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 2023. Now I will hand over to Mr. Ivor Chow, the CEO of Hutchison Port Holdings Trust. Mr. Chow, please begin.

Thank you. And thank you all for joining our call to talk about the first half results for HPHT. As we have announced results already, some of you would have seen the presentation. At least briefly kind of expected, the volume has been down compared to last year. And I'll kind of give my thoughts as to how I see the first half in as well as giving you some color as to how I see the second half as well as the full year. And then I'll hand it to, Jimmy, to -- our CFO, to talk about the detailed figures a little bit. And then we'll move into Q&A at the end. Overall, if you look at just the headline numbers, you see that overall, our volume is down 15% year-on-year. with Yantian being down 12% and Hong Kong down a bit more 18%. And if you look at kind of like the split between U.S. and European trade, you see that U.S. is actually down a bit more than the European trade. And I'll talk a little bit about why that is. And obviously, our profit compared to last year has been down, both on a total basis as well as an attributable basis. Again, not surprising to us given that storage income has gone down this year as compared to last. The throughput has been down. Interest cost has been up. So these are some of the main factors affecting us, and I'll talk a little bit about how I see those moving forward as well. From a DPU standpoint, we are distributing HKD 0.055 per unit as compared to HKD 0.65 in the same period last year. So certainly, we have about a 15% reduction in our DPU as a result. Obviously, if you look at the bottom line figures, is down a lot more than the 15%. But as you all know, we are a Trust vehicle, and if you look at our cash flow -- underlying cash flow generation, or EBITDA, if you will, is certainly still quite strong, and the decline is a lot less than what the profit level figures is. And hence, despite profit down quite a bit larger, we are only reducing DPU by 15% as of interim. Again, a lot would depend on what -- how things look in the second half before we look at the full year dividend figures. Coming back to the throughput figures again, Yantian doing a little bit better than Hong Kong. From a quarter-to-quarter basis, I would say that volume has been largely the same first quarter and the second quarter between the both ports. However, from a profitability standpoint, second quarter is a lot better than the first quarter for us. So even though you're only seeing the half year number, second quarter, from a bottom line point of view, has improved quite a bit as compared to the first quarter. Coming back into kind of U.S., European trade a little bit. If you look at the underlying EU trade, it was only down 6% in the first 6 months, particularly for Yantian. The reason why Europe is faring a little bit better than U.S. is because, last year, Europe was down ahead of time before the U.S. declined. So I think, from a bottoming out point of view, U.S. has certainly reached bottom and is starting to show some sign of improvement in the second quarter -- at the latter part of the second quarter and will probably continue to third quarter and fourth quarter as well. So Europe is showing some sign of improvement. U.S., however, the decline is still continuing into the third quarter. The reason for me is saying that is because Yantian, if you look at the third quarter last year, Yantian actually had quite a good month between July, August and September, record highs as well. So U.S. actually didn't start to decline in earnest until the fourth quarter of last year. And hence, we do expect U.S. trade to continue to suffer a little bit in the third quarter as well. So if you heard me talk about things in the first quarter, I was looking more of a recovery in the second half. I think that has now been pushed back more to the fourth quarter. And third quarter will be largely kind of stagnant like the second quarter we have seen as well. And then that's reflected in the overall shipping market. If you've seen freight rates, freight rates have gone down from the highs of USD 10,000, USD 20,000 per box, now reaching as low as below USD 1,000 per box going to the U.S. West Coast. Shipping lines are talking about general rate increase coming months. But so far -- and they have been withdrawing tonnage from the market. But so far, export out of China continues to be fairly weak. So we're definitely looking into fourth quarter for any type of strong recovery. From an interest rate point of view, interest cost continues to rise for us. As you'll hear, Jimmy talking about later on, even though our interest costs have gone up, it has not gone up as much as other REITs in the market or other -- as affected because, again, we've been paying down quite a bit of debt over the last 5, 6 years, and that has afforded us to manage our interest costs a little bit better in comparison. So again, we have continued to pay down debt to the tune about HKD 1 billion a year. So we're continuing that. And finally, on the dividend, Again, as I said, the EBITDA generation continues to be quite good in comparison to the profit decline. So I'll pause it there and let Jimmy kind of go through the numbers, I'm happy to revisit some of these points in the Q&A. Jimmy?

