Port operator stocks continued to perform well in the second half of the year, suggesting a much better supply/demand balance compared to most other maritime sectors. Investors preferred companies with a presence in emerging markets and a strong balance sheet. Share prices of Chinese port operators
outperformed global peers, backed by improved economic data flow.
Port Operators Indexed Performance Since Beginning of the Year
Note: stock performance captured till 01 Dec 2013
Source: Bloomberg, DMER
Strong year-to-date share price performance of port operators under DMER coverage once again points to good supply/demand fundamentals in the global container port industry. Average global container terminal utilisation was already a decent 67% in 2012, and this is expected to improve as demand outstrips supply. Not surprisingly, therefore, the industry has witnessed increased M&A activity recently. For example PSA acquired terminal interests in Colombia and China, and APM Terminals’ Global Ports announced the acquisition of its Russian competitor NCC. Liner operators such as Yang Ming, MSC and CMA CGM, have also offloaded stakes in their container terminal businesses, facilitated by reasonable valuations, in order to improve their balance sheets.
ICTSI (ICT PM) and DP World (DPW DU) shares have been the top performers this year, registering robust gains of 38% y-t-d and outperforming Drewry’s Port Index benchmark by a wide margin. In 2H 13, ICTSI’s share price increased by 18%, matching its performance in 1H 13, while DP World’s share price increased by 5%, following a sharp rally of 31% during 1H 13. Both companies have a common goal of increasing their presence in emerging markets through new acquisitions/concessions and the rebalancing of portfolios. For instance, ICTSI divested 50% of its stake in Colombia development, as it was sufficiently invested in Latam. We continue to believe that the stock is richly valued. Key concerns for ICSTI are geopolitical risks generally associated with emerging markets and longer than expected gestation period at new terminals. DP World has managed its balance-sheet well, as well as timely monetizing port assets, such as in Hong Kong. Key concerns are moderating container throughput at Jebel Ali, its flagship port. Other catalysts to watch will be the performance of London Gateway, and Embraport which commenced operations in 2H 13.
Share prices of Chinese operators witnessed a sharp rebound in 2H 13. For instance, Cosco Pacific (1199 HK), CMHI (144 HK) and Tianjin Port Dev. (3382 HK) rose by 20%, 19% and 38% respectively, compared to drops of 9%, 3% and 8% in 1H 13. The Chinese economy has reacted well to the stimulus announced by the Government at the end 1H 13, which focuses on improving small businesses, exporters and railway development plans. China’s official Purchasing Managers Index (PMI) recovered from a low of 50.1 in June to 51.4 in November, and monthly import growth has also gathered pace since its low in the middle of this year. Hang Seng Index is up 16% in 2H 13 compared to a drop of 8% in 1H 13. There is also a strong sense of optimism for stocks such Tianjin Port Development and SIPG (not covered) as a result of talks surrounding the development of free trade zones.
Rebound in Chinese Operators in 2H13
Source: Bloomberg, DMER
Chinese Operators Performance Relative to HSI
Source: Bloomberg, DMER
Investors continue to avoid companies which face regulatory headwinds and operate in an uncertain environment. Santos Brasil saw a sharp sell-off despite attractive valuations. This was caused by weak operational performance in 3Q 13, continued uncertainty regarding the extension of its concession at Tecon Santos, and a potential increase in competition as Embraport and BTP commenced operations in 2H 13. The company’s stock has declined by 31% in 2H 13. Other weak performers were HHLA (HHFA GR; +5%), HPH Trust (HPH SP; -14%). HHLA still waits regulatory approval for the dredging of the river Elbe, which is critical for its business operations. HPH Trusts’ operations in Hong Kong are under pressure due to structural reasons, and they offer limited ability to be volume drivers going forward. However, it is important to point out that the HPH Trust is rightly positioned to expand in Yantian, and will increasingly benefit from economic recovery in the US and Europe.
COSCO Pacific remains our top investment pick, being backed by robust container throughput, and steady utilisation rates in the container leasing business. The company benefits from a balanced throughput generation across ports in the Bohai Rim, Pearl River Delta and Yangtze River Delta. Its overseas terminal operations, especially in Piraeus (Greece), continue to record high volume growth, whilst its container leasing business enjoys support from its sister concern COSCON, one of its key customers. On the balance sheet front, its net debt to equity was 16% at the end of 3Q 13, thanks to cash proceeds of USD 1.2bn from the sale of its stake in CIMC. The company is looking to further expand its terminal in Piraeus, which is being touted as a major gateway into South/Central Europe and surrounding regions.
Key Performance Numbers – DMER Coverage
Our View
We believe that strong underlying fundamentals of the port sector will continue to drive share prices. However, investors will prefer companies with better business and financial standing. The sector will be the investment focal point in maritime industry given delayed recovery in shipping.
Source: Drewry