly that empties actually came back to Hong Kong rather than to Yantian, and thus the increase in Hong Kong empty volume and also transshipment increased from 76% to 79%. So because of the increases in empty transshipment, that actually had a slight drop in our ASP for Hong Kong last year. Yantian. Same -- pretty much the same story for transshipment. We had an increase in our transshipment. So total transshipment volume increased from 15% in 2019 to 18% in 2020. And of course, renminbi depreciated slightly last year and that actually contributed to the drop in our revenue per TEU or ASP. Again, the proportion of our Mainland China revenue increased slightly to 69% in 2020. And thus, Hong Kong only contributed 31%. And on next page, Page 11, that's the amount of CapEx that we spent. You see that we had quite a drop of 20% drop year-on-year, so only HKD 464 million. I just say that this is definitely a bit less than what we normally expect for maintenance CapEx. So in the past year and even in 2019, we're on the low side of maintenance CapEx. And that's the reason -- that's the main reason that we were trying to control the spending even especially in the first half with the volume drop and the uncertainty of the whole business outlook. And that's why we did put in quite stringent controls on how we spend our CapEx. And thus, you see that there's a drop in 2020 CapEx now. I'll say that, overall, we do expect an increase in CapEx, slightly, probably back to the 2019 month and because they're mainly maintenance CapEx so we would need them somehow. And -- but it would definitely not be on the high end because we will still continue to monitor how much CapEx we spend due to the uncertainties of the whole business environment. On Page 12, this is a summary of our financial position. In terms of our total consolidated debt, you will see that we did have a decrease of close to HKD 1.3 billion. And so what we did in 2020 was that we actually repaid the basic, I would say, of HKD 1 billion as we announced before, probably about 4, 5 years back. And on top of that, we repaid additional HKD 250 million as well. So total debt repayment last year was about HKD 1.25 billion. And thus, that's reflected in our consolidated debt level here. And the slight increase in our consolidated cash, that's just timing impact, mainly just working capital differences. And on Page in 13. This is the distribution page that we are proposing for the second half of last year, that we are proposing a DPU of HKD 0.077 And that means, for the full year, we are distributing HKD 0.12. And the -- if you recall at the beginning of last year, we were guiding towards the DPU of HKD 0.08 to HKD 0.11. And therefore, by distributing HKD 0.12 above our upper end of the range for our DPU guidance. And of course, the increase in the DPU is a reflection of how we perform better than we expected, as you'll see later on in our P&L. And with the HKD 0.12, if we use the year-end price, of course, the price has gone up lately. But if we use the December 31 unit price, we're talking about a 7.8% yield. And if we use the price for yesterday, we're talking about a close to 7% yield for our DPU. And lastly, on this page, that's our P&L for the full year. And so you see that, as I explained earlier, revenue was down 4%. Cost of service rendered, we actually managed to have a saving of 8%. That included a very small portion of the COVID subsidy that Yantian received, but that's not significant at all. And with the cost of rendered savings of 8%, the bulk of it actually came from the Hong Kong Seaport Alliance savings, and we managed to get over HKD 200 million savings out of the SPA arrangement. And just a slide not from there, with the investigation of the Hong Kong Competition Company Commission on the SPA, that's the Hong Kong Seaport Alliance arrangement, we actually have got clearance from the CCE. And so there are certain commitments that we have discussed with the CCE in the past 1.5 years and that we are comfortable with, and we are in the process of selecting the monitoring trustee, of course, under the review of the commission. So in a way, we cleared with the CCE on the arrangement so we could fully exercise the -- for what we are planning -- or we were planning for Hong Kong SPA. And SPA cost, again, we actually did manage some savings, so 11% savings. And with the other operating income, you see that there's a significant increase in that. So the bulk of it actually -- the bulk of the increase actually came from the ESS, the Hong Kong ESS, employment support scheme. That's the HKD 9,000 that the government gave to support the salaries of the Hong Kong employees from June to November. And so all in all, our operating profit increased by 2% year-on-year so that the cost savings and also the ESS actually managed to cover the drop in our revenue as a whole. Interest costs actually was reduced by 29%, and that's mainly because of the drop in our -- in the hybrid and LIBOR rates. And of course, with our refinancing, like we said, that we did have some reduction overall and thus the 29% savings in our interest costs. And the share of profit less taxes after tax -- less losses after tax of associate companies and joint ventures, so that increase actually definitely came from our total operations, that same associate company that we have, the increase in their profit and also for COSCO-HIT and ACT, the terminal 8 that we have in Hong Kong as a result of the increase in operations and also a reduction of its interest. And thus, the increase there that you see. So profit before tax, we had a 19% increase. And taxation, on the other hand, of course, I have been mentioning this all along in the past -- the half year result. We have an expiry in our Yantian Phase III high and new technology status, which means that Phase III actually has to pay 25% income tax versus 15% last year. And thus, the increase in our taxation there. Profit after tax, still a 10% increase. And you see that with profit after tax attributable to unitholders, because of the savings in our interest cost, which the HPH Trust enjoys or in a way enjoys more than 90-plus percent. And also, our Hong Kong operations had a growth in our NPAT last year as well, which we own a higher percentage there. So that's why the profit after tax attributable to unitholders as a whole had a 57% increase for the full year 2020 against 2019. And that probably concludes my presentation. And then, of course, welcome any questions that you may have. Thank you.

