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

Ladies and gentlemen, welcome to the conference call of Hutchison Port Holdings Trust Interim Result Announcement for the period ended 30th of June 2024. Now I will hand over to Mr. Ivor Chow, the CEO of Hutchison Port Holdings Trust. Mr. Chow, please begin.

Good afternoon, everybody. Thank you for joining the interim results for Hutchison Port Trust. As usual, I will give color as to what has transpired in the first half of 2024 as well as give some of my thoughts as to what we expect in the second half of this year. And as usual, Jimmy, our CFO, will kind of go through the numbers later on and then we will kick off with the Q&A subsequently. So overall for the first half of 2024, I would say the underlying performance of the trust is actually quite good. Our volume is up. We have been able to achieve both our internal targets as well as having some growth year-on-year. So from a performance standpoint, I'm actually quite pleased with the results. But if you kind of drill down into the details, again our tale of 2 cities with Yantian being up quite a bit in the first half up 11% year-on-year whereas Hong Kong continues to be under pressure. Hong Kong was down overall about 7% year-on-year. So even though the whole trust is up year-on-year, Hong Kong is not faring as well as Yantian. In some sense, that kind of reflect the general economic situation of the whole of Hong Kong versus Shenzhen and Guangzhou as well. But looking out to the second half, I certainly do expect Hong Kong decline to narrow over the last half of this year. Hopefully, the drop on a full year basis will be smaller as well. If you look at the kind of individual trades during first half, the U.S. trade continues to be very strong for us despite whatever is said about the tariff and the Sino-U.S. trade friction. Overall, especially on the e-commerce side, U.S. trade continues to be very, very robust with some of the major retailers having over 20% growth in Yantian. And looking out ahead into the third quarter, we expect that trend to continue, but the uncertainty will come in the fourth quarter. Based on my discussion with some of the shipping lines and some of the shippers, the market is fairly divided as to what's going to happen with quarter 4. Some are forecasting a more moderate fourth quarter while some shippers continue to be quite optimistic about the fourth quarter. And I suppose it comes down to whether the market believes that a lot of the shippers are preloading the peak season in Q2 and Q3 ahead of the election as well as potential tariff increase to China at the latter part of this year. So some believe that some of the shippers are trying to get ahead of that shipment or the tariff increase and have the shipment early in Q2 and Q3. But overall, I still believe that Yantian overall will be above last year, in fact quite a bit above what we have budgeted for as well. So it continues to do well. And as a result, our expansion in Yantian continues and the East Port expansion target to be rolled out sometime the end of 2025 or early part of 2026. On the Hong Kong side, obviously we have been battling with decline over on the Hong Kong front since recovery of COVID. Definitely some of them is due to the fact that a lot of the consumption now in Hong Kong has moved across the border to Shenzhen and Guangzhou. So that has had some effect. But also the fact that within the Greater Bay Area, there's quite intense competition now with the players including Nansha and Shekou and Chiwan and whatnot and Hong Kong has been losing market share to Shekou and Chiwan as well as Nansha. So our strategy continues in terms of trying hard to integrate the Hong Kong assets with our Yantian assets. Yantian continues to be the market leader within the region and so we are looking into increasingly tying in our contracts with Yantian and Hong Kong and marketing as a kind of unified product rather than separate product that we have in the past as well. But Hong Kong is definitely going through a transition period. I do expect that will take some time over the next 12 to 18 months especially with the Gemini alliance coming into play in the start of 2025. But overall, I suppose I'm quite happy with the results in terms of the underlying profit growth and whatnot. Overall if you look at the DPU, we are distributing only HKD 0.05 per unit as compared to HKD 0.055 per unit in 2023 representing a HKD 0.05 decline versus last year. And the main reason for that is not due to the fact that the underlying performance is not strong, but mainly due to the fact that, as Jimmy will go through later on, taxation has increased in Yantian, which is eating into our cash flow. But more importantly, interest cost is still on the rise in the sense that we certainly originally expected some interest rate decline this year, which has been deferred to the latter part of this year if not early part of next year. We do have additional debt to be refinanced at the end of this year as well as early next year to the tune about USD 1 billion to be refinanced. We have weathered this high interest rate cycle particularly well by locking in a lot of our debt 5 years ago. So we have not been having a significant interest cost increase over the last couple of years especially when we continue to pay down HKD 1 billion of debt every year. But as we refinance, I do expect interest cost to continue to rise basically because of the fact that when we did the financing 5 years ago, the rates were a lot cheaper and now the underlying rates are a lot higher as compared to 5 years ago. So we would be looking at increase in interest costs when we refi over the next 12 months and I do expect that these increase in interest costs will be eating into our cash flow. And hence, to leave ourselves with more flexibility, the Board has decided to reduce DPU slightly in the first half. But certainly when we look at the full year dividend, it will depend on how the underlying performance will fare in the second half as well as whether we will be seeing a more moderate rate environment especially from the Fed reserve near the end of this year, whether we have more clarity as to precisely what kind of rate cuts and how quickly the rate cuts that we can expect early coming into next year and that will determine largely what our final dividend will be. So I'll pause there and hand it over to Jimmy and then certainly happy to pick up any additional questions you may have during the Q&A.