Thank you, Ivor. If I may go through the numbers, taking reference with the investor presentation that we loaded up onto our website, starting on Page 9 of the presentation. That shows our throughput trend over the past few years and our throughput for the first 6 months of the year. In Yantian and Huizhou, we told -- in total, we handled 6.2 million TEU in the first 6 months of the year. And in Hong Kong, we handled 3.8 million TEU in the first 6 months of the year. That takes the total of our Trust throughput to 9.97 million TEU for the first 6 months of the year. In terms of percentage change year-on-year, that represents a 15% decrease compared with the first 6 months of the year. If I may continue with the key financial performance on Page 11 of the presentation, you would see, on the left-hand side, our overall revenue for the first 6 months. That is HKD 5.2 billion, which is around 20% lower compared with the first 6 months of last year. Now 1 reason is the throughput decrease that you have seen on the previous slide. And also because of the storage income decrease that Ivor mentioned. As terminal congestions eased, we're now seeing a shorter time period that containers stay at our terminal. Therefore, the storage income has decreased correspondingly if we look on the year-on-year comparison. On the power chart on the right-hand side of the same page, you will notice that our revenue from Mainland China now accounts for around 75% of the total Trust revenue. On the next page, you would find, on Page 12, the total CapEx for the first 6 months. We spent HKD 253 million during the first 6 months of the year. Now for the full year, we maintain our target to spend CapEx of around HKD 500 million, although we will be very prudent in spending out CapEx. HKD 500 million, that's roughly at par with what we have spent in the past few years. On Page 13, that shows our financial position. You would see that our total consolidated debt has reduced from HKD 27.1 billion at the end of 2022 to roughly around HKD 26 billion at the end of June 2023. That represents a reduction of HKD 1.1 billion during the period. At the bottom of the page, you would see our net attributable debt as of June 2023. That would be around HKD 20.3 billion. And by net attributable debt, we meant total debt minus attributable cash. And attributable cash in turn is our consolidated cash minus the cash attributable to our noncontrolling interest. On next page, on Page 14, you would see our distribution per unit. As Ivor mentioned, the distribution per unit for the interim distribution for 2023 is HKD 0.055. The record day for distribution is the second of August 2023 at 5:00 p.m. And the payment of distribution will be made on the 22nd of September 2023. Finally, if I can take you through quickly the summarized P&L for the first 6 months of the year, that's on Page 15 of our presentation. Revenue, as mentioned before, is HKD 5.2 billion. That is 20% lower compared with the same period of last year. If we look at cost of services rendered, that's HKD 1.7 billion. We have improved our cost of services by 20%, both from a combination of cost initiatives that we had in place, and we also benefited from a reduction in throughput and also the relaxation of COVID precautionary measures in Mainland China and the Hong Kong SAR. Operating profit for the first 6 months was HKD 1.6 billion. And interest and other finance costs are HKD 422 million, that's 37% higher the same period of last year. But as you may know, the benchmark rate has increased by over 4x during this period of time. However, our interest and other finance costs rose by a smaller amount and a smaller percentage because of the debt reduction, as I mentioned, and also because a large portion of our debt is actually on fixed rate. Profit before tax, we have for the first 6 months at HKD 1.1 billion. Profit after tax at HKD 676 million, and profit after tax attributable to unitholders of HPH Trust at HKD 95 million for the first 6 months of the year.