[Operator Instructions] We have Mr. Parash from HSBC.

Yes. I have a few questions. But firstly, let's talk about interest cost. It seems like you managed to lower your borrowing costs by as much as 100 basis points. And can you give us some color about what is -- of the total debt, how much is fixed, how much is floating? And how do you expect this to change over the next, at least, 2 years, 2021 and 2022? How shall we think about your sustainable level of interest and other finance costs? And second question is more on we have seen a sharp recovery in U.S. and Europe trade in the fourth quarter. And the fact that we will be entering into some sort of low base in the first 2 quarters of 2021, have you seen the same momentum continued in year-to-date numbers so far? And what we are hearing is that this time around, during the Chinese New Year, not all factories will be shut down. Are you seeing more activities around Chinese New Year in your port areas? And finally, with the record-breaking profitability by the shipping line, does it make your conversation with shipping lines easier in terms of raising your tariff?

Thanks, Parash. I'll take the first question first, given its interest cost, and then I'll leave the other 2 questions to Patrick. So in terms of the -- yes, in terms of the interest costs, currently, we have about 66% being based. And the reason why we -- in terms of our cost of funding, last year, it was 2.6%, and whereas the year before, it was about 3.5%. I guess what -- as I was saying earlier, there were 2 reasons to the drop in our interest costs, firstly, because of the LIBOR and HIBOR rate reduction in the past year comparing to 2019. And also, we actually did manage to refinance just a portion of the loan at a lower rate because of the general lower rate environment in the market. Whether it's sustainable, I would say at this point in time, yes, because, I mean, unless suddenly interest rates shoot up, but based on my discussion with quite a number of banks, so they're not really forecasting an increase in the LIBOR rates at least for this year. And thus, for any refinancing that we do, we are expecting the cost to be lower. So of course, we will not be able to further reduce interest cost much. But I guess, maintaining it at last year's level should be achievable based on the current estimation of how interest rates go. And then I'll pass it over to Patrick for the other 2 questions.

Sure. Okay, Parash. Lovely to hear you here. Yes, I haven't see for a long time, right? Okay. First question is on the Europe trade. Actually, you know that after the Brexit issue, now U.K. actually are still in the chaos on the terminal congestion or even some tariff issue. And well, I would say for Europe trade accounting for trust business, it's about just 1/4 or 1/2 of the volumes of the U.S. business. For trust, half of the business goes to U.S. bank and 1/4 is going to Europe bank. So in that sense, that means no matter how the fourth quarter grows 18%, because of the reopening or release on some of the lockdowns in some European countries, for example, France, Spain, then more activity is picking up. So you can see that while business is getting up in Europe. And as I mentioned, the full year growth for Europe trade in Yantian, for example, is about 4%, but while growth in U.S. still in a bigger volume. And well, you are very, very, very knowledgeable about China. Yes, this year, the Chinese government wants the people to stay in their own local city, not go back to the hometown. That means not too many people is moving around so that -- as a COVID control measures. And second, the Southeast, South China business, actually, this -- during this Lunar New Year period, it's very, very good that I would say that only both East China and South China. They are enjoying very good growth. Of course, I'm not giving any forward numbers, but I'll just tell the fact that you can see that the ships, they are quite fully loaded, and then they're all idle rushing for -- heading for U.S. and then that making the U.S. port congestion. And the other way now going into Europe, causing another sort of congestion because of these vessels, they are now overboard and then they delay for their -- they missed the schedule. So making everything lesser. But well, this is sometimes we say it's a good business. But of course, not well managed. So probably, I would say that the fact is that these 2 areas is China and South China. They're getting very good business. And for this new year, the -- some of the factory, they may shorten their holiday. And since they don't -- they have enough staff, not going hometown, they will remain here, then they do take more orders. And some of you may know about that the Southeast Asian countries, they are now under the COVID impact. They don't have a full production chain. So some of the production is now coming back to China. So you can see that maybe some of you will read from the newspaper, the general numbers are quite, quite good. Yes. I hope I answered you. Yes, Parash?