Thank you, Ivor. So I will go through the financials as presented in the presentation slides uploaded to our website and also through SGX. If we refer to the presentation slides starting on Page 9, you would find our throughput for the first 6 months of the year. So in total, the trust handled 10.3 million TEU for the first 6 months of the year. Now if you look at the breakdown in the bar chart on Page 9, you would notice that for Yantian, YICT and Huizhou HICT; together they handled 6.8 million TEU, that is 11% higher than last year's. And for Hong Kong, that comprises of our terminals HIT, COSCO-HIT and ACT; together they handled 3.5 million TEU, which is 7% lower compared with the first 6 months of the year. So that's how our throughput performance was in the first 6 months. Next if we look at the financials starting on Page 11, that shows our revenue on the left hand side of the chart. Now you will notice our revenue was HKD 5.3 billion for the first 6 months of 2024 and that is 3% higher compared with the first 6 months of 2023. On the right hand side, that shows the segment information in terms of the geographical split of our revenue. Hong Kong now accounts for 22% and Mainland China accounts for 78%. Now on next page, on Page 12 that shows our CapEx spend in the first 6 months. We spent HKD 185 million in the first 6 months, which is 27% lower year-on-year. Now these CapEx are mainly maintenance in Asia and the year-on-year difference is mainly accounted by the timing difference of how quickly we spend the CapEx. Now on Page 13, that shows our financial position. You will notice here that our short-term debt is HKD 8.7 billion and that goes with Ivor's comment just now. We will need to refinance a chunk of this HKD 8.7 million after factoring in our $1 billion debt reduction program that we will keep going on. So from our discussions of banks, there's a very strong appetite from banks to lend to us and we plan to refinance this HKD 8.7 billion after reducing the amount by the debt repayment. We are preparing to finance it by a combination of bank borrowings and bond issuance. However, as also mentioned, the current market rate is likely to be quite significantly higher than the low interest rate that we have enjoyed as you can see from our financial statements. Now our long-term debt stood at HKD 16.95 billion and that takes our total consolidated debt to HKD 25.69 billion and our net attributable debt at the end of June 2024 was HKD 19.9 billion. Now on Page 14, that summarizes our interim DPU situation. The DPU per unit is HKD 0.05 as Ivor mentioned. The record date is the 31st of July 2024 and we expect to pay the distribution on the 20th of September 2024. Now finally, if I can quickly take you through our summarized P&L statement that's on Page 15. Revenue and other income $5.3 billion, as I mentioned, is 3% higher than the first 6 months of last year. Cost of services rendered was improved by 1% despite a higher throughput. And our operating profit of HKD 1.8 billion is 17% better than last year. Interest and other finance costs went up by 2% despite we have repaid -- we have some loan repayment over the past 12 months. The market rate has continued to go up in our borrowings hence the increase in interest cost. Taxation also increased. That's because we have a higher profit before tax and also because of the expiry of certain tax holidays in Yantian, which we enjoyed after we built the terminals. Profit after tax at HKD 817 million is 21% better than last year. And profit after tax attributable to unitholders for the first 6 months of the year was HKD 158 million. And that's basically the highlights of the financial situation that I would like to talk about for today.

Let's move into the question and answers.

[Operator Instructions] Mr. Herbert Lu from Goldman Sachs.

I'm Herbert, transport analyst at Goldman. I have 2 questions. The first question is -- first, congratulations on Yantian's strong growth in the first half. Given the strong volume, can we expect some tariff hike for this year? And the second question is for DPU. As we just mentioned, the full year DPU still depends on the second half year situation. But do we maintain the guidance unchanged for this year or we are able to increase the payout ratio of Yantian to maintain a flattish DPU versus last year? Just want to check if Yantian still has some space to distribute more cash to us.

I'll leave the DPU question to Jimmy. In terms of the tariff on Yantian, definitely. In fact Yantian revenue has grown actually higher than what's shown here because this is in Hong Kong dollars. Actually, renminbi has depreciated roughly I think year-to-date about 4%. So we actually across the board have been increasing Yantian rate so far. I think the rate increase in general around between 1% to 3% depending on shipping lines and depending on how long the contract, but we have been getting pricing increase into Yantian as well obviously to cover some of the underlying cost increase also. So we have been successful in terms of raising some rates, but suffice to say, Yantian continues to be 1 of the more expensive ports within China. Our premium over Nansha and Shekou remain fairly substantial around at least within the 20% plus range. So we're also looking in terms of competition. But I think in general, it's good to see that most ports within China are also looking to raise tariff as well. So that's in terms of Yantian, I think tariff increase is still positive for us.

