Hutchison Port Holdings Trust unit price: US-China trade war to put a drag to its Q2 earnings

Container port business Hutchison Port Holdings Trust (HPH Trust) is expected to announce its second quarter results ended June 30, 2019 next Wednesday (24 July, 2019), after the market closes.

The Singapore Exchange-listed trust owns interests in deep-water container port assets located in two of the world’s busiest container port cities by throughput: Kwai Tsing, Hong Kong and Shenzhen, China.

HPH Trust operates terminals including International and Asia Container in Hong Kong and the Yantian and Huizhou International Container Terminals in China.

Net profit for the previous quarter fell by 33.4%

The business trust posted a 33.4% decline at HK$96.9 million (S$16.8 million) for its bottom line in the first quarter ended March 31, 2019.

Earnings per unit came in at 1.11 Hong Kong cents, down from 1.67 Hong Kong cents a year ago. Revenue edged up by 0.3%, at HK$2.7 billion.

The firm said its combined container throughput for its Kwai Tsing terminals in Hong Kong fell by 9.6%, mainly due to a fall in transshipment charges. Its container throughput in terminals in Yantian, Shenzhen, rose by 4.6%, supported by growth in transshipment cargoes.

Compared to 2014 pricings, HPH Trust's unit price has fallen by 70.2%

Comparing the firm’s unit price from five years ago, its unit has fallen by 70.2% from US$0.74 in July 2014 to US$0.22 as of Tuesday (July 16, 2019).

Year-to-date, HPH Trust’s units have fallen by US$0.02, from US$0.24 on January 2, 2019 when compared to today’s price.

From the financial year of 2014 to 2018, HPH Trust’s annual Distribution Per Unit (DPU) has fallen from a high of 41 HK cents to 17 HK cents, and is at a decline of 58.5%.

US-China trade war rocking the boat

For the financial year of 2018, the business trust posted a loss of HK$11.6 billion, due to non-cash impairment losses. The firm’s business problems overlapped into this year, as seen by the 33.4% year-on-year profit decline for January to March this year.

The weak performance in the first quarter of 2019 was due to the weak outbound cargoes to the United States (US), due partly to the front-loading of cargoes in the fourth quarter of 2018 in anticipation to the tariff increase by the US on Chinese exports which was originally scheduled to commence on January 1, 2019.

The volume of outbound cargoes to the US is expected to be volatile for this year as the US-China trade dispute continue.

Following the first quarter results from HPH Trust, Singapore banks DBS and OCBC had placed their rating on the business trust at “hold”, but cautioned on downside risks on the firm due to the weaker-than-expected start to 2019.

OCBC which had upgraded their view of HPH Trust from “sell” to “hold” since February this year, said it will keep watch on the global economic growth figures, ongoing discussions regarding the trade war, and possible cost-saving synergies from the Hong Kong Seaport Alliance, going forward.

‘Our full financial year 2019 DPU forecast remains at 13 Hong Kong cents which translates into a dividend yield of 6.9% as at April 26, 2019’s closing price,’ said OCBC analyst Deborah Ong.

DBS meanwhile, cut its target price on HPH Trust to US$0.26.

‘Despite a decent prospective yield of 7.4% on offer, we remain neutral on 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,’ said DBS in the April report.

‘The relatively high-gearing level of the trust also means that higher interest rates would also hurt its earnings and cash flows,’ the bank added, cutting its DPU forecast for 2019 to 15 Hong Kong cents.

Exposure to interest rates

A rising interest rates environment would lead to lower-than-expected earnings, cash flows and thus impact on dividends for HPH Trust as the fixed-rate debt accounts for 36% of its total debt.

Economies are currently slashing interest rates to cope with the slow global growth. On July 4th, 2019, 10-year US treasury bonds was at a yield of only 1.95%, a decline from 2.4% in May and 3.2% in November.

The lower interest rates would provide some relief for the firm, as it gives more room for cashflow and has a smaller impact on dividends.