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Edited Transcript of NS8U.SI earnings conference call or presentation 24-Apr-17 10:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Hutchison Port Holdings Trust Earnings Call

Singapore Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Hutchison Port Holdings Trust earnings conference call or presentation Monday, April 24, 2017 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Diana Lee

Hutchison Port Holdings Trust - CFO

* Gerry Yim

Hutchison Port Holdings Trust - CEO

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Conference Call Participants

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* Calvin Wong

JP Morgan - Analyst

* Deborah Ong

OCBC - Analyst

* Simon Cheung

Goldman Sachs - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the conference call of Hutchison Port Holdings Trust 2017 Interim-Results Announcement for the period ended March 31, 2017. Now, I'll hand over to Mr. Gerry Yim, the CEO of Hutchinson Port Holdings Trust. Mr. Yim, please begin.

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Gerry Yim, Hutchison Port Holdings Trust - CEO [2]

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Thank you. Thanks for dialing in. We announced our first quarter results today. And in that, [please bear with us], there will be a few adjustments that Diana Lee, the CFO will take you through, so that you can understand the numbers properly. As usual, I'll give you the background to the business situation for the first quarter.

If you look at the throughput, throughput -- our total throughput for the deep-water ports increased about 2% over last year. In Hong Kong, we increased our throughput by about 3%, while in Yantian we have a 1% reduction in throughput in Yantian. Diana will talk about the mix-up and the reason why there is a slight drop in Yantian.

And if we move on, if we talk about the profit, last year you remember, we had a substantial rebate from the government on the past rent and rate that we paid, to the tune of -- before tax -- more than $400 million. This year, obviously, we will not have the same amount of rebate, although our rent and rate ongoing payment is reduced, because of the negotiation. So if we take out that fixture received last year and taking off this year, I think, overall, on a comparable basis, NPAT was down about 14% compared to last year, on two major reasons. One is the reduction in revenue in both -- through the throughput factor, and the other one is the increase in interest rates by 25 basis points that affected us this year.

The other thing is that we have implemented the co-management of Terminal 8 in Hong Kong. There is some implication to efficiency and also affects some of the figures that is being reported and we will take you through those, so that you can have a proper understanding of the situation. Overall, I think the business for the Trust for the first quarter is a continuation of the last quarter of 2016; a steady increase in exports out of Yantian to US and Europe, very small single-digit increase, and in Hong Kong, there is some recovery of the transshipment throughput to the tune of a few percentage points. And margin, for us, the tariff is -- specific items, we are a little bit under pressure, because of the competition. We did actually give some tactical discount and that affected the tariff rate a little bit. But, overall, it is in a stable situation.

I'll pass it now onto Diana to take you through the numbers and then we can have the Q&A.

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Diana Lee, Hutchison Port Holdings Trust - CFO [3]

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Sure. Thank you, (inaudible). If we could just pass on page 9, with the throughput volume for the period, as Gerry was saying, now overall throughput for the first quarter actually went up 2%. I'll explain a bit more on the [freight] percentage, were actually based on Hong Kong with HIT, COSCO-HIT, and ACT as a whole, the volume went up 3%. And for Yantian, the volume actually was down minus 1%. We did not include HICT in -- I mean, I guess, minus 1% for Yantian as a whole as well. And the reason for the increase in the Yantian volume is (inaudible) quite well in the export, US and Europe export. US actually recorded a growth of 4% in the first quarter and Europe had a 1% increase in the Europe volume. So, the reason why there is a minus 1% for Yantian was because it's dragged down by transshipment, firstly; despite Yantian only had a small portion, probably last year, about 11% being transshipment. Transshipment in Yantian still continued to decline and that contributed to the drop. And, second was empties. Empties continued to actually have a minimal increase in the first quarter, because there is actually a shortage of empties coming back to China -- in still South China. They have been quite [taxed] in terms of the Europe imports into China, because it focuses a lot on the waste paper. As the demand for waste paper is very high, because of all the shipments or the e-commerce activities and thus there are less empties coming back in and the shipping lines actually are ordering new containers in the first quarter and also the used containers to cater for the need. And as a result of that, our empties actually did have a drop in the first quarter. So we don't see that as an ongoing impact [in turn]. So we do expect that in the next few months or so, empty would go back to its normal trend for Yantian's business.

