As the gatekeepers to China’s manufacturing base, domestic ports are feeling the effects of dwindling global export demand. Things are not going to get any easier.
"Port operators and container shipping companies are both facing declining demand at the two main end markets: the US and Europe," said Jimmy Lam, an analyst with Bank of China International in Hong Kong.
Credit Suisse expects China to post a lackluster 2.5% year-on-year growth in container throughput in 2009, with Shanghai, Shenzhen and Qingdao seeing negative growth.
Time to buy in?
Investors considering a punt on ports stocks, which fell to trough valuations in 2008, would do well to steer clear of the big names. The likes of Cosco Pacific (1199.HK) and China Merchants Holding International (0144.HK) are overly reliant on manufacturing, analysts argue. Dalian Port (2880.HK) is the better bet.
"Dalian Port is unique in China with both a container and an oil business," said Roslyn Ji of Core Pacific Yamaichi in Beijing, who has a "buy" rating on the stock.
Dalian Port can count on a geographical advantages – it is less exposed to both manufacturing and the US market than its southern counterparts – but its real edge is oil. Roughly half of its profit derives from oil handling and storage, and the port is the only approved center in China’s northeast for crude trans-shipment.
"This distinctive earnings profile means that Dalian Port’s earnings are less sensitive to slowing global container trade growth," Credit Suisse said in a research note to clients.
Although China’s crude exports are expected to decrease through the first half of 2009, Farzam Kamalabadi, founder of Future Trends International, a Shanghai energy consultancy, stresses this will have no impact on what will be strong long-term oil demand.
Dalian’s status as one of China’s four bases for the strategic oil reserve will also keep business healthy. With oil prices below US$50, it may be a good time for China to build up its strategic reserve, according to Ally Ma, an analyst with Citi in Hong Kong.
Ma believes Dalian Port will see single digit growth in oil throughput in 2009. Factor in the expected downturn in container business and the port’s annual profit growth could be flat.
"That already is a very good compared to other container ports," Ma said.
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