COSCO SHIPPING Ports Ltd

HKEX:1199

Earnings Call Transcript 2020-Q3

[Operator]

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

Without further ado, let me introduce our panel of speakers for today. First we have Ms. Margaret Siu, Executive Deputy General Manager of Finance Department; Mr. Ricky Ng, General Manager of Investor Relations Department; and Mr. William Chiu, Senior Manager of Investor Relations Department.

I would now like to hand the conference over to Mr. Ricky Ng. Please go ahead, sir.

[Ricky Ng, executive]

Okay. Thank you. Hello, everyone. Welcome to COSCO SHIPPING Ports 2020 Third Quarter Investor Presentations Conference Call. Today, presentation consists of 5 parts: first, recovery and stable dividend policy; second, third quarter financial highlights; third, third quarter operational review; fourth, outlook; and fifth, Q&A.

First of all, as the month has recovered, our company is now positioned to embrace opportunities from margin demand. Our focus and net product has started to recover in the third quarter, increasing by 3.3% year-on-year and 19.7% year-on-year, respectively. Meanwhile, we have strong cash flow, so we are confident of maintaining stable dividend policy.

Now let's move to Slide #4. In the third quarter of 2020, the company overall equity throughput reached 10.3 million TEU, up 2.1% year-on-year and 9.2% quarter-on-quarter, which shows further recovery in throughput growth. Expected throughput in second quarter increased by 8% quarter-on-quarter. Terminal profit in the second quarter and the third quarter this year increased by 54.8% quarter-on-quarter and 13.7% quarter-on-quarter, respectively. Terminal profit in the third quarter averaged USD 93.7 million, increasing by 16.5% year-on-year, representing the highest quarterly terminal profit since this year. We see the strong recovery momentum.

Let's move to the next page. Although the market is maintaining various internal and external challenges and uncertainties lie ahead, we are very confident that our dividend policy can be maintained in 2020. And at the end of September 2020, our cash and cash equivalents reached USD 1,187 million, increasing by 28% compared to the end of 2019, which was mainly due to the operating cash inflow of around USD 196.5 million and cash received from the disposal of interest in Yangzhou and Zhangjiagang terminals of around USD 251.2 million. Therefore, we are confident that our dividend policy of payout ratio of 40% will be maintained as one of the main basis to reward our shareholders. We are considering the declaration and payment of certain income dividend in lieu of final dividend in order for shareholders to receive the dividend earlier.

On Slide #6. Amid economic uncertainty, some other companies have cut or even canceled their dividend. However, we expect to maintain our dividend policy. We are maintaining 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 Ports in the global shipping market. We are confident that our operations can be sustained under current market, which is full of uncertainties in order to see the opportunities arising from market recovery and uphold our long-term goal of creating long-term value for shareholders.

Next, I will introduce the financial highlights. In third quarter 2020, revenue rose by 6% year-on-year to USD 270 million and the net profit achieved strong growth, up 19.7% year-on-year to USD 85.9 million excluding Nanjing Longtan, Zhangjiagang and Yangzhou and Yangtze Petrochemical Terminal, which have already been disposed as certain net profit attributable to shareholder record growth of 22.2% year-on-year. Earnings per share increased by 18.9% year-on-year to USD 0.0266.

Now let's move to Page 9. Excluding Nanjing Longtan, Zhangjiagang, Yangzhou and Yangtze Petrochemical terminal, from January to September 2020, adjusted net profit attributable to shareholders decreased by 15.9% year-on-year to USD 180.7 million. Benefiting from a strong recovery of net profit in third quarter and disposal gains, net profit attributable to equity holders reached USD 249.3 million for the last -- for the first 9 months this year, up 13.5% year-on-year.

Okay. So Page 10. Excluding Yangzhou, Zhangjiagang terminal, which have already been disposed, revenue increased by 11.3% in the third quarter. Revenue in the Greater China region increased by 13.3% year-on-year in the third quarter, while revenue in most of these regions increased by 9.9% year-on-year. Cost of sales increased by 10.8% year-on-year in the third quarter and also cost in Greater China region increased by 1.8% year-on-year. Costs in overseas region increased by 15.8% year-on-year. For the Greater China region, our profitability has shown improvement in the third quarter with revenue rose by 13.3% year-on-year, while its cost slightly increased by 1.8% year-on-year.

