Cashing out?
Is Hutchison's IPO for its South China assets a sign port facilities in saturated markets have reached maturity?
By Eric Johnson
Hutchison Port Holdings made waves in February when it announced it was rolling some of its foundational terminal assets into a public trust to be listed on the Singapore Stock Exchange.
HPH, a privately owned subsidiary of the Hong Kong-based conglomerate Hutchison Whampoa, is the world's biggest container terminal operator when measured by equity-adjusted throughput.
In mid-March the company formally rolled out its financial vehicle, called HPH Trust, in an initial public offering aimed at garnering nearly $6 billion through the sale of shares. The trust's portfolio incorporates HPH's big ticket container terminals in South China ' HIT terminal in Hong Kong; its Yantian terminal complex in Shenzhen; its 50 percent stake in another terminal in Hong Kong; and three smaller, less developed ports in the Pearl River Delta.
The IPO was notable on a financial level ' it was estimated to be the biggest IPO worldwide thus far in 2011, and the biggest ever on the Singapore Stock Exchange.
But from a ports and shipping perspective, the IPO could well be a symbol of a less optimistic trend. It's possible Hutchison sees little scope for the extravagant growth its terminals in South China witnessed in the past decade and wants to benefit financially from its considerable assets there.
As Jonathan Beard, managing director of port consulting firm GHK (Hong Kong), recently told the business magazine The Edge Singapore and reiterated to American Shipper, HPH's best years for growth are probably in the past.
So the question is whether the terminal operating industry in saturated markets like South China can be considered a mature market whose returns will slowly diminish. Is Hutchison's share sale of its South China assets a sign those assets have reached their peak in terms of value?
In its prospectus for the trust, Hutchison said Yantian is still growing. It can be massively expanded, with three additional berths due to open in 2015, and another phase of the complex ' called East Port, comprising an additional nine berths ' to be built on reclaimed land if demand requires it. The issue is whether there is, indeed, enough demand.
'That is equivalent to buying four or five ports, so there is plenty of organic expansion for the trust,' Iver Chow, chief financial officer of HPH Trust, told The Edge Singapore.
But Beard estimates there are 10 million to 15 million TEUs of container terminal overcapacity in the Pearl River Delta. Though the assets in the HPH Trust (HIT in Hong Kong and YICT in Shenzhen) are the two single-biggest deepwater terminals in the Pearl River Delta, they have lower utilization rates than Nansha, Chiwan and China Merchants' Hong Kong terminal.
Nansha is a particular threat, as it taps into areas of cargo generation ' the western Pearl River Delta ' that Yantian isn't really designed to attract. Beard also said Nansha is aggressively luring cargo from around the region by undercutting Shenzhen terminals on price.
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One more sign: Last year APM Terminals, A.P. Moller – Maersk Group's terminal operating arm, sold a roughly 10 percent stake in the HPH-operated Yantian terminal complex, a move it said was aimed at redirecting resources to assets in emerging markets with higher growth potential. And APMT maintains a 20 percent share of one of the two terminals in Nansha.
Taken broadly, APMT's sale of its Yantian stake and HPH's attempt to sell up to 75 percent of its share seem to favor the theory that Yantian, while still growing, is a mature asset.
Jason Chiang, a senior consultant with Drewry in Singapore, characterized the IPO as a cashing out of assets. Drewry, incidentally, was a market research consultant for the HPH Trust.
Chiang said proceeds from the trust, after the yield is distributed to investors, will likely go to the parent company, Hutchison Whampoa. The prospectus said yield to investors is planned to be 5.5 percent to 6.5 percent for 2011, and 6.1 percent to 7.2 percent for 2012.
'The business trust has enough cash flow, so it will not need this money,' he said.
The prospectus indicates HPH Trust will use proceeds to acquire more port assets being developed by Hutchison Port Holdings.
'HPH Trust's investment mandate is principally to invest in, develop, operate and manage deepwater container ports in the Pearl River Delta,' the prospectus said. 'HPH Trust may also invest in other types of port assets, including river ports, which are complementary to the deepwater container ports operated by HPH Trust, as well as undertake certain port ancillary services including, but not limited to, trucking, feedering, freight forwarding, supply chain management, warehousing and distribution services.'
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That narrow geographical mandate specifies the trust can only invest in deepwater container ports in Hong Kong and Guangdong province and not in HPH's considerable portfolio of ports globally. The 2015 Yantian expansion is said to be prefunded and outside the scope of the trust, so proceeds wouldn't ostensibly be directed there. Considering that there is a surfeit of terminal capacity in the Pearl River Delta already, it's hard to picture where the trust might invest, which lends credence to Chiang's belief that profits from the trust will be routed back to Hutchison Whampoa.
The three smaller ports rolled into the trust ' in Zhuhai, Nanhai, and Jiangmen ' are all in the western Pearl River Delta, but none have the scope to become true deepwater hubs anywhere close to the size of Shenzhen, Hong Kong or even Nansha.
