Ask CMHI's Chairman Dr. Fu Yuning and Managing Director David Li what was their greatest success last year, and without hesitation they mention the fast-growing port operator's acquisition of a 30% strategic stake in Shanghai International Port Group (SIPG).
Headed by Chairman Fu Yuning and Managing Director David Li, buying into one of the busiest ports in the world is the culmination of many years of rising growth and profitability. Indeed, in 2004, the company announced record earnings of HK$2.06 billion, a 40% improvement on last year. The company's dynamic management has overseen an impressive 25% CAGR in earnings per share growth since 2001.
The acquisition represents a bright new chapter in CMHI's illustrious 130 year corporate history. China's port operating market is characterized by multiple economic centres emerging in geographically separate areas. By buying in SIPG, CMHI will have completed the roll out of a genuine nationwide network. Crucially, such a nationwide presence will enable the company to leverage its bargaining power in order to provide seamless logistics solutions across China's vast markets. Other synergies will include economies of scale, cost reductions, and the ability to spread rapidly best company practice across numerous different ports.
Traditionally, CMHI has had a powerful base in the South of China. Indeed, the company, which is an offspring of China's Ministry of Communications, started the modern era of port management in China when it started the development of Shekou in southern China in 1979. Early expansion efforts were naturally focused on the southern part of the country, with harbour facilities rapidly established/acquired both in Guangdong and in Hong Kong. In southern China, the company has already emerged as a definite force.
As the final part of its efforts to streamline and modernize its operations, CMHI sold its freighter fleet and restructured its toll road operations in 2004. At the same time, the company continued to execute an aggressive port acquisition master plan in establishing a nationwide ports network.
As a result, CMHI has now made numerous acquisitions in key hub areas all the way down China's economically booming coastline, from Tianjin and Qingdao down through Shanghai and Ningbo, and finishing up in Zhangzhou, Shenzhen and Hong Kong. Particularly in Shenzhen, CMHI was able to achieve a dominant position with a 52% market share in 2004.
All these are hub ports that connect shippers from all over the world with China's dynamic growth areas in the Pearl River Delta, the Yangtze River Delta and the Bohai Economic Rim.
Consequently, CMHI is now universally acknowledged as the top ports operator in the whole of China, connecting all participants along the logistics chain, and ensuring timely processing of customs, inspections services and border controls.
The company has also invested in a market-leading container manufacturing and a specialized marine paints business. The customers for these businesses are the same as those CMHI serves in its ports. These businesses thus provide a mutually reinforcing opportunity to improve customer service.
Interview with Dr Fu
You now have a presence all the way down China's coastline. It would seem that the M&A process has reached its logical conclusion. So what is the focus for 2005? How will you maintain earnings growth?
Dr Fu: This year we are focusing on consolidating our recent assets in such a way as to maximize efficiency. In simple terms, this means accelerating the throughput of the containers in the ports we operate across China in order to increase our earnings. Given that we now have a nationwide network of ports and facilities, we have the basis for numerous synergies; added to that we will be focusing on rolling out the IT networks and human resources to ensure we maximize the benefits of our geographical integration.
Very few mainland companies have achieved the dual investment grade rating (from both Moody's and Standard & Poor's) you managed for your recent $500 million bond to finance your 30% acquisition in SIPG. What is the significance of that?
Dr Fu: Yes, it's unusual, and means we are one of only three mainland companies to achieve this feat. It's symbolic of the transformation the company is going through. Issuing a bond requires a rating and an enormous commitment to transparency and excellent corporate governance. I believe it is a tribute to our performance in this field that we managed to issue a 10-year bond with a coupon 5.375%. Is this level of pricing typical of a red chip? We think not. We urge investors to put away the old perception of CMHI as a traditional red chip holding an un-transparent array of different assets. Over the past few years we have divested ourselves of our fleet of freighters and restructured our toll road operations in order to improve our focus on our core port operating business.
Issuing a bond also reflects our commitment to increasing shareholder value, since balancing our capital structure by issuing debt will generate higher returns on equity for our shareholders.
You have acquired a lot of capacity in the past few years through M&A. That leads to two questions: How simple will it be for you to acquire further capacity? And are you concerned with over-capacity, especially with a possible slowdown in China's economy in 2005?
Dr Fu: Actually, we have a full pipeline of construction projects over the next five years. In Ningbo one berth is set to operate in the first half of this year and another berth in the second half, four berths will commence operation this year in Shekou in Shenzhen, and of course we are now the only oversea player who will have access to the Yangshan project, which is an artificial island port connected to the environs of Shanghai. Our participation in this project is of enormous significance, since the project has the full backing of the Chinese government to become the hub port for the region.
There has been a lot of talk of over-capacity, but we haven't seen much evidence. Ships are still queuing for up to four days outside Shanghai to unload. Although the growth rate has come down, in absolute terms, the volume of containers is still increasing. In any case, while China as a whole might be slowing, regional variations mean that super-growth areas like the Yangtze and Pearl River deltas are sheltered from any downturn. We foresee that demand will outstrip supply all the way to the end of the decade. Indeed, China's Ministry of Communications estimated recently that China trade will result in the need for capacity of 130 million TEUs (20 feet equivalent units) by then. The actual throughput figure stood at just 60 million TEUs for 2004 - so there is plenty of room to grow.
How does the acquisition of SIPG impact your company both strategically and financially?
Dr Fu: Strategically, the acquisition (which we estimate will be approved by the Chinese government in the first half of this year) completes our roll-out of a nationwide port network. You could say it is the missing piece of the jigsaw connecting our northern ports and our southern ports. And the port of Shanghai, at the mouth of the booming Yangtze River delta, is ideally suited to leveraging CMHI's development off the growth of China's economy.
The acquisition of a 30% stake in SIPG will grow our earnings and improve our return on equity. We expect the earnings contribution from SIPG to compose a significant part of our future profits growth.
Strategically speaking, there are some voices suggesting that the future belongs to port operators who also operate freighters. What's your view?
Dr Fu: We don't believe this is a strong trend. We have two major advantages over the freight operators who also operate ports. Firstly, we are independent, so there is no conflict of interest. For a shipping operator who also operates ports there is an obvious conflict of interest, since the port operators' revenues are the shipping operators' costs. If you look at why we were chosen as the right partner for SIPG, it's because we saw eye-to-eye about the positive benefits of being a pure port operator.
If you look at the way shipping companies invest in ports, it's also quite different to us. Shipping companies will take a small exposure, primarily in order to generate port capacity for themselves. It is certainly not their core business. In contrast, we are 100% committed to operating ports: It's the heart of what we do. We are very happy being a pure port operator and feel it's the appropriate model to generate maximum returns for our shareholders. We face the future with confidence.
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