Zitong Financial APP learned that Guotai Junan issued a research report that China Merchants Port (00144) was operating steadily in the first half of 2017 and is expected to resolve inter-industry competition in Shenzhen's western home port within three years, coupled with the company's continued expansion at home and abroad. Therefore, reaffirm the "buy" rating and maintain the target price of HK $27.20.
The overall performance in the first half of 2017 was stable.First-half revenue rose 5.4 per cent year-on-year to HK $4.055 billion, in line with market consensus and our expectations. The increase in income was mainly due to the increase in the contribution of China's international shipping containers (02039), while China International Marine Containers indirectly benefited from the recovery in global trade.
Net profit for shareholders in the first half of 2017 rose 86.3 per cent year-on-year to HK $3.148 billion, better than market consensus and our expectations. The 86.3 per cent year-on-year improvement is better than the 50 per cent year-on-year profit increase given by China Merchants Port in July 2017. The increase in profits was mainly due to a gain of HK $813 million from the disposal of China International Marine Containers's stake. Eliminate the influence of China International Marine ContainersProfits from China Merchants Port's core port business reached HK $2.453 billion in the first half of 2017, up 18.7 per cent from a year earlier.
To celebrate the 25th anniversary of the company's listing on the Hong Kong Stock Exchange, China Merchants Port declared an interim special dividend of 135 Hong Kong cents per share. Excluding the special dividend, the interim dividend of China Merchants Port (HK22 cents) is equivalent to a dividend ratio of 22.2%, which is in line with our expectations.
The first half of 2017China Merchants Port handled a total container throughput of 50.16 million TEUs, an increase of 8.9% over the same period last year.Of this total, mainland ports contributed 37.88 million TEUs, up 9.9 per cent from the same period last year. The container throughput handled by China Merchants overseas ports reached 8.54 million TEUs, which remained at the same level as in the first half of 2016. Bulk cargo throughput rose 14.6% year-on-year to 249 million tons, in line with our expectations.
The market is worried about the competition between China Merchants Port and Shenzhen Chiwan Port Airlines ("Shenzhen Chiwan A", 000022.SZ), and we expect the company to complete the integration within 3 years.At present, China Merchants Port holds a 67% stake in Shenchi Bay, which constitutes an industry competition in the operation of the port area of the Qianhai-Shekou Free Trade Zone in Shenzhen. On August 23, 2017, China Merchants Port and Shenzhen Chiwan A signed an entrustment agreement. With regard to the home port resources of China Merchants Port, China Merchants Port entrusts Shenzhen Chiwan A to exercise certain shareholders' rights of the Mega SCT80% interests held by China Merchants Port. Accordingly, the entrustment agreement will remain valid for 3 years.
Mega SCT is mainly engaged in container loading and unloading business at berths 1 to 9 in Shekou Mawan Port area. At the analysts' meeting on August 31, 2017, the port management of China Merchants promised to solve the problem of inter-industry competition within three years. We expect that under the coming tide of state-owned enterprise integration, China Merchants Port will gradually integrate the resources of its home port in the west of Shenzhen. In fact, there has been a new wave of consolidation / reshuffle in the domestic port industry since 2017.
China Merchants Group, the parent company of China Merchants Port, decided in June 2017 to be responsible for port integration in Liaoning Province (Dalian, Yingkou and Jinzhou). The port industry in Shenzhen is generally divided into eastern and western port areas. The eastern port area belongs to Yantian Port Group (000088.SZ), while the western port area belongs to China Merchants Port and its subsidiary Shenzhen Chiwan A. The eastern port area accounts for about 50% of Shenzhen's total container throughput, while Shenzhen Chiwan An accounts for 21%.
On September 12, 2012, China Merchants Port promised to solve the problem of inter-industry competition through recapitalization and within 3-5 years. In response to its previous commitment, in the context of the existence of multiple interest groups (minority shareholders) in Shenzhen Chiwan A, China Merchants Port requested that the timetable be extended for another three years to September 16, 2020. China Merchants Port believes that the problem can be better resolved through gradual negotiation, while we believe in the executive ability and effective corporate governance of the parent company, China Merchants Group.
With the progress of the integration process, China Merchants Port will benefit from Guangdong-Hong Kong-Macau Greater Bay Area's economic growth. We do not rule out the possibility that China Merchants Port will control the integration of Shenzhen port industry (eastern and western) in the future. Under such circumstances, the competitive strength of China Merchants Port in the Pearl River Delta region will be further enhanced.
China Merchants Port recently set foot in Latin American "Belt and Road Initiative" related countries.On September 4, 2017, China Merchants Port announced the acquisition of a 90% stake in TCP Participacoes S.A. ("TP") for 2.89 billion reais (HK $7.228 billion). It is said that the deal will be funded by internal resources and debt financing.
As Brazil's second largest container terminal, TCP's franchise contract expires in 2048. TCP's current design capacity includes three berths, handling 1.5 million TEUs per year, and will further increase to 2.4 million TEUs per year by the second half of 2019. The TCP is currently at a depth of 12.3m and is capable of receiving the largest ship to and from the easy waterway in Latin America. Therefore, the acquisition will enable China Merchants Port to expand its business in Latin America.