Driven by the exclusive recovery in the recent 2 quarters in Greater China region, our overall terminal profit increased by 16.5% year-on-year as shown on Page 11. The chart shows the terminal profit decline from different regions. Bohai Rim is the largest contributor, representing 39.9% of the total terminal profit followed by Pearl River Delta, contributing 31.1%.

Now let's move to Page 12. While our profitability has been shown -- has been showing a strong recovery in third quarter, balance sheet also show further improvement. In terms of cash, we adopt a prudent approach in cash management. At the end of September this year, the company had cash and cash equivalents of USD 1,187 million, representing an increase of 28% compared with the end of the last year. Net debt-to-equity ratio remains at a relatively low level of 26.4%, decreasing by 7.6 percentage points compared to the end of the last year.

Next, I will introduce the company's operational review. The company's total throughput and equity throughput have shown strong momentum of growth since first quarter 2020. Total throughput increased by 9.7% quarter-on-quarter in second quarter and 11% quarter-on-quarter in third quarter. Equity throughput increased by 8.7% quarter-on-quarter in second quarter and 9.2% quarter-on-quarter in third quarter.

Now let's move to the Page 15. We are committed to building a global terminal network and searching opportunities to acquire terminals globally, such as in Southeast Asia, the Middle East, Africa and South America. We continue to seek potential acquisition projects globally with target hurdle rate of at least low double-digit equity IRR to create value for our shareholders. Since restructuring in 2016, our equity throughput increased from 7.5 million TEU in the third quarter 2016 to 10.3 million TEU in the third quarter 2020 at an average growth rate of 8.5%. Equity throughput on overseas increased to 3.2 million TEU in the third quarter 2020 at an average growth rate of 21.5%. Our CapEx has been quite stable in 2018, and we expect CapEx amount in 2020 will be similar to the amount of USD 624 million in 2019. Until the end of September, our total CapEx was USD 199 million.

Now let's move to the Page 17. In third quarter 2020, throughput from our 7 major subsidiaries increased by 5.5% year-on-year. OCEAN Alliance as the major contributor of the volume in our subsidiaries, contributed 50.2% of total throughput. The throughput from our sister company, OOCL, increased by 26.1% year-on-year mainly due to its contributions at PCT, CSP Zeebrugge Terminal and Guangzhou Nansha Terminal, which shows synergy in our subsidiaries. Meanwhile, throughput from 2M and THE Alliance also rose by 7.1% year-on-year, which was mainly driven by the throughput in Guangzhou Nansha and Lianyungang Terminal.

We continue to strengthen the control of our terminals, adopting a unified way of management to coordinate the performance of the terminals to increase the level of the investment project. Our equity throughput increased to 10.3 million TEU for third quarter 2020 at an average growth rate of 8.5% per year of which even if equity throughput will increase to 3.8 million TEU for the third quarter of 2020 at an average growth rate of 11.7% per year.

Okay. Next page. COSCO SHIPPING Ports will continue to speed up the terminal expansion business which we will to build up a port supply chain platform develop into high-end warehouse and related business. We are actively developing ports to expand the business to provide many other services for our customers. CSP Abu Dhabi CFS Phase 1 is expected to commence operation by fourth quarter of this year. For CSP Verbrugge CFS, its leverage is negative, it seems here with the terminal to provide better service to our customers with utilization rate of about 100%. We are actively applying the Navis N4 operating system to our terminals, which is expected to improve efficiency and business costs. In 2020, we expect to acquire Navis N4 system to Quan Zhou Terminal for utilizing of informatization and cost control and to our subsidiaries in the coming 3 to 4 years. Global Shipping Business Network, GSBN, is a network using blockchain technology by the alliance of shipping industry. The participation in GSBN, we support our company to establish a digital benchmark, thereby driving the synergies of collaborative innovation and common digital transformation within the group.

