Hutchison Port Holdings Trust
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(Extracted From Annual Report 2017)

In 2017, improving global economic conditions, especially in the US and Europe, supported growth in throughput volumes around the world. However, excess capacity in the container shipping industry continued to keep freight rates under pressure, necessitating cost cutting measures and restructuring amongst shipping lines, mainly in the reformation of alliances and mergers and acquisitions.

CO-MANAGEMENT IN HONG KONG ENHANCES OPERATIONAL EFFICIENCY

Starting 1 January 2017, HPH Trust's Hong Kong ports rolled out the co-management arrangement of the five container terminals in Kwai Tsing, streamlining operations and delivering additional operational efficiency. Pursuant to the arrangement, one management team will be responsible for managing and operating the terminals at HIT, COSCO-HIT and ACT. Revenue and expenses from these terminals will be allocated among the parties according to the respective designed capacity of the facilities.

In order to facilitate a more meaningful comparison of the percentage variances on certain key operating results post co-management in 2017 against the pre co-management results of 2016, certain 2016 key operating profit and loss lines have been internally re-stated to include 100% of the these terminals to derive a restated percentage variance. For the purposes of the Financial Review, all key operating results percentage variances mentioned will be in reference to the restated percentage variances as shown in the table below:

STRONG THROUGHPUT AND IMPROVING OPERATING EFFICIENCY SOFTEN IMPACT OF LOWER TARIFFS

While HPH Trust's ports benefitted from the pickup in global economic activity, average revenue per TEU was below that of 2016 mainly due to the greater volume of concessions offered to certain shipping lines and revisions on tariffs following the mergers and acquisitions amongst existing customers.

In 2017, HPH Trust recorded a 7.9% growth in throughput to 24.3 million TEU. Supported by the growth of outbound cargoes to the US and Europe, as well as empty and transshipment cargoes, YANTIAN's throughput rose 8.6% to 12.7 million TEU. At the same time, our terminals at Kwai Tsing in Hong Kong handled a combined container throughput of 11.4 million TEU, an increase of 5.1% due largely to higher transshipment cargoes and additional throughput from a new customer.

HPH Trust's revenue and other income came in at HK$11,551.0 million in 2017, 1% higher than last year. However, cost of services rendered was HK$4,131.6 million, 4% higher than last year mainly attributed to higher throughput handled and general cost inflations, including rises in external contractors' costs. This increase, however, was partially offset by the cost-synergies arising from the improved efficiency in resource allocation from the co-management arrangement. As a result, operating profit was down by 4%.

NPAT in 2017 was HK$2,217.5 million, a 15%2 drop from 2016. NPAT attributable to unitholders was HK$944.2 million, down 30%2 from 2016 reflecting both lower operating profit, the higher general interest rates and the effective share of HICT losses while it ramped up its operations following its acquisition by YANTIAN at the end of 2016.

PROACTIVE CAPITAL MANAGEMENT AND SOUND BALANCE SHEET SUPPORT SUSTAINABLE GROWTH

It is HPH Trust's ongoing strategy to optimise its financing and capital structure. At the end of December 2017, total borrowings declined to HK$32,699.5 million, down from HK$33,641.6 million a year ago, in line with our strategy to reduce overall indebtedness.

The balance sheet of HPH Trust remained sound with a cash balance of HK$6,768.1 million and net debt of HK$25,931.4 million at the end of December 2017. The decline in 2017 cash balance is largely attributed to the cash consideration of HK$672.8 million paid in 2017 for the acquisition of 41.3% effective interest in HICT in December 2016 which were partially offset by the reduction in capital expenditure mainly resulting from the near completion of the West Port Phase II project in YANTIAN at the end of 2017.

HPH Trust has recommended a total payout of HK$1,794.5 million for 2017, which translates to a DPU of 20.6 HK cents. Based on the US$0.415 market price as at 29 December 2017, the distribution yield approximates 6.4%.

Supported by our proactive capital management efforts and sound balance sheet, the Trust is in a good position to continue building a long term sustainable business.

OUTLOOK FOR 2018

Although the momentum over the improvement in world economic activity as seen last year is expected to continue into 2018 but this, by and large, is still susceptible to the uncertainties and downside risks arising from geopolitical tensions and regulatory reforms which may impact on the overall rate of growth. Furthermore, major liners have announced plans to continue to invest and build more mega-vessels of up to 22,000 TEU and 2018 is set to see some of these new mega-vessels being put into operations. This potential excess capacity will likely put pressure on freight rates, and as a result, keep port tariffs in check.

Against this backdrop, the Trust remains vigilant but confident that our pro-active efforts to make the most of our modern facilities and equipment, skilled manpower resources, strategic locations and efficient mega-vessel handling capabilities can enable us to advance in this new era for the liner shipping industry.

1Net other operating expenses are defined, for the purposes of this table, as staff costs, depreciation and amortisation, other operating income and other operating expenses, excluding the one-off government rent and rates refund of HK$430 million received in 2016.
2In the first quarter of 2016, HPH Trust received government rent and rates refund of HK$430 million. This one-off refund has been excluded from the operating profit and NPAT calculations for comparative purposes.