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HPH Trust braces for uncertain future

A 7% decline in throughput last year, a slow down in China, a write down in value of its assets by over US$1.5 billon, and now a regulatory investigation into the Hong Kong Seaport Alliance are weighing heavily on HPH Trust.

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Hutchison Port Holdings Trust, the Hutchison entity that owns its Hong Kong Terminals and Yantian International Container Terminal (YICT) is facing a difficult future. In its 2018 Financial Results Presentation for the year ended 31 December 2018, HPH Trust reported a 1% drop in container throughput at its facilities for the year to just over 24M TEU. Volume at YICT was up 4%, while the Hong Kong terminals - HIT, COSCO-HIT and ACT (collectively “HPHT Kwai Tsing”) - were down 7%.

 

“YICT’s full year throughput growth was mainly attributed to growth in the US and transshipment cargoes. The drop in HPHT Kwai Tsing’s throughput was mainly due to reduction in transshipment cargoes,” HPH Trust noted.

 

This follows a trend that has been happening for some time now, but the growing relative weight of YICT to HPH Trust’s performance is causing wider structural problems. YICT now accounts for 66% of HPH Trust’s revenue, and realistically most (or even all) of its growth prospects. However, the trade outlook for southern China is uncertain.

 

HPH notes that slowing economies in China and the EU, Brexit and the US/China trade war are all weighing on the international trade outlook. Furthermore, “there is a risk that long established supply chains in southern China will be altered over time to the detriment of HPH Trust.” In recognition of the market the Trust booked non-cash impairment losses of HK$12,289M, including writing down the value of Goodwill and Customer Relationships on its books.

 

The 2018 results statement also reflects a decline of confidence from HPH Trust in its own competitive advantage. In past annual results statements HPH Trust has expressed confidence that the water depth and infrastructure of its terminals “position it to be the preferred port of call for mega-vessels and HPH Trust is expected to benefit from these developments,” to quote the 2016 statement. HPH Trust was also looking to a major investment in converting yard cranes to remote control to lower its operating costs in Hong Kong.

 

The company was far less optimistic reporting its 2018 result. It noted there will continue to be a need to invest in terminals to handle mega vessels, but is now looking to work with its competitors to achieve cost efficiencies in Hong Kong. “In Hong Kong, the Trustee-Manager believes the formation of the Hong Kong Seaport Alliance, announced in January 2019 between HIT, COSCO-HIT, ACT and Modern Terminals Limited will enable better vessel berth planning and deployment and cost efficiencies to be achieved,” HPH Trust said.

 

This has not been welcomed in all quarters. The Hong Kong Competition Commission opened an investigation into the new Alliance. “In particular, the Commission is investigating whether the agreement may constitute a contravention of the First Conduct Rule of the Competition Ordinance by preventing, restricting or distorting competition in Hong Kong,” the Commission stated, adding that the investigation is being given priority.

 

In response to current events one market analyst, Singapore’s OCBC Investment Research has downgraded its recommendation on HPH Trust from hold to sell. Cited in “The Edge Singapore” OCBC analyst Deborah Ong said the non-cash impairment loss was “a large disappointment” and went as far as to say “There is no more goodwill relating to Kwai Tsing”.

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