COSCO Shipping Ports Ltd.-Khalifa port Ph2:2nd overseas acquisition with controlling interest

What's changed.

After the market closed on Sept 28, COSCO announced that it signed a 35-year concession agreement (extendable for 5 years) with Abu Dhabi PortsCompany (ADP) to form a 90/10 joint venture which will construct, manageand operate Phase 2 of Khalifa Port (KPCT2). It will comprise of 3 berthsadding 2.4mn TEU to the existing 2.5mn TEU handling capacity of Ph1.

The first 800m of quay length is expected to commence operation in 1H18and the later 400m in 2020. The JV has an option for a further 600m quaylength later on which will expand its capacity to 3.5mn TEU. The companyestimated the present value of the total consideration to be US$738mn,including (1) US$7mn annual fixed concession fee adjusted upward by2.5% each year, (2) a variable concession fee at 10-30% of revenue, (3)US$400mn capex. The group targets 10+% IRR for this project.

Implications.

After its successful experience with PCT port, COSCO has been activelylooking for overseas opportunities with controlling interest along the SilkRoad Economic Belt and new Maritime Silk Road. KPCT is the majorgateway port of Abu Dhabi completed in 2012 replacing the old Zayed portin the city. With its strategic location and the support from its parentcoCOSCO Shipping’s large global network, mgmt. hopes to develop KPCT2as a key feeder port in the Persian Gulf region of the Middle East. Similarto other greenfield projects, they target NPAT breakeven in 2-3 years whenutilization reaches 70% - we model it in 2021 by assuming0.8/1.1/1.4/1.7mn TEU and 0/10/20/30% EBITDA margin in 2018/19/20/21E.

Valuation.

Incorporating this deal, we fine-tune our 2018E EPS and revise up our 12mDCF-based TP by 4% to HK$10.2 (from HK$9.8). With no upfront payment,COSCO’s net debt to equity should stay low at 14% (2016E), well equippedfor further M&A opportunities.

Key risks.

Further EUR weakness, weak foreign trade