Moody's says lower economic growth is pressuring China port operators
Moody's Investors Service says that slower economic growth, deteriorating export competitiveness and weak liner profitability are narrowing the headroom within the ratings of Chinese port operators.
"Although manageable capex plans over the next three years will alleviate some of the pressure on their financial profiles, weak liner profitability will limit the port operators' ability to raise handling chargers," says Osbert Tang, a Moody's Vice President and Senior Analyst.
"In addition, export-oriented ports such as Shanghai and Shenzhen will be particularly affected by slowing container throughput amid muted export growth in China," says Tang.
Moody's conclusions are contained in its just-released report, entitled "China Ports - Slower Economic Growth Is Challenging the Sector". The report follows Moody's report on port operators across Asia, entitled "Rated Port Operators - Asia: Challenges on the Rise".
The Moody's report highlights that port operators in China are facing major headwinds from slower economic growth and a weaker throughput outlook, which - due to the high fixed costs of port operations - could lead to margin pressure.
Overcapacity in the liner industry - the key customers of port operators - is exacerbating this pressure on the operators' margins. Moody's forecast global containership capacity will increase by 4.5%-5.5% in 2016, outpacing the expected demand growth of 1.5%-2.5%.
Consequently, shipping lines are facing significant pressure on freight rates, which in turn will make it increasingly difficult for port operators to negotiate higher container handling chargers.
These pressures are somewhat mitigated by the manageable capex plans for the port operators, as most have sufficient capacity to handle mega containerships. This is in contrast to many other Southeast Asian ports, which will still see relatively high capex in the next two years.
Nevertheless, Moody's notes headroom is narrowing in the ratings of the port operators, which it says will likely prompt them to preserve cash flow through stringent cost controls and discipline in overseas expansion.
In that context, China's One Belt, One Road initiative will increase M&A capex for the port operators as they expand overseas, although most operators have thus far been selective in their investment decisions.
In the short term, such geographical expansion will raise the capex burden and increase political, execution and currency risks for the operators, says Moody's.
However, in the longer term - and subject to their ability to manage these challenges - it will allow the operators to realize synergies and increase their geographical diversification.