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

Ladies and gentlemen, welcome to the conference call of Hutchison Port Holdings Trust interim results announcement for the period ended 30th of June 2021. Now I'll hand over to Mr. Ivor Chow, the CEO of Hutchison Port Holding Trust. Mr. Chow, please begin.

Hello, everyone. This is Ivor speaking. For those of you who is -- who may not be familiar with me, I took over from Patrick Lam, who is the previous CEO shortly at the beginning of the month. And I have actually been the Trust CFO and -- from listing until, I think, to about 2016. So I'm still very familiar with what's happening at the Trust level. And I'm glad to have the opportunity to come back to work for the Trust. If we can focus on now this first half results. I can say, overall, we had a fairly robust first half, and I'll let Diana kind of go through the numbers. And trade has been good, as you can see from the performance of the shipping lines, our customers. They're all doing very well. Loading is very well, and hence, our results kind of reflect that as well. But if you kind of look into the second half, we're seeing -- start seeing some headwind in terms of how we see the market develops over the next few months. And a lot of the headwind obviously comes from the fact that COVID is still with us. Government is taking -- still taking a lot of precautionary measures, especially at the key assets like airports and container ports. You would have seen the case for Yantian where we are affected because of COVID cases. And we have all now recovered from it, but these measures, if you will, are here to stay. And working with management, we have to look at the new normal to see how we can live with the current situation, if you will. And one of the things I noticed after a couple of weeks back is that my feeling is, for our industry to be profitable, the velocity at which goods are moving through the supply chain is very important to us. And one of the things that I have seen is that the velocity has slowed down a lot. There's certainly congestion, not just at our own ports, but around the world, within the U.S. ports, within the destination where the goods are delivered. And the return of the empty boxes, et cetera, are being affected, partly because of COVID measures, but partly just things are chaotic at the moment, and it continues to be. And so not only is Yantian affected because of the COVID cases, but Hong Kong, if we look at July's performance, we're fairly congested just because goods are staying at the port a lot longer, unlike the old days where goods moved in and out. Being a transshipment hub, things are being stuck at the yard, if you will, for a much longer period of time. And as a result of that, the yard density has gone up significantly. And that has affected our operation, if you will. And we're kind of like coming to terms with how this has affected us. We're slowly recovering. Hong Kong is getting better. Yantian is getting better. But while we are cautiously optimistic about the volume for the second half, operationally, it's still going to be a challenge for us. But having said that, the first half is good. And we still expect, full year-wise, I think we'll come in ahead of our guidance, if you will. And hence, if you look at the DPU interim distribution, standing at HKD 0.065 per share, which is certainly, if you look at our historical track record, this -- it kind of implies a full year dividend, which is higher than what Diana has been guiding for the full year. So we're fairly confident we should be able to kind of meet our guidance this year, if not exceed it. But again, we are tempered with just because things are moving slowly in the supply chain at the moment and whether we can kind of work on that and improve despite all the measures being put on us by the various governments. So I'll kind of leave it here. And Diana can go through the numbers, and then we can pick it up at the Q&A. Thank you.