And on page 11, that's the revenue slide, you see that for the quarter, revenue went down by 6%. That's actually versus the 2% -- there was an increase in the volume. But [the 6%], let me give to you later as to why in shipping you're looking at, in fact, a minus 2% [increase] in revenue, instead of 6%. But for the 2% [increase] in revenue instead of the 6% that you see in the [graph], well, the 2% is actually contributed by HIT having a 4% drop in terms of its ASP, and Yantian minus 3%. And the reason for HIT's drop in the tariff was due to what Gerry was mentioning about the [tax-coded cap] that we gave up to the alliances, and also as we said about this during our last call, the merger impact, whereby with the two shipping lines merging, they open their books to each other and then the shipping lines will come back to negotiate back for us to give then the lower of the two, which -- but we may not just simply give some to the shipping lines that feel they will end up having to give some of these caps to the merged shipping line.

And Yantian, on the other hand, with the minus 3% drop, it's mainly contributed by the renminbi depreciation impact. In the first quarter, year-on-year, renminbi actually went down close to 5%. And half of our revenue is in renminbi. So, in effect, with the minus 3% drop, the bulk of it, probably 2.5% or so, is actually due to the renminbi depreciation impact. And the remaining little part of it was due to the merger of several shipping lines impact, for the decrease. So with the 2% increase in the volume, which is offset by the revenue and the tariff drop, for both HIT and Yantian on a comparable basis, revenue actually went down 2%.

And on to the next page, page 12, CapEx, we actually did have a decrease of 43% year-on-year, but it's all just due to timing. For the full year, we maintain that -- for last year total CapEx was about $1.76 billion, and this year, again, we are forecasting a CapEx of about $1.3 billion. So it's just a matter of timing for the CapEx. And that's mainly -- for the $1.3 billion, that's mainly the CapEx to complete the Phase II -- the throughput in West Port Phase II in Yantian.

And on page 13, the consolidated debt. Again, it's $33.6 billion, which is similar as our last quarter's balance. And cash, we had $6.5 billion cash on hand, and so we are fairly liquid on this.

And then, let me take some time to walk you through page 14, which is the P&L for the first quarter, against last year. The reason why we have the restated percentage variance here is because of co-management. For the co-management, just to summarize what it is, what we signed at the end of last year was that; HIT having 12 berths is 100% held by us. And the other two terminals that we own, COSCO-HIT and ACT, that we have joint-venture with COSCO; together they got Terminal 8, they own four berths. So, in total, there are 16 berths that we own in Hong Kong. And at the end of last year, we signed an agreement, a co-management agreement with COSCO, whereby all the 16 berths are run under by one team, led by HIT. And so, what it is, is that with the deployment of the contractors, with ship planning, yard planning, everything else is actually 16 berths as a whole. And that's run by the HIT team only. And so, with this we have a pre-agreed ratio that we will split between HIT and Terminal 8. So that [leaves] like 70% versus 30%. And that was calculated and negotiated based on the capacity of HIT and Terminal 8. And if you remember last year, Terminal 8 actually had quite a big drop in volume, because of the merger of China Shipping and COSCO. The market share actually of the two companies merged together actually led to quite a decrease in its overall volume. So, Terminal 8 last year had a big drop than HIT alone, in the scale of 14% versus a 7% drop for HIT. So, last year, Terminal 8 actually had quite a low throughput volume. And so, this year, based on the profit split ratio that we agreed on, like [70-30], if we just look at HIT alone, the volume of HIT actually had a drop versus an overall increase of 3%, integrating all the 16 terminals.

