COSCO SHIPPING Ports Ltd

HKEX:1199

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for joining COSCO SHIPPING Ports Limited 2020 First Quarter Results Announcement Conference Call. [Operator Instructions] Kindly be reminded that replay will be available upon a request after the call.

I would now like to hand the conference over to the speakers. Ms. Margaret Siu, Executive Deputy General Manager of Finance Department; Mr. Ricky Ng, General Manager of Investor Relations Department; and Mr. William Chiu, Manager of Investor Relations Department. Please go ahead.

[Ricky Ng, executive]

Okay. Welcome to COSCO SHIPPING Ports' 2020 First Quarter Investor Presentation Conference Call. The presentation consists of 4 parts: first, assurance; second, first quarter financial highlights; third, first quarter operational review; and fourth, planning. As before, we are full of confidence and expectations for our company.

Now let's move to the Slide #4. Although the market is facing various challenges and uncertainties, we are very confident that our dividend policy can be maintained in 2020. We have sufficient cash flow, including the cash flow from our recent disposal of terminals. We completed our disposal of interest in Yangzhou Terminal and Zhangjiagang Terminal at consideration of USD 251 million in February 2020, of which about USD 131 million was received in February, and the rest of the amount is expected to be received in the second quarter.

In April 2020, we entered into an agreement related to the disposal of interest in Jiangsu Yangtze Petrochemical Terminal at a consideration of about RMB 250 million. In addition, it is expected that the potential disposal of equity interest in Taicang Terminal this year will bring strong cash flow to our company.

At the end of the first quarter this year, our cash and cash equivalents amounted to USD 832 million. Therefore, we are confident that our dividend policy of payout ratio of 40% will be maintained as one of the main phases to reward our shareholders.

On Slide #5, since the reorganization in 2016, our dividend yield has always been higher than our peers' average. In 2019, our dividend yield was as high as 8.1%, while the market average was only 4.5%. Clearly, the advantage of our dividend yield has significantly expand. Under the current environment of low interest rates, our dividend yield is relatively high.

Leveraging the management capacity of COSCO SHIPPING Ports accumulated over 26 years and the establishment of a global terminal network over the years, combining with the advantage of COSCO SHIPPING Group in the global shipping market, we are confident that our operations can be sustained under the current market, which is full of uncertainties in order to seize the opportunities arising from market recovery and uphold our long-term goal of creating long-term value for our shareholders.

The next slide. When we are fully prepared for the rising demand driven by the global market recovery, we also see signs of initial recovery in the market. From 1st April to 14th of April 2020, the throughput of our subsidiaries in China dropped only by 2.4% year-on-year. In addition, leverage the synergy with OCEAN Alliance and other shipping alliances, our throughput is expected to begin to recover, giving us the confidence and ability to quickly seize the opportunities arising from the current demand.

The coronavirus outbreak in China has gradually been under control. Factories are resuming to operations. On the other hand, the production capacity of overseas regions is still adversely affected due to the coronavirus.

Next, we will introduce 2020 first quarter financial highlights. On Page 8, mainly due to the coronavirus, the revenue of the first quarter 2020 dropped 11% year-on-year to about USD 221 million. However, we have after-tax disposal gain of USD 61.5 million from disposal of Yangzhou Yuanyang Terminal and Zhangjiagang Terminal. The profit attributable to the equity holders is USD 91.9 million, with an increase of 84.1% year-on-year.

Excluding the -- if we -- excluding the disposal gain of Yangzhou Terminal and Zhangjiagang Terminal in the first quarter of 2020, the adjusted net profit attributable to shareholders was USD 30.4 million, down 39.1% year-on-year. The cost of sales decreased by 1.5% year-on-year to USD 175 million, resulted in the reduced revenue due to the coronavirus. However, because of sales did not decrease as similar as the revenue, which was mainly attributed to the cost of depreciation of USD 3.5 million from Abu Dhabi Terminal, and Nantong Terminal also had a higher depreciation cost of about USD 1.9 million.

The company shares of profit from joint ventures and associates was mainly affected by the coronavirus again, with a year-on-year decrease of 15.5% to approximate USD 52.3 million. Among them, Euromax, for example, was offsetted by a 20% drop in equity throughput, with each profit contributions reduced to a loss of USD 1.05 million from a profit of USD 1.09 million in the first quarter of last year.