Sure. Thanks, Ivor. Hi, everyone. Maybe to start with, we will just quickly go through the PowerPoint, Page 8, and that's a chart for our volume. So overall, for the half year 2021, we had an increase in our overall volume by 13%. And that was contributed by 4% for Kwai Tsing, that's Hong Kong; and then 21% for Yantian. And of course, with the 21%, that has account for the drop in our June volume as a result of the COVID cases. On Page 10, on the left-hand side, you see the bar box -- bar chart for revenue. So in terms of revenue, we had a 25% year-on-year growth. So that's after the volume growth of 13%. What it means is that we had some growth from our ASP. So for Hong Kong, we had an increase of 1% in our ASP. And for Yantian -- so the bulk of the growth actually came from Yantian, a 13% growth in our ASP. Reason was mainly because of the storage income that we earned during the period. As I was saying, the boxes of the container stays in our yard for much longer time now just due to the new norm. And therefore, we did receive more storage income as a whole. But I wouldn't say that that's something to continue, or at least as an operator, we would not want that to continue given that it does increase our operation costs. Keeping the yard is -- the yard density is much higher than usual, and thus, more cost needed to be incurred, reshuffling the boxes around. And to some extent, our operational efficiency would be affected under these circumstances. But still, overall, we had the increase in our storage income, which contributed to the increase in our ASP, in particular, for Yantian. And also, for Yantian as well, year-on-year, renminbi appreciation by 9%. And that, of course, helped with our increase in ASP. And the pie chart on the right-hand side, you see that the contribution from Yantian actually increased a lot comparing to last year, from 66% to 72% in the first half of 2021. And of course, a lot due to the increase in the volume as well as the ASP. And on Page 11, that's the total CapEx incurred. We had quite a small amount of CapEx incurred in -- for the first half. And I have to say that that's just due to the timing issue. And of course, the first half was quite unusual, with a lot of volume increase to start with, and also, subsequently the COVID cases in Yantian and the congestion of the ports, thus leading to the deferral of the CapEx spending in the first half. I'll say that we do maintain our estimation on total CapEx incurred for the year. Probably, this year, it will be pretty much close to last year's full year CapEx of around HKD 500 million, which is on the low side for our maintenance CapEx. And of course, we continue to put stringent control on our CapEx spending as a whole due to the pandemic environment and a bit of uncertainty and also the operational efficiency problem that we have now. And on next page, Page 12, with our total consolidated debt at HKD 29 billion, you see that comparing to last year-end of HKD 29.4 billion, there was a reduction of about HKD 400 million. And as you recall, in February this year, we did announce that we would repay HKD 1.4 billion from cash that we earned last year. So HKD 1 billion was like -- rather routine one for -- from our debt repayment plan and additional HKD 400 million. And up to now or for this year, we will be repaying a total of HKD 400 million from the HKD 1.4 billion that we mentioned. The remaining HKD 1 billion, the way to look at it is that we actually -- you could say that we did repay it. But then, of course, we -- for the Yantian East Port project, which we announced 2, 3 months ago, we expect the contribution from its [ fixed trust ] for the east port would be around HKD 1 billion in 2021 or early 2022. So the way that we have done it is that instead of drawing new bank loan for this HKD 1 billion for east port, we just withheld the originally planned debt repayment of HKD 1 billion. And thus, on a net basis, we only repaid HKD 400 million for this year in terms of our debt, saving the HKD 1 billion repayment for the expected cash injection for our Yantian East Port project. And on Page 13, so this a page on our DPU. And as Ivor mentioned, we are distributing HKD 0.065. Comparing to last year, for the first half, we distributed HKD 0.043. And if you recall in February, we did have a DPU guidance for this year of HKD 0.11 to HKD 0.13. And given HKD 0.065 for the first half, we do have confidence that we will be at the high range of our guidance, HKD 0.13 and of course, depending on our overall performance in the second half of 2021, maybe we will exceed the HKD 0.13. Of course, that's all subject to the overall second year results. And lastly, the P&L for the first half of 2021 versus last year. As you -- as mentioned, overall revenue actually increased by 25%, of course, due to the volume growth of 13% and also the increase in our ASP, as I mentioned earlier. Cost of services rendered actually increased by 24%. So that's quite a bit higher than the 13% volume growth that we had. And main reason was due to Yantian's cost of services rendered. We did spend additional costs to cater for the COVID environment, with the first COVID case that we discovered on the 21st of May and then up to the 24th of June, so that's about a month later that we resumed full operation. And for the full month, well, we actually incurred around HKD 70 million to actually cater for the COVID situation. That included partly the costs that we incurred as the government required all the terminal workers within the yard to stay inside the terminal, and thus we are giving up allowances to the labor. And the maximum number of labor within the terminal was close to 5,000. But then now after the full operation resumes, government actually relaxed, so that's only the workers who need to go on board would need to stay inside the terminal. And we do have around 1,000 workers now who actually are staying within the terminal. So the costs to be incurred both, together with other precaution, [ preventory ] sort of measures that we have to put in place, for example, disinfection. So both together, we are expecting probably around HKD 25 million per month of costs to cater for the COVID situation at Yantian. And for other operating income, you see quite a jump, over HKD 300 million for this half year, and mainly due to 2 reasons: firstly, increase in our railway subsidy that we received at Yantian of about HKD 20 million; and also, we received a special subsidy by Yantian as a result of the increase in the volume last year, 2020 comparing to 2019 of HKD 280 million that we booked in other operating income, but the net impact is about HKD 220 million, as we do have some reimbursement to be paid to the barge operators, and we have put that in under revenue. And so total operating profit actually increased by 87%. And of course, that's due to the increase in our revenue, and more than enough to offset against the increase in our cost of services rendered during the period. Interest costs, a reduction by 27%, and that's mainly because of the 1.5% rate reduction in the first quarter of 2020. And overall, the profit after tax, we had an increase of 141%. And profit after tax attributable to unitholders, an increase of 262% for the half year. And that was mainly because -- that's higher than profit after tax on an overall basis, mainly because HPH Trust actually enjoys most, nearly 95% of the savings in interest costs, and thus a higher increase in terms of percentage for profit after tax attributable to unitholders. That actually concludes my presentation on the numbers. And any questions that you may have, please let us know. Thank you.