And in the [tax] that we have that we present [in the statutory account] in the revenue part, we take 100% of HIT. And then the numbers for Terminal 8, [if you say], our joint ventures, they are all captured in the line of share of profit after-tax of joint ventures. So, in a way, the numbers for Terminal 8, the revenue and the costs are not recorded in the normal [statutory account]. And because of this, after the co-management arrangement, it is actually unfair to just look at HIT standalone, because it's actually affected by the ratios that we allocate for HIT and Terminal 8. So, as a result of that, we have presented the year-on-year percentage variance, based on the restated percentage that you see on the right-hand side. And that takes into account 100% of HIT, COSCO-HIT and ACT to make it comparable and meaningful as a comparison. So that's how we see the 2% drop in revenue that I was talking about, because although our volume went up 2% and then the tariff went down 3% to 4%, leading to the 2% drop in terms of revenue.

And for the cost of services rendered, similarly we didn't manage to pay 12% as you see in the [statutory account],because HIT, as a result of the co-management arrangement, share less of the costs as well. So it's more meaningful to look at the restated percentage, which is a net saving of 4%. And so, remember, we have a 2% increase in the volume and then we had an inflation for contractors and our own labor cost of about 4% last year. So, after taking into account the 6%, we still managed to save 4% on an overall basis. And that's due to, firstly, we did get synergies from the co-management arrangement, mainly due to, we had a decrease in the internal trucking cost, because we don't need to ship boxes through the Terminal 8 because it's like COSCO ships, or because they have to be booked at Terminal 8. So, now we are bundling overall 16 berths as a whole, so we have more flexibility and to which (inaudible) and at a more optimal operational efficient level. And, of course, renminbi depreciation did help. And also, Yantian did do some cost-saving initiatives, which helped in the cost of services rendered as well. So, overall, we managed a net saving of 4% for the cost of service rendered in the first quarter.

And if you look further down, what's the operating expenses, the restated amount was that we have a saving of 9% and that's as well, again, the co-management did have an impact on this saving, and also timing as well. And, with that we did have a decrease in the revenue, but it's set off against cost of services rendered savings and also other cost savings. So our operating profit was down about 2%.

And for interest, you see that it has gone up about $25 million and that's due to the 25 basis points interest rate hike at the end of last year. And for the share of profit after tax of associate companies and joint ventures, we see that there's a turnaround from $17 million gain to a $12 million loss, and the key reason is, because we've added in the loss of Huizhou, which is HICT. That's in terms of the two berths/terminals that we acquired at the end of last year. Yantian actually holds 80% of Huizhou, but Yantian was [also our Plc] partner. And COSCO has some shareholding in Yantian as well. So, effectively, the Trust only holds 41% of Huizhou. What we see here in this line is that we had a [$13 million] loss for Huizhou, [so that's 18%]. And then the loss will be added back in the line below; that's in profit after tax attributable to non-controlling interests. So in effect, the loss of Huizhou that we bear effectively was about $15 million in 2017 first quarter.

And for taxation, you see that we did have a saving of 6%. And if you recall from the year-end last year, Yantian managed to get the High and New Technology status, whereby its income tax rate actually was reduced from 25% to 15%. So we had a saving of about $17 million last year, because of this status. And so, we continue to enjoy the status this year, so there should be savings in terms of the tax. But, on the other hand, Yantian phase III and also the West Port Phase I actually have their tax holiday expired, starting from this year. So that would actually increase our overall taxation. But, luckily, it's set off against the High and New Technology of Yantian Phase I and II Company. So, overall, we see the 6% savings in taxation on an overall basis.

So, if you just look at all those numbers, before the exceptional gain that we got for the HIT's rent and rates refund last year, profit after tax actually went down 14%. I think this is due to the decrease in revenue and also the increase in interest, but of course they were offset by the cost savings in the cost of services rendered, other operating expenses and taxation on an overall basis. And so, this is the profit and loss that are even the key highlights for some. And this ends my presentation on the first quarter numbers, and we are open for Q&A, please. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Calvin Wong, JP Morgan.

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Calvin Wong, JP Morgan - Analyst [2]

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I have a few questions. First, I just wanted to clarify on that restated variance. So, the restated number includes 100% of HIT, ACT and COSCO-HIT, right. So that we compare to 100% of throughputs, so it's more on a like-for-like basis, right? I just wanted to clarify that point.

