• HPHT's 2Q earnings and DPU of 8.52 HK cts (-10.4% y-o-y) below expectations on weak volumes in Hong Kong. 
• An escalation in the US-China trade war would impact the Trust’s volumes and cash flows. 
• FY18 DPU guidance lowered to 17-20 HK cts. 
• Downgrade to HOLD, Target Price US$0.28. 

Downgrade to HOLD With Target Price of US$0.28

Given the Hong Kong operations’ ongoing struggles with profitability and management’s reduced DPU guidance, we have cut our FY18F and FY19F earnings forecasts for HPHT by 12% and 19% respectively, as well as reduced our DPU forecast for FY18F and FY19F from 20.6 HK cts to 18 HK cts for each year. 

While > 8% yield is on offer, which should support share price in the near term, the stock may struggle to re-rate until it addresses concerns over the profitability of its Hong Kong operations. 

Where We Differ

• We cut our FY18F and FY19F DPU forecast from 20.6 HK cts each to 18 HK cts for both years. 

Potential Catalysts

• HPHT’s share price could re-rate if throughput volumes can drive better-than-expected revenues and cash flows in the quarters ahead. 
• DPU guidance lowered to 17-20 HK cts for FY18. Citing the weak performance in Hong Kong in 2Q18 and uncertainty over its throughput outlook due to the ongoing US-China trade war situation, HPHT cut its FY18 DPU guidance to 17-20 HK cts from 20-23 HK cts previously. 

Valuation

• HOLD, Target Price US$0.28. Our Target Price is based on a discounted cash flow valuation framework (weighted average cost of capital of 8.6% and terminal growth rate of 0%). 
• We have adjusted our WACC assumption upwards to account for higher earnings volatility in view of the US-China trade war situation. 

Key Risks to Our View

• A global recession would materially impact trade and throughput numbers for HPHT, which would then have an impact on the group’s earnings and cash flows, and ultimately dividend payout. 

What's New - 2Q Earnings Disappoint on Weak Hong Kong Performance 

2Q18 revenue decline 3.6% y-o-y to HK$2,789m.

The combined throughput in Hong Kong fell by 7.2% y-o-y, mainly due to a decline in transshipment cargoes, while Yantian also saw a 4.1% y-o-y decline in volumes, which was mainly due to a drop in empty cargoes. 

At half-time, revenue declined by 0.3% y-o-y to HK$5,457m as the combined throughput in Hong Kong declined by 3.3%, offset by a 1.8% increase in throughput at Yantian. 

2Q18 earnings decline 37% y-o-y to HK$170m.

As a result of higher operating costs and a 3.6% y-o-y decline in revenue, operating profit fell by 12.4% y-o-y to HK$837m. Interest costs were higher by 20% y-o-y on higher rates and pretax earnings declined 22.5% y-o-y to HK$757m. With Yantian performing relatively better than Hong Kong, which is largely wholly owned, PATMI fell by 37% to HK$170m. 

Interim earnings declined by 28% y-o-y to HKS$315m even as PAT fell by a lower 5% y-o-y, highlighting the continued weak performance of HPHT’s Hong Kong operations. 

Interim dividend cut by 10% to 8.52 HK cts.

As a result of lower earnings and cash flow, HPHT lowered its interim dividend from 9.5 HK cts a year ago to 8.52 HK cts for the current interim period. 

FY18 DPU guidance slashed to 17-20 HK cts.

Citing the weak performance in Hong Kong in 2Q18 and uncertainty over its throughput outlook due to the ongoing US-China trade war situation, HPHT cut its FY18 DPU guidance to 17-20 HK cts from 20-23 HK cts previously. 

Given the Hong Kong operations’ ongoing struggles with profitability and management’s reduced DPU guidance, we have cut our FY18F and FY19F earnings forecasts by 12% and 19% respectively, as well as reduced our DPU forecasts for FY18F and FY19F from 20.6 HK cts to 18 HK cts for each year. 

Source: DBS Research - 24 Jul 2018