[Operator Instructions] First, we have Ping Fan from UBS.

This is Ping Fan from UBS. Actually, I have 2 questions. The first one is on, can you provide any color on your volume guidance for the second half? And the second question is regarding the ASP. I know that the Yantian ASP increased a lot in the first half due to the storage costs. So how would you expect the ASP to increase or decrease in the second half?

Sure. Thanks. I guess in terms of volume guidance, as we have been saying all along for this year, it's actually quite difficult to predict, especially for the second half. The reason has been last year second half, as you recall, it was on a very high base. Just after the world lockdown, everybody was catching up. And there's quite a lot of the catch-up cargoes in the second half, and thus quite some increase. So with such a high base, I guess even before the COVID situation in Yantian, it would be quite difficult to predict how it would be. And now after the COVID with the port congestion and also, of course, the situation is improving, but still, in terms of the operational efficiency, I guess the way that we would guide this is that Hong Kong is probably more predictable. I would say probably a slight increase, slight single-digit increase for all year around. Remember, first half, it's 4%. But if we sort of like aiming at flattish for the second half, it will be about 1%, 2% for Hong Kong. So we are targeting for that. Yantian, on the other hand, we definitely would not expect the growth to be continuing in the second half. And in fact, we do expect probably there will be a decrease in volume on a monthly basis, at least probably for, say, July and up to probably the end of the peak season, which is normally October. So all year round, I would expect, hopefully, a slight growth, if not flattish for Yantian on an overall basis. But I have to say this is very difficult to guide at this stage, given that we are really looking at how it will eventually evolve in the second half. And in terms of ASP, we had quite significant growth for Yantian. As I said, 2 reasons: firstly, renminbi appreciation; and secondly, the storage income. We do not expect the same magnitude of storage income for the remaining second half. Of course, we do expect higher than normal sort of storage income. And we are working towards like improving our operational efficiencies as well. And I will say that given the port conditions now, that's like worldwide, given probably 2, 3 months, we do not expect that to continue into the fourth quarter. So less storage income, and thus, definitely not such a high ASP growth for the remaining second half. And I hope that helps.

Next, we have Parash Jain from HSBC.

Ivor, good to be -- good to see you back. I have 3 questions for both of you. First of all, on Yantian's east expansion. Can you just talk a bit about how eventually it would shape? And would it eventually target transshipment business from Hong Kong? Do you expect it to naturally be participating in the organic volume growth that you expect out of Shenzhen? And any reason of not able to consolidate that business? Is it something that you didn't have choice or you did it deliberately? Secondly, on the whole condition thing, as you mentioned, right, with third quarter seasonally better than second quarter and with your existing backlog, do you foresee the boxes staying longer or some sort of condition all the way till end of this year? Or you think that at the top of the optimal level, you will be able to clear that much sooner? And finally, last thing, and probably this is more a flavor of the season. And we have seen regulatory risk hitting port tariffs few years back in phased manner. Now with the cost of moving goods from one part of the world to other has gone skyrocketed, do you foresee any sort of regulatory interventions with respect to probably cutting further tariffs, et cetera? And also you think that so far as port operations are concerned, probably we have seen the worst or the regulatory headwinds are behind?

