Upgrade to Buy from Hold: Earnings expectations reset

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com   The stock has underperformed the local index since 1Q16 results as consensus cut its overly optimistic forecasts  We believe ROE is set to rebound from a low base, synergies from recent acquisitions and upcoming alliances reshuffle  Upgrade to Buy from Hold; 2016-18e profits up by 2-17%; raise TP to HKD9.7 (from HKD8.2) on higher earnings and multiple Stock underperformed on consensus downgrades. CS Ports’ share price is down 12% vs a 9% rise in the Hang Seng Index since 1Q16 results announcement (27 April 2016). We attribute this to the weak results and subsequent consensus earnings downgrade. Consensus earnings expectation for CS Ports is now reset to a lower level following a 23% decline in consensus 2016e profit estimates since its 1Q16 results. Low base, strong performance from top 7 profitable ports to drive sequential improvement in 2He: We expect CS Ports’ throughput growth to improve to 9% y-o-y in 2H16 due to a low base (vs 4% in 1H16). Indeed, in August 2016, effective throughput of its top 7 profitable ports (c75% of 1H16 terminal profits) grew 7% y-o-y vs 4% y-t-d. Synergy from recent acquisitions, parent group support, alliances reshuffle could drive higher ROE from 2017e: Synergies from CS Ports’ acquisition of CSPD terminals (unlisted) in 1Q16 are yet to be fully reflected. The company now has overlapping interests in certain terminals and owns multiple terminals within the same port. CS Ports could benefit not only from a higher market share but also could potentially integrate and improve the efficiencies in these terminals. CS Ports also seems well positioned to benefit from a bigger parent (China COSCO (1919 HK, Reduce, HKD2.89), which is now the fourth biggest shipping line globally following its acquisition of CSCL’s (2866 HK, Reduce, HKD1.83) shipping network in 1Q16. China COSCO is also part of the proposed new bigger alliance ‘Ocean”. Based on our discussion with industry participants, we argue that major shipping lines and alliances will drive volumes to associate ports in an effort to lower overall costs. Both these developments could result in higher traffic to CS Ports’ terminals, especially its hub ports in Piraeus, Hong Kong and Singapore. ROE to rise above 6% in 2018e from below 5% in 1H16: We lift our 2016e profit by 2% and 2017-18e profits by 9-17%. Our profit increase is steeper in 2017-18e driven by the potential benefits from a bigger shipping network and alliance of its parent. We are now in line with consensus in 2016-17e on recurring earnings estimates and slightly higher in 2018e reflecting impact of restructuring and new alliances. Upgrade to Buy (from Hold) with higher TP of HKD9.7 (from HKD8.2) on higher earnings and multiple. Our revised forecasts imply CS Ports’ ROE could improve to 6.2% in 2018e (from 5.4% previously) and the overhang of consensus downgrades is also behind us now. Therefore we value CS Ports at 0.8x 2017e PB multiple (vs 0.7x previously). This compares with CM Port’s (144 HK, Reduce, HKD21.8) 0.8x 2017e PB valuation for a similar ROE. We prefer CS Ports to CM Port. 19 September 2016 UPGRADE TO BUY TARGET PRICE (HKD) PREVIOUS TARGET (HKD) 9.70 8.20 SHARE PRICE (HKD) UPSIDE/DOWNSIDE 7.97 +21.7% (as of 15 Sep 2016) MARKET DATA Market cap (HKDm) 23,668 Free float 54% Market cap (USDm) 3,051 BBG 1199 HK 3m ADTV (USDm) 3 RIC 1199.HK FINANCIALS AND RATIOS (USD) Year to 12/2015a 12/2016e 12/2017e 12/2018e HSBC EPS 0.11 0.08 0.09 0.10 HSBC EPS (prev) - 0.08 0.08 0.08 Change (%) - 2.0 9.2 17.3 Consensus EPS 0.10 0.09 0.09 0.10 PE (x) 9.6 12.6 11.6 10.5 Dividend yield (%) 5.1 14.1 3.5 3.8 EV/EBITDA (x) 7.5 9.3 8.6 7.7 ROE (%) 6.5 5.4 5.8 6.2 52-WEEK PRICE (HKD) Source: Thomson Reuters IBES, HSBC estimates Parash Jain* Head of Transport Research, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited parashjain@hsbc.com.hk +852 2996 6717 Jack Xu* Analyst The Hongkong and Shanghai Banking Corporation Limited jack.y.xu@hsbc.com.hk +852 2996 6566 Deepak Maurya* Associate Bangalore * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Cosco Shipping Ports Ltd (1199 HK) EQUITIES MARINE China 6.9 08.9 511 .00Sep 15Ma r 1 6Sep 16Targ et price: 9.7 0High : 9.3 6 Lo w: 7 .23 Curre nt: 7 .97Upgrade to Buy from Hold: Earnings expectations reset  EQUITIES  MARINE 19 September 2016 2 Financial statements Year to 12/2015a 12/2016e 12/2017e 12/2018e Profit & loss summary (USDm) Revenue 798 566 591 631 EBITDA 433 243 268 294 Depreciation & amortisation -210 -95 -98 -101 Operating profit/EBIT 223 149 170 192 Net interest -43 -37