China Ports:Guangdong, Tianjin and Fujian become the second batch of FTZs

Free Trade Zone extended to Guangdong, Tianjin and Fujian

    According to Sina.com, China’s prime minister Li Keqiang announced on aState Council executive meeting on Dec 12 that three new Free Trade Zones(FTZ) will be established in Guangdong, Tianjin and Fujian. The new zoneswould leverage on the successful experience of Shanghai FTZ (approved inAug 2013) but each would have its own "local characteristics". According toSing Tao, the three new FTZs would be much larger than Shanghai FTZ (28 sqkm) in terms of the site area. The “Guangdong-HK-Macau FTZ” will have a sizeof 931 sq km, including Nansha in Guangzhou, Qianhai in Shenzhen, Hengqinin Zhuhai and Guangzhou Baiyun Airport Bonded Zone; Tianjin has proposedtwo plans - one with 64.5 sq km and the other 260 sq km; the Fujian FTZ willhave an area of 644 sq. km.

    More flexibility for foreign trade to attract transshipment volume

    There are currently 15 bonded zones nationwide in Shanghai, Tianjin,Shenzhen, Guangzhou, Xiamen, Fuzhou, etc. Cargoes entering into thesezones are not subject to custom duties and cargo owners do not need to claimduty rebate when re-exporting them. Aside from these preferential policies,FTZs also enjoy more flexibility and do not require custom checks for mostcargoes similar to that in Hong Kong. We expect the ports in these FTZs tocapture more international transshipment cargos over time, which represent0%/4%/3%/18% of the container port throughput in Tianjin, Xiamen,Guangzhou and Shenzhen respectively in 2013. As a reference, after the setupof FTZ last year, Shanghai’s international transshipment has grown 6.7% ytd,outpacing 5.5% for its overall container volume. By way of sensitivity, every10% increase in container throughput would raise port operators’ 2015Eearnings 7-9%, by our estimate.

    Potential redevelopment of port/vacant lands; HK$2.3/sh for CMH

    As discussed in our prior reports, one potential upside for port operatorswould be the redevelopment of underutilized port sites into commercial orresidential projects. To recap, SIPG owns three terminals handling domesticcargoes with a total site area of 0.8mn sqm, which we think has the potential tobe converted. We estimate Rmb0.86/share accretion to SIPG if all converted.

    CMH owns 1.4mn sqm of land in Qianhai. If it were to be sold back to thegovernment or parentco for redevelopment at the prevailing market price forindustrial land, we estimate HK$2.3/share accretion (net of LAT) to our basecase NAV of HK$31. We are mindful that the share prices of Tianjin, Dalian andSIPG may be subject to near-term pull-back after recent run-ups, similar towhat SIPG experienced in 2013 after SH FTZ was announced.