Ivor, would you like to take the first question on the transshipment?

Sure. I mean if we look at east port, for me, first and foremost, the east port expansion is to cater to the continued growth of exports out of South China, and we do expect that trend to continue. Despite whatever talk about continued U.S. tension, we're still seeing good U.S. exports out of Yantian. And we're certainly fairly confident that, that's going to continue because most of the issue between Sino-U.S. relationships, it's more on the kind of higher-tech cargoes, not the low-tech cargo that we see out of Yantian. So certainly, Yantian will continue to focus on import/export. Certainly, with Yantian being such an important hub for import/export, it would naturally result in a transshipment cargo, just as a normal extension of a large import/export hub. However, Hong Kong for us is kind of static in the sense that there is no new capacity coming on. So Hong Kong serves a unique role in terms of connecting to Asia trade to some of the barge services to the inner ports of South China. And Hong Kong, with its limited capacity, will kind of continue to play that role. Irregardless of how Yantian continues to expand, there is still such a need. If you look at the Hong Kong airport, for example, there is still advantage to Hong Kong just because of the freeport status as well as the connectivity as well as the location. Now that won't change. But over time, you can expect Yantian to pick up a larger share of that transshipment over time just because we have additional capacity. And certainly, from a Trust point of view, we'll try to kind of manage the growth of those and manage the rollout of that additional capacity over time and not sacrificing Hong Kong just for Yantian's sake.

Sure. Thanks, Ivor. For the second question, about the performance of the second half versus the first half. I'll say that we -- I mean, of course, I don't have a crystal ball and it's difficult to guide, as I always say. But I mean, I do not expect the second half to perform as well as our first half, mainly, firstly, because last year, the second half, we see have quite some subsidy. If you recall, last year, we had the -- in particular, the ESS, the employee support scheme from Hong Kong government. And we received a total more than HKD 100 million, and the bulk of that actually was recorded in the second half. And of course, if you remember, first half, we had the subsidy from the Shenzhen government on the volume growth last year of HKD 220 million. So that will not be in the second half. And also, the additional costs that we will have to put in and the uncertainty in terms of the volume. So I guess, overall, I would think that volume-wise, you probably see that the volume would start to increase probably in the next month or 2 for Yantian. So I guess on an overall basis, we will have a decrease versus last year. And probably, we wouldn't be able to do as well as the first half in terms of our profitability. And for your third question, regulatory intervention on our tariffs. I would say, of course, a few years back, NDRCC come in and for -- and deep review on all the ports in China. They have -- there have been other sort of business from different government regulatory body in the past few years as well. So there has always been release or this is on our tariffs. There's nothing new. Even prior to the NDRC business, we did have regular visits on our tariffs as well. I'll have to say that, of course, nobody knows what happens there, but we are not expecting any like intervention at this point in time. But given this is China risk, as I always said, nobody really knows. But I will say if there's anything to be done, it would be on the shipping lines to start with for this round.

Next, we have Simon from Goldman Sachs.

I got several questions. One, you mentioned about the -- you received a HKD 220 million net subsidies from someone. Can you tell me the nature of that? And how is it calculated? And given your expectation that [ HKD 1 million ] going to be coming off, so are you going to be having to pay back some or what's going to be happening in the second half? That's the first question. The second question, similarly, can you maybe tell us what is your storage revenue? Does -- that 25% ASP increased RMB a bit, storage revenue a bit. So I wanted to gauge how much is that then? On an apple-to-apple basis, what is the so-called revenue per TEU increase on -- in Yantian in RMB term? And then thirdly, Yantian, obviously, there's -- as you might highlight, there's a lot of [ starving ] and all these employee and very -- density is very high. Do you foresee any capacity issues? And if so, then in near term before your east port is going to be up and running, how would you address it? I think those are my 3 questions.