HPH operates a long list of terminals globally (308 berths in 51 ports in 25 countries) but chose to only segment out the South China assets. Asked why they chose the terminals they did for the trust, Chiang said HPH likely considered it a good mix.
'Hong Kong isn't likely to grow anymore ' the prospects for growth won't be that good ' but Yantian is still viewed as up-and-coming,' he said. 'Hong Kong is not growing much, but tariffs are high there, among the highest in the world. It balances out the whole mix and make it look attractive.'
HPH was attracted to Singapore as the place to launch the trust because of financial laws that allow the trust to be spun off entirely from the parent company, as well as lower tax rates.
'In Hong Kong, there would still be some sort of link to the parent company,' Chiang said.
Yet the IPO didn't go as swimmingly as HPH would have hoped for. The share price fell nearly 7 percent on its debut listing, though analysts chalked that up more to jittery market sentiment after the Japanese earthquake and tsunami and less to the fundamentals of the port trust.
'It will eventually rebound as Hutchison Port generates solid cash flow,' Ng Soo Nam, a Singapore-based chief investment officer at Nikko Asset Management Co., told Bloomberg right after the trust's IPO.
HPH relied on cornerstone investors, including Capital Research & Management Co., Paulson & Co. and Singapore's Temasek Holdings, to invest $1.6 billion in the trust. Temasek is the state-owned Singapore sovereign wealth fund that owns HPH rival PSA International, and also maintains a 20 percent stake in HPH, which it acquired in 2006 for roughly $4.4 billion.
Hutchison itself has so far bought the majority of the shares to keep the share price up, according to analysts. It owned roughly 87 percent of shares as of late March. That would have only netted the trust about $1.3 billion, not the $5.8 billion it was seeking when it settled on an opening price in mid-March.
And it raises another question: Was listing the best way for Hutchison to maximize the value of its assets? Other operators have sold off terminal assets and fetched huge returns. Are those who cashed out their assets before the economic downturn ' when sales were based on sky-high and probably unrealistic price-earnings ratios ' in better shape than those who held on?
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| Yantian's International Container Terminal. |
In 2006, Hong Kong-based liner carrier group OOIL, parent of OOCL, sold off most of its terminal assets in North America for $2.4 billion, a move questioned at the time since the container shipping industry was in the midst of unbridled growth. OOCL and its relationship to its former terminal division can be compared, on a much smaller scale, to Maersk Line and its sister organization, APMT. OOCL is a fraction the size of Maersk, and its terminal assets were a fraction of those of APMT's, but controlling those terminals gave OOCL a guarantee of space in key North American gateways. OOCL decided, however, that the assets were overvalued, and that space in North American terminal could somehow be procured. Their gamble paid off when the container shipping industry sunk like a stone two years later.
APMT's cashing out of its share in Yantian could be seen in a similar light. APMT has long been the odd man out in the cadre of large global terminal operators. Analysts still viewed it as a company that supports the activities of its sister company, Maersk Line, more than one that seeks simple terminal operating profitability above all else. This despite the fact APMT continually says it strives for a higher percentage of non-Maersk Line business through its terminals.
However on views APMT's overarching goals, it is clear the company will always have dual purposes as long as it resides under the same umbrella as the world's largest container line.
But operators like Hutchison, PSA, and Dubai-based DP World operate in no such abstract environments. Their role is to maximize profits through one source of business ' operating terminals. And if an asset of Hutchison's is maturing and providing diminishing returns, it can't serve another purpose, like ensuring capacity for a sister container line.
Chiang said it thought it unlikely that HPH rivals PSA or DP World would follow suit.
'PSA need not worry, they are cash rich,' he said. 'DP world is in bad shape, but restructuring. There's not much they can do. APMT came off a difficult year, but they use their terminals to subsidize their liner business, so there's no pressure to do something similar. They'll all continue with what they have been doing.'
And Chiang added that IPOs are a more expensive way to raise cash than other vehicles, like issuing bonds.
In truth, the ball was probably set rolling in the mid-2000s, when DP World bought the terminal assets of CSX and P&O Ports for a combined $8 billion. In 2007, American Shipper reported that terminals were being sold at 20 times earnings before interest, taxes, depreciation and amortization, whereas shipping companies commonly sell at five to 10 times EBITDA.
Some sales even reached a level of 30 times EBITDA, but that ship has clearly sailed, as sources of funding have dried up. Short-term investors lured by consistent double-digit percentage growth in container shipping were soured by the recession. Long-term investors don't like the volatility and often moribund rates of return from the industry.
That leaves operators who want value for their assets to turn to ports groups looking for greater market share or to shipping lines that want strategic investment in certain ports. Or they can turn to a public market that is skittish about investing at all.
In short, the audience for such assets has thinned.