Now we move to Slide #9. The total revenue dropped by 11% year-on-year, mainly affected by the outbreak of coronavirus in the Greater China region during the first quarter. Our revenue in the region decreased by 24.3% year-on-year. While the first quarter revenue growth in overseas regions was flat. The total cost decreased by 1.5% year-on-year due to the impact of the factories' shutdown, our sales cost in Greater China regions also decreased. But such decrease was not as much as [ best ] in revenue mainly because of the fixed costs generated during the shutdown period. For overseas, due to the depreciating cost incurred after the operations of Abu Dhabi Terminal, the cost of overseas regions increased by 5.3%.

On Page 10, now let us see the performance of terminals by region. First of all, in the Bohai Rim region, QPI throughput increased by approximately 2%. And the increase of our company's shareholdings increased from 17.12% in the same quarter last year to 19.79% in the same period of this year. The Yangtze River Delta, Southeast Coast and the Pearl River Delta are affected by the coronavirus. Although the total shares of the terminals have not changed much, the actual profit amounts have declined. The progress in the Southwest has a decrease mainly due to the fact that our company only held about 4.34% of Beibu Gulf in first quarter last year. And the fair value gain was about USD 24.4 million, which was included in our net profit last year. Since January this year, our equity in Beibu Gulf to increase to about 10%. So our company posted a net booked the products from Beibu Gulf by equity accounting method, so the terminal profit has declined. For overseas, the depreciation cost of Abu Dhabi Terminal after the commencement of commercial operations that resulted in a loss of USD 5.9 million in terminal profit. The throughput of CSP Spain fell by about 14% in the first quarter. It is mainly due to the container volume from 2M and THE Alliance decreased by 22.7% and 48.8% year-on-year, respectively, resulting in a loss of 1.6 -- about USD 1.6 million in terminal profit.

Okay. Now let's move to Slide #11. Subsidiaries EBITDA decreased by 18.2% in the first quarter of 2020. Due to the coronavirus outbreak, EBITDA of subsidiaries in the Greater China regions dropped by 21.7%. EBITDA from overseas subsidiaries decreased by 12.8% because of our newly developed or acquisition of new terminals in recent years such as Abu Dhabi Terminals and CSP Spain. However, we believe with the continued increase of the throughput and the utilization rate, our profit growth is expected to be different in the future.

Our share of profits from non-subsidiaries dropped by 35% year-on-year. The main reason for the decline of 35% of the shares of profits from non-subsidiaries in the Greater China region was due to the coronavirus outbreak. Due to a decrease of 20% in throughput from Euromax, which caused a loss of about USD 1.05 million in the first quarter 2020, our share of profit from overseas non-subsidiaries dropped by 39.1% year-on-year.

Okay. Page 12. In the end of first quarter 2020, our company's net debt-to-equity ratio remains at a relatively low level of 33.9%, up 1.7 percentage points year-on-year. We have ample from our borrowing capacity for investments. In terms of cash, we adopt a prudent approach in cash management. At the end of the first quarter this year, the company has cash and cash equivalents of USD 832 million, representing an increase of 47.8% year-on-year.

Next, we will introduce the company's 2020 first quarter operational review. On Page 14, in the first quarter of 2020, affected by the coronavirus, the total throughput of the company decreased by 4.4% year-on-year, while the equity throughput dropped by 6.6% year-on-year. In terms of the equity throughput, the equity throughput of the subsidiaries declined by 11% year-on-year. Equity throughput of non-subsidiaries decreased by 3.6% year-on-year. Subsidiaries had a larger decrease in equity throughput, which was mainly because of the disposal of Yangzhou Terminal and Zhangjiagang Terminal.

Page 15. Since the company's restructuring in 2016, we have established 3 major core strategies: globalization, enhancing our synergy and strengthening our cost and management capital capabilities. The company's 3 core strategies have been effective. Equity throughput from overseas account for 35.6% of equity throughput in first quarter of 2020, and container volumes from shipping alliance contributed 83.1%.

The company continues to strengthen the control and management of the port and terminal business, adopting a unified way of management to coordinate the performance of the terminals to increase the value of the investment projects. Equity throughput of the group subsidiaries account for 38.5% of equity throughput in the first quarter 2020.

Next page. We continue to seek acquisition partners globally and create value to our shareholders. The equity throughput increased from 6.9 million TEU in the first quarter of 2016 to 8.67 million TEU in the first quarter of 2020 at a CAGR of 5.9%. The CAGR of equity throughput from overseas was 21.9%.

On Page 17. In the first quarter of 2020, the throughput from the OCEAN Alliance, 2M and THE Alliance amongst our 7 major subsidiaries increased by 2.3%. We will continue to leverage the synergies with OCEAN Alliance. Throughputs from OCEAN Alliance account for 52.3% of total throughput from the 7 major subsidiaries, and that's from 2M plus THE Alliance account for 30.8%.

