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China Port Sector
Resilient (and good value)
despite US slowdown
Port stocks oversold on US slowdown concerns; Value re-emerged
Over the past 12 months, listed Chinese port operators have underperformed the
HSI and HSCEI by 34% and 46%, respectively. The current valuation implies a
throughput CAGR of only 2-3% for the coming three years vs. our forecast of
15%. We see value has emerged in some leading port plays. We initiate coverage
on Dalian Port with a Buy and upgrade COSCO Pacific to Buy. However, we
reiterate our recent downgrade to Sell for China Merchants.
Global Markets Research Company
Weak correlation between US economy and China’s container throughput
Our regression analysis suggests a surprisingly weak correlation between the
growth of China’s container throughput and US real GDP. China’s strong growth
in exports to Europe and other emerging markets such as ASEAN countries,
Middle East and Russia has significantly diluted China’s reducing reliance on the
US market. In 2007, Europe overtook the US as China’s major export market, with
a ~24% share in China’s total exports (in value).
15% throughput CAGR over 2007-10F
Surging demand for outsourced production by developed countries and expanding
exports to emerging markets should continue to drive China’s export volume to
grow by 13% YoY in 2008F as estimated by DB Economic Research Team. In
addition, we expect the increase in transhipment activities within China arising
from shipping companies’ aggressive fleet expansion should put container
throughput growth at least 2ppt ahead of export volumes.
Chinese ports more defensive than they appear to be
With the structural growth story intact, we continue to like Chinese ports for their
defensiveness against any potential downturn in global trades. Superior pricing
power as reflected in their stable and yet rising handling charge, compounded by
the strong cash flow generated from their high operating leverage, should enable
port companies to survive any short-term hiccup and deliver long-term growth
potential.
Buy Dalian Port, COSCO Pacific; Sell China Merchants
Our TPs for China’s port sector are based on a one-year forward 2008F DCF
valuation, using a WACC of 10.2% (DB China risk premium of 5.3%, beta of 1.0).
These translate into an average 2008F P/E of 17-20x vs. current sector average of
14.3x (excl. China Merchants). Our top pick is Dalian Port (2880.HK, TP: HK$5.56,
Buy) for its unique exposure to both oil and container terminals and dominant
position in Dalian. We also like COSCO Pacific as the current valuation has overdiscounted
its weakness in the container box leasing and manufacturing
businesses. We have a Sell on China Merchants and believe that the sustained
volatility would continue to drive a de-rating and erode its current 74% valuation
premium to the sector average.
Table of Contents
Executive Summary........................................................................... 3
Outlook ....................................................................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
US slowdown concerns overdone ................................................... 4
Underperformance of Chinese port operators unjustified.........................................................4
DB expects a mild recession in the US.....................................................................................5
China’s port throughput growth appeared to move in sync with the US economy but… ........5
…the correlation is surprisingly low..........................................................................................5
Reducing reliance on the US market for Chinese exports.........................................................6
China port growth running ahead of exports’ ................................ 8
15% throughput CAGR over 2007-10F .....................................................................................8
Surging demand for low-cost outputs from China ..................................................................10
Sustained FDI inflow further affirms the outsourcing trend....................................................12
Exporting to emerging markets heating up.............................................................................12
Shipping co’s aggressive fleet expansion should give port operators long-term support.......13
Value re-emerged ............................................................................ 15
Chinese ports are more defensive than they appear to be .....................................................15
HK-listed port companies at attractive valuations ...................................................................15
Buy Dalian Port and COSCO Pacific; Sell China Merchants ....................................................16
Dalian Port (PDA) - H ....................................................................... 17
Cosco Pacific .................................................................................... 31
China Merchants.............................................................................. 35
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