Citi: Upgrading COSCO SHIPPING Ports: Utilization of existing terminals is key to improving returns

Why is Citi upgrading the rating now?

Citi raised its target price for COSCO SHIPPING Ports from HK$5.50 to HK$7.15 and upgraded the stock from Neutral to Buy. Relative to the share price of HK$5.87 cited in the report, the target implies approximately 21.8% upside.
The bank expects port congestion to ease gradually after the peak season in the quarter ending in September, which should particularly benefit throughput at Chinese terminals. Meanwhile, following completion of the company's new terminal in Chancay, Peru, its focus is shifting to improving utilization of existing assets.
Earnings forecasts were raised accordingly: Citi increased its core earnings forecasts for 2026–2028 by 8%, 18% and 16%, respectively, mainly based on higher assumptions for throughput and average price growth in 2026, as well as cost adjustments.

Citi estimates that terminals outside China currently operate at 60%–70% utilization. Handling more cargo at existing facilities could increase operating leverage and thereby improve returns on assets.
The situation at Chinese terminals is different: utilization has already reached 85%–95%, and Citi believes capacity needs to be expanded at existing terminals. The bank expects Chinese ports to remain congested over the next few years, which could accelerate the ramp-up in utilization of expanded capacity and also facilitate the indirect selection of higher-yielding international container cargo.
There is ground to make up on returns: the company's revenue grew 11% year on year in 2025, but its adjusted EBITDA margin fell from 30.8% in 2024 to 27.9%; Citi expects it to recover to 29.8% in 2026.

Citi expects core return on equity to rise from 5% in 2025 to 6.3% in 2028, compared with its previous forecast of 5.5% for 2028. After the revisions, the bank's core earnings forecast for 2026 remains 9% below Bloomberg consensus, but its forecasts for 2027 and 2028 are 21% and 25% higher, respectively.
The target price is based on a discounted cash flow valuation at the end of 2027. Citi raised its annual free cash flow to the firm forecasts for 2026–2040 by an average of 48%, including an average 6.4% increase in adjusted EBITDA forecasts and an average 9% reduction in capital expenditure forecasts. At the same time, it raised the weighted average cost of capital from 8.6% to 10.4%, offsetting part of the valuation gain.
The long-term model assumes average annual throughput growth of 4.7% and average annual revenue growth per twenty-foot equivalent unit of 1.6% in 2025–2035, and a combined US$5 billion in capital expenditure and investments in associates in 2026–2035.

Expansion can ease capacity constraints, but if the company accelerates investment in new projects again, a lengthy capacity ramp-up could delay the realization of operating leverage. Higher-than-expected capital expenditure or acquisitions would also weaken free cash flow.
If container demand is weaker than expected or shipping lines lack discipline in deploying capacity, falling freight rates could weaken ports' pricing power. Persistently rising operating costs and higher-than-expected financing costs would also constrain margin improvement.