VW Investments

Author: vw_investments   |   Latest post: Wed, 25 Mar 2020, 3:00 PM


Give Hutchison Port Trust a second chance

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Coronavirus, or CoVid19, is the hottest topic globally. If it were a stock, holding it would exponentially increase your net worth. Unfortunately, it isn’t. Having it would make you sick. We hope all readers will never catch it. For those unlucky few who did, the odds are on your side in getting well.

Trade screeched to a halt and the global economy is staring at the brink of a recession. The rate of decline dwarfs the Global Financial Crisis in 2008/09, and exceeded the Great Depression in 1929. It is hard to juxtapose the fact that just about one month ago, before CoVid19 hit shores of the United States, DJIA and S&P500 were at all-time highs. In the midst of the pandemic-roiled stock market, we are out in the market bottom fishing.

Hutchison Port Trust (Bloomberg: HPHT SP Equity) is tasty fish when the water is receding. We are possibly looking at the very raw fundamentals of the Li Ka-Shing-inspired company. If you remember, at the turn of the decade in 2011, HPHT came to the market asking for USD 1.01 per share, raising USD 5.8 billion. Hutchison Port Holdings’ Greater China port assets were carved out to form the trust. Fast forward about 10 years, HPHT is just 9% of its IPO price, at USD 0.09 as of 25 March 2020. Yes, you read it right, no typo with the decimal point. It is trading at 9 cents.

The Trust’s business portfolio remains essentially the same. It has 38 berths, handling some 23 million TEUs (a measurement of container boxes) in 2019. To put the cargo volume in perspective, Singapore PSA handled 37 million TEUs in 2019 and the port in Dubai (Jebel Ali) moved 14 million TEUs. Ten years of a share price slump to USD 0.09, yet the business is 10 years ago, standing shoulder to shoulder with the busiest ports in the world? What in the otherworldly crap happened in the past decade to result in this stark divergence?

Management is quick to point fingers at the global trade, saying HPHT is a victim of circumstances amid the US-China trade war. In my opinion, management is taking investors on a downward spiral. While hindsight is always perfect eyesight, the Trust was carved out and offloaded with the mature assets. At that time, the valuation was rich, trade was in a resurgence and the IPO sentiment was strong. The promise of flushing investors with dividends, as with all trusts do, was alluring. The perennial problems are that it had a weak balance sheet and that the cash flow was on a downtrend, making the dividend promise increasingly difficult to sustain.

If investors were looking for any sympathy, they needed a microscope. Nothing at all. In fact, while the share price was trending lower, management added loss-making Huizhou International Container Terminal to HPHT portfolio. In addition, the “cost-savings” from co-management of Kwai Tsing terminals with Cosco did not help a tiny bit to prop the crippling earnings. Lurching earnings in the dump was a goodwill write-down for the second time to the tune of HDK 12bn in 2018; the first round was in 2014 erasing HKD 19bn from its assets.

The best example of sympathy is this, you want management to ride out the trough with you. Sorry, my friends, you’re on your own. Total management remuneration rose at a compounded annual rate of 9.3% per year, from HKD 17.6 million (SGD 3.3m) in 2013 to HKD 30.2 million (SGD 5.6m) in 2018. The surprising fact is that most of the compensation (>50%) is in the variable component. How then when the share price is down could management remuneration go up? Don’t get us started on the CEO remuneration band. Mr Gerry Yim claimed up to SGD 1 million in 2012. In 2018, his package band was up to SGD 2 million. Ok, to be fair, management gloriously took a pay cut of some sort since 2015. Total package dropped from SGD 5.8 million to SGD 5.6 million (yes, steep drop!).

At the same time, dividends slumped from HKD 0.47 in 2012 to HKD 0.14 in 2019. In our worst-case scenario, HPHT would not declare second-half dividend, and that for Year 2021, the total dividend would just be HKD 0.05. This works out to be a prospective yield of 7.2%, which is kind of decent for a company continues to handle merchandise cargoes amid human border control. Airports would be severely impacted by human movement restriction. Cargoes still have to flow. Containers don’t sneeze and cough corona.

However, we are prepared to give HPHT a second chance, purely looking at the cheapness it is now. You know if you buy a car, you pay COE, OMV, car value and the whatnot for 10 years of use. Assuming you extend for another 10 years, you lose some 50% of the OMV. At the end of 10 years, you either scrap or export the car. You get the scrap value or slightly-higher-than-scrap export value. You see, at USD 0.09 per unit, HPHT is at scrap value. If you are like us, believing all the drama are reflected in the share price, we could potentially be looking at an acquisition of HPHT at this price; in our car analogy, the export value. By who? Possibly Chinese operators, but the latter can’t make it too obvious given the geopolitical tension between mainland China and Hong Kong.

Summarising my thesis on HPHT – why we would buy HPHT and why should we buy now:
1) Sitting on a valuable piece of land in Hong Kong, which could be monetised
2) Long concession years remaining, suitable for acquisition
3) Best-case scenario 16% dividend yield in 2020 if the Board maintains last year’s second half payout. Worst-case scenario no 2H dividend, and the yield is 7.2%. For a trust, dishing out dividends is the least they ought to do.
4) High-debt Trust, likely to benefit from reduced interest costs against the loose money pledged by central banks
5) Trailing P/E at 10x, forward P/E at 21x assuming a 50% decrease in earnings. This is cheaper than its IPO P/E of 30x, and is undemanding compared to peers like DP World and Cosco Shipping Ports if they were to take a 50% cut in CoVid19-impacted earnings.
6) There is limited downside. Management needs to be exceptionally “brilliant” to drive this stock to zero.

Take up this yellow ribbon play, buy HPHT!

Cargo volume trend of HPHT

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