Page 20. Our company is committed to optimizing our terminal portfolio and considering selling some of our noncore assets. The disposal price of the terminal such as Yangzhou, Zhangjiagang and Jiangsu Petrochemical terminal are at a premium PB valuation are higher, far higher than the PB our share is trading at. We believe that such disposal will also pass value to our shareholders. Recently, we agreed to subscribe for a 26% equity interest in Guangxi Beibu Gulf Terminal. Guangxi Beibu Gulf Terminal will benefit from the promotion and implementation of the Western New Land and Marine Routes strategy of the PRC. And it's expected to share the benefits of economic growth and industrial development in Southeast -- sorry, in Southwest China and Southeast Asia. Our strategy is to enhance our development in the Southwest region of China.

Next, I will introduce the company's strategy of Lean Operations and outlook. In the past few years our company has made significant improvement in scale and number of terminal portfolio. Now we will focus more on the quality of terminal development and profitability. We are committed to increase the volume and profitability of our terminals. We continue to strengthen strategy in 2020 in formulating Lean Operations. We plan to execute this strategy from 3 aspects, mainly cost reduction, revenue growth and headquarters empowerment to improve efficiency. We focus on cost per TEU and also introduce this as the KPI to formulate the operational cost control target of subsidiaries. Meanwhile, we are accelerating informatization and digitization, unifying terminal operating system and continuing to implement Navis N4 system in the subsidiaries.

Okay. So next page. In order to boost our revenue, we have built customer value analysis model to analyze the profit contribution from different shipping companies and various types of boxes. Headquarters and terminals can precisely target each customer based on the analysis results and formulate more effective marketing and negotiation strategies. We are enhancing the sales and marketing team and optimizing marketing structure. Furthermore, we are actively developing the ports to expand the supply chain business. We expect container throughput station services could attract more business. We have set up the Lean Operations center as the major department of our headquarter, where we have the business partners with subsidiaries in order to improve their profitability through cost reduction and revenue growth.

On Page 24, now we have a total experience of below measures to increase revenue. Thus our subsidiaries continue to strengthen marketing activities. As a result, from January to September this year, we have had 28 shipping lines in our facility. Apart from maximizing synergy with parent company, we also cooperate with different shaping alliance to increase shipping calls at our terminal to increase their volume proportion and optimizing client portfolio. The target to further increase the volume proportion from other shipping companies, that means excluding COSCO SHIPPING and OOCL in our subsidiaries in the year 2021 compared to 2020. We aim to increase the revenue per TEU of our subsidiaries by around 4.5% and around 2.7% year-on-year in 2020 and 2021 in order to further enhance our profitability.

Page 25. Our terminals highly value the cost control system, focusing on cost per TEU. The company has set up overall cost control target of 2020 to save cost by RMB 100 million. Our company has 4 measures to improve lean operations and cost control capabilities: first, innovatively set up ports operations management COE team; second, establish cost control incentive system; third, formulate 4-stage cost control and supervision system, including our terminals, operations center and COE team, audit and supervision department supervising the work; and also in terms of the long-term problem which cannot be effectively solved regarding cost control, we also introduced the -- we'll probably also introduce the personnel change and disciplinary inspection when necessary.

Okay. We also set up -- we also plan to set up a centralized procurement system based on the principle of making as many necessary purchases as possible from the same supplier. We have also taken a series of measures to control cost. We actively promote and enhance automation in the terminal to improve the efficiency and lower outsourcing cost. The terminals evaluate the allocation of human resources and maximize human resources by one job post with multi-functions or change of job in order to reduce the labor cost. Meanwhile, the terminal also improve the working efficiency of cranes to reduce equipment and electricity costs per TEU.

Okay. Now let's move to the final page, 26. We expect overseas terminals would probably be shadowed with COVID-19. Global economy and trading environment are [ confounded ] with uncertainties and negative impacts, such as final U.S. trade tension. However, we are actively implementing Lean Operations strategy to improve profitability. We are ready to grab opportunities arising from further market recovery. Although global economic growth looks balanced, some companies reduced or even canceled dividend payout. We continue to increase our asset portfolio by looking for good projects and dispose noncore [ assets under evaluation ]. This do not only improves our earnings quality, but also could lower earnings volatility. We are confident to maintain our dividend policy to reward our shareholders. We believe negative impact from COVID-19 on the ports industry have gradually eased. We will actively enhance the gateway ports network and further strengthen our supply chain further.

