'Boring' firm rides river-trade wave
Hong Kong is becoming more and more dependent on its neighbour Guangdong. Last year trade surged 24 per cent to 380 billion yuan. In January alone, trade was up 25.6 per cent on the same month last year, pointing the way to another year of massive growth.
Even more stunning is the robust growth in cargo and container shipments by river, the main mode of transport of these goods. Figures from the Port Management Authority revealed that from 1989 to 2003, river cargo throughput skyrocketed 554 per cent to 59 million tonnes. It probably gained another 7 per cent last year.
This phenomenal growth far outperformed seaborne cargo throughput, which gained only 130 per cent to 149 million tonnes, and perhaps another 10 per cent last year. River cargo probably accounted for 27 per cent of total cargo throughput last year.
Equally breathtaking is the growth of river containers. During 1995 to 2003, river container throughput rocketed 274 per cent to 5.9 million teu (20-foot equivalent units); it probably gained another 10 per cent last year. Seaborne container throughput gained only 32 per cent to 14.5 million teu, and perhaps another 8 per cent last year.
A direct beneficiary might be a very boring and perhaps forgotten company called Chu Kong Shipping. The company fits the bill of what I look for in an undervalued stock: a reviving business, out of the headlines - so boring and so small that most analysts and investors have overlooked it.
Chu Kong is essentially a sea- and land-freight forwarder specialising in cargo and container forwarding between Hong Kong and Guangdong.
River cargo probably accounted for 29 per cent of Hong Kong's total container throughput in 2004.
Guangdong is blessed with an extensive network of rivers collectively called the Zhujiang (Pearl River). Shipping cargo and containers on small-tonnage vessels along these rivers is much more economical than road or rail transport.
The Zhujiang is made up of three main rivers - East, North and West rivers - and a network of small rivers centred around the provincial capital Guangzhou. The West river, known as the 'the golden waterway', links Guangdong with the resource-rich southwestern provinces of Guangxi, Guizhou and Yunan.
Guangdong will invest some 5 billion yuan in the coming 5 years in strengthening the transport capacity of the three rivers. Coupled with high economic growth, the transformation of the rivers will result in a substantial increase in cargo and container shipments between Hong Kong, Guangdong and the Chinese southwest.
About 10 per cent of Chu Kong's profit comes from cargo transportation, 37 per cent from cargo handling and storage and 9 per cent from container hauling and trucking. The remaining 44 per cent comes from the Guangzhou Foshan Expressway.
The core business is cargo transportation. Due to a low entry barrier, this sector has been suffering from falling freight rates for years, but signs of a recovery appeared in last year's interim results.
Chu Kong represents more than 100 ship owners with more than 400 small-tonnage river vessels.
In addition to its intra-China trade, Chu Kong also processes transshipments from Guangdong to the rest of the world. The company maintains marketing offices in China to help with documentation and customs clearance. It also has a licence to operate at the marine cargo terminal at Chek Lap Kok.
Cargo is sometimes shipped by river vessel to Shenzhen airport, or in reverse from Guangdong factories to Hong Kong.
Profitability of the auxiliary business of cargo handling has been outstanding. To serve river vessels from China, Chu Kong provides cargo and container handling services (consolidation and warehousing) at its private wharf at Tuen Mun, at the airport marine cargo terminal and at the public cargo working areas
Another auxiliary business, container hauling and trucking, has also been impressive. Chu Kong owns 50 big trucks, tractors and 70 trailers, used to haul between Tuen Mun wharf and the Kwai Chung container terminal.
To enhance its role as a freight forwarder, Chu Kong owns many significant minority equity interests in wharfs, terminals and some related businesses. These assets provide synergy. The associate companies seem to have done even better than the subsidiaries, especially the wharfs and terminals businesses.
Superficially, Chu Kong is burdened by long-term falling freight rates, but a detailed look at results during the five years ending last year shows improvement in subsidiary profit which could be sustainable.
Let me highlight some of my findings.
Further growth might come from container volume. During the first half last year, the number of containers handled by Chu Kong rose 42.6 per cent to 221,522 teu.
Last year Chu Kong probably had sales of $660 million, up 34 per cent year on year, earning a net profit of $84 million, up 20 per cent. This translates into 11 cents per share, so the current share price of $1.22 might imply a price/earnings ratio of only 11.1 times and a historic yield of 4.1 per cent.
This year's valuation might be even lower on further profit growth.
There is the risk that Chu Kong could suffer an unexpected fall in freight rates, in which case profit growth might be much less than expected and any share-price appreciation might vanish.
If the results due next month confirm these favourable trends, prospects for this year should be optimistic, and the share price should imply under-valuation.
Henry Chan is the deputy head of research at Quamnet. He owns shares of Chu Kong.