Pre-marketing starts for Hutchison's port IPO

Pre-marketing has started for the upcoming initial public offering of part of Li Ka-shing-controlled Hutchison Whampoa’s container port assets which, at an expected size of about $6 billion, is promising to become the largest ever listing in Singapore. It is also the first multi-billion dollar IPO to hit the Asian markets this year, aside from Chinese aluminium producer China Hongqiao Group which called off its Hong Kong offering of up to $2.2 billion citing volatile market conditions. 

Consequently, the Hutchison deal will be an important test for the market and the first real indication of whether 2011 has the potential of becoming as busy as last year. Since there is unlikely to be any new listings the size of Agricultural Bank of China or AIA, which each raised just over $20 billion, there will have to be a number of $3 billion to $5 billion transactions to reach similar volumes. Getting the first few right will be crucial in terms of building confidence among both issuers and investors.

Few additional details are available about the Hutchison spin-off, known as Hutchison Port Holdings (HPH) Trust, at this stage, although syndicate research puts the likely dividend yield for 2011 at about 4.5% to 6%, which would be roughly in line with other yield plays such as Singapore real estate investment trusts, large utilities and infrastructure plays, but above that of most other port operators.

Few people would expect the deal to come cheap as Li Ka-shing is a very savvy asset trader with a knack for buying low and selling high. However, as Hutchison will retain a portion of the assets, it is in its interest too that the deal isn’t priced too aggressively.

HPH Trust is structured as a business trust, which will allow it to distribute as much as possible of its free cashflow and sources say the trust has committed to pay out 100% of its distributable income. This suggests that the dividend each year will be greater than the net income, which also includes non-cash items such as depreciation and amortisation. One analyst argues that the payout ratio (based on net profit) could be as high as 140% in 2011 and more than 160% in 2012, while other listed port operators, including Hong Kong-listed China Merchants Holdings International and Cosco Pacific pay out less than 60% of their net earnings. The ability to pay large dividends is said to have been one of the key reasons why Hutchison chose to list the port assets in Singapore. The other obvious place would have been Hong Kong, where Hutchison itself is listed, but Hong Kong doesn’t have regulations in place to set up business trusts.

In a statement issued late Monday, Hutchison said the dividend payout that is attributable to HPH Trust unitholders is expected to be approximately HK$3.26 billion ($418 million) in the nine-and-a-half months from March 16 until the end of this year, and increase to HK$4.46 billion in 2012. To give the manager of the trust (a subsidiary wholly owned by Hutchison) an incentive to grow the distributions, the fee structure includes a performance fee that will increase depending on how much the distribution per unit (DPU) exceeds the forecast distribution. Starting from 3% if the DPU is up to 25% above forecast, additional performance fees of 6%, 12% and 18% will be paid if the excess distribution is more than 25%, 50% and 75% above forecast, respectively.

The listing vehicle is also at the advanced stages of securing a loan to help improve the yield somewhat. Media reports yesterday suggested the loan could be as large as $3 billion, although one source said that “sounds a little high”. HPH Trust hasn’t indicated any targeted gearing level, but the source noted that it will not be that highly leveraged at the outset.

As reported earlier, HPH Trust’s initial portfolio will comprise the deep-water container terminals at Hong Kong’s Kwai Tsing port and the Yantian container terminals in Shenzhen that are currently part of Hutchison Port Holdings (HPH). At the time of listing, HPH Trust is expected to own 100% of Hong Kong International Terminal (HIT), which operates three terminals plus two additional berths at Kwai Tsing, and 50% of Cosco-HIT, which operates one terminal at the same harbour, and stakes ranging from 51.6% to 56.4% of various phases of the Yantian port. 

It will also include Hutchison’s entire port ancillary interests in the Hong Kong, Macau and Guangdong area, including trucking, feedering, freight-forwarding and other logistics services, as well as its economic interests in certain river ports that serve mainly as feeder ports to the two deep-water terminals.

Hutchison reiterated in the Monday statement that it will own approximately 25% of the units on issue and yesterday sources said that Singapore port operator PSA International, which is wholly owned by Temasek Holdings and currently owns 20% of HPH, will hold another 7% to 9%. This means that HPH Trust will have a free-float of at least 65% at the time of listing. However, part of that will be offered to Hutchison Whampoa’s existing shareholders through a preferential offer. The size of that offer has yet to be determined, Hutchison said, but the record date for those who wish to participate has been set for March 3.

There will also be a Singapore retail offering and a public offering without listing (POWL) targeted at Japanese retail investors. The latter will be arranged by Daiwa and Mizuho. The final split between the tranches will be determined closer to the launch of the deal, as will the number of units on sale and the price range. The trust will trade on the Singapore Exchange in US dollars.

The pre-marketing is expected to last for about two weeks and will be followed by a formal institutional roadshow on February 28 that will go for another two weeks. The trading debut is scheduled for March 18. DBS, Deutsche Bank and Goldman Sachs are joint bookrunners.

Aside from the fact that yield plays tend to attract interest when markets are volatile, HPH Trusts’ strong position in the Pearl River Delta container port market is expected to go down well with investors. Together, Hong Kong and Shenzhen ranked as the world’s busiest container port market and trading hub in 2009, and that year Hutchison had a 60% market share of the throughput at Kwai Tsing and a 47% share of the container traffic at Yantian.

Yantian is also one of the few possible ports in the region that is deep enough for the large container liners that are becoming increasingly common. And contrary to the common perception that container ports is a cyclical business, the ports included in HPH Trust’s portfolio has only had one negative year in the past 40 years and kept a stable Ebitda margin during the most recent financial crisis. This will sit well with the high dividend payouts. However, analysts also see growth opportunities as China’s economy continues to expand and the country increases its imports of goods.

Meanwhile, HPH Trust will still have the support of its parent company, HPH, which has interests in 308 berths, split on 51 ports in 25 countries across Asia, the Middle East, Africa, Europe, the Americas and Australasia.