The throughput from OOCL at CSP, Zeebrugge Terminal and Abu Dhabi Terminal surged by 80.5%. While the throughput from 2M and THE Alliance decreased by 10.4%, which was mainly due to the decrease in CSP Spain and Zeebrugge. In the future, we will further strive for major shipping alliance to call at our terminals to drive the growth in throughput.

On Page 18. We are actively applying the Navis N4 operating system to our terminals, which is expected to improve efficiency and reduce costs. The implementations of the Navis N4 system at Zeebrugge Terminal was in July 2019. The Navis N4 system was also launched at Lianyungang Terminal in December 2019. In 2020, we will apply the Navis N4 system to terminals in Spain, Quan Zhou and Jinjiang for the efficiency, optimization and cost control.

Page 19. Our company disposed of the equity interest in Nanjing Longtan Terminal, Yangzhou Yuanyang Terminal and Zhangjiagang Terminal. The 3 terminals contributed very limited profit to our company in 2019, accounts for only about 1.6% of the total terminal profit. However, the total cash proceeds from the transactions were about USD 331 million. In addition, compared with the PB ratio of the disposal of the terminals was at about 1.7x. So our shares of PB at the moment is about 0.4x. Therefore, we believe that our valuation is significantly underestimated by the market.

Furthermore, we signed an agreement in relation to the disposal of equity interest in Jiangsu Yangtze Petrochemical Terminal in April at a consideration of RMB 250 million. The price-to-book ratio of this transaction is estimated to be about 1.5x. So we believe that the disposal will also add value to our shareholders. In the future, we may consider the disposal of Taicang Terminal. As the 5 terminals are all located in the Yangtze River Delta, our future position is to continue to develop Wuhan and Nantong terminals and strengthen the development of our portfolio in Yangtze River Delta.

Slide 20. Coronavirus is spreading around the world, causing a certain negative impact on the economy and trading environment in short run. Overall, we're affected in the first quarter of 2020 to a certain extent, the throughput is expected to increase with the rise in demand as China gradually resumes work. At the same time, however, there are a number of unfavorable factors in the second quarter due to the serious situations caused by the coronavirus in the overseas.

However, we believe that there are also potential M&A opportunities in the market. A low interest rate environment could drive the consumption and investment, and demand is expected to rebound strongly after the coronavirus epidemic.

Our company is ready to seize the market opportunities. Although the local economic environment is full of challenges and uncertainties, we believe that our company is in a better position to respond.

That's the end of our presentation. Now it's our Q&A session. Operator?

[Operator]

[Operator Instructions] Ms. Ping Fan at UBS.

[Ping Fan;UBS;Quantitative Risk Specialist, analyst]

This is Ping Fan from UBS. I have two questions. The first one is about your overseas terminals. So I'm just curious, how is your overseas terminals performing so far in April? Because it seems that several shipping companies have suspended some savings on certain lines. The second question is about the other operating income. It is USD 67 billion (sic) [ USD 67 million ] for Q1, but the disposal gain is only USD 61 billion (sic) [ USD 61 million ]. So how much is the pretax disposal gain of the 2 terminals? And what are the main sources of the remaining of the other operating income?

[Kim Shan Siu, executive]

This is Margaret. Actually, maybe I answer the second question first. In the other operating income, you see there will be an increase of around USD 66 million, in which for disposal gain for Zhangjiagang and Yangzhou Terminals, the pretax gain is around USD 71.1 million, yes.

[Ricky Ng, executive]

Okay. So for the overseas terminals, I do not have the April number with me. But if you look into the numbers in March, the throughput, equity throughput in Europe dropped by about 13.4% year-on-year. So I think that the situation in Europe in March is quite serious. So -- yes, so this is the number for Europe.

And certainly, the coronavirus situation in overseas is a risk. I mean it's the risk to our overseas business. However, as I have mentioned before that the situation in China is actually picking up. The -- in the PowerPoint slide, we mentioned that in the first 3 weeks, the official numbers already -- it's only dropped by about 2.4% year-on-year. So yes, this [indiscernible] is great.

[Operator]

Our next question is from [ Mackie ] at [ Herman ].

[Unknown Analyst]

So the first question is actually relating to the China ports. Just want to check if the percentage of volume relate to the domestic trade and the percentage of volume versus international trade. And second, for Taicang port disposal, can you just elaborate a bit more on the time line for the deal completion? And the deal size comparing to previous disposals, are you looking to dispose more after the Taicang disposal? And the 40% dividend payout ratio, is it based on the reported earnings or it's based on recurring earnings?

