Cosco Shipping Ports: High Leverage Sustains Europe Expansion

Equity Research Analyst, Maritime sector, Drewry Maritime Financial Research

Ankush Kathuria CFA, FRM

Equity Research Analyst, Maritime sector

Maritime Sector, Equity & Credit Research

Drewry Maritime Financial Research

With no ties to other players in the shipping, finance or banking world, we provide a uniquely impartial view of the markets and companies we cover. Our parent organization, Drewry is a leading independent provider of research services to the maritime and shipping industry, employing over 100 professionals across an international network of offices in London, Delhi, Singapore and Shanghai. Combining our market-leading resources with seasoned sector expertise DFRS offers a highly differentiated and comprehensive range of investment and financial research services to lenders and prospective investors in publicly listed maritime and shipping companies. The full service of reports, supporting resources and sector orientated webinars provides our clients with the most complete picture of the organisations under coverage as is possible. We have been charting and analysing the world’s maritime markets for more than 40 years. This unrivalled intelligence and understanding provides the foundation of our research service. Our analysts have access to one of the most up-to-date, comprehensive and reliable sources of market insight and research data available today. We look at globally listed companies within the following sectors: Port Operators, Container Shipping, Container Manufacturing & Leasing, LNG Shipping, Dry Bulk Shipping and Tanker Shipping. Combine in-depth sector expertise with financial analysis focusing on over 50 stocks globally.

Equity Bottom-Up

<div>The company’s throughput data reported a lower growth of 4.6% in 3Q19 (vs 11.8% in 3Q18). Uncle Sam’s effort to tame the dragon seems to be taking a toll on its business. With exception to the PRD (3Q19: +2.2% vs 3Q18: -2.3%) growth deteriorated across the company’s Chinese port belts - Bohai Rim (3Q19: +0.5% vs 3Q18: +22.4%), Yangtze River Delta (3Q19: +3.1% vs 3Q18: +3.3%) and Southeast Coast (3Q19: +0.5% vs 3Q18: +7.1%). Considering the downward growth trajectory, CSP’s strategy of strengthening its overseas port business is appropriately placed.</div><div></div><div>Despite the company’s highly stable core ports business and its relation with the major shipping alliances, the stock is trading near to its multi-year low, alluding to the market’s scepticism about the broader operating environment. With the recently triggered Trump impeachment process, increased protectionism and the upcoming presidential election in 2020, we expect heightened uncertainty to shroud world trade order. Furthermore, China’s own domestic problem (deleveraging, slowing economy and geopolitical issues pertaining to Hong Kong) will only make the matter worse.</div><div>Cosco Shipping ports is currently in the middle of its five year restructuring programme, initiated in 2016, which aims at higher focus on its overseas business, leveraging higher synergies from its shipping alliances and strengthening control and management of its ports and terminals business. 3Q19 terminal profits more than doubled to 20.9% share of total, confirming the company is line</div><div>with its above-stated objectives also substantiated by higher equity throughput from overseas segment (31.9% in 3Q19 vs 20.9% in 3Q16); improved total throughput from all three shipping alliances (83.5% in 3Q19 vs 82.7% in 3Q18); and increased equity throughput from subsidiaries (40.7% in 3Q19 vs 33.8% in 3Q16). However, this has also resulted in higher capex spent, which was primarily sourced from debt and thus translated into increased total debt (USD2.9bn in 3Q19 end vs USD 2.3bn in 3Q18 end). Moving forward, we expect the company to continue with its strategy of leverage expansion for next few quarters before muting its capex spent and shifting its focus towards synergy generation.</div><div></div><div>To sum-up, Cosco Shipping Ports provides a complex mix of a stable business operating in an adverse macro-economic environment. Furthermore, we believe the stock price has already discounted the current issues. After weighting its well-integrated business model and implicit operating support from the broader shipping alliance, we believe it offers higher upside opportunities than the downside risks in the long term. We attach a neutral rating to the stock with an upside below 15% of its current trading price recommended to investors with long-term investing horizon.</div>

The company’s throughput data reported a lower growth of 4.6% in 3Q19 (vs 11.8% in 3Q18). Uncle Sam’s effort to tame the dragon seems to be taking a toll on its business. With exception to the PRD (3Q19: +2.2% vs 3Q18: -2.3%) growth deteriorated across the company’s Chinese port belts - Bohai Rim (3Q19: +0.5% vs 3Q18: +22.4%), Yangtze River Delta (3Q19: +3.1% vs 3Q18: +3.3%) and Southeast Coast (3Q19: +0.5% vs 3Q18: +7.1%). Considering the downward growth trajectory, CSP’s strategy of strengthening its overseas port business is appropriately placed.Despite the company’s highly stable core ports business and its relation with the major shipping alliances, the stock is trading near to its multi-year low, alluding to the market’s scepticism about the broader operating environment. With the recently triggered Trump impeachment process, increased protectionism and the upcoming presidential election in 2020, we expect heightened uncertainty to shroud world trade order. Furthermore, China’s own domestic problem (deleveraging, slowing economy and geopolitical issues pertaining to Hong Kong) will only make the matter worse.Cosco Shipping ports is currently in the middle of its five year restructuring programme, initiated in 2016, which aims at higher focus on its overseas business, leveraging higher synergies from its shipping alliances and strengthening control and management of its ports and terminals business. 3Q19 terminal profits more than doubled to 20.9% share of total, confirming the company is linewith its above-stated objectives also substantiated by higher equity throughput from overseas segment (31.9% in 3Q19 vs 20.9% in 3Q16); improved total throughput from all three shipping alliances (83.5% in 3Q19 vs 82.7% in 3Q18); and increased equity throughput from subsidiaries (40.7% in 3Q19 vs 33.8% in 3Q16). However, this has also resulted in higher capex spent, which was primarily sourced from debt and thus translated into increased total debt (USD2.9bn in 3Q19 end vs USD 2.3bn in 3Q18 end). Moving forward, we expect the company to continue with its strategy of leverage expansion for next few quarters before muting its capex spent and shifting its focus towards synergy generation.To sum-up, Cosco Shipping Ports provides a complex mix of a stable business operating in an adverse macro-economic environment. Furthermore, we believe the stock price has already discounted the current issues. After weighting its well-integrated business model and implicit operating support from the broader shipping alliance, we believe it offers higher upside opportunities than the downside risks in the long term. We attach a neutral rating to the stock with an upside below 15% of its current trading price recommended to investors with long-term investing horizon.

Cosco Shipping Ports (HK: 1199): Valuation Dented by Trade War, Expect Moderate Recovery