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

Ladies and gentlemen, welcome to the conference call of Hutchison Port Holdings Trust annual results announcement at the year-end 31st December 2022. Now I'll hand over to Ivor Chow, CEO of Hutchison Port Holdings Trust. Mr. Chow, please begin.

Thank you. Thank you, everybody, for joining the HPH Trust full year results call. I won't be reading off the highlights, you can see it from the Investor Relations -- investor presentation. I'll just quickly give kind of like my thoughts on what happened during 2022 as well as give a short outlook as to what I think will transpire in 2023. And then I'll pass it over to Jimmy, our CFO to go through some of the numbers, and then we'll go through Q&A. Overall, if you ask me, 2022 is a year that, obviously, besiege by COVID. But the results were largely in line with what we have set out to do in 2022. The volume, during the first half, was actually quite respectable. We had growth, obviously, came second half throughput were slowed down significantly, especially in the last quarter. If you have been following the shipping industry, you know that the shipping lines, especially come in the fourth quarter, the loaded factor has gone down. Freight rates have actually dropped significantly from the high in 2021. It used to be that -- it took almost USD 20,000 to ship the box from Shanghai to West Coast in the U.S. And now the same box will only cost you around USD 1,300, USD 1,500. So freight rates have dropped 80%, 90% since the peak. And largely because export from China, both to U.S. and Europe, has been fairly weak in the last quarter. And the main reason, if you ask me, is because in some sense, if you look at the congestion that we're in last part of 2021 and early part of 2022. As a result of congestion, inventory was moving very slowly through the supply chain. And a lot of the shippers and buyers had to actually order more stock in order to meet the demand. So there were actually a lot more inventory in the entire supply chain because it was moving slowly. But since the congestion ease and with COVID easing around the world, the supply chain actually speed back up. And by fourth quarter, a lot of goods were rushing to the end destination. So what we have seen is that warehouses at the destination, both in U.S. and Europe were fairly full. And as a result, most of the retailers have to kind of let their inventory run down before they start ordering again. The overall consumption continue to be quite strong in the U.S., and I'm now touching on the outlook part as well. Consumption in U.S. is quite strong. Europe is recovering still, but we do expect inventory to kind of be depleted by probably the first and second quarter of this year. So largely from an outlook standpoint, I think the first half is still going to be challenging for us. Because last year first half did have still some growth, and we still have a large store income to support our profit in the first half of last year. So from a comp standpoint, I think 2023 first half is going to be challenging. But I think, overall, I personally feel that in the second half, we can look to somewhat a recovery, largely for several reasons. One of them is that we do expect the U.S. Fed rates hike to be more moderate by the -- after the first half of this year. That's number one. Second of all, with China, finally reopening its borders for both Hong Kong and elsewhere. We do expect a more stimulus packages will be released by the central government in the first half with the hope of stimulating both export and domestic consumption in the second half. So with all these going on, and hopefully, the Ukraine conflict will subside by middle of this year as well. All those kind of point to more of the recovery in the second half. Now depending on how strong that recover is, we may actually recoup some of the lost ground in the first half, hopefully ending the full year in more or less a flat year-on-year situation or with more growth coming into the fourth quarter at the end of this year. So that's basically what my outlook is. Obviously, if you look at the last half of last year, we had a profit decline, but that's largely due to storage income coming down, volume coming down, which were actually -- as we actually forecasted ourselves. So overall, we're fairly happy with what 2002 results were, and we are, therefore, making a full year distribution of HKD 0.145, which is in line with our guidance and remain the same as 2021 despite profit coming down. And looking forward from next year, our guidance for DPU will be in the range of somewhere between HKD 0.14 to HKD 0.15 for next year. Again, my goal is to maintain that HKD 0.45 distribution, which is based on current share price yielding around 9% to 10%. We're fairly comfortable with that. Our cash flow remains fairly strong. Over the last couple of years, we have been actively paying down our debt. As you see later on, Jimmy will go for the numbers. Despite interest rate rising fairly rapidly over the last 12 months, you see that our interest cost growth were fairly moderate largely because of us paying down the debt as well as fixing our debt proportion as well. So I think with some of the challenges this year that we're seeing through, I think we still foresee that our distribution will be a fairly stable, which is what we're aiming for at somewhere between HKD 0.14 to HKD 0.15. So I'll pass it on now to Jimmy to go kind of quickly go through the numbers, and then we can go into the Q&A.

