The company has made brilliant achievements in development.
As the largest container port in the world, Shanghai Port Group has made brilliant achievements after years of development. Relying on the Yangtze River Delta and the hinterland of the Yangtze River Basin, Shanghai Port Group radiates Northeast Asia, and the connectivity of foreign trade routes is the first in the world. Ball liner companies have taken Shanghai Port as the core hub of its route network. From 2006 to 2021, the container throughput of Shanghai Port Group increased by 117% to 4703 TEU, ranking first in the world for 12 consecutive years; its operating income increased by 168%, and its net profit increased by 395%. Through the empowerment of scientific and technological innovation and the leading development of smart ports, Shanghai Port Group has realized that China has exported the advanced technology and management experience of "smart ports" to developed countries for the first time. In 2021, the operating income of Shanghai Hong Kong Group was 34.3 billion yuan, an increase of 31%, and the net profit of its mother was 14.7 billion yuan, an increase of 77%, in line with expectations.
The valuation of port shares is in trouble.
Compared with the company's brilliant achievements, the share price is mediocre. The share price has risen 118 per cent since it went public in 2006, well below EPS growth. The reason is that valuations have fallen sharply, from valuing PE by growth to valuing PB by ROE. This is related to the decline in the growth of the company's main business: although the net profit of homing increased by 395% in 2006-21, the gross profit increased by only 118%. Among them, the container terminal business, which contributed about 2% of gross profit, grew by only 101%, while container throughput grew at an annualised rate of 4% in the same period. The profitability of the container business has declined:
In 2007-21, the revenue per container of container business was stable, while the cost per container continued to rise, resulting in a decline in gross profit per container. We believe that the company's profit growth mainly comes from investment income such as banking stocks and shipping stocks, which is difficult to give a high valuation.
Reinvestment capacity determines valuation
Port shares lack of performance and valuation flexibility: under the dual-cycle development pattern, container throughput and profits are difficult to grow; terminal fee regulation and capacity utilization bottlenecks determine that ROE is difficult to rise significantly. As an asset with stable profits and abundant cash flow, the port can be valued by DCF model if the reinvestment ability is strong; if the reinvestment capacity is weak, it is suitable to use DDM model valuation. In the past, Shanghai-Hong Kong Group has made good achievements in investing in banking stocks, real estate development and shipping stocks, which proves its strong investment ability. If future investments can maintain a high rate of return, then valuations are expected to rise.
Maintain profit forecasts and target prices
Taking into account the growth of container throughput, real estate settlement and investment income, we maintain the forecast EPS for 2022-23 and increase the forecast EPS for 2024 to 0.60 yuan, keeping the target price unchanged.
Risk hint: the growth rate of global trade has declined, the port fee reduction policy has been introduced, house prices in Shanghai have fallen sharply, and the rate of return on reinvestment has declined.
