Ports, logistics and finance conglomerate China Merchants Port Holdings announced a massive jump in operating revenues and a rise in profits for the year ended December 31, 2018.
Hong Kong Stock Exchange-listed China Merchants, which operates box and bulk ports primarily in China but also around the world, reported revenues of HK$10.16 billion (US$1.29 billion). That’s a 16.9 percent increase on the previous calendar year’s figure of HK$8.7 billion. The cost of sales increased last year too, by 9.9 percent, to stand at HK$5.77 billion, up from the previous year’s figure of HK$5.3 billion.
China Merchants also recorded profit after tax of HK$8 billion (US$1.02 billion), which was an increase of 18.72 percent on the previous calendar year. A major driver of profit was the company’s share of profits from associates and joint ventures, which stood at HK$4.83 billion (US$615.41 million). However, the profit contribution from associates and joint ventures was down 11.81 percent on the previous calendar year.
Profit boosted by exceptional items
It should be noted, however, that there was also a significant contribution to profit from revenues in the “other income and other gains” accounting line, which included a HK$4.4 billion gain on the disposal of its subsidiary, formerly known as Shenzhen Chiwan Wharf Holdings. That disposal radically altered the profit figures.
In the group profit and loss statement, the group made gross profit (revenues minus the cost of sales) of HK$4.39 billion. It also generated “other income” of HK$3.4 billion, incurred administrative expenses of HK$1.766 billion), incurred net finance costs of HK$1.6 billion and it received HK$4.83 billion from associates and joint ventures. That equates to HK$9.3 billion profit before tax. The group was then slugged by HK$1.3 billion of tax. That gives a net profit of HK$7.96 billion.
But if the exceptional, non-recurring, HK$4.4 billion gain is removed, then the profit levels change. The exceptional item is found inside the “other income” figure of HK$3.4 billion. It’s a non-obvious figure as it is only found deep in the notes to the accounts. It forms part of a calculation that takes into account revenues and decreases in fair market value of assets to result in the “other income” figure of HK$3.4 billion. If the exceptional item is stripped out then the HK$3.4billion “other income” becomes a HK$1.01 billion expense. If we then re-run the calculation (** see below) we can see the effect. Profit before taxation declines from HK$9.3 billion to HK$4.9 billion. Profit after tax of HK$1.3 billion then becomes HK$3.56 billion. Stripping out the exceptional item gives a difference of about HK$4.4 billion (US$510 million) in profit from the reported figure.
The origins of China Merchants’ revenues are particularly interesting because, as will be seen below, the company is suffering a sharp fall in the geographic-core of its sectoral-core businesses. But that decline in the core-of-the-core is being offset by expansion of revenues in geographically peripheral businesses.
The vast majority of the company’s self-generated revenues of HK$9.6 billion (as opposed to revenues from associates and joint ventures), represents 94 percent of revenues. This was generated by terminal handling charges for loading and unloading cargo on and off vessels at the company’s terminals, and from stevedoring and auxiliary services. Revenues from this core business rose by 16.6 percent on the previous calendar year. Another 4.5 percent, HK$459 million, was generated from the provision of services such as warehousing, customs clearance and other ancillary services. There was also HK$150 million generated from investment property rental income.
China Merchants derives just under two-thirds of its self-generated revenue (as opposed to revenues and/or profits received from associates and joint ventures) of HK$6.5 billion from its home markets in China, Hong Kong and Taiwan. Its home markets-generated revenues fell marginally in 2018 compared to 2017. Revenues from the home markets were down by just under 6.1 percent last year compared with the year before. Port operations in the Pearl River Delta (the area around Hong Kong, Macau and Guangdong, which are in the southeast of the country) generated just under HK$4.95 billion. However, in 2017, China Merchants’ Pearl River Delta revenues stood at HK$5.84 billion, which means that the 2018 figures are down by 15.4 percent.
Port operations in all other parts of China together generated HK$969 million. Bonded warehouse operations and other investments in China generated HK$616 million, which together adds up to approximately HK$6.5 billion generated in China.
The other HK$3.6 billion generated in 2018 came from “other locations” and that figure more than doubled compared to the previous year. China Merchants’ “other locations” profit increased by 108.7 percent last year compared to the 2017 figure of HK1.74 billion.
** HK$4.39 billion gross profit + minus HK$1.01 billion “other losses” + minus HK$1.6 billion net finance costs + HK$4.83 billion from associates and joint ventures + minus HK$1.3 billion of tax equals HK$4.90 billion profit before taxation. Subtract the HK$1.30 billion of tax and that gives a net profit of HK$3.56 billion. And that’s a substantial difference: HK$4.4 billion (US$510 million).
NOTE: Readers who run this calculation from these figures may get a different answer as the numbers above have been rounded; the calculation was made using the figures from the corporate accounts which were originally expressed in thousands of millions of HK$.