And also, any prospects on tariff increase?

Tariff, I would say that we have tariff with shipment rise on contract by term. Some of them have been signed in 2 or 3 years ago. And for those who are expired or going to be expired, we are reviewing the possibility of tariff increase. But of course, you will know that, in South China, our competitors, they are quite competitive and they are quite aggressive as well. So we will cautiously take these measures. But of course, trying to maximize the profit for our shareholders. This is one of our aim, okay?

Right next on the line, we have Ms. Bin Xu from UBS.

Just wondering, first, can you provide your throughput and DPU guidance for 2021? And second question is, can you suggest the -- whether the increase in the operating income for 2020 is sustainable in 2021 and -- or will this go back to 2019 level? And also, my third question is about your debt repayment schedule. If I recall this correct, the schedule will cease in '20 -- end in 2021. So going forward, would you continue to repay some debt or you will just keep your debt at current level?

Sure. I just -- in this environment, first question on the throughput, at this early stage, I probably would not be very confident to give out any concrete sort of throughput guidance at this stage. The reason being that, as you would expect, we would have quite an increase comparing to first half last year. Basic reason is that last year, since like February or end of January, there have been the COVID environment and all the trade actually was pretty much distorted, so we had quite a drop last year. So what would happen this year, as far as what we will see, and you will probably see pretty soon that they will -- we do expect quite some increase in the first half. But the question is about the second half. Second half 2020, actually, we had quite an increase, in particular, in the fourth quarter, of course. And so that was at a very high base. So how it will turn out in the second half. Because last year second half, there was quite a catch-up element in the high volume. So probably, it would be very hard to maintain at last year's second half level. So I guess, all in all, in terms of volume, we are still cautious about the overall volume that we could do. I would say, at this point in time, we are just saying full year-round flattish maybe. Or even if there's any growth, it could be just very, very low single digit, if that's the case. I mean, at this stage, I think this is all that we will say because it's just too hard to actually have any forecast at this point in time in terms of volume. For the P&L, if the volume is pretty flattish, we are not expecting any sort of like significant movement in our ASP. And so I would say that we are definitely targeting to maintain the 2020 P&L level. And at this point in time, I wouldn't say that it is a very aggressive type of forecast of maintaining the 2020 P&L level. But of course, it is not something that can easily be done, especially the COVID is still ongoing and it's not clear about the U.S.-China trade tension at this point in time. So there are too many -- or a lot of uncertainties at this point to actually give out any concrete guidance. And in terms of the debt repayment, yes, you're right that the HKD 1 billion debt repayment for 5 years, that we have done already. But at this point, I'll say that this will continue for the HKD 1 billion. That will probably be something that we will continue repaying. A point to note for this year, with the HKD 0.12 DPU, we will be repaying a total of HKD 1.4 billion bank loans as well. So in a way, we do have the, what you said, that the capability of repaying just HKD 1 billion rather than HKD 1.4 billion. So that will be some room for us next year. And I guess, right now, of course, all subject to the Board of Directors' decision early next year. But right now, we will be maintaining the HKD 1 billion debt repayment. And whether we will be repaying more or whether we would keep it at HKD 1 billion, I'll leave until later on to decide. Of course, it all depends on our business prospects as well.

Okay. Yes. Just thank you for the analyst comments and I'll try to give you to more consideration. One is on the economy side, the government is proposing a GDP up 6% to 7%. It looks good, according to the government. But on the low side, I would say that we have to consider currently the maritime trade is at a high freight and second is a shortage of the container and third is distributed schedules of these vessels. That will all offset some of the favorables of the volume growth, as Diana mentioned. And then second, about those expenses, not to forget, well, there are some increase in the equipment, for example, the protection equipment, the personal protection equipment or some sort of other longer inspection time. But rest with our team to do a better cost management. So this is the answer.

Sorry. Just one more small question. So for 2020, I see you realized a 100% increase in the other operating income. Just wondering if this is sustainable for this year.

Oh, I think, Diana, they're talking about the ESS. Is it?

I was saying earlier this is the other operating income. The increase was due to the ESS. The bulk of it was the ESS, which is a one-off that the government gave out from June to November last year. So I would expect that not to happen this year, so there will be a reduction there.