Okay. Now it's our Q&A section. Operator, please?

[Operator]

[Operator Instructions] First, we have question from Ms. Ping Fan from UBS.

[Fan Ping, analyst]

This is Ping Fan from UBS. I have 2 questions. First one, I see the control terminal throughput declined 9% year-on-year, but your revenue increased by 6%. Can you elaborate on the underlying reasons? Second question is can you provide a guidance of your full year throughput?

[Ricky Ng, executive]

Okay. So you mentioned that the throughput, right, the throughput of our subsidiaries have declined, right? And however, our revenue has been improved.

[Fan Ping, analyst]

Yes. Yes.

[Ricky Ng, executive]

I think -- yes. Okay. Maybe I'll pass it to our -- I'll pass to Margaret Siu.

[Kim Shan Siu, executive]

This is Margaret. Regarding the first thing, the revenue in throughput, from $254 million to $270 million, which was up 6%. I have to mention, there [indiscernible] throughput [indiscernible] compared with the TEU. The first one is the euro. The euro in the third quarter is -- the exchange rate is increasing. So as we need to reflect the first half exchange rate for the asset rate for the euro which is increasing to our average rate in September. So there will be around USD 5 million revenue related to the exchange rate business. And the other one is because of some of our type of mix, the type of mix between the local and the transshipment, we can see our local throughput volume is increasing. So also all the revenue for third Q is increasing.

[Ricky Ng, executive]

Okay. So for your second question about the throughput guidance for this year. Unfortunately, we do not have the throughput guidance at the one time -- I mean the one more both for your reference. However, our management believes that the worst scenario has passed. And you can actually see that our third quarter figure of throughput number has already gradually improved. So yes. So we do not have the throughput guidance for you for 2020. Yes.

[Fan Ping, analyst]

Fair enough. No further question.

[Ricky Ng, executive]

In fact, you can -- okay. Impact on numbers could be what you have as reference. I mean based on the survey report, the consultant in the shipping industry -- field. And so they do have a quarter for 2021, and it was -- in 2021, it was up 6.6%. But it is based on the focusing for the whole market in the world. So it is a number for your reference.

[Operator]

[Operator Instructions] Next, we have our participant, Ms. [ Maggie Al-Hamy ].

[Unknown Analyst]

I just want to follow-up regarding the guidance and the outlook. I understand the profit guidance for the Q4 numbers, how would the company compare it with the Q3 number? That's my first question. My second question is regarding your second interim dividend. Can you just elaborate a bit more on the second interim dividend? For example these signs and also the timing. And the third question is regarding the cost savings. So I just want to clarify, you mentioned about the company targets, you say, by RMB 100 million by the end of this year. Is that compared to the last year regardless of the throughput? And is there like an extent or like a percentage of cost reduction per TEU the company is targeting on? And for us to see the cost per TEU reduction for like timing, will it reflect on the financials?

[Ricky Ng, executive]

Okay. Maybe I'll answer your second question first. The second income dividend, right? I mean -- okay. First of all, our dividend policy remains unchanged. You know that our payout ratio is 40% of reported net profits. And we are considering to change some final dividend to second dividend, the main intent that we want to distribute the dividend to our shareholders earlier because we expect -- we changed it to second income dividend shareholders to receive the dividend about 2 months earlier. So this is the reason why we are considering to change from final dividend to the second income dividend. Okay.

So coming back to your first question about the throughput, right? It really depends on the -- okay. So you are asking about the fourth quarter compared to the third quarter, right? I mean as we mentioned, right, I might as well believe that the work now has gone. So you see that the third quarter, the China recovery is very good as well. So I think some official numbers about the export also along recently. And so in China, we are actually optimistic about the throughput. However, you know that in overseas, the recent coronavirus situation, the COVID is likely one of reasons that I become more driven. So we are still cautious on the regions. So this is the situation, that the outlook that we could share with you, that China...

