Port Authorities looking to tender container terminal management concessions now have two Chinese players with overseas aspirations to assess.China has seen its economic growth moderate from 14.1% in 2007 to 7.8% in 2012, according to the IMF. Even though there are early signs of the economy bottoming out, it is anybody’s guess as to when it will rebound to pre-crisis levels, given the protracted debt crisis in Europe and muted recovery in the US. China has been predominantly an exports driven economy, and regions such as the US, Europe and Japan are its major markets.
For container terminal operators, slower economic growth has resulted in a decline in volume throughput at Chinese ports, especially those which focus on the arterial tradelanes between Asia and North America, and from Asia to Europe. This could be encouraging Chinese terminal operators to expand their presence overseas, thereby diversifying business risk. Most notably, COSCO Pacific and China Merchants Holdings International (CMHI) have recently acquired assets in overseas markets. In COSCO Pacific’s case, its acquisition of assets in Greece (Piraeus) has already born fruit with a turnaround in container volumes.
Meanwhile, CMHI has been expanding its presence in emerging markets such as Africa and Sri Lanka. More recently, it has just acquired a 49% stake in CMA CGM’s Terminal Link, which has terminals spread across the globe.
CMHI’s problem is that nearly half of its equity throughput is derived from the Pearl River Delta (largely the main export centres i.e. Shenzhen and Hong Kong), where growth has been stunted due to an unfavourable economic environment and high labour costs. This means that if it is to continue expanding rapidly, overseas investments will be important.
According to Drewry Maritime Equity Research (DMER), by 2015, CMHI’s overseas assets will account for about 20% of equity throughput, compared to negligible levels in 2011. Accordingly, the company’s net income attributable to its overseas assets will be 12.4% of the total by 2015.
On the flip side, the expansion plans entail large capital expenditure, which stresses the company’s cash flow at least in the short term. The company will require $1 billion during 2013-2014 (including $525 for the acquisition of 49% of Terminal Link, according to DMER estimates.
It should be noted that Terminal Link’s portfolio is largely located in Europe and Mediterranean, for which the demand outlook remains muted. Additionally a weak global economy, and factors such as an unfriendly political environment, especially in Africa, could result in a longer-than-expected gestation period. Overall, expansion in overseas markets could surely garner additional revenues and diversify the business risk, but execution and integration of new operations is a big challenge, which port operators will need to handle successfully.
Our View
Terminal operators in China will continue to seek expansion opportunities in overseas markets given moderating growth in China. This will diversify their business risk especially for those with a significant presence in the Pearl River Delta, which is dependent on long haul cargo to the US and European markets.
On the flip side, this will entail significant capital expenditure and could stress the near term cash flows of the acquiring company. Moreover, macro risks such as political environments, integration of operations, and weak recovery in the US and Europe, should be considered prior to entering new markets in a bid to augment revenue streams.
Source: Drewry Maritime Research