Second is, we're seeing HIT underperforming a bit versus COSCO-HIT and ACT. How should we kind of look at the throughput numbers now with the co-management, because given everything is kind of managed altogether, perhaps looking at the three components of the Hong Kong operation separately, doesn't necessarily make as much sense anymore. I just kind of want to see how you guys would think we should be looking at that.

And in terms of throughputs for Hong Kong, I think, indeed overall Hong Kong saw a bit of a rebound in the first quarter, but the new alliances that were launched April 1. So I want to see your expectations on that front, whether you foresee some throughput disruptions that we saw when the last round of alliance reshuffling occurred, which put some pressure on our Hong Kong operations. And lastly, just DPU guidance, any update there. Are we just maintaining what we mentioned before at FY16 results call?

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Diana Lee, Hutchison Port Holdings Trust - CFO [3]

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I will take the financial questions first and then I'll pass to Gerry for the business -- the volume question. Yes, you're correct, the restated percentage is actually 100% of HIT, COSCO-HIT and ACT for this year, versus the 100% of [the stated] business units for last year. So in that way it would be more meaningful to actually look at the comparison. And, going forward, I would think that for year-on-year comparison it's probably easier for you to actually look at Hong Kong as a whole. HIT actually takes about 70% of Hong Kong, and then Terminal 8 about 30%, and out of the 30%, we own about 45% of the remaining 30% of Terminal 8. So I think that would be an easier picture to compare. And, I think we will only have problem for this year, because last year it wasn't based on the co-management, and so this is the first year that we have the co-management arrangement and that's why the numbers would be a bit messy, because they are on different basis. But going forward, like say for next year, it won't be on the co-management comparison in the statutory account and then it will probably be just easier when you look at the fluctuations in the [stat accounts], just like normal.

And in terms of the DPU, we are not changing our guidance and we will be repaying for the bank loans, probably in the next months or so -- next one or two months, as we have been announcing. So the total debt repayment will amount to $1 billion for this year and [so that's] additional, say, about $650 million debt. And so, we maintain our DPU guidance of $0.20 to $0.23 right now. And now I'll pass to Gerry for the HIT volumes.

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Gerry Yim, Hutchison Port Holdings Trust - CEO [4]

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In terms of this variance, it's absolutely correct, we really should focus on the 100% of HIT, plus COSCO-HIT, plus ACT for this year compared to last year, because that gives you a good picture of the business fundamental, rather than the accounting trickery.

In terms of the throughput in Hong Kong, we have increased our throughput in Hong Kong for 3% for the first quarter. I think this is a representative of the real business nature of Hong Kong. If you look at Hong Kong Port as a whole, because we also have MTL as part of the Hong Kong Port, they are about 25%, 30% of the market. They have one specific factor holding up the comparable figures. Maersk transshipment volume increased substantially over the last, say, maybe 12 months in MTL, because of the specific deal with MTL and also with Maersk change of business operating strategy around Hong Kong and Southeast Asia transshipment location.

So, in addition, these are not additional volume to Hong Kong really, because they were there before 2014, and not only because Hong Kong or MTL experienced some technical difficulties like computer upgrade, and they left Hong Kong, and then they've come back. So, I think, I would say that from, say, mid-year 2017, we'll be sort of right back to normal, and all these comparable quirkiness will go away.

So, I think, so far we talk about the alliance experience. We have experienced quite smooth transition for the alliance and also Ocean Alliance. We have concluded the arrangement for them to call it a terminal, not as we would like to that they all call us one terminal, one alliance. For pricing issues, for other strategic reasons, they did not all come to our terminal. So for the Ocean Alliance, OOCL remain at MTL. So the rest of the Ocean Alliance are now with us. We believe [in our northeast] is China COSCO. And for the alliance, we managed to get NYK to come over to us, but Hapag-Lloyd will remain at MTL. So, again, we have one member out at the other side. Sometimes, you can't really force the alliance members all come to one terminal, although it is to their benefit. For various reasons, even members themselves cannot force them to do that. So we accept that. So, you see that Hong Kong, the throughput has actually come up by about 3%. For second quarter, we probably do see a bit better compared to the first quarter, because of the phase in and out and the changing over etc. I think we will be slightly positive in terms of outlook, in terms of transshipment in Hong Kong, at least for the first three quarters of this year.