As to your second question, Herbert, on the DPU. I think if you look at our interim results, as you mentioned, we have a strong first half. And as we have briefly talked about in the call, although we have a good first half, there remains to be some uncertainty in the second half. However, I would say the underlying business is strong, but we do have to notice the increase in interest cost when we refinance our debt and also the increase in taxation in Yantian. So I think all in all, first half results indicates the underlying business is strong and we do have the capacity to meet the DPU. But in the first half, I think we take on a more prudent approach in terms of retaining the flexibility so that we can decide at the end of the year whether DPU -- what level of DPU will be most suitable.

But we definitely continue to distribute 100% of our distributable cash after debt repayment and capital expenditure. So from that point of view, Yantian is already at maximum distribution. So whatever cash that the trust will receive after interest servicing and debt repayment, we will continue to pay out 100%. So what Jimmy is saying that right now there's still uncertainty as to what the exact interest cost is going to be depending on our refinancing rate as well as the rate environment. Then depending on the overall results in the second half, we may determine then what the full year dividend is. But right now as it look, I think meeting the full year guidance in terms of meeting what we paid out in terms of DPU last year, I think it's going to be an uphill battle. So I think it's going to be difficult for us to achieve or at least maintaining what last year is at this point in time, at least that's what the trajectory looks at this point in time. But again we're not discounting the fact that we could play a bit of catch-up in the second half.

Mr. Paul Chew from Phillip Securities Research.

Paul from Phillip Securities. Just a few questions for me. Can you just mention on the Gemini alliance, just wondering what are the scenarios that you're looking at especially this so-called hub and smoke and what would be the impact on HBH? My second question is could you just remind us what is the net debt at the Yantian level because you not continue to push through dividends? And the third question, if you don't mind, is there any chance to maybe push more of your debt into renminbi I guess because of the lower interest rates? And my last one is sorry, [indiscernible]. Just any impact on the Red Sea destruction. Obviously it benefited container rates, but any impact on your segment basically?

Okay. Let me kind of answer the 1 and 4 and I'll let Jimmy answer 2 and 3 on that. In terms of Gemini, I think I commented a little bit when Gemini was first announced in our last call as well. Again in short just beyond reasonable doubt, I think overall it's going to be fairly neutral to the trust in the sense that Yantian has been chosen as 1 of the key hubs for the Gemini for both Maersk and Hapag-Lloyd whereas both Hapag-Lloyd and Maersk are customers. But Yantian will expect to benefit from additional volume as a result of the Gemini formation. However, on the downside, I think Hong Kong will suffer a bit as Gemini currently have some services with Hong Kong even though Maersk and Hapag is not a customer of HIT in Hong Kong. It's a customer of our partner, Modern Terminals, but it does affect Hong Kong as a whole. So I do expect Hong Kong will suffer a bit as Gemini kick start. But overall for the trust again because now if you look at the underlying contribution, about 80%, 85% comes from the Yantian; only about 10%, 15% come from Hong Kong. So Yantian pick up the slack, I think overall it might be slightly positive for the trust as a whole. But we are looking into because of the Yantian importance whether we can leverage Yantian to maintain certain services in Hong Kong as well. Hopefully, Hong Kong will benefit as a result. So that's number one on the Gemini alliance. In terms of the Red Sea situation, I think overall we've been fairly neutral for the trust in the Red Sea because unlike Port of Singapore where they're facing extreme congestion right now because Singapore is predominantly looking at more on the European trade whereas in Yantian we are actually a bit even with more dominance on the Transpacific trade and the Transpacific trade so far has not been impacted by the Red Sea situation at all. And the European trade in Yantian only account for about 30%. So yes, we are seeing some delay in some of the boxes, but not significant enough that it would affect Yantian at this point in time. So our yard right now is still moving quite good. The only impact that I'm seeing affecting China is that a lot of the empty containers inventories are stuck in the destination. They're basically stuck in Europe having a hard time getting back into Asia. So lack of empties is a challenge right now in the market. A lot of the shippers are having difficulty securing empty boxes for re-export. That's why the trade itself for EU, the turnover is much slower than the Transpacific trade. So from that point of view, the Red Sea does have some impact, but not to the underlying performance of Yantian or Hong Kong in general.

