China Merchants Holdings Pacific

analyst piece from Kim Eng

Toll Roads: Sector to be revitalized by reforms?
24/03/2015
The toll road sector has long been ignored. The sector advanced 18% in 2014 primarily driven by its high yield and low interest rate environment, difficult to repeat such performance in the foreseeable future, in our view. The sector has been flat YTD in 2015.

Valuation-wise, the toll road sector is cheap at FY15F PER of 11x, 1.48x PB and 4-5% yield. However, the sector offers flat earnings growth.

The problems confronting the toll road sector include: (i) typically listed toll road assets have an average of 20 years before their toll collection rights expire - definite life expectancy, (ii) a well-built highway network in developed areas has made it increasingly difficult for companies to seek growth through new road construction, (iii) the upside for domestic toll standards is limited based on a comparison with overseas standards and the current policy push for lower logistics costs in China.

The toll road sector is an important area for SOE reform as state ownership is high, we see two possibilities (i) to introduce private investors, PPP scheme, (ii) use in asset securitization given their abundant cash positions, stable cash flows, good asset quality and cheap valuations.

Asset securitization means that local governments could use the toll road assets as collaterals in bond issues. There are some rumours in A-share market suggesting local governments may privatize some of these the toll road assets. Reason for such rumour, we believe, is that some local governments have used non-listed toll roads as collaterals in bond issues.

Whether this will become a trend, we have to wait and see. Undoubtedly, the listed toll road companies are cheap but many local governments are heavily indebted and may not have the financial strength to carry out such privatization. Nevertheless, it is worthwhile to pay close attention to monitor the progress.

Stocks worth to look at are:
Sichuan Expressway (107 HK), yield 3.6%
Jiangsu Expressway (177 HK), yield 4.8%
Shenzhen Expressway (548 HK), yield 4.2%
Zhenjiang Expressway (576 HK), yield 4.7%

By Benny Wong

Investment is a funny thing and there is always tendencies for "investors" to go for higher risks, lower yielding concepts stocks even though they are within a broader definition of infrastructure.

As far as I can see, "investors" enjoy the thrills of high beta water stocks like SIIC, China Everbright in order to ride the Chinese infrastructure reform plays. Personally, I think while these stocks are good SOE parent backing and connections, the valuation that they are paying are much higher in hope of higher growth coming out from the sector reforms.

Toll roads on the other hand, which is more strategic (since a location can only be served by major roads and the rights to toll meant exclusivity for a good number of years) and higher yielding is deemed boring to many of such "investors".

Anyway, only time can tell if value investments is more rewarding than concept chasing...

Formality

http://infopub.sgx.com/FileOpen/Announce...eID=341282

PROPOSED BONUS ISSUE – APPROVAL IN-PRINCIPLE

New step up levels of around 104 in the process of establishing.

Vested
Core Pick

UOB KH Retail Market Monitor:

China Merchants Holdings
Pacific (CMH SP, C22)
Technical BUY with 12.6% potential returns
Last price: S$1.065
Target price: S$1.20
Protective stop: S$1.025

BUY with a target price of S$1.20, with stops placed at S$1.025. The stock has made a breakout from the upward parallel channel formation and currently looks poised to continue trading in its upward trajectory. The MACD indicator appears to have corrected moderately and looks poised to form a bullish crossover above its centreline. Watch the MACD histogram to see if it could move above its centreline.
Expected timeframe: 2 weeks to 2 months.


GG's fundamental take:

CMP offers the highest indicative forward dividend yield of 6.8% amongst the listed Chinese toll road H shares listed on HKSE.

GG's recent price behaviour monitor:

The short term overhang resulting from approximately 10m new shares converted from CBs in March appeared to have been well absorbed late last week after sustained selling pressure of the last few weeks disappeared as sellers between 1.045 - 1.065 were convincingly taken out. The recent low of 104s appeared to be a new base camp from which CMP shares could be starting on a new journey.

Notice of AGM and 2014 annual report should be out this week and will be interesting to share management's insight into historical operations and any forward outlook.

Vested
Core Holdings

http://infopub.sgx.com/FileOpen/Notice_o...eID=342283

3.5 cents declared , payable in 3th June.

Cmp is at a record high today. However, its recent out performance is nothing compared to the H shares peers. In fact, Cmp has underperformed its mainland peers...

Cmp rally of 3.7% is peanuts... H Shares toll road jump between 5% to 20% today. The small cap ones were the big performer. Anhui and sichuan up 20% while sichuan up 14%. Only Yuexiu is miserable with 3% while big caps jiangsu and zhejiang up around 5% after performing strongly recently.

GG

CMP share price performance today is going down on my memory as one of the most spectacular as far as I can remember in terms of price gains and volume traded.

UOB KH's retail market monitor issued last week is turning out to be a genius call.

Interestingly, the consistent conversion of CBs appeared to have dried up temporarily and the recent madness of A and H shares may have resulted in the temporary drought and hence aided CMP's surge.

I have enclosed valuation matrix comprising of the main H shares toll road plays that is under my radar.

Div Yield wise, CMP remains top. Apart from Yuexiu's mediocre price performance, the other H shares' peers dividend yield now stands at between 2.2 - 4.4%.

Price to book wise, CMP is ahead of Sichuan and Yuexiu.

Fundamentally, one of my burning question would be CMP's ability to vulture on acquisition opportunities. The recent boiling financial markets in mainland may have ease the financial difficulties of some of over leverage businessmen and hence toughen the negotiation advantage of CMP when times are harder.

Perhaps this is a question to post to CMP mgt during AGM.

Vested
Core Holdings
GG

If this was a business trust paying out all of its cash-flow as dividend, it be trading at a much higher valuation. But fortunately it is not, the dividends are sustainable though the valuation has grown richer recently. Nonetheless, the current yield stands at 6.0%.

(Vested)

The chairman did say in his AR13 statements that CMPH is committed to pay as dividend at least 50% of underlying net profit, so at the rate that net earnings is growing (CAGR of around 30% in last 6 years by my calculations), maybe we can get more than 6% yield unless the price grows even faster? Or am I doing wishful thinking?

Quite tempted to sell some given current run in price. Never wrong to take profit I suppose.
Waiting for Q1 result see how it goes.. Have high expectation of 9rui.

Very vested.