• HPH Trust's FY18 core earnings fell 22% y-o-y to HK$738m mainlydue to higher finance costs with full year DPS 17.5%lower at 17HKcts.
• Non-cash impairment charges of HK$12.3bn to reflectuncertain outlook and other structural changes.
• We cut our FY19F DPS forecast to 15HKcts, which iswithin management’s guidance of 11HKcts to 17HKcts.
• Maintain HOLD with a reduced Target Price of US$0.26.

Maintain HOLD With Target Price of US$0.26

• Despite a decent prospective yield of 7.4% on offer, we remain neutral on HUTCHISON PORT HOLDINGS TRUST (SGX:NS8U,HPH Trust) as it remains vulnerable to the on-going trade dispute between the US and China as its key port assets in Shenzhen and Hong Kong are heavily exposed to China’s export sector.
• The relatively high gearing level of HPH Trust also means that higher interest rates would also hurt its earnings and cash flows.

Where We Differ

• We cut our FY19F and FY20F DPU forecast to 15HKcts and 16 HKcts respectively.

Potential Catalysts

• HPH Trust’s share price could re-rate if throughput volumes can drive better-than-expected revenues and cash flows in the quarters ahead.
• Cautious DPU guidance of 11HKcts to 17HKcts for 2019 highlights the uncertainty posed by the US-China trade situation. Citing the uncertainty over its throughput outlook due to the ongoing US-China trade war situation, and depending on how interest rates move, the company provided a wide DPU guidance range for FY19 of between 11HKcts to 17HKcts.

Valuation

• HOLD, Target Price cut to US$0.26. 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 HPH Trust, which would then have an impact on the group’s earnings and cash flows, and ultimately dividend payout.

What's New - Weak 2018 Earnings With Uncertain Outlook

Core earnings declined 22% y-o-y to HK$738m:

• HPH Trust's 2018 revenue dipped marginally by 0.6% y-o-y to HK$11,483m on a slight drop in throughput volumes.
• Operating profit declined by 1.4% y-o-y as operating costs were relatively well contained. Finance costs rose by 19% y-o-y resulting in an 8.4% y-o-y decline in core pre-tax earnings and an overall 22% drop in core profit. Yantian continued to outperform HK port operations.

Non-cash impairment charges of HK$12.3bn recorded.

• In view of the mounting global trade uncertainties caused by the current trade tensions, multinational corporations are adjusting their strategies such as accelerating the diversification of production bases outside of China and addressing the effects stemming from the structural changes within the shipping line industry, HPH Trust recognised non-cash impairment losses of HK$12,289m in 4Q18.

2018 DPU of HK 17cts expected; cautious DPU guidance ahead.

• HPH Trust declared a final dividend of 8.48 HKcts, bringing the full year total to 17HKcts.
• Citing the uncertainty over its throughput outlook due to the ongoing US-China trade war situation, and depending on how interest rates move, the management provided a wide DPU guidance range for FY19 between 11HKcts to 17HKcts.

Source: DBS Research - 13 Feb 2019