[Unknown Analyst]

Sorry, just like want to -- just want to clarify. So I understand the more situation, right, according to the numbers provided by the company, it's actually in Q1, and we saw sequential improvement. But I would just say that in Q4, we would probably see the number come back to Q2 level?

[Ricky Ng, executive]

Okay. So we do not have a number to share with you, but we believe that the numbers, I mean, the group number in China is -- we're actually optimistic for the numbers in China. And for the emphasis for some of our terminals, if you look at our September numbers, it's actually some terminals business improvement as well like the CSPs are saying and also Zeebrugge's number is also quite good. Yes. So yes. I mean overseas remains uncertainties to the company.

[Unknown Analyst]

So based on your observations for the past month, how bad is the overseas? Is it like as bad as like in quarter 2 we saw?

[Ricky Ng, executive]

Based on the September numbers that the overseas also increased a bit compared to -- okay? So I'll give you some numbers. Okay. For third quarter this year, the overseas throughput for the third quarter was up 2.7% year-on-year. And for the second quarter, it was down 4.9% year-on-year. So overseas also rest of the improved number in the third quarter.

Okay. And -- okay. And also the third question about our cost savings, right? Okay. So we have a target to save our cost by RMB 100 million, which is the Lean Operations -- one of the Lean Operations strategy. So yes, so we are targeting to improve our cost per TEU abroad. So this is our project. Yes.

[Unknown Analyst]

So I just want to clarify, is that RMB 100 million improvement, is it versus last year regardless your throughput for this year? And also like for the cost per TEU reduction, do you have a target as well in terms of like percentage or absolute number?

[Ricky Ng, executive]

Okay. We do not have the cost per TEU to give you the numbers for you as a target because the throughput number, we also have certain cost per TEU number. However, if you -- but in fact, you can calculate our difference with the last 3 quarters. We lowered the cost per TEU from USD 34.3 in first quarter to USD 33.4 per TEU in the third quarter. So yes. So that means around -- you can actually calculate it from the -- from our numbers that the gross profit per TEU increased from USD 8.9 per TEU in first quarter to USD 11.8 per TEU in third quarter. Yes. So this is something that we can gather from our numbers.

[Operator]

[Operator Instructions] Next, we have Mr. Kelvin Lau from Daiwa Capital Markets.

[Kelvin Lau, analyst]

I have 2 questions. One question is about the -- your target about raising revenue per TEU by 4.5% this year and 2.7% next year. So is it coming from more better mix of -- or actually more third-party business at a different mix of ports? Or can you share with us how much is from organic?

[Ricky Ng, executive]

Okay. So we actually do not have the breakdown because this is a combination of assets. You are correct that we want to increase the volume proportion from the third-party customers. So we hope that it will be one of the reasons to increase our North America TEU. At the same time, we -- actually, our sales and marketing department has been strengthened and they continue so well. You can see that on our slide, we have added 28 shipping lines in the first 9 months in this year. So that's why we could improve our throughput as well. So if we can improve that, then our bargaining power will also be increased. That's why the revenue per TEU will also improve. So this is our plan.

[Kelvin Lau, analyst]

So it should be coming more from more third-party business and not the mix of ports, right?

[Ricky Ng, executive]

Okay. So it's not because of the mix profit ports but we want to improve the mix of the customers and also to strengthen our sales and marketing team to reduce our organic ASP per TEU.

[Kelvin Lau, analyst]

Okay. And my second question is with your cost saving of CNY 100 million. How much already achieved in the first 9 months? Or how much were you expecting in the fourth quarter now?

[Ricky Ng, executive]

Okay. Just one second. Okay. So first in our portfolio that you understand that some of our terminals is operating for many years, and some of them is newly developed. So we do not have the exact number to share with you at the moment. But we mentioned that this is our target, that we're working for this target for this year.

[Kelvin Lau, analyst]

Okay. Okay. And a final question is that the second interim dividend arrangement, would it be a long-term arrangement? Or will be because this year because of the one-off issue for the [ top 10 parent ], all these things?

