Hong Kong-based port operator COSCO Shipping Ports (HKEX: 1199) has announced mixed results for the third quarter of 2019. Revenues were flat and profits were down. But box volumes rose. And analysts are bullish on the stock.
Financials: revenues, costs and profits … and accounting policies
For the three months ending Sept. 30, COSCO Shipping Ports (CSP) reported US$254.7 million of revenues and a net profit of US$71.8 million. Revenues generated in the third quarter of this year were essentially flat, having grown by 0.7% from the US$253 million earned in the third quarter of 2018. Equities analyst Kelvin Lau of the Hong Kong arm of Daiwa Capital Markets ascribed the flat result to currency depreciation and “poor performance in Guangzhou Nansha and CSP Spain.”
Meanwhile, the cost of sales increased by about 6.1%, and that translated into an increase in costs from US$177.2 million in the third quarter of 2018 to US$188.1 million in the third quarter of this year, a US$10.9 million increase. That took a bite out of gross profits, which fell by 12% from US$75.8 million the third quarter of 2018 to US$66.6 million in the three months to the end of September 2019.
After accounting for other income and expenses, such as administrative expenses and shares of profit from associate entities, COSCO Shipping Ports ultimately concluded the quarter with a profit attributable to equity holders of the company of US$71.81 million. That’s a 4.4% decline from the third quarter of 2018.
Lau was nonetheless bullish on the stock. He noted that the IFRS 16 accounting policy was changed in January 2019. IFRS 16 governs how companies report the effect of lease transactions. In summary, it requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months. Lau pointed to the impact of the policy, which, if excluded from the nine-month figures, would have meant a 5.4% year-on-year increase in CSP’s nine-month net profit.
Lau also pointed out that if the effect of the IFRS 16 accounting policy change were excluded from the third quarter of 2019 (a US$9.13 million change), then adjusted net profit would not have declined but instead would have grown 7.8%.
CSP’s third-quarter container throughput was boosted by 5.2% year on year to just over 32.41 million containers, as measured in twenty-foot equivalent units (TEUs). Volumes from CSP subsidiaries in which CSP had a controlling stake increased by 13.1% to just over 6.57 million TEUs and accounted for 20.3% of CSP’s total throughput. Meanwhile, throughput from terminals in which the group does not have a controlling stake rose by 3.4% year on year to 25.84 million TEUs.
Throughout the Greater China region, in the three months through the end of September 2019, CSP’s box throughput increased by 3.2% to 25.21 million. In the Bohai Rim area, CSP’s volumes increased by 4.4% to just over 10.63 million TEUs. The group added that there had been some diversion of volumes away from Dalian Container Terminal, by about 16.3%, owing to recent port consolidation in China.
In the Yangtze River Delta area, box throughput rose by 3.1% to just under 5.29 million. Meanwhile, box volumes rose by 4.5% year on year to 1.45 million in the southeast coast area and by 1.1% to just over 7.4 million TEUs in the Pearl River Delta region. CSP attributed the volume growth in the southeast and the Pearl River Delta regions to support from container shipping alliances.
In the future
Commenting on the near-term outlook, CSP said it will continue to work with the OCEAN alliance and its parent company, COSCO, and that it will “seize opportunities to cooperate with major shipping companies and ports to keep boosting throughput.” It added that it will “remain committed” to building a global terminal network and that it is looking to acquire overseas terminals “so as to provide more efficient and comprehensive services to meet the needs of the shipping alliances.”
The company added, however, that it is “committed to optimizing” asset return. So, in addition to the agreements to dispose of its interests in Nanjing Port Longtan Container Co., Yangzhou Yuanyang International Ports Co. and Zhangjiagang Win Hanverky Container Terminal, CSP said it intends to divest itself of indirect interests in Taicang International Container Terminal and Jiangsu Petrochemical.
“The profit and throughput contribution of these five terminals are comparatively small. The disposal of interest in various port assets is our response to industrial development and changes in the region,” the company said in a statement.
Lau reaffirmed that Daiwa Capital Market’s recommendation is to buy, adding, “We see an earnings recovery beyond 2020E without the negative impact from IFRS 16 and that a potential deal between China and the US could be another catalyst on top of [CSP’s] strong fundamentals.”