According to China Merchants Port, the hinterland covered by TCP covers 45 per cent of Brazil's population and 48 per cent of GDP. High interest expenses (bond expansion of berths in the fourth quarter of 2016) enabled TCP to record a net loss of 7954000 reais (HK $19.9 million) in 2016. In 2016, TCP handled 760000 TEUs of throughput, and TCP can be classified as the main overseas port of China Merchants Port in terms of throughput scale. We believe that TCP is not only the cornerstone of China Merchants Port into Brazil, but will also become a hub port with the growth of commodity trade between China and Brazil in the future.
Although it will take 1-2 years for TCP to make a profit, we believe that China Merchants Port will replicate its "port-region-city" model in TCP and its operational development, similar to the development path of CICT in Sri Lanka. It is estimated that the China Merchants Port will coordinate cargo resources and increase the trans-Pacific route docked at TCP to increase its handling capacity and enhance business ties between China and Brazil.
China Merchants Port continues to integrate potential port assets in the Pearl River Delta region.On September 11, 2017, China Merchants Port announced that it had acquired a 51 per cent stake in Zhongshan Port Group for a total cost of 485 million yuan through its subsidiary Shenzhen Chiwan A. Zhongshan Port Group operates Zhongshan Port, Xiaolan Port and Shenwan Port in Zhongshan.
Based on our research, the cargo throughput of Zhongshan Port Group from 2014 to 2016 is 6.32 million tons / 6.54 million tons / 6.59 million tons respectively. At the same time, the container throughput of Zhongshan Port Group from 2014 to 2016 reached 906000 TEUs / 923000 TEUs / 920000 TEUs respectively, accounting for about 67.9% of Zhongshan's total container throughput in 2016.
The acquisition of Zhongshan Port Group enables China Merchants Port to control Zhongshan's core port assets and further enhance the synergy of port resources in the region. We believe that the layout of China Merchants Port in Guangdong-Hong Kong-Macau Greater Bay Area will become more diversified after entering the west coast of the Pearl River Delta for the first time. In view of the fact that the mother port of Shenzhen in the west of China Merchants Port is located on the East China Sea, Zhongshan Port on the west coast may make use of the platform of China Merchants Port to increase the number of call routes and attract additional goods.
Zhongshan Port's after-tax net profit in 2016 was 75.8 million yuan, corresponding to 12.5 times 2016 price-to-earnings ratio and 2.0 times 2016 price-to-earnings ratio, but considering the size of Zhongshan Port's business and above-average trading price-to-earnings ratio, we think the valuation is a bit too high. The implementation of the Zhongshan Port share transfer agreement was originally expected to be completed on September 13, 2017; the agreement has not yet been implemented. China Merchants Port said the company will announce further implementation details at a later date.
Slightly adjust our profit forecast for 2017-2019, but we expect the port business of China Merchants Port to benefit from the continued recovery in China's import and export trade and to be affected by recent asset acquisitions.The contribution of the major port areas is sound. By August 2017, the annual throughput growth rates of western Shenzhen, Hong Kong, Shanghai (600018.SH) and Ningbo Daxie had reached 8.5%, 21.1%, 8.3% and 19.7%, respectively. The external environment is also beneficial. By August 2017, China's exports / imports had risen 7.6% year-on-year and 16.9% year on year (in US dollars), indicating a strong trade trend.
To sum up, we will increase the net profit of shareholders of China Merchants Port by 1.9%, 0.2% and 1.6% respectively from 2017 to 2019. Accordingly, earnings per share for 2017-2019 are forecast to be HK $1.660, HK $1.676 and HK $1.762, equivalent to year-on-year changes of-5.5 per cent, 1.0 per cent and 5.1 per cent, respectively. In year-on-year terms, our forecast for earnings per share of China Merchants Port will decline in 2017, mainly due to incremental financing costs (bond acquisition of overseas assets) in 2017 and the expected poor performance of China Merchants Port Joint Venture (overseas terminals in Turkey and Nigeria).
Maintain the "buy" rating and the target price of HK $27.20 to reflect the valuation potential of China Merchants Port.Based on the expectation of the integration of the western port area of Shenzhen, we are optimistic about the implementation ability of China Merchants Port in solving the problem of competition with Shenchi Bay A. In terms of industry outlook, China Merchants Port is alert to the pressure of the new shipping alliance to reduce terminal handling charges and docking fees. On the other hand, China Merchants Port can make rational use of cash on hand to provide some financial support for its overseas mergers and acquisitions in "Belt and Road Initiative" countries. We believe that the port mix layout of China Merchants Port is balanced, and the new terminal is expected to bring more cargo volume to China Merchants Port. Our target price corresponds to a price-to-earnings ratio of 2017-2019 and a price-to-book ratio of 1.2x for 2017.
(editor: Wang Mengyan)