Thank you, Ivor. If I may just quickly go through the key numbers for 2022. Starting on Page 9 of the presentation that we loaded on to our website. Now on Page 9, you could see our 2022 total volume handled. We total -- in total, we handled 22.7 million TEU, which on a year-on-year basis, represented a 7% drop. Splitting between China and Hong Kong. In China, we handled 13.8 million TEU, which is 4% lower than 2021. And in Hong Kong, we saw a bigger drop. We handled 8.9 million TEU, which is an 11% drop compared with 2021. That's the picture of our throughput handled in 2022. Next, if we look at the financial performance, starting on Page 11. You would see our revenue for 2022 at 12.1 -- HKD 12.2 billion, is 8% lower than the year before. Now one reason is because of this throughput decrease that you have seen just now. And revenue was also impacted by the renminbi depreciation, a decrease in storage income and also a change in box mix in terms of the type of cargoes or type of boxes that we handled. In terms of segment breakdown, you can see on the right-hand side of the 2 pie charts. Revenue from Mainland China now accounts for 73% of our overall revenue in 2022 with Hong Kong accounting for the remaining 27%. On the next page, on Page 12, that shows our total CapEx spend in 2022. The total CapEx is at HKD 511 million, represent quite a substantial increase from the previous year 2021. However, as we have alluded in the previous presentation in 2021, there was some delays in terms of the CapEx spend because of COVID and because of various reasons. But if you look at the CapEx spend in the earlier years in 2020 and 2019, you would see that our annual CapEx spend remained at around HKD 500 million, and that represents mainly our maintenance CapEx. On Page 13, that shows our debt and cash position. As Ivor mentioned, we reduced our debt further in 2022. So our total consolidated debt at the end of 2022 stood at HKD 27.1 billion, which is HKD 1.9 billion lower compared with year ended 2021. Our cash position remained in a healthy position at HKD 10.4 billion. On next page, on Page 14, that summarizes our distribution for this full year. In the first half of the year, we already distributed HKD 0.65. And for the second half of 2022, we propose to distribute HKD 0.08 that takes our total distribution for the year to HKD 0.145, which represented a yield of 9.6%. HKD 0.145, as Ivor mentioned, is same FL distribution in the year before. Now that's despite of the more challenging market that we have seen in June 2022, which you already saw in previous slides, that throughput and revenue had come down. On Page 15, that summarizes our profit and loss for the year. Revenue at HKD 12.2 billion is 8% lower compared with the year before. Cost of services blended, we managed some cost savings and the cost of services branded for 2022 is at HKD 4.2 billion. Other operating income at HKD 146 million, it's HKD 271 million lower than the year before, and that was mainly because of the reduction in subsidies that we received in the PRC. Other operating expenses, HKD 587 million, which represents a 17% increase compared with the year before. The bulk of that is because of exchange loss from RMB depreciation. So all together, you would see total operating expenses despite we have some cost savings in cost of services rendered, the major part of it has been largely offset by changes in other operating income and other operating expenses one-off items. So you would see our total operating expenses at HKD 7.9 billion is roughly the same as 2021. That means our operating profit of HKD 4.3 billion is 20% lower compared with the year before. Interest and other finance costs at HKD 673 million, is about HKD 57 million higher than the year before. Now this is on the backdrop -- against the backdrop of a fairly substantial increase in market interest rate during the year in 2022. However, as we have continued to pay down our debt and also a very big proportion of our debt from fixed instead of floating rate. Therefore, you would see the interest and other costs go up by only 9% during the year. Share of profits from associated companies and JV is reduced by HKD 27 million, and that's primarily because of lower profit from the 2 joint ventures that we have in Hong Kong. Profit before tax, HKD 3.6 billion; profit after tax, HKD 2.5 billion; and profit after tax attributable to unitholders at HKD 1.1 billion -- HKD 1.099 billion, which represented a 7% decrease compared with the year before. And that sums up the high-level financials that we would like to present today.

Okay. We will now move to Q&A.

[Operator Instructions] [indiscernible] from DBS.

This is [indiscernible] from BDS. Can you guys hear me?

Yes. Bob, go ahead.

Yes, yes, congratulations on a good set of results. I think the strong cash flow generation of the Trust has shown through in the DPU being distributed and the lower debt. Now I recall in the last year of results that it was mentioned that the Board of Directors are getting PCV more comfortable with the level of debt. And we saw that the total debt of the Trust dropped by nearly HKD 2 billion as at the end of the year to HKD 27 billion. And I recall that you will say that at some point in time, we will consider actually using that debt pay down to distribute to shareholders. When do you think that, that would be the case?

Okay. So this is Ivor. To answer that question is I think, it would depend on the recovery that I talked about earlier in the second half, especially, depending on how strong that recepter is going to take, how much of an adjustment to DPU at the end of the year. And also depending on whether the expectation that Fed rates hike will moderate by midyear whether that's the case, will dictate how much debt will be comfortable on because we're still not at the end of the hikes yet at this point in time.