20130925-高盛-Earnings_revision_momentum_to_turn_positive__upgrade_to_CL-Buy_27页_888kb

China Merchants Holdings (0144.HK) - Buy Rating

Core Content

Goldman Sachs upgrades China Merchants Holdings (CMH) from Neutral to Buy, citing positive earnings revision momentum and upside potential to consensus estimates. The company is expected to benefit from accelerating port volume growth, driven by stronger international trade, easing cost pressures, and increased contributions from overseas port operations. CMH's overseas port earnings contribution is projected to rise from 6.4% in 2013E to 9.5% in 2015E, enhancing its overall performance.

Main Points

• Earnings Revision Momentum: CMH's earnings revision has bottomed and is expected to turn positive, with forecasts of 5%–11% higher earnings growth for 2013–2015E.
• Upward Re-rating Potential: The stock is currently trading below mid-cycle valuation, offering potential for further re-rating.
• Valuation Metrics:
  • The 12-month SOTP-based target price is raised to HK$33.00 from HK$27.20.
  • The stock is currently trading at 14.3x 2014E P/E and 8.9x 2014E EV/EBITDA, below historical averages.
  • CMH's stub valuation is close to historical troughs when excluding SIPG and CIMC.
• Upside Potential:
  • Bull Case: Favorable policies for the Shanghai FTZ and monetization of CMH's Qianhai landbank could yield an implied value of HK$42.5/share, 29% higher than the base case.
  • Additional Upside: HK$6.8/share from FTZ policy benefits and HK$2.7/share from Qianhai land monetization.
• Port Volume Growth:
  • CMH's domestic port throughput growth is expected to accelerate from 6.4% in 2013E to 7.8% in 2014E, with international trade growth increasing from 5% in Q1 2013 to 9% in August 2013.
  • The company's performance is expected to benefit from better external demand, especially from Europe, which accounts for 18% of China's foreign trade.
• Geographical Exposure:
  • CMH's portfolio ports have a more diversified geographical exposure compared to COSCO Pacific, with 25% of shipping lines going to the US and Europe.
  • In Shanghai, the geographical mix is fairly even, with 20% each to the US, Europe, Asia, Japan/Korea, and the rest of the world.
• Operational Improvements:
  • CMH has gained management control of key port assets in West Shenzhen, improving coordination and asset utilization, which should enhance operational efficiency and optimize capacity utilization over time.
  • This change is expected to lead to better fee structures and cross-selling of value-added services.

Key Information

• Current Price: HK$27.80
• 12-Month Price Target: HK$33.00 (19% upside potential)
• Market Cap: HK$69,242.8 million / US$8,930.8 million
• Earnings Growth (2013E–2015E): 5.6% / 20.3% / 14.5%
• EPS (Post-exceptionals): HK$1.53 / HK$1.62 / HK$1.95 / HK$2.23
• Dividend Yield: 2.8% / 2.7% / 3.2% / 3.7%
• ROE: 8.6% / 8.6% / 9.8% / 10.6%
• CROCI: 7.9% / 7.6% / 8.4% / 9.0%

Key Risks

• Weaker-than-expected port volume growth
• Disappointing policies for the Shanghai Free Trade Zone (FTZ)

Investment Profile

• Catalysts:
  1. Accelerating port volume growth from international trade
  2. Potential policy benefits from the Shanghai FTZ
  3. Monetization of Qianhai landbank

Analysts

• Simon Cheung, CFA: +852-2978-6102, simon.cheung@gs.com
• Frank He: +852-2978-7414, frank.he@gs.com
• Janet Lu: +852-2978-1642, janet.lu@gs.com
• Alex Ye: +852-2978-6666, alex.ye@gs.com

Summary

Goldman Sachs has upgraded China Merchants Holdings to a Buy rating due to positive earnings revision momentum and upside potential from improved port throughput and favorable policies. The company is expected to benefit from international trade growth, with overseas port earnings contributions rising significantly. CMH's valuation is attractive, offering upside potential from both policy developments and asset monetization. The stock is currently undervalued relative to historical averages, making it a compelling investment opportunity.