With analysts projecting China Merchants Port Holdings Company Limited (HKG:144) to record a fall in earnings of -0.60% annualised over the couple of years ahead, let’s stop and consider this damaging sentiment. Investors should consider the forces that are causing this projected increase, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get some insight, this article will interpret China Merchants Port Holdings’s margin performance to assist in analysing the revenue and cost anatomy behind the earnings expectations for the future and the impact it has on shareholder returns relative to the wider industry.View out our latest analysis for China Merchants Port Holdings
Breaking Down 144’s Profit Margin
In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating 144’s profit margin.
Margin Calculation for 144
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = HK$6.03b ÷ HK$8.69b = 69.35%
China Merchants Port Holdings’s margin has expanded in the past five years, as a result of 4.80% in average net income growth and decline in revenue growth of -3.68% on average, which suggests that the company has been able to convert a larger percentage of revenue into net income despite the top line has fallen over the previous 5 years. 144’s most recent margin of 69.35% appears to follow this trend, which suggests that the increase in net income has probably occured due to enhanced cost efficiency as opposed to revenue increases.
How is China Merchants Port Holdings’s margin expected to behave in the future and what could it mean for shareholders?
Margins are expected to shift towards contraction, with annual revenue growth tipped at 3.99% and earnings expected to fall at -0.60% on an annual basis. This suggests the previous earnings growth is expected to reverse due to an increase in costs rather than a dramatic fall in revenue potential. This is causing negative net income growth, whilst revenue growth remains positive, resulting in the expectation for margins to contract. Despite this, those watching the stock must know margin contraction has different impacts on profit and return depending on the underlying situation, which reinforces the importance of deeper research. In many situations, looking at a company’s profit margin in relation to other similar businesses can be more informative. For China Merchants Port Holdings in particular, future profit margin is expected to contract whilst the Infrastructure industry margins remain constant, and at the same time, 144’s projected ROE of 8.65% is less than the 10.11% expected ROE for the rest of industry. This highlights that analysts believe the underlying earnings characteristics mentioned above will provide a lower return for shareholders in relation to the industry. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don’t always give the full picture. Thus, it is essential to run your own analysis on China Merchants Port Holdings’s future expectations whilst maintaining a watchful eye over cost behaviour, because if the business is able to maintain their revenue trajectory, there may be an opportunity to return to positive earnings growth and attractive returns.
For 144, there are three essential aspects you should further research:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is 144 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 144 is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of 144? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!