China Loses Growth
Premium (New Angles to Consider)
- China‟s container port (manufactured goods) growth shrinking
- Growth premium has been shrinking since 2008-09
- This coincided with rising wages and the financial crisis
- Growth premium in the last 2 years was 4 ppt (9 ppt 2008-09)
- In 2012, the growth premium might be as low as 2 ppt
- Most impressive port growth in 2010-11 was Tanjung Priok (23%)
- China‟s leading ports know they have to shift more to logistics.
Defensive can be a
bad word but not for us; with ports making 30%. Issues?
To some, “defensive” can be a bad word. But we care more
about absolute performance than abstracts. We have been “equalweight shipping”
from the
time we put out the first reports
in this series in mid-2011 because there
are so many subsectors, and many listed companies remain compromised. Our #1
choice is to buy underlying vessel assets for certain vessel types, and not so
much to encourage investors to buy shipping shares without considering legacy
issues such over-priced vessel purchases, poor timing on business scale-up or
legacy debt financing still unresolved. Certain tankers may be good investments
at the bottom, but BLT may not have been the best investment choice. Having
said this, individually, certain well-managed container, tanker or bulk
shipping companies may be worth looking at more closely now (which is why we
were not negative either in mid-2011).
When we started our shipping sector updates in September
2011, we highlighted a penchant for ports and our general interest there. What
we found to begin with was that HPH, though initially over-priced during its
IPO, presented some value in 2H11, which
Jason Saw flagged in his BUY reports in 4Q11. More recently, on 13 March 2012,
Stenning Ho made an investment case for COSCO Pacific shares.
Conservatively, at
the macro level, the investment picture has been:
1) Ports can be seen in a portfolio perspective made up
mostly of med-cap names, with small caps in smaller proportion
2) The larger cap ports have been making good money since
the 4Q11 lows, generally 30+% up to about 50%
3) Dividend yields annualized on these choices are 5+ % from
time of investment.
Going forward we need
to consider:
1) What are forward drivers of global growth?
2) What is Asia’s and China’s role in the global growth
picture?
3) What multiple expansion/contractions lie ahead? (will the
market break out further?)
4) What equity premium/discount should ports get in a
falling/rising market?
5) What are new growth avenues for key players?
We can answer or have views on global growth drivers and
company specific issues, but we can’t call the market, with the general
exception that directionality has been that we have been in an upward re-rating
phase, benefitting from stimulative growth policies and over-priced bonds and
cash with low/no yield. So at a minimum, our no-brainer strategy last year was
that although “defensive” might not offer high risk, high upside for a recovery
(which no one really wanted to call in Aug-Sept, though they got around to
becoming more bullish by Dec 2011, and then again head-on bullish in 1Q11), at
least we had a low risk path to decent returns in ports.
2012
driver/expectations (answers to questions above) in simple form:
1) Global growth remains subdued in terms of containerized
demand. The US is better while Europe is a little more mixed. No real change to
previous view. 2012 growth could be
4-7%. Initial post Chinese New Year data if using only Jan-Feb is distorted. China
exports were weaker than expected while imports were stronger than expected (especially in weak dollar/high
commodity price terms). Since China exports is what we care about for
containers, our 4-7% view still stands. BUT we also expect China’s March 2012
data to be a little better than Jan-Feb. Shanghai at about +3.5% Jan-Feb says
virtually nothing. If March is not better, then we will be more worried. China
Ports continue see softer growth on an aggregated level. The big ports are not
growing as fast, and the fast growing ports such as Lianyungang are not big
enough to pull up the average that much. In 2011, China’s core ports grew about
9% and the China total was about +12%. Global port TEUs (still an estimate), on
the other hand, grew closer to 8-9%, while the Top 25 ports grew +8.6% in 2011.
China’s premium was 3-4ppt. In 2012, this spread could be a little closer to 2
ppts. Investors have realized this for a little while, especially given that we
are now in Year 3 of writing about: i) higher wages for factory workers, ii)
migration inland and iii) general disaffection of the Chinese workforce, as
seen through protests and refusals to return post CNY holidays. Growth has
slowed. Container terminal export growth
drivers have come down to global growth levels at a time when China makes up
28% of global container trade (Greater China 34% of global container trade).
2) We can‟t predict the future, but we can see that some of
the larger port companies are competing with conglomerates and property in
general for investors‟ attention. But
since the message is China property is not looking as good, some have looked to
ports again. If there were to be a re-rating of property with an overall market
rally, then this could hurt some ports on a relative basis at the time…
3) “Plastics” was the famous line in the 1967 film, “The
Graduate’’. For us it is Logistics. But to be more specific, we have been on
for some time about inland logistics in China. Port players have an opportunity
to growth inland. They know it and are working on it. Long term returns on
logistics, given the lower asset bases, can be higher than those from the asset
intensive businesses. But what is key is probably a mix and core investments in
networks, which can be intangible. With about 18% of China‟s GDP coming from
logistics, there is room i) for China to shrink the overall cost of transport
as a percent of the cost to get China moving, and ii) for first movers to add value by
increasing efficiency and reducing inland transport costs. Given that China’s
18% spend on logistics is some 2x higher than Japan, Europe and the US, China
should be handing out prizes to companies which come up with the best transport
solutions (let’s set aside the recent setbacks in Chongqing as a blip in one of the inland success stories). Leading
ports need to provide new growth stories to bring new trading levels, absent
global growth going to 10%.
Source: OSK188
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