China Covid curbs easing unlikely to help HPH Trust in near term

INVESTORS are cheering China’s easing of curbs that had been in place since the Covid pandemic struck, expecting that stocks dependent on the world’s second-largest economy would benefit.

Would Hutchison Port Holdings Trust (HPHT), which operates the Yantian port in the southern China city of Shenzhen and derives about 70 per cent of its revenue from mainland China, be one of them?

DBS, in a research note, wrote that November’s contraction in manufacturing and new export orders in China could have a short-term negative impact on HPHT’s share price.

The Caixin manufacturing purchasing managers’ index has hit a seven-month low, and a similar economic indicator for new export orders fell sharply too, due to prolonged Covid-induced lockdowns and curbs in China as well as weakening external demand for Chinese goods amid global recession risks and rising inflation.

Yet, DBS noted that the move away from a reliance on lockdowns and strict curbs to manage Covid-19 in the world’s factory would help ease manufacturing headwinds.

China’s Covid caseloads have since surged, however, with reports of consumption and production being hit as residents stay home to avoid being infected and workers call in sick.

Renesas Electronics Corp recently had to put its Beijing semiconductor plant on pause due to Covid infections, although it has since reopened its factory.

China’s worsening Covid situation could cause the nation to go into a lockdown if its public health system becomes overwhelmed and collapses.

Widespread infections might also negatively affect productivity and economic output before things improve.

A survey by World Economics showed that China’s business confidence fell in December to its lowest since January 2013.

HPHT is therefore unlikely to benefit from China’s easing of Covid curbs in the short term.

Yantian port was affected by lockdowns and absenteeism in March, when there was a flare-up of coronavirus infections in southern China. It is unlikely to be spared by the current wave of Covid infections.

HPHT’s profit dipped 6.8 per cent to HK$716.3 million (S$126.5 million) in H1 2022, as its facilities in Hong Kong handled less cargo. Although 2021 profit surged 110 per cent year on year, the e-commerce boom triggered by global lockdowns is deflating as consumer dollars are diverted to services from durable goods and rising inflation dampens global demand.

HPHT’s dismal price performance – the counter is down by 80 per cent from its initial public offering price of US$1.01 in 2011 – was raised at its 2022 annual general meeting. Its trustee manager attributed the decline to global challenges in recent years, such as the pandemic, supply chain disruptions, Sino-US trade tensions and interest rate hikes.

But the decline in HPHT’s unit price has predated these challenges, while the pandemic and supply chain disruptions ought to have worked to HPHT’s favour. It may be time HPHT reviewed its business model and strategies, now that it might not be able to depend on the e-commerce boom that had helped its profitability in the past two years.