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Calvin Wong, JP Morgan - Analyst [5]

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So, on a net-net basis, we had some, I guess, probably leave -- or some customers leave and then some customers come in. So, net-net from the reshuffling of alliances, we're seeing slight positive impact. At least on the volume front, can I make that conclusion? And on the pricing, how much additional, I guess, volume discounts have we agreed to on that front? I think at recent first quarter, we saw that it had a bit of a noticeable impact on ASP.

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Gerry Yim, Hutchison Port Holdings Trust - CEO [6]

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Just to clarify, nobody left us. We can only take one for example, again, NYK. None of our business actually left us. I think the tariff change, I think you should project it forward a bit, because a similar situation will probably come true in the second quarter. We did not give huge discounts, let's put it this way. In Hong Kong, tactically, we gave some incentive to retain some of the intra-Asia cargo that is a bread and butter of Hong Kong and is actually -- China Merchants is actually very keen at that. And so for some specific shipping lines, we gave some specific discount to certain trade routes, mainly intra-Asia in Hong Kong. The rest is basically what Diana said, is a result of the merger situation, because two shipping lines merged and then they sort of like go for the lowest common denominator, and that affected the tariff a little bit. Other than that I don't think we have pushed down the rate so much. Yantian, I think the rate is being protected rather healthily. With the exception of the merger effect, I think the Yantian rates have seen stable. And, long term, I think we will be pushing up the tariff for Yantian in particular, because as I said so many times, the ultra-large vessel deployment is going to benefit Yantian for the certainly medium term, if not the short-term. So that should be able to drive up the tariff a little bit in Yantian, but probably not for this year, though.

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Operator [7]

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Deborah Ong, OCBC.

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Deborah Ong, OCBC - Analyst [8]

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I just wanted to ask a quick question about tax. So, for the tax rate that was applied this quarter, can we expect that to be about the same for the remaining two quarters of this year?

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Diana Lee, Hutchison Port Holdings Trust - CFO [9]

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The trend will be pretty much the same and so, overall, I would say that the taxation will be flattish. This year we did have some phasing -- or this quarter, we did have some phasing, which is a drop in profit before tax. So, depending on that we would think that to put it flattish would be a reasonable assumption.

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Deborah Ong, OCBC - Analyst [10]

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Then one more question on the cost of services rendered. Are all the efficiency gains from the co-management agreement more or less seen in this quarter, or can we expect further margin improvement?

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Diana Lee, Hutchison Port Holdings Trust - CFO [11]

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That will continue for the rest of the year, because it is actually the way how it's run that we managed to save under the co-management arrangement. So, it will be ongoing with the co-management arrangement for the rest of this year.

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Gerry Yim, Hutchison Port Holdings Trust - CEO [12]

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Deborah, let me just clarify a little bit. The co-management benefit will continue, because that's a structural change of the way we do business. Some of the efficiency measures, I think, you cannot continue to expect increasingly more cost savings from some of these measures. So, specifically, for co-management benefit, yes, you should expect that's a permanent, sort of, gain on a going-forward basis.

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Deborah Ong, OCBC - Analyst [13]

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So, meaning that we will see -- I mean, this improvement in margins will be seen for the rest of the year. But then, in terms of further improvement, it might not be as substantial?

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Gerry Yim, Hutchison Port Holdings Trust - CEO [14]

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Yes, you can say that.

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Operator [15]

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Simon Cheung, Goldman Sachs.

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Simon Cheung, Goldman Sachs - Analyst [16]

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I have a few questions. One just on the restatement of gains. You mentioned a bit of the costs during the statements. I just wanted to make sure that, how does that affect the reported EBITDA versus the adjusted EBITDA? Are we still talking about the EBITDA would pretty much be same as what you have mentioned I think in the presentations? That's the first question.