[Ricky Ng, executive]

Okay. For the second question is that we target potential disposal of Taicang Terminal in this year. And the dividend policy is 40%. Our payout ratio is on the reported net profit. So for the first question, you asked us about the throughput proportions, right, from -- between overseas and China, right? And so...

[Unknown Analyst]

Yes. Just like for the domestic ports, just wondering the portion of the volume actually generated through the domestic trade and the portion actually relates to the import and exports.

[Ricky Ng, executive]

Oh, okay. Okay, for the domestic ports, right?

[Unknown Analyst]

Yes.

[Ricky Ng, executive]

For the domestic ports, the -- for the domestic -- okay, so for O&D, it is about -- in first quarter, it was about 78%. And for the transshipment, it was about 21 point -- it's about 22%. And of the O&D, the international trade will be about -- was about 48%. And then the domestic trade was about 30%, 3-0, 30%.

[Unknown Analyst]

Okay. And sorry, you didn't answer the question on the -- regarding Taicang, like what kind of like the deal size should we expect comparing to the previous disposals? And are you looking to this more -- to put more after the Taicang deal?

[Ricky Ng, executive]

I think we will wait to disclose more information to you, but you can track the throughput numbers of Taicang. So you can estimate the operations scale of Taicang compared to other terminals that we have recently disposed.

[Operator]

Our next question is from Allen Huang at Goldman Sachs.

[Yuelun Huang, analyst]

Okay. Great. So I have two questions. So first of all, I wanted to talk a little bit about Abu Dhabi. So first of all, this will be an important earnings driver, just given it's still in the initial operating losses. So currently, like, I think we see roughly flattish sort of first quarter, like 2020 growth. So apparently like -- just wanted to get a sense in terms of how much sort of ramp-up in terms of volume are you expecting. And then also in terms of the earnings trajectory, like in terms of the ramp-up. In addition to that, I saw like there's a news article thing like the group also sort of disposed like around 1/3 of the stake to Qingdao Ports and then it was settled like last Friday. So just wanted to confirm like if the effective ownership sort of was reduced to 60% as of now. That's my first question.

[Ricky Ng, executive]

Okay. For the sales tax of Abu Dhabi Terminal to QPI, Qingdao Port, actually, we post the announcement in the last year, talking about it. So we will not repeat the details. Please refer to the announcement that we have published -- we posted in the last year.

And regarding to the Abu Dhabi Terminal, we start to have the commercial operations for this terminal in the end of first quarter. So because after the commercial operations that the depreciation cost will start to kick in. So -- but the point is the utilization rate of the terminal is rising. So we target the initial capacity for the terminal is 1.5 million TEU for Abu Dhabi Terminal. So yes, so that's the update about the Abu Dhabi Terminal.

And for the equity throughput, equity throughput is about 142,000 TEU for Abu Dhabi Terminal.

[Yuelun Huang, analyst]

Okay. Got it. So my point, it was more like because apparently like in terms of Q-on-Q, right, so the ramp-up in terms of volume was not like very significant. So is that like sort of normal, like looking to the rest of the year? Or was it more like just because of the barriers, like sort of would you expect much more growth like for the remainder of the year?

[Ricky Ng, executive]

I think because of two reasons. First of all, if you compare quarter-on-quarter, normally, first quarter is the weak season for the port business. So I think it's a onetime -- so I think it's the one of the reasons. And then we know it's because of the coronavirus situation, right, and it happened in the first quarter. So that's why you see comparing quarter on quarter may not be a good comparison, but we see the momentum for the terminal is actually rising. So yes, so that's the situation of Abu Dhabi Terminal.

[Yuelun Huang, analyst]

Okay. Great. Got it. And then my second question, regarding to your sort of capital allocation because the group was very actively in selling assets and then you'd be able to sell at above book value. So that's a good thing. But then the question is, like with all this cash, and then do you have a sort of specific target in terms of M&A? Or like -- and also, additionally, like given you also have such an amount of cash, right? As the sort of parent co think about like in terms of privatizing the company sort of at this type of like really depressed valuation, I mean given your cash flow and then sort of cash on hand?

[Ricky Ng, executive]

Okay. So the potential M&A is one of our strategies because our strategy is globalization, right? So as we previously mentioned that we are actively looking for potential M&A opportunities, such as the leaders in Southeast Asia. And in fact, in the first quarter of this year, we also increased some spec in Qingdao Port. Maybe Margaret could give you more information.

[Kim Shan Siu, executive]

Yes. For the first quarter of this year, we further increased our shares in the QPI, Qingdao Port, international port, for the around USD 56 million. That is from our -- increasing our equity interest from 18.46% to 19.79%. We think that QPI is a very attractive investment for us. And also is the potential for us to increase our share in QPI.