Sure. Thanks, Simon. So more information on this HKD 220 million subsidy. That's actually from Shenzhen government. And but with respect to the volume growth for -- comparing 2020 to 2019, and I guess there's no paper on how the subsidy would be given. So last year, it was just verbal because the Shenzhen government wanted to have volume increase for Shenzhen on an overall basis. So there was verbal communication that if we have volume increase by over 1% versus 2019, then there would be the subsidy. Eventually, the calculation was based on a certain amount multiplied by the overall TEU, excluding transshipment. So that's sort of like a basic calculation of how the HKD 220 million was arrived at. And so that supply in a way a one-off subsidy that's -- the government actually gave out last year. Whether that will continue, of course, no one knows, given that it started off with no documentation for last year. And whether that would actually apply to this year's volume as well, we do not know. Of course, we will try our best to talk to the government on current year. But I'll just have to say that please do not sort of like take that into consideration at this stage. And for storage, I guess that if we look at Yantian for the first half, we are talking about around about over HKD 500 million. Comparing to last year -- they're just rough numbers, I have to say. Last year, it was about HKD 100 million plus. So additional HKD 300 million plus in terms of our storage income from Yantian. And that, actually, of course, contributed to the revenue per TEU or the ASP growth. And renminbi appreciated 9%. And as you recall, about half of our volume is in renminbi, so about 4% to 5% increase or contribution to our ASP. And lastly, with respect to the capacity issue, the way that we look at it is that the main impact on our current operation again here is the time for disinfection. What it means is that we need to do all sorts of disinfection procedures on the vessel after a berth before we could carry out our lifting at the normal work. And that takes about 2 to 3 hours. And that's not us alone. That applies to offices and ports in Guangdong ports well. And so that actually affects our productivity by around 10% at this moment. I do not expect that to be a permanent sort of like type of procedure. But of course, this is just what we see it. And so the way we look at it is that, probably after a few months, we will see whether anything could be done, streamlining the process. And hopefully, the shipment productivity would increase. And the way to look at this is that it would only affect probably 2 or 3 months, our peak months, given that we do not normally operate at full capacity. And thus, if there's any impact, it will be just about 2 or 3 months, that would have any impact on our operations. And as I said, this we do not expect to be a permanent sort of procedure. So I think we will get better after this year. And thus it's not something that we need east port to actually help with the productivity. And I hope that answers your question.

I have quickly just maybe 2 follow-up, maybe somewhat related to that as well. So first of all, you mentioned about the -- I guess the capacity, and we touched on, on the Yantian. Can you tell me about -- do you know -- and you mentioned that the U.S. trade is actually still very strong. Maybe you can give us a sense about maybe the breakdown for the U.S.-Europe trade again as you have done it in the past? That's the first question. The second one, quick one is that, if I quickly look at your EBITDA on a -- I guess, on a year-on-year basis or half-on-half basis, you increased quite significantly by 40%, 50%. But when I look at your DPU in the last couple of quarters, you're paying maybe, call it, HKD 0.04 to HKD 0.05. First half of '19, you paid HKD 0.06. So it does not seems to synchronize each other considering that CapEx is flattish. So there should be some leverage in terms of your actual net cash flow. So wanted to ensure how is -- have you distribute all those one-off item that you mentioned earlier?

Okay. With respect to the U.S. and Europe trade, if we sort of like count all like including all the MTs U.S. related, U.S. actually accounts for 50%, about 50% of our total volume. Europe, I would say about 25% of our total volume for Europe. And -- yes, so that's about right. 25% to 30% for Europe. And in terms of EBITDA growth versus the DPU, I guess just one point to note. We actually distribute DPU based on distributable cash. And that actually -- but that has to be adjusted by adding the amortization back. If you remember, we do have amortization for PPA, and that's quite a large amount, and that's a constant number. So it probably -- we probably shouldn't really just put the growth in the EBITDA and then directly to the increase in the DPU to start with. And secondly, with our distributable cash, remember that we had additional loan repayment, HKD 400 million last year and HKD 250 million the year before. And thus, it is, of course, again, not a direct comparison to the EBITDA growth. And I hope that answers your question.

