Main Board H-share Listing Research 青島港國際股份有限公司 Qingdao Port International Co., Ltd. (06198)

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Kelvin Li 26 th May 2014 Main Board H-share Listing Research 青島港國際股份有限公司 Qingdao Port International Co., Ltd. (06198) Joint Sponsors : BOCI CITIC Securities UBS Joint Global Coordinators : BOCI CLSA UBS Joint Bookrunners & Joint Lead Managers Sector : Transportation Business : Operator of the Port of Qingdao in the PRC : BOCI CLSA UBS Deutsche Bank Total share offer: 776,380,000 H shares (16.5% of the enlarged share capital) (including 705,800,000 new shares & 70,580,000 sales shares) Public Offer: 77,638,000 H shares (10%) Placing: 698,742,000 H shares (90%) Greenshoe: 116,457,000 H shares Price: HK$3.76 per H share Total Market Capitalisation: HK$17,693.8 million Pro-forma fully diluted FY2013 P/E: 9.4x Adjusted NTA per share: HK$2.66 Staffing: 8,000 (as of 31 st December 2013) HK Public Offer period: 26 th May th May 2014 noon Receiving bank: Bank of China (Hong Kong) Share registrar: Computershare Hong Kong Investor Services Listing date: 6 th June 2014 Business of Qingdao Port ( The Group ) The Group is the primary operator of the Port of Qingdao, one of the world s largest comprehensive ports. The Port of Qingdao is an important hub of international trade in the West Pacific and maintained shipping routes with over 700 ports in over 180 countries and regions around the world by end of In 2012, the Port of Qingdao ranked 7 th in total throughput, 8 th in container throughput, and 6 th in metal ore throughput worldwide. In 2013, 76.4% of the total throughput of the Port of Qingdao was handled by the Group. The Group handles a large variety of cargo, including containers, metal ore, coal, petroleum, grains, steel, cars and other liquid bulk, dry bulk and general cargo. As a comprehensive port operator, the Group provides a wide range of port-related services, ranging from basic port services, such as stevedoring and storage services, to ancillary and extended services such as logistics services and financing-related services. As of the end of March 2014, the Group operated 22 terminals with 69 berths at the Port of Qingdao, which represented 76.7% of the total number of berths at the Port of Qingdao. The berths operated by the Group at the Port of Qingdao included 47 berths dedicated to handling a single type of cargo and 22 berths capable of handling metal ore, coal and other general cargo. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.

2 Shareholders after Listing (assuming the Over-allotment Option is not exercised) Qingdao Port (Group) Co., Ltd. ( QDP ) wholly owned by the State-owned Assets Supervision and Administration Commission of Qingdao ( Qingdao SASAC ) 75.00% Qingdao IIC wholly owned by Qingdao SASAC 1.02% Malai Storage controlled by China Merchants Holdings (International) (00144) 2.38% Qingdao Ocean controlled by China Overseas Shipping (Group) Company 2.04% China Shipping Terminal controlled by China Shipping (Group) Company 2.04% Everbright Qingdao FLC controlled by China Everbright Group 1.02% Public shareholders 16.50% % Use of Proceeds Net proceeds from the offer are estimated to be HK$2,493.2 million (based on an offer price of HK$3.76). HK$ million To fund the construction of oil tanks at the Dongjiakou Port Area To fund the construction of an ore stacking yard at the Dongjiakou Port Area To fund the construction of one crude oil berth with docking capacity of 300,000 DWTs and one crude oil berth with docking capacity of 100,000 DWTs at the Dongjiakou Port Area To fund the construction of two general berths each with docking capacity of 50, DWTs at the Dongjiakou Port Area To fund the construction of one liquid chemical berth with docking capacity of 20, DWTs, one liquid chemical berth with docking capacity of 30,000 DWTs and crude oil tanks at the Dongjiakou Port Area For general working capital Financial Highlights Year ended 31 st Dec RMB million RMB million RMB million Turnover 5,079 5,741 6,526 Gross profit 1,617 1,674 2,052 Operating profit ,437 Profit attributable to shareholders 1,195 1,247 1,500 Gross profit margin 31.8% 29.2% 31.4% Operating profit margin 18.5% 17.2% 22.0% Net profit margin 23.5% 21.7% 23.0% 31/12/ /12/ /12/2013 Net debt to shareholders equity ratio Net cash Net cash Net cash Breakdown of revenue in terms of business segments (RMB million) FY2011 FY2012 FY2013 Container handling & ancillary services % % % Metal ore, coal and other cargo handling & ancillary services 2, % 2, % 3, % Liquid bulk handling & ancillary services % % % Logistics and port value-added services 1, % 1, % 1, % Port construction and other services 1, % 1, % 1, % Total 5, % 5, % 6, % Qingdao Port International Co., Ltd. 2