The second question is, I think in the last several results, you guys were quite reluctant to give out much more than guidance, because there is pending shipping alliance. And now that obviously you mentioned NYK already coming into the Hong Kong port and you have better visibility, would you be able to give us a better sense, your volume, or even ASP guidance for the full year? And then lastly, obviously, you are now still targeted to pay the $1 billion per annum for a couple of years. In the event that if interest rates continue to rise, let's say, even sharper, would you consider actually repaying your debt even more, like up to $1.5 billion or even $2 billion? Thank you.

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Diana Lee, Hutchison Port Holdings Trust - CFO [17]

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I'll take your first and third question and leave the second one to Gerry. For the restated EBITDA, so the reason why we restated is to put 100% COSCO-HIT and ACT, to make it comparable. And if you get down to the EBITDA, because EBITDA is after the share of profits of the JV. So if we just look at EBITDA, we don't need to restate it, because it's basically taking the right percentages on an overall basis. So the restated is really to just look at the year-on-year fluctuations of Hong Kong in a better angle than just comparing HIT 100%.

And for your question on the $1 billion, I think we are actually -- or the Board is actually talking about repaying $1 billion for the next five years, $1 billion per annum for the next five years. There has been no discussion on increasing this $1 billion, because we need to balance out the repayment and also the distributions as a whole. But, of course, I'm not really saying that that's the maximum for the next five years, no matter what happens. But, at this point in time, we have all being just talking about $1 billion repayment [per year]. And then I'll give to Gerry.

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Gerry Yim, Hutchison Port Holdings Trust - CEO [18]

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The throughput question, at this point in time, I still cannot really give you a very good guidance on the overall throughput for the rest of this year. Looking from an operational point of view, Q1 is actually quite promising. As I say, the core throughput increase has been quite healthy. Hong Kong is up 4% and Yantian will be up 2% -- no, the core business. So I think that we can expect probably for that to continue. I think I'll probably have a better feel after Q2, because of the alliance changes actually coming from -- starting after April 1. So, first Q was sort of like a preliminary reshuffling and from on, it is the new alliance arrangement. But, so far, I think that the first Q trends will continue, at least for the next quarter and hopefully for the rest of the year.

And for ASP, I think, again, nothing much has changed for ASP, I think, with the 1Q. I would expect that to continue.

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Simon Cheung, Goldman Sachs - Analyst [19]

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Can I just double-check. So, on a restated basis, based on year-on-year, is it fair to say (inaudible) EBITDA will be pretty much flattish year-on-year versus last year? That's on the EBITDA line. And then the second question is on the repayment. I think the rationale of you basically paying that $1 billion was because you enjoy savings from the reduction of the payment (inaudible) what you would have paid if the interest rates were to go up by 75 basis points. What if, as I mentioned earlier, if the interest rate is going to be going up even faster, then obviously, by doing so you would actually -- actually you will pay more than you actually enjoy more saving relative to your existing structure. So I just wanted to get a better sense. When you say you're trying to balance the DPU versus the debt repayment, what were you thinking, because, obviously, now you are paying not 100% of your free cash flow, you pay what, 60%, 70% of free cash flow. Will you think there would be [an outflow], i.e., 50% of the free cash flow you were giving before, or how you're thinking about it, other than the interest rate savings breakeven point?

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Gerry Yim, Hutchison Port Holdings Trust - CEO [20]

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Let me just clear the first (inaudible) don't let the restatement confuse you. You can completely ignore the restatement, because the statutory reporting is perfectly fine. But, because of the co-management arrangement, various information are picked up into different categories, so it will be difficult for you to just compare this year with last year and get a meaningful understanding.

So the restatement, basically, is to give you a management view of the underlying business in Hong Kong, that is all the things that we control together on 100% basis and we'll see whether we have improved or we have not improved compared to last year. So you should read the restatement on that basis, as a pure management performance measure, rather than how that will affect the statutory number. The statutory number as reported is perfectly fine.