[Operator Instructions] Next, we have Paul from DBS.

I have 2 questions, one for Ivor and, I guess, one for Diana. So Ivor, welcome back to HPH Trust. I recall that when we were doing the IPO, you were CFO. I think one of the key messages to investors that as a Trust, we were looking for the Trust to have an optimized capital structure, and therefore, pay out as much cash flow as we can as dividends. The Trust has undergone a 5-year deleveraging program. We paid back debt of about HKD 1 billion per year for the last 5 years. And our debt-to-EBITDA ratio is now quite close back to IPO levels. When do you think we can stop paying down debt and start to use that cash to pay investors that dividend?

If you look at -- obviously, the Board has discussed the debt level. And as I always mention, even on day 1, we're not like a perpetual trust, if you will. Our concession does have an end date, both for Yantian and Hong Kong. Hong Kong obviously is 2047. There is obviously a chance that we can continue to extend assuming that Hong Kong is happy with our operation then, and we're fairly confident on that stage. But for us, if there are specific end date, you do need to think about a debt settlement prior to the end of concession as well. So from that point of view, even if we would pay HKD 1 billion a year on our debt, it would be 20, 30 years at least or at least 20 years before we can actually fully repaid. So at this point in time, we are not increasing, if you will, the level of debt repayment. We still continue the trend. Obviously, as we get closer to the end concession date, we'll have to look at what the environment is at that point in time and how likely the concession renewal or extension will be, and then kind of extend out to see what the optimal debt level is. I think that's a consideration. But for now, without kind of clear guidance as to likelihood of extension, we are going to slightly stick with the path of at least paying HKD 1 billion per annum for now. But if that changes, obviously, at some point in time, if that extension becomes more likely, then, yes, potentially, there could be more room to pay out more for the shareholders and the unitholders.

Right. And when do you think we could have clearer visibility on that? Because I don't think that -- if I recall, I don't think, I really think that was a message different when we came to IPO, that at some point, we have to pay down all the debt until the concession ends.

Right. So if you ask me, it's a little bit too early at this point in time to think about extension renewal. And surely, the debt level is more as a result of risk of the company and how much interest rate exposure we have. I mean we have certainly saved a lot of interest costs over the last 12 to 18 months. We've managed our balance sheet well. But we might be looking at another round of rate increases, and those kind of gain that we have seen gets easily reversed. And if we continue to carry on a large debt portion, then the profitability of the company can be negatively affected as well. So we kind of balance those 2 at the moment. And at this point in time, I think for us, the Board hasn't decided that we should kind of stop the repayment yet.

Right. Okay. My second question is with regards to our underlying container handling charges. I mean with container liners enjoying record profits, what kind of container handling charge increase are we sort of targeting? I mean if we can't get any increase now, then it's hard to imagine another time where you can get it, right? I mean ignoring storage costs and FX impact, just the underlying price for container handling charges, what kind of targets do you think -- or what kind of rate do you think we can achieve this year and next year?

Sure. I guess probably, if you look at historically, when the shipping lines were in big financial difficulties probably 3, 5 years back, that most of them, if not all, were in red, our ASP did not drop much at all. So we were within probably like a 1%, 2% drop in those times. And so the way to look at this is that our ASPs doesn't necessarily fluctuate with the shipping line performance. So this is how it works with our business, of course. But definitely, with the shipping lines being in such a good financial performance, we do have more room for our tariff increment, and this is what we are working on. But most shipping lines actually have probably about 2-year contracts. So only half was -- half actually shipping lines that we actually can negotiate for tariff increments, which we are working on. But I would say that, normally, it takes quite a long time for us to conclude on this. So this is on -- this is in the way that we are working on. And you'll probably see later on the outcome out of this ASP increase. Thank you.

[Operator Instructions] There are currently no questions. [Operator Instructions] Ladies and gentlemen, as there are no further question, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you.