Okay. So let me address your second and your third question. Now your second question is on the net debt at Yantian. Now Yantian has a very minimal level of debt. Almost all of the debt that you see on the balance sheet is at the holding company level or the trust level whereas the cash, a big chunk of it is at Yantian. So I think you have a general feeling that the net debt at Yantian so to say is very small. Now the second question is in terms of whether there's any chance of doing an RMB financing taking advantage of the lower interest rate for renminbi financing. Now that's certainly something that we will look at. We keep looking at as well not only on the onshore and offshore financing avenues. Now offshore financing renminbi financing currently is at a favorable rate compared with U.S. dollar financing. Now when we do our refinancing, we will consider the possibility of doing RMB refinancing. However, I think we should note that our books are in Hong Kong dollars and the loans or the debt that we need to be refinanced are either in U.S. dollars and Hong Kong dollars. So we need to balance the exchange rate risk when we consider that. But certainly that is something that we will consider when we come to the actual refinancing exercise.

Yes. I would agree that while the interest rate is lower in renminbi terms, but because in general we are not willing to take a foreign currency risk, we do not -- we naturally hedge our currency exposure so we do not take a position on FX. And if we do take a position on FX, we naturally want to swap it back into the underlying currency as well. So even with a lower renminbi interest rate, once you kind of swap back to kind of U.S.-dollar based, then the price differential is actually quite minute. So in short unless we're willing to take the FX risk, the probability for us getting a substantial decline in interest cost is quite low.

Okay. I would have thought Yantian will be giving you the renminbi revenue to pay the renminbi debt money. Simplistic understanding?

Yantian, actually most of our tariff is either U.S. dollars or Hong Kong dollar base in the sense that roughly we collect about 50% of our revenue in foreign currency and about 50% of that in local currency. And the half of it is for local cost consumption and whatnot and the other half of the foreign currency is used for distribution and repayment for us. That's why when I said it is quite naturally hedged at this point in time.

Can I pop in one last question? You mentioned Hong Kong is in transition, transition into what sense? I think in the previous call, you did mention the shipping lines are permanently being so I'm just wondering assuming the next 5 years so where can -- what is the level of transition that could materialize over there?

A good question. Let me kind of elaborate what I have in mind and I think I alluded to this a little bit earlier in my last couple of calls. I think if you look at Shanghai example, Shanghai is a good example. Shanghai has a different port cluster within the Shanghai region. There is the Yangshan port, there is the Shanghai port as well as the Waigaoqiao port. If you think of Yantian more like a Yangshan port and think of Waigaoqiao more as Hong Kong and they have a distance around 40, 50 kilometers away from each other and they are still 1port zone, but they handle different trade in the sense that Yangshan is handling predominantly U.S., European trade whereas Waigaoqiao, the older ports handle more of the domestic and IA trade. And for us, the long-term goal for us, I think we need to have Hong Kong, Yantian move into more segmentation in the market. More of Hong Kong as an extension of the Yantian port rather than looking at 2 different ports and competing with each other. Because historically, Hong Kong also has Transpacific trade, EU trade and inter-Asia trade whereas Yantian is also trying to replicate the same. But I think increasingly we will focus more on the European and Transpacific trade in Yantian whereas we focus more on the inter-Asian trade within Hong Kong and then connecting the 2 ports via a barge network that we will manage ourselves. So I think that change in strategy we would need to coordinate with the shipping lines in terms of how their network is going to be formalized. I think Gemini is 1 area that we are trying to work on to see going forward whether Hong Kong can be used in conjunction with Yantian. If that model is successful, we would push it out more with other shipping lines as well. So to answer your question in short, I think Hong Kong's role over the next couple of years will change in the sense that it would not be like an independent port, but it would from our perspective form part of the Yantian port extension.

There are currently no questions. [Operator Instructions]

Okay. If there are no questions, then again I end with the thought that for us is Yantian continues to be doing well and I think we're fairly confident about the future of Yantian especially with speaking with some of the large BCO like Amazon, Target, Walmart. Their focus is continuing to develop the e-commerce business in Yantian and we are putting a lot of resources in terms of ensuring that e-retailers be able to do the business there and such that when we roll out the additional berth in East Port in 2016, Yantian can continue to grow. But we're also looking at Hong Kong, as I said a little bit earlier. We're looking to Hong Kong as a backup support for Yantian as well because beyond East Port, there is no more space, very little space to expand in Yantian as well. So if Yantian continues to grow at a rate of 4% to 5%, eventually I still believe that Hong Kong can backfill some of that unutilized capacity at some point in time. And that's why for me, I haven't given up on Hong Kong despite shipping lines saying that they're not choosing Hong Kong as a hub. But using Hong Kong as a backup facility for Yantian as Yantian continues to grow is something that we're thinking about long term. So that's why I say the transition period will be over 12 to 18 months. So I kind of leave that thought with you, and thank you for joining the call today. Certainly I think Jimmy will continue to go around to see investors. If you have additional questions over what I've said, feel free to ask later on.

Thank you very much.

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