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Diana Lee, Hutchison Port Holdings Trust - CFO [21]

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So, what I meant about the $1 billion is that it would be (inaudible). Of course, what he is saying is that we will be saving on the interest cost. But it's not really one to one. By spending like $500 million or something more on the debt repayment, it doesn't mean that we could save as much interest expense. So, in a way, what I was referring to is that we don't have a set ratio on how much we need to distribute versus the debt repayment. So there's no set percentage, but in the event if we further increase the debt repayment, then it just means that the DPU will automatically increase, so despite we do have some saving in the interest expense, but that's not enough to compensate for the additional amount that we use for the debt repayment. So, I guess, right now, we're not really forecasting in the event of any interest rate hike, whether we should increase it or we should not. So, bear in mind that in the event where there is an interest rate hike, the DPU automatically, or actually the distributable cash amount would automatically be reduced already, because of the increase in the interest payment. So we have to bear that in mind as well.

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Operator [22]

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(Operator instructions) Calvin Wong, JPMorgan.

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Calvin Wong, JP Morgan - Analyst [23]

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I just want to ask one follow-up here. Can you just talk a bit about the Huizhou asset that was acquired, and the impact was a bit negative in the first quarter, albeit not very substantial relative to the rest of your operations. But what's your expectations there and sort of the outlook on the impact of that particular asset going forward?

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Gerry Yim, Hutchison Port Holdings Trust - CEO [24]

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Right, okay, Huizhou, we added Huizhou from January 1 this year. If you customize that, Yantian is very strong in export to US and Europe, but we are not very strong in intra-Asia business export or trade with intra-Asia region. Huizhou is repurchased at a reasonable price and it is just starting to -- going into full operation now and we will be running it as part of Yantian, to develop predominantly an intra-Asia business together with existing business of Yantian. So in that case, you will have a more comprehensive service offering out of Shenzhen and [Wenzhou], because this is actually very close. And so, because this has got a different cost base and serving a different type of business, we can actually have a slightly different pricing model for Huizhou. So long -- ongoing, we believe that Huizhou will be complementary to our Yantian existing services and give customers a full range of service. And because this is just starting to become operational, we expect we have to invest in it for a number of years, maybe up to three years, so that we can get the full benefit of it.

Now, the initial indication is promising. We have increased our volumes out of Huizhou and also the alliance have actually put more of the intra-Asia services into Yantian. Now that is the testimonial of -- they believe that Shenzhen, East Side [best pass] can provide them with a good service network to cover the world and not just US and Europe. So I think the jury is still out. We will continue to work on it very hard. It is not easy, because we are developing a new market, but I think it is a good addition to our existing portfolio.

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Diana Lee, Hutchison Port Holdings Trust - CFO [25]

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And just [a fresh look] on this is that despite in Huizhou that a loss like we took, effectively [about $15 million] loss this year, or this quarter, is actually less than what we expected when we did the forecast of Huizhou. So, in a way, we did expect that there would be losses. As Gerry was saying that at the start-up phase, we do expect in a couple of years it will turn around.

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Calvin Wong, JP Morgan - Analyst [26]

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Sort of going into second quarter with the alliance you mentioned, there's been more allocation within Huizhou. So on a quarterly basis, can we expect that loss to start narrowing steadily from 2Q? And can you just remind me if there is any additional CapEx necessary for the Huizhou asset?

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Gerry Yim, Hutchison Port Holdings Trust - CEO [27]

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Let me take the first part. I don't think you should expect any major reduction in the loss for Huizhou, because, first of all, it's a start-up; and also it is not a big number. So we are talking about a small loss only. So, in the whole scheme of things, it's not going to significantly impact our Yantian or the Trust profit. But I think you should expect more of the same for the second and third quarter.

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Diana Lee, Hutchison Port Holdings Trust - CFO [28]

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And for the tax needs, we do expect the need of like about $200 million or so for Huizhou, and that will be financed by borrowing. But Huizhou is actually (inaudible) company, so that's not going to hit into our balance sheet.

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Operator [29]

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Thank you. Ladies and gentlemen, as there are no further questions, this concludes today's conference call. Thank you for your participation, you may now disconnect.