Right. And I'll add a little bit of color here on my thoughts on how I see this P&L a little bit as well. I mean, over the last few years, during the COVID, the shipping industry has enjoyed a fairly good results for the whole industry as a whole. And for us, at the ports, no difference. We have quite a bit of windfall from storage income during the last 2 years. A lot of that extraordinary profit that we generated over the last year has been used to pay down debt, which, for us, we're in a much better financial position as a result. And I've always maintained that once the COVID situation is passed, we wouldn't be able to enjoy some of those windfall gain that we have, much like what the shipping lines have as well. So from my point of view, year-on-year comparison is not -- well, I wouldn't say is not fair, but I mean, obviously, investors look at it. But I also look at what -- where the Trust was prior to COVID. And for us, I look at 2020 during our first half results. And we did look at that. And if you look at kind of detailed and line-by-line comparison, our profit, both operating profit and profit before tax, was still ahead with what the pre-COVID situation was. Obviously, even interest cost compared to what it was in the first half of 2020 was still comparable despite interest rate have been risen that much, and a reflection of the fact that we have paid down so much of our debt during that interim period. But compared to pre-COVID, our taxation has gone up because some of the tax exemption that we've been enjoying in Yantian has largely kind of expired. So from an attributable point of view, because interest cost headsets more and because Yantian is actually doing a bit better than Hong Kong, it affects it disproportionately on an attributable basis. So just some more color in terms of how management looks at the P&L for this particular first half. So I'll pause it there a little bit, and then we'll go into Q&A if you have specific questions that you want us to cover a bit more.

[Operator Instructions]

Well, there's no questions, maybe I can offer some additional insights as well. Obviously, if you look at the profit decline in the first 6 months, it's to the tune of around HKD 600 million. If I kind of roughly look at that breakdown on the shortfall, I would say almost 60% of that is due to kind of storage income that was lost. And then another 15%, 20% is due to interest cost. So almost more than 80% of the decline is due to kind of interest and storage income. The underlying operation only affected by about 15% of that decline. So that's #1 observation that I wanted to share. The other one is, I have been speaking to quite a bit of investors in terms of how they see the Sino-U.S. trade impact to our ports, especially in Southern China. I've attended the Trans-Pacific Maritime Conference in L.A. this year. Spoken to quite a few large shippers, including kind of Target, Amazon, and I actually went to Bentonville to see Walmart as well. And my takeaway is that, there's been a lot of talk about continued decline or decoupling with China and moving to Asia. I actually don't see that as that significant of a factor affecting our volume. I mean, certainly, I can see that new capacity will be increasingly focused in other areas outside of China, such as India, in particular, and Vietnam and Thailand. But I think relocating existing capacity to those countries, I haven't seen that much -- at least those are not the main reason affecting the volume in the first half. It's just that U.S. consumption has been particularly weak, given that, as I've maintained before, during COVID, the American public has spent a lot of their disposable income on goods rather than services, and therefore, during the last 2, 3 years they have accumulated quite a bit of goods. So after the COVID has been relaxed, including that in China and Hong Kong, goods consumption has certainly gone down significantly. And increasingly, disposable income has gone towards services. And hence, with a lot of these large retailers, they're in -- their warehouse continue to be quite congested. The inventory depletion has been a bit slower than what they expect. And I think that's moving into the third quarter as well. But with some orders coming in, we're seeing some recovery in certain segments. And I certainly see also electric vehicles being on the rise in terms of export out of China. We do see that as a growing market segment as well. So again, I think with our business is cyclical. And for us, management is just focusing on cost at the moment. Eventually, hopefully, we will see some return on export. We're certainly seeing more intermodal coming into Yantian, connecting to different services. There has been growth in intermodal services even during the first 6 months and that a segment of area that we've been focusing on as well. But that is a fairly long-term development for us that we're watching out for. But in the short term, we're still extremely relying on the Guangdong manufacturing, the pace, which is, in some way affected by some of the factories moving out of China to Southeast Asia, well. So just to give a little bit more color there. Okay. And if there are no more questions, then I thank you all of you for listening in, and I hope to catch up next time.

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

Sorry for the confusion, but we're still here to answer questions.

[indiscernible]

You can speak a bit louder? Sorry, I can hear you too well.

Do you hear me now?

Yes, go ahead.

Mentioned today I have a few questions. First is about our guidance for the full year DPU. Is they're unchanged? And the second question is about the composition of other operating expenses. Why it increased so much? I guess last year, yes, we may have some [indiscernible] cost could be saved? And the third question is about the Hong Kong volume. Is there any particular reason why Hong Kong volume kept double-digit decline this year? I remember last year, there was a restriction for cross-border truck drivers due to COVID prevention in Mainland. Just want to get a sense is there any one-off reason or this would be a structural trend going forward?

