For the past three years China Merchants Ports Holdings (CM Ports) has been looking for shelter from the storm. Externally, it has been hit by the Sino-US trade war, which has accelerated the shift of supply chains from China to lower-cost neighbours. Domestically, it has also been hurt by government-mandated price cuts to keep logistics costs lower at Chinese ports.
As a result, its Hong Kong-listed shares have been on a prolonged slide, pushing CM Ports out of the benchmark Hang Seng Index in 2018. The shares are currently trading one standard deviation below their 10-year average on a current year price-to-earnings basis.
Financial analysts have been left scratching their heads about whether the share price has hit bottom. But CM Ports itself is forging ahead with an international diversification strategy that’s starting to reap benefits and could provide its shares with a firmer anchor.
Last week, it forged a new agreement that saw France’s CMA CGM inject 10 international ports into an existing joint venture called Terminal Link (the French hold 51% and the Chinese 49%). Analysts calculate that the $955 million deal could lift CM Ports’ overseas earnings to 32% of the total, up from an estimated 27% this financial year.
Prior to the deal, it had a portfolio of 36 ports across 18 countries. These included recent acquisitions such as Brazil’s most profitable port, TCP (CM Ports’ purchased a 90% stake in 2018) and Port of Newcastle in Australia (where it acquired 50%, also in 2018).
Terminal Link previously held just over a third of CM Ports’ total holdings: the majority in France or French-speaking countries like Morocco and Cote D’Ivoire. It will now hold 23.
CMA CGM’s motivations in the deal were to reduce its debt load after its own acquisition of Switzerland’s Ceva Logistics. However, CM Ports has also said that it doesn’t want to increase its own gearing above the 34% level it reported at the end of the first half. So it may raise funds by shedding lower yielding assets, such as ports at Shantou or Zhanjiang. On the flip side, management says it’s looking for equity partners to help boost expansion at some of the fastest-growing ports in the China Merchants portfolio.
Earlier this August, managing director Bai Jingtao told Lloyd’s List that the group wants to forge partnerships with some of its container shipping line clients. Analysts have suggested that two prime candidates for this kind of equity investment are in Sri Lanka: the port in the capital Colombo and another in Hambantota further south.
However, CM Ports has another suitor of sorts for Hambantota: the Sri Lankan government under its new president, Gotabaya Rajapaksa. As we reported in WiC475, one of Rajapaksa’s manifesto pledges was to review the previous government’s handing over of an 85% stake in the port as part of a $1.1 billion debt-for-equity swap. Last week, one of his advisors said that Sri Lanka wants the Chinese to give the port back and let it carry on paying off the original loan.
The Chinese government reacted cautiously, issuing a statement saying that cooperation between the two countries, including the building of the Hambantota port project, was “on the basis of equality and cooperation”. Make of that what you will, but the Chinese added that they are determined to make Hambantota into a major new shipping hub in the Indian Ocean. On that basis it might suit both sides for Sri Lanka to get a bigger equity share, although there’s also the question about how it would pay for it, especially without breaching spending constraints put in place since an IMF bailout in 2016.
CM Ports might also welcome a sale of shares back to Sri Lanka as a way of boosting its war chest, particularly in Southeast Asia where it’s said to be on the lookout for a suitable opportunity (a majority stake that meets a 10% to 12% internal rate of return threshold). Such an investment would fill an obvious gap in the group’s portfolio and continue the reorientation of its business model. International operations are now a new focus for profit, given the company’s forecasts for single-digit volume growth overseas in 2020, compared to flat growth at home.
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