Rating: BUY (Initiation) 

Target price: RMB3.65 

Share price (16 Aug): RMB2.49 

Market Cap (RMBm): 14,755.6 

Up/downside: 46.6% 

We initiate coverage with a BUY call and PT of RMB3.65 (46.6% upside potential). The buildout of Tongzhou City and Xiongan New Area would support future steel consumption and iron ore import demand, while growth of electricity consumption would drive demand for thermal power generation and coal transportation. Even if carbon neutrality and environmental policies reduced demand for iron ore and coal in the Beijing-Tianjin-Hebei region in the future, we expect the restructure and upgrading of Qinhuangdao and Tianjin ports to lead to a bulk cargo business overflow to Tangshan Port, which would help stabilize its cargo throughput. 

Port rates set to rise as competition eases 

Tangshan Port experienced low port rates in 2020. In 2021, the cancellation of some preferential policies led rates to rise as market-based pricing was implemented in major port charges. In the future, port production capacity in the Beijing-Tianjin-Hebei region would have low growth and port integration would ease competition, which would help increase tariffs. In addition, environmental pollution caused by loading and unloading of bulk cargo would raise port charges to make up for losses caused by the pollution. 

A refocus on the main business to increase ROI 

Tangshan Port successively divested its unprofitable commodity sales, ship transportation and container terminal businesses to refocus on its core business of bulk cargo handling, which has higher profitability. As demand for bulk cargo handling tends to be stable, we would expect less capex in the future. Tangshan Port has a low debt ratio, stable and strong cash flow, so we believe its dividend ratio would rise in the future. 

Valuation and risks 

Factoring in stable throughput and slight increases in its fee rates, we expect net profit of RMB1.86bn/1.93bn/2.02bn in 2021/22/23E. The reinvestment of Tangshan Port focuses on its main business of loading and unloading, which has higher return rates than those of commodity sales and shipping transportation. Based on our dividend discount valuation model and average peer PB, we derive a target price of RMB3.65 in 2021E for Tangshan Port and initiate coverage with a BUY call. Risks include: continuing production restrictions in steel mills; rapid development of photovoltaic power generation to replace thermal power; rapid expansion of Beijing-Tianjin-Hebei port capacities; and a sharp decline in Tangshan Port’s dividend ratio. 

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