Thanks for the questions. I'll leave the operating expenses part to Jimmy later on. But in terms of the guidance, obviously, I think when I spoke earlier in the year about HKD 0.145. Right now, at this point in time, the HKD 0.055 is lower than what we would have given. Last year, our final dividend was HKD 0.08. If you assume that we maintain our original final dividend, now we're looking at HKD 0.135 to HKD 0.145. So -- for us, that's probably more realistic at the HKD 0.135 or somewhere between HKD 0.13 to HKD 0.135 would be more realistic depending on how the second half fares. Obviously, if you look at our cash flow, it is actually quite a lot more than even [indiscernible] because if you look at our debt repayment, we pay about [ HKD 1 billion ] a year of debt. That's actually somewhere around HKD 0.11 to HKD 0.12 as well. So we do have some leverage as to how we would -- how we would determine the DPU at the year-end. I think the Board will have a discussion as to depending on the interest rate environment at that time as well as how the second half fare compared to the first half. But suffice to say for now with our HKD 0.01 decline compared to what we have last year, our DPU guidance would actually be HKD 0.01 lower than the HKD 0.145. I think that's #1 point. Second point is on the Hong Kong side. I think for Hong Kong, the situation is a bit more challenging as compared to Yantian. I think Yantian is more waiting on the underlying market to recover and volume will pick up a little bit. Hong Kong, on the other hand, I think the 3 years of COVID closure for Hong Kong has affected Hong Kong a bit more than Yantian. Because Hong Kong historically has been -- well, Hong Kong on itself doesn't generate a lot of local cargo. It relies on the border of import and export with China and everywhere else. So the closure of the border has affected Hong Kong. And even though the border has reopened since December and volume has picked up a little bit on the cross-border, it hasn't returned to pre-COVID levels. And I think you have seen the Hong Kong government, especially the Chief Executive, going out to market Hong Kong, saying that our doors are open, but the rate of recovery for Hong Kong as a whole has been slower than what we have anticipated. Is it structural? I would say I'm not 100% convinced that it is structural, but I would definitely see this as being something that could potentially be structural affecting Hong Kong. So I would say, definitely are not as hopeful for Hong Kong in terms of volume recovery as compared to Yantian. Hence, from a management standpoint, what we are doing is we have formed the Hong Kong Seaport Alliance a couple of years ago with our competitor MTL. We are looking in other ways to see whether we can continue to have more cost integration on that front. So that's something that we're pursuing as well. But we're also lobbying Hong Kong government as well as the Shenzhen government to think about, going forward, more of the integration between Yantian and Hong Kong. Previously, Hong Kong and Yantian has been operating as 2 independent port area. I think increasingly, Hong Kong and Yantian has to look to a more integrated future in terms of offering services to shipping lines. So that is something that we are looking into whether it's feasible. Obviously, there is a physical border between Hong Kong and Shenzhen. But if the officials can ease the good movement between the 2, we certainly do see that Hong Kong can be -- Hong Kong and Yantian can be marketed as a combined product going forward. And that could be of some interest for shipping lines as well. And hopefully, that will slow down the decline of the Hong Kong port. So that is something that we're looking into, but it is a work in progress. And as you broadly point out, the recovery of Hong Kong is going to be a more -- a bit more difficult as compared to Yantian. Jimmy, if you can comment on the other operating expenses.

Sure, Ivor. So regarding the other operating expenses, the HKD 43 million increase from HKD 279 million last year to HKD 323 million this year. Now there are 3 main reasons for that: one is the exchange loss. The second is on the...

The exchange loss resulting from the renminbi cash that we have in Yantian.

Yes. The second is on the claims that we received in 2022. So on a year-on-year comparison, 2023, we would have -- we would not have received similar claims.

So this is an insurance refund on some of the claims that we have made, so which is one-off during last year, which offset our operating expenses. So this year, without that to offset our operating expenses would have increased.

Yes. So the third item -- the third one-off item is the disposal loss at our Hong Kong terminal where we disposed certain fixed assets.

Ladies and gentlemen, as there are no further questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.