HUTCHISON Port Holdings

AM Fraser Research on 5 Feb 2013

HUTCHISON Port Holdings (HPH) Trust, sponsored by the world's top container operator Hutchison Port Holdings, is structured as a business trust holding container port assets in Hong Kong and Yantian.

HPH Trust's core container ports are Hong Kong International Terminals (HIT) (100 per cent) and Yantian Ports (51.6-56.4 per cent), which boast market leading positions in the Pearl River Delta (PRD) region. We believe that backed by its twin pillars of growth, HPH Trust is strategically poised to leverage on PRD's growth potential.

Yantian and HIT are equipped with competitive advantages such as natural deep-water facilities, superior land and sea connectivity as well as strong operational efficiency. These asset positives have underpinned HPH Trust's resilience through the global financial crisis and, in our opinion, will continue to support its sturdy growth going forward.

Generating a sustainable stream of cash flows. HPH Trust's distributions are paid out of its operating cash flows.

Given the earnings resilience and strong cash flow generation of its portfolio assets, we are confident about the consistency of HPH Trust's distribution yield. We project a forward yield of 6.6-7.9 per cent between 2013 and 2015.

Current yield of 7.8 per cent is compelling. HPH Trust has had a dismal performance since IPO, which we believe can be attributed to its mispricing at the start. While HPH Trust has recovered some ground since then, we believe current valuations remain attractive.

The present degree of undervaluation in HPH Trust could potentially be linked to softened trade conditions in the US, EU and China. Moreover, investors may be concerned with the sustainability of HPH Trust's distribution yield on the back of company-specific factors such as rising tax rates and operating costs. The semi-annual distribution frequency of HPH Trust could have been another contributing factor as well.

The key question is whether current valuations are overpricing in these concerns and we certainly believe so.

In our opinion, HPH Trust's current valuations present an attractive entry opportunity for investors to take part in an earnings growth story as global economic recovery gathers momentum and goes full steam ahead. We initiate coverage on HPH Trust with a "buy" recommendation and a dividend discount model-derived target price of US$0.940.

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