20130925-高盛-China_Merchants_Holdings__0144.HK_Earnings_revision_momentum_to_turn_positive__upgrade_to_CL-Buy_27页_879kb

Summary of China Merchants Holdings (CMH) Investment Report

Core Content

China Merchants Holdings (CMH) has been upgraded from Neutral to Buy, with the addition to the Conviction List. The upgrade is based on the expectation of positive earnings revision momentum and upside potential to Bloomberg consensus estimates for the first time in three years. The key drivers for this positive outlook include accelerating port volume growth, especially in international trade, easing cost pressures, and increased earnings contribution from overseas ports.

Main Points

• Earnings Revision: CMH's earnings revision has bottomed and is expected to improve. The company's earnings are forecasted to grow by 5-11% for 2013-15E, with a 19% upside potential to the current share price.
• Valuation: The stock is currently trading at a discount to its mid-cycle valuation. The 12-month SOTP-based target price has been revised up to HK$33.00 from HK$27.20, representing a 19% increase. The P/E ratio for 2014E is at 14.3x, below the historical average of 16.8x.
• Port Volume Growth: China container port throughput is expected to grow at 6.4% in 2013E and 7.8% in 2014E, driven by stronger international trade growth. CMH's domestic port volume growth improved to 7.9% in August 2013, compared to 5.7% in 1H13.
• 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/Europe (vs. 14% for COSCO Pacific), and 50% to Asia. This diversification enhances its exposure to international trade.
• Shanghai FTZ and Qianhai Landbank: The Shanghai Free Trade Zone (FTZ) and the monetization of CMH's Qianhai landbank are viewed as potential catalysts. Favorable policies for the FTZ could improve port operations, while monetization of the landbank could add value, potentially contributing up to HK$9.5/share.
• Management Control: CMH has assumed management control of key port assets in West Shenzhen, which should improve coordination, asset utilization, and operational efficiency, leading to better financial performance over time.
• Investment Profile: CMH is expected to benefit from the improved macroeconomic outlook in developed markets, with the ECS team forecasting 3.6% global GDP growth in 2014, which should underpin better external demand for China's ports.

Key Information

• Current Price: HK$27.80
• 12-Month Price Target: HK$33.00 (up 19%)
• Market Cap: HK$69,242.8 million (US$8,930.8 million)
• EPS (Post-exceptionals):
  • 2013E: HK$1.53
  • 2014E: HK$1.62
  • 2015E: HK$1.95
• Earnings Growth:
  • 2013E: 5.6%
  • 2014E: 20.3%
  • 2015E: 14.5%
• Valuation Metrics:
  • P/E (2014E): 14.3x
  • EV/EBITDA (2014E): 8.9x
• Dividend Yield: 3.7% for 2015E
• ROE (Return on Equity): Expected to rise from 8.6% to 10.6% by 2015E
• CROCI (Core Return on Capital Invested): Expected to rise from 7.9% to 9.0% by 2015E

Key Risks

• Weaker-than-expected port volume growth
• Disappointing policy outcomes for the Shanghai FTZ

Investment List

• Asia Pacific Buy List
• Asia Pacific Conviction Buy List

Analyst Contributors

• Simon Cheung, CFA: simon.cheung@gs.com
• Alex Ye: alex.ye@gs.com
• Frank He: frank.he@gs.com
• Janet Lu: janet.lu@gs.com

Conclusion

CMH is positioned to benefit from improving international trade and the monetization of its overseas land assets. With a more favorable earnings outlook and undervaluation relative to historical averages, the company presents an attractive investment opportunity, supported by potential policy benefits and enhanced operational efficiency.