[Ricky Ng, executive]

Yes. We would like to improve our overall quality of our portfolio. So we have disposed some terminals, what we think is nonperforming or not strategically strong to our overall portfolio, then we will potentially dispose it. And at the same time, we think that we have a handful renewal acquisitions that will add the value to our overall portfolio and also to share -- add good value to our shareholders, and we are looking for such M&A opportunities.

[Yuelun Huang, analyst]

And sort of regarding like to your parent cos, like is sort of like group restructuring like involving the company as part of maybe their consideration or like given that you have so much cash and creating out such a depressed valuation. Would you consider there to be something like they would consider?

[Ricky Ng, executive]

With respect to recent -- our previous recent M&A cases, we're actually looking for opportunities around the world. I mean like we have the brand new project in Abu Dhabi, and we signed the contract with a local company in Peru to develop the terminals in South America in Peru.

So yes, I mean, as long as it is a good asset and learnings to our shareholders, like we think people doubt if it's good to our shareholders because they have a strong proof of growth. And also, we think QPI delivered good asset qualities, then we will pursue the M&A -- such M&A opportunities.

[Yuelun Huang, analyst]

Sorry. My question was more like within the overall group. So your parent company, like how does COSCO Ports sort of begin within the overall group structure? And would the parent co sort of consider in terms of sort of synergies and then consolidating or privatize COSCO Ports, would that be an option for them?

[Ricky Ng, executive]

We do not have such plans. We know that we have just finished the restructuring in 2016. And we believe that as long as we could look for some good cost projects in the world, globally and then at a reasonable and good pricing, then it could add the value to our shareholders.

[Operator]

Our next question is from Simon Cheung at Goldman Sachs.

[Simon Cheung, analyst]

I have -- I dialed in late. So I have two quick questions. I tried to understand what's going on with your operating deleverage here. Because your core earnings fallen by, what, 45% when your throughput down by 11%. I haven't seen this sort of operating deleverage before. I know you have provided a breakdown by segments on the -- by regions on the terminal profits and showing a very drastic decline on the South Western Coast as well as overseas ports. Can you a bit -- perhaps talk to -- talk a bit about what's going on over there? Obviously, going into second quarter, third quarter, we have seen a lot more drastic impact on the global trade. And if this would continue to deteriorate, how should we think about this operating deleverage? That's the first question. I have another question.

[Ricky Ng, executive]

Okay. Maybe I answer your first question, yes. I mean so if you turn to Page 11 of our presentation slide, you see that the EBITDA of our company for the subsidiaries actually only dropped by 18.2% on the left-hand side of the chart. So if we -- excluding the disposal gain, our net profit is down by about 39.1%. Okay. So one of the main reasons is because of the depreciation cost of some of the terminals like in Abu Dhabi. But if you're focusing on the EBITDA of the subsidiaries, we only dropped by 18.2%, given that our revenue is down by about 10% -- down by about 11%.

So yes, so yes, we are expecting the depreciation cost impact will be smaller going forward because some of our Qingdao Port start operating -- will start to operate in at a relative high utilization rate than the overall convertibility. But if you're just focusing on the EBITDA, actually sales only dropped by 18.2% at subsidiaries.

[Simon Cheung, analyst]

All right. So maybe going back to Page 10 on your slide on the left, the orange color and the blue bar, which basically the entire 30% contracted to almost nothing. Can I -- would you be able to -- other than Abu Dhabi, the depreciations, can you give us a better sense about what's going on elsewhere?

[Ricky Ng, executive]

You're talking about Page 10, the terminal profits, right? Okay. Okay. So as I mentioned for the overseas, the depreciation cost of Abu Dhabi, right? It -- we felt a loss of USD 5.9 million in the terminal profit. But for the throughput of CSP Spain, it also dropped by about 14% in the first quarter. It is mainly due to the container volume from the 2M plus THE Alliance decreased by 22.7% and 48.8%, respectively. So because of the performance of the CSP Spain, it also dropped down the overall terminal profit from the profit.

[Operator]

So there are no questions on the line. I'll pass it back to management.

[Ricky Ng, executive]

And also one more thing to answer Simon's questions, that for the non-subsidiaries for overseas that supports Euromax was also affected by a 10% drop in equity throughput. Then the profit contributions reduced a loss of -- in a loss of USD 1.1 million from the previous profit loss of about USD 1.1 million. So yes, so that's the reasons behind that. Yes.

[Operator]

There are no other questions on the line. I'll pass back to management.

[Ricky Ng, executive]

Okay. So thank you very much for dialing in. And this is the end of our conference call for today, so thank you very much. If you have further questions, please feel free to contact us. Thank you.