3 Peer valuation comparison Qingdao Port (06198) Qinhuangdao Port (03369) Dalian Port (02880) FY2013 FY2014E FY2013 FY2014E FY2013 FY2014E Gross profit margin 31.4% 28.7% 32.6% 44.5% 22.7% 23.5% P/E ratio 9.4x Market capitalisation Sources: Reuters 9.2x (based on the estimate of UBS one of the IPO sponsors & bookrunners) HK$ billion 8.0x 9.0x 9.4x 8.1x HK$3.394 billion (H shares only) HK$1.870 billion (H shares only) Strengths/Opportunities Leveraging on the natural deep-water capacity of the Group s port facilities, the Group can accommodate some of the world s largest vessels, including container vessels with a loading capacity of 18,000 TEUs, oil tankers with a capacity of 440,000 DWTs and dry bulk vessels with a capacity of 300,000 DWTs. The Group has a balanced product mix in terms of cargo types. Container and bulk/general cargoes accounted for 45% and 55% of the Group s total throughput in The Group and its 30%-owned joint venture acquired certain port assets in the DongjiaKou Port ( 董家口港 ) area in Qingdao in the first half of The newly developed Dongjiakou Port will cover an area of 72 sq km with 112 berths and an expected annual throughput capacity of 300 million tonne, and will be connected to major rail lines and Sinopec s oil and gas pipelines. The Chinese government plans to build the Dongjiakou Port into one of the key transportation hub for dry bulk cargo, which will provide the Group with enormous opportunities for business development in the future. The Group s H-share IPO would be priced at 9x FY2014E earnings, slightly higher than that of other bulk cargo terminal operators listed in HK. Nevertheless, the valuation of the IPO counter seems fair given its business potential from the expansion in the Dongjiakou Port area. Qingdao Port International Co., Ltd. 3

4 Strengths/Opportunities (continued) The Group has entered into cornerstone placement agreement with six investors. The cornerstone investors are subject to a six-month lockup period. The cornerstone subscription would represent 7.35% of the enlarged share capital (assuming the over-allotment option is not exercised). Details are as follows:- Cornerstone investor Shanghai Zhenhua Port Machinery (HK) Company Ltd. wholly owned by Shanghai listed Zhenhua Heavy Industries (600320), which in turn is 46% owned by China Communications Construction (01800) (CCCC) No. 2 Engineering Company Ltd. Of CCCC First Harbor Engineering Company Ltd. 64% owned by CCCC China International Marine Containers (HK) Ltd. wholly owned by CIMC (02039) Sinotruk (HK) International Investment Ltd. wholly owned by Sinotruk (03808) DP World Asia Holdings Ltd. wholly owned by Dubai-listed Dubai World Ltd. Ming Cheng Company Ltd. wholly owned by the Subscription (US$ million) % of Global Offering** % of total enlarged share capital upon completion of Global Offering** % 2.19% % 2.19% % 1.31% % 0.88% % 0.44% % 0.44% Shanghai-listed Ningbo Port (601018) Total % 7.35% Remark: (**) Assuming the IPO price is set at HK$3.76 and the Over-allotment Option is not exercised. Weaknesses/Threats Throughput of bulk cargo at Qingdao Port may slow down on economic slowdown in China. The Chinese government has targeted GDP growth of 7.5% in 2014, down from growth of 7.7% in The government may further revise down the annual GDP growth target in the next couple of years amid push for structural reform in the Mainland economy. In 2013, about one-third of the Group s net profit was derived from joint ventures, in which the Group has limited control over its management and daily operations. Such minority-owned JVs may not act in the best interests of the Group. Recommendation: Neutral Qingdao Port International Co., Ltd. 4

5 Important Disclosure / Analyst Certification / Disclaimer This report is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited ( BEA ). Each research analyst primarily responsible for the content of this report (whether in part or in whole) certifies that (i) the views on the companies and securities mentioned in this report accurately reflect his/her personal views; and (ii) no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This report is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. The analysis or opinions expressed in this report only reflect the views of the relevant analyst as at the date of the release of this report which are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific recipient. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Investments involve risks and investors should exercise prudence in making their investment decisions and obtain separate legal or financial advice, if necessary. East Asia Securities Company Limited and / or The Bank of East Asia Group accepts no liability whatsoever for any direct or consequential loss arising from any use of or reliance on this report or further communication given in relation to this report. At the time of preparing this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein, while BEA along with its affiliates/associates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its affiliates/associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates/associates may beneficially own a total of 1% or more of any class of common equity securities of the company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the company or companies mentioned in the report. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. Qingdao Port International Co., Ltd. 5