Tangshan Port is mainly engaged in the handling and storage of bulk goods such as ore, coal, and steel in the Jingtang Port area of Tangshan Port, and shows that the business continues to contribute about 80% of its performance. The company's iron ore, coking coal, and steel throughput is mainly driven by the hinterland steel industry, and coal throughput, mainly thermal coal, is mainly driven by the transportation of coal from North to South, contributing to steady cash flow. At the same time, the company's cash expenditure pressure is low, and it has the ability to continue to pay dividends, underpinning absolute profit value.

Tangshan Port: Hebei's core dry port, with clear business lines, steady growth in performance. Tangshan Port Group Co., Ltd. (Tangshan Port 601000.SH) specializes in the handling and storage of bulk goods such as ore, coal, and steel in the Jingtang Port area of Tangshan Port. The direct hinterland is Tangshan City, extending the hinterland to include central and western regions such as Shanxi, Inner Mongolia, and Shaanxi. The Jingtang port area of Tangshan Port was opened for domestic navigation in July 1992. Over the past 30 years, it has become an important port for handling imported iron ore and coking coal in China, an export port for steel, and one of the main sewage ports for transporting coal from North to South.

The overall cargo throughput has been rising steadily: since 2022, the goods handled and unloaded by the company are all bulk goods, and the proportion of ore, coal, and steel has stabilized in the range of 45% to 50%, 30% to 35%, and 6% to 8%, respectively.

Profit structure: The combined business continued to contribute about 80%, and the joint ventures Tanggang Railway and Caofeidian Industrial contributed the main investment income. In December 2016, the company purchased 30% of Tianjin Airlines Dredging's shares, 18.58% of Tanggang Railway's shares, and 10% of Caofeidian Industrial's shares from the controlling shareholder Tanggang Industrial. The Tanggang Railway and Caofeidian Industrial Service Hinterland and their industrial chains overlap highly with the company. In 2022, the company's total profit reached 2,258 billion yuan, a year-on-year decrease of 12.90%, and the 2019-2022 CAGR was 0.93%. Among them, the combined business profit, Tanggang Railway investment income, and Caofeidian Industrial investment income contributed 77.85%, 17.17%, and 3.12%, respectively.

Port integration in Hebei Province: On the rise, operating efficiency is expected to continue to improve. In the past, the port industry had problems such as repeated construction and structural overcapacity. Fierce competition among peers led to damage to overall efficiency, forcing the industry to form a trend of integration. Ports in Hebei Province follow the “three ports and four zones” pattern of Tangshan Port, the Jingtang Port Area of Tangshan Port, Caofeidian Port of Tangshan Port, Qinhuangdao Port, and Huanghua Port. Due to the proximity of locations and main products, each port area was limited in utilizing its resource advantages before integration. In October 2022, the Hebei Port Group was reorganized to unify the management of Hebei's “Three Ports and Four Zones” to drive overall operational efficiency improvements. According to the official website of Hebei Port Group, after integration and restructuring, in 2023, Hebei Port Group completed cargo throughput of 795 million tons, an increase of 8.5% over the previous year, ranking 3rd among major coastal port groups in the country; achieving a total profit of 4.21 billion yuan, an increase of 20.36% over the previous year.

Handling and storage: serving the steel industry+transportation of coal from north to south, contributing to steady cash flow. The company's core business is handling and storage. The main products it operates are iron ore, coal, and steel. The total contribution of the three is stable at around 90% of the throughput. Among them, coal can be roughly divided into two categories according to use: thermal coal and coking coal. The company's iron ore, coking coal, and steel throughput is mainly driven by the hinterland steel industry, and coal throughput, mainly thermal coal, is mainly driven by the transportation of coal from north to south.

Steel industry: Give full play to the advantages of Tangshan's “steel market” to drive the throughput of iron ore, coking coal, and steel. China's iron ore resources are weak, but the steel industry is mature, and there is a huge and continuous demand for iron ore imports by sea. China's share of global crude steel production has stabilized at more than 50%, while Tangshan's share of crude steel production in the country has stabilized at around 13%, supporting the relevant throughput scale.

Transportation of coal from north to south: connected to the strategic channel Daqin Railway to drive coal throughput. China's overall coal transportation follows the pattern of “west coal to east” and “north coal to south”. Part of the cargo volume is diverted into Tangshan Port via the strategic channel Daqin Railway, and the related throughput scale is stable.

Demand related to the steel industry and the transportation of coal from north to south supports the company's throughput scale and contributes to steady cash inflows.

Considering that depreciation accounts for a stable share of around 25% of business costs, we believe that the cash expenditure pressure on the company's handling and storage business is limited. Looking at the company's net operating cash flow, in 2022, the company achieved net operating cash flow of 2.407 billion yuan, a year-on-year increase of 25.34%. The CAGR from 2019 to 2022 reached 14.83%, and thanks to the continuous reduction in current liabilities, the cash flow to debt ratio increased from 39.23% in 2018 to 112.34% in 2022.

The pressure on cash expenses is low, and it has the ability to pay dividends continuously. The company's capital expenditure support continued to shrink and the balance ratio continued to decline. As of the end of the third quarter of 2023, the balance ratio fell to 10.55%. With the completion of the 250,000-ton waterway, which is mainly under construction, we expect that subsequent cash expenses will be limited.

Thanks to the steady cash flow and low capital expenditure pressure from the main handling and storage business, the company has the ability to continue to pay dividends. Since 2020, the company's annual profit distribution has stabilized at 0.2 yuan/share. Based on the company's profit forecast for 2023 and the closing price on March 5, 2024, we estimate that if the annual profit distribution remains 0.2 yuan/share, the corresponding dividend rate will be 4.6%. Referring to the industry's historical dividend rate, we expect the company's dividend ratio to continue to lead the industry, underpinning absolute earnings value.

Profit forecast and investment rating: Tangshan Port's performance is growing steadily. We expect the company to achieve operating income of 60.20, 61.97, and 6.317 billion yuan from 2023 to 2025, up 7.1%, 2.9% year on year, and achieve net profit of 20.86, 22.33, and 2.03 billion yuan, up 23.5%, 7.1% and 3.2% year over year, corresponding EPS of 0.35, 0.38, 0.39 yuan. The closing price on March 5, 2024 corresponds to PE 12.6 times, 11.8 times, 11.4 times We believe that the company's current value is undervalued, combined with ROE and continued to lead dividend ratios, and for the first time, it was covered to give it an “overweight” rating.

Stock price catalysts: Port consolidation in Hebei Province exceeded expectations; crude steel production in Tangshan exceeded expectations; coal traffic of the Daqin Railway exceeded expectations.

Risk warning: The throughput of goods related to the steel industry falls short of expectations; the throughput of goods related to the transportation of coal from North China to the South falls short of expectations; the pressure on cash expenses exceeds expectations.