Hutchison Port Holdings Trust
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(Extracted From Annual Report 2016)

PORTFOLIO EXPANSION STRENGTHENS THE TRUST IN THE FACE OF OVERALL THROUGHPUT DROP

2016 was a volatile year for the shipping industry. Continuing subdued trade levels and overcapacity resulted in low freight rates, which may have ultimately led to the bankruptcy of one shipping line, while major players merged and formed new alliances for better economies of scale. Throughput was down and tariffs were under constant pressure as shipping lines tried to reduce their operating costs. Despite this, the Trust was resilient and worked diligently on streamlining its operations, recording a mild 3.0% drop in operating profit compared with 2015, to HK$4.2 billion.

HPH Trust's Hong Kong and Yantian ports both recorded a decrease in transshipment volumes as a result of the service rationalisation of various global shipping lines. This contributed to the overall volume decline in throughput at both locations, with HPH Trust's Hong Kong ports also impacted by a drop in intra-Asia trade.

NPAT for the full year 2016 was HK$3.0 billion, a 3.0% drop from 2015. NPAT attributable to unitholders was HK$1.7 billion, down 1.8% from 2015.

On 19 December 2016, HIT, COSCO-HIT, and ACT entered into an agreement for the co-management and operation of the 16 berths across Terminals 4, 6, 7, 8 and 9 in Hong Kong. With operations handled under one management team, the Trustee-Manager believes that this arrangement will allow the most efficient use of facilities and deployment of resources, improving overall competitiveness.

In late December, Yantian acquired interests in HICT and HPH Trust now owns an effective interest of 41.3% in the terminal. The Trustee-Manager believes the acquisition will provide additional handling capacity and will generate operational synergies with Yantian through the sharing of resources and better utilisation of port and related facilities.

RESPONDING TO CHALLENGES

Compared with 2015, throughput at HPH Trust's deepwater ports was down 5.9%, with the ports handling a total of 22.5 million TEU. Yantian's throughput was 11.7 million TEU, or 3.9% down on last year. The combined throughput of HIT, COSCO-HIT and ACT was 10.8 million TEU, or 8.1% down on last year.

The drop in throughput at Yantian was mainly due to a decrease in empties and transshipment cargoes, and that for Hong Kong was mainly due to weaker intra- Asia and transshipment cargoes.

Outbound cargoes to the US and Europe showed an upward trend in 2016. Outbound cargoes to the US grew at a faster rate in the fourth quarter of 2016, in response to the strengthening US economy. HPH Trust's performance over the year was also affected by the impact of structural changes in the container shipping industry, including cost rationalisation and changes in global shipping alliances.

HPH Trust's natural deep-water channels and unparalleled mega-vessel handling capabilities continued to cement its position as the preferred port-of-call for mega-vessels.

Revenue and other income was HK$11.9 billion, HK$0.7 billion, or 5.6% down on 2015.

Throughout the year, the Trust managed to improve operational efficiency and contain its costs by streamlining workflows and improving service delivery.

LIMITING RISK WITH A HEALTHY CASH BALANCE AND BALANCED CAPITAL STRUCTURE

HPH Trust concluded 2016 with a cash balance of HK$7.0 billion. Cash generated from operations in 2016 totalled HK$6.8 billion, with net cash from operating activities at HK$5.2 billion. In 2016, HPH Trust recommended a total payout of HK$2.7 billion in distributions to unitholders, translating to a DPU of 30.6 HK cents and a distribution yield of 9.0% based on the market price of US$0.435 on 30 December 2016.

Short-term debt as of 31 December 2016 stood at HK$4.2 billion and the Trust's total outstanding bank loans amounted to HK$33.6 billion. The Trust has proposed to reduce its overall debt by repaying a minimum of HK$1 billion of debt annually over a five-year period starting from 2017, limiting the Trust's exposure to risk under challenging market conditions.

OUTLOOK FOR 2017

Given the relatively soft global trade outlook, the Trustee- Manager remains cautious about expected cargo volumes for 2017 and will continue to focus on cost improvements and new equipment deliveries over the next few years, including a replacement programme for yard cranes. Investments in hardware and software – which include remote-controlled yard crane technology and other systems enhancements – will enable the Trust to remain competitive.

The International Monetary Fund's latest projection for global growth in 2017 is 3.4%, up marginally from 3.1% in 2016 – which is in line with its earlier projection that global growth may pick up slightly from last year's lacklustre pace. In Europe, Britain's terms of exit from the European Union remain unsettled, with uncertain repercussions at this time. On the other hand, the US economy is regaining its growth momentum, and economic activity has increased at a faster pace than expected. However, the new US president and any policy changes may present uncertainties for the US economy and impact global trade in 2017. Although a general slowdown in China's economy may dampen regional trade, this may counteract China's ongoing policy to move also from export-led growth towards domestic consumption. There may be opportunities offered for export trade, especially in light of Renminbi depreciation.

Despite these uncertainties, the management is confident that HPH Trust will respond promptly and effectively to any new challenges, given its strong fundamentals. By focusing on cost improvements and enhancing its megavessel handling capabilities through equipment and facility upgrade programmes, the Trust will ensure sustainable growth and stable annual distributions to unitholders.