[Ricky Ng, executive]

Yes. I think it will be a long-term arrangement. And in fact, it is not -- okay. And in fact, a lot of the -- as far as you know, quite a lot of the companies, they do have dividend arrangement. The -- for ourselves, we want the shareholders to get the share, the dividend earlier. If we are using the final dividend, then we need to pass the AGM and then allow further to execute the final dividend in July. And if we treat it as a second income dividend then, the shareholders could receive the dividend at about 2 months earlier. So that's why we want to transition the second income dividend. So in terms of the dividend policy, in terms of the payout ratio, all kind of things remain unchanged.

[Operator]

[Operator Instructions] Next, we have [ Ms. Lee ] from [indiscernible].

[Unknown Analyst]

Just want to ask another question. We have observed an increasing shipping freight rates recently. Does the company average considering changing your tariff? Or do you feel that you have got more bargaining power in negotiating the tariff for next year?

[Ricky Ng, executive]

Okay. At this stage, we are still having like a stable ASP outlook. However, we are more optimistic because you know that the negotiation situation in the second half of this year must be better than the first half of this year. So we are optimistic but still maintaining a prudent, stable ASP outlook for next year. And quite a lot of our contracts, not a lot, actually about every year, about 10% to 30% of our contracts will expire. And then most of the contracts will be -- for those contracts, it will expire [ on the lease ] in the end of the year. So you probably also understand that this quarter compared to the first half, the operation already improved a lot and the throughput number and also our port number already showing the improvement. And you can also see the profit, our similar profit the cost year-on-year growth, quarter-on-quarter as well will show the good numbers. So we are optimistic for the negotiation in the end of the -- about the ASP for the last -- for the next year.

[Unknown Analyst]

Okay. So the base like -- the base form effect of your 4.5% revenue per TEU growth for next year?

[Ricky Ng, executive]

Sorry, can you repeat your question again? It's like...

[Unknown Analyst]

Yes. Because of a higher shipping freight rate we saw recently, so is that kind of one of the reasons for your improvement in revenue continuing for next year?

[Ricky Ng, executive]

Okay. Okay. Revenue per TEU certainly will be related to the -- not only the fueling but [indiscernible]. But one of the reasons why we have the target to increase the revenue per TEU is not because of the -- it's not only because of the macro, it's because of our internal improvement on our sales and marketing team. So that means even though the market in the -- we do not like -- even though the margin may have some uncertainties in the coming months, although we are optimistic of the matter. The revenue per TEU improvement purely because of our Lean Operations strategy, that means if you refer to our slides, you can see that we are aggressively strengthening our sales and marketing team. Now we have more colleagues in the department. And we have a lot of good efforts so that in the first 9 months, we have added 28 shipping lines from January to September. And some of the shipping lines will be in fact in the second half of this year. So that means this is all we have done, and that's why we aim to increase the revenue per TEU.

[Unknown Analyst]

Sure. May I just check the reasons why you do not want to increase your tariff for your customers rather than maintaining a stable one? Because given your market share and your dominance on the key rules, isn't it sensible for you to raise your tariff for pricing to your customers?

[Ricky Ng, executive]

We always want to higher the ASP to our customers. However, if you're asking us about the outlook, we want to give you the -- we want to keep the market to have a prudent outlook. And certainly as you know, you know that we have the Lean Operations strategy and the revenue per TEU. We need to draw our second half -- we have more throughput. Our sales and marketing team also increased their bargaining power. At the end, the ASP could also improve. But regarding about the outlook, we are prudent to keep the stable ASP outlook value.

[Operator]

[Operator Instructions]

[Ricky Ng, executive]

Okay. So any other questions? If no other questions, thank you very much for joining this investor conference call. And if you have any other questions, please feel free to contact me and also our teammates. So thank you very much again. Have a good evening. Thank you. Operator, back to you.

[Operator]

Thank you very much. Ladies and gentlemen, with that, we have come to the end of the conference call. Thank you for your participation, and have a pleasant evening ahead.