China Ports:Outlook Remains Lackluster,Relatively Prefer Container Port

Outlook remains lackluster in 2H16 & 2017 — Amid the current macroenvironment, China’s exports and FAI growth are expected to further slow in 2016and 2017, putting pressure on both container and dry bulk demand (for details, seeour 2H shipping outlook). As a result, we expect the overall port sector to remainquite muted. Within the sector, on a relative basis we prefer Cosco Pacificcontainer port operator) given cheap valuation of 0.7x 2016E PB and dividend yieldof 4.0%; we maintain Buy and trim TP 10%. We downgrade QHD Port (dry bulkport) to Neutral from Buy (and cut TP 31%) given continuously deterioratingdemand, increasing competition from other railway lines, and its declining volumeand tariff trends. We maintain Buy on China Merchants (container port operator) butlower TP 17% to reflect likely limited earnings growth in the coming years.

    Container port: both volume and ASP trend to remain muted — Given thecontinuous weakness in EU/US demand, China’s exports are expected to furtherdrop by 2.7% in 2016E. We expect container throughput volume in China’s majorports to record only low to mid-single-digit growth in 2016E. ASP is expected toremain flattish for most ports as liners are struggling for profitability. Overall, weexpect earnings growth to be very limited for container ports, especially with thecost inflation pressure, e.g. rising labor costs, etc.

    Dry bulk port: volume and ASP to continue downward trend in 2H16E — Drybulk demand has been in a much more severe situation compared to containers.

    With the slowdown of the domestic economy, iron ore imports growth has slowed toonly 5.9% in 4M16, while coal consumption is expected to decline by 3.4% in2016E. This, combined with overcapacity in Northern China, has driven down thehandling tariff for dry bulk cargoes. In addition, the opening of the Mengji andShuohuang lines (to public use) has caused significant diversions for the existingmajor coal ports. Overall, we expect volume and ASP trends to further decline in2H16E and 2017E, as should port operators’ core earnings.

    Key risks — Major upside risks include better-than-expected export growth andbetter-than-expected steel production or domestic coal consumption.