China Merchants Holdings Pacific

Hi all,

Doesn't seem to be announced here so for your info...

China Merchants Holdings (Pacific) Limited wishes to announce that it will release its financial results for the third quarter ended 30 September 2014 on Thursday, 6 November 2014, after trading hours.

http://infopub.sgx.com/Apps?A=COW_CorpAn...3cb374f9b3

(Vested)

CMP is currently trading at around a yield of 7.8x%, which is very attractive compared to other companies at this point in time. This is higher than even most REITs. The big difference in valuation prompted me to think more about the risks.
Here are some of them. (Part of my opinion is formed after reading this thread and some of your blogs, so forgive me if I seem to be rehashing some of the things already said.)

- Natural disasters (earthquakes)
Earthquakes are entirely possible, but mid-sized quakes should affect only some sections of roads. There will be a temporary loss of income due to repair costs and road closure. Impact should be limited, unless we are talking about huge earthquakes that lay waste to nearby cities, like the one that happened in Japan 2011.

- Competition from new roads
Unlikely that someone would want to build another highway that runs parallel to the existing roads, unless the traffic density is so high that such a project is justified, in which case there should be enough business for both roads.

- Recession
A recession reduces economical activity, so less trunks transporting building materials and goods for delivery, less people driving to sightseeing destinations, etc. However, impact should not be that significant. (I don't really notice much reduction of traffic in Singapore during recessions)
Perhaps a particularly bad scenario would be a road located in a region very dependent on an industry that is badly hit.

- Government policy on tolls
China government may impose caps on tolls, affecting revenue. Of all the risks, this one seems to be most pausible, especially if a recession occurs and the authorities feel the need to boost economical activity.

http://www.infrastructureviews.com/2013/...ad-sector/

- Accounting irregulalites, etc
S-chips here have a less than pristine reputation, with a number blowing up in various ways.
I read up on a few of the cases, and here are some reasons in the past:

- Cash on balance sheet turns out to be non-existent
Very unlikely for CMP since they have been playing out regular dividend for 10 years or more.

- Exaggerated earnings (hiding of losses)
Toll road revenue should not fluculate drastically in the short term, so it should be difficult to cook the books.
Also, cash is collected at the toll booths, so there should not any ballooning receivables.
Majority owner of CMP is China Merchants Huajian Highway, and most of the CMP directors are Huajian executives. Since Huajian is in the same line of business, I take it that Huajian can easily detect any kind of accounting irregularity in their subsidary.

- Rogue employee running away with company money
There is a recent case where the CEO of a China company listed in Germany simply took company funds and disappeared. (The person denied wrongdoing) I guess there is no guarantee (in any company) that an executive will not turn rogue and disappear with funds. For the case of CMP, the reputation of a major corporation is at stake, so I imagine the authorities would be serious about finding and prosecuting such a person. He would have few places to hide, whether in China or elsewhere. That should be enough deterrence for most people, I think.
But not impossible if a person is desperate enough?

- Forex risk
I am not well vested about Forex to form an opinion, but I read that RMB is doing fine right now.

I probably missed out some risks. Look forward to hearing your opinions

(vested, thinking of adding more)

Hi.

I think all your thoughts on risks are valid, especially the one on regulation

But I think the main reason why the yield is so "high" is because it is undervalued. It is undervalued because it is a s-chip and people are shuning it.

I can't agree more on this perception.

However since CMP is a SOE toll road owner/operator, its quality will shine through eventually like its compatriots listed on HKSE.

CMP has done very well for the last 10 years as a toll road owner/operator.

With its rising scale, we can only expect CMP to deliver more going forward since share price is firmly above its NAV.

There is no need to participate in any Madness just cultivate patience and wait for management delivery.

In Comrades Merchant Parties
We Trust
Vested Core

(28-10-2014, 05:23 PM)Greenrookie Wrote: Hi.

I think all your thoughts on risks are valid, especially the one on regulation

But I think the main reason why the yield is so "high" is because it is undervalued. It is undervalued because it is a s-chip and people are shuning it.

(28-10-2014, 04:27 PM)gzbkel Wrote: CMP is currently trading at around a yield of 7.8x%, which is very attractive compared to other companies at this point in time. This is higher than even most REITs. The big difference in valuation prompted me to think more about the risks.
Here are some of them. (Part of my opinion is formed after reading this thread and some of your blogs, so forgive me if I seem to be rehashing some of the things already said.)

- Natural disasters (earthquakes)
Earthquakes are entirely possible, but mid-sized quakes should affect only some sections of roads. There will be a temporary loss of income due to repair costs and road closure. Impact should be limited, unless we are talking about huge earthquakes that lay waste to nearby cities, like the one that happened in Japan 2011.

- Competition from new roads
Unlikely that someone would want to build another highway that runs parallel to the existing roads, unless the traffic density is so high that such a project is justified, in which case there should be enough business for both roads.

- Recession
A recession reduces economical activity, so less trunks transporting building materials and goods for delivery, less people driving to sightseeing destinations, etc. However, impact should not be that significant. (I don't really notice much reduction of traffic in Singapore during recessions)
Perhaps a particularly bad scenario would be a road located in a region very dependent on an industry that is badly hit.

- Government policy on tolls
China government may impose caps on tolls, affecting revenue. Of all the risks, this one seems to be most pausible, especially if a recession occurs and the authorities feel the need to boost economical activity.

http://www.infrastructureviews.com/2013/...ad-sector/

- Accounting irregulalites, etc
S-chips here have a less than pristine reputation, with a number blowing up in various ways.
I read up on a few of the cases, and here are some reasons in the past:

- Cash on balance sheet turns out to be non-existent
Very unlikely for CMP since they have been playing out regular dividend for 10 years or more.

- Exaggerated earnings (hiding of losses)
Toll road revenue should not fluculate drastically in the short term, so it should be difficult to cook the books.
Also, cash is collected at the toll booths, so there should not any ballooning receivables.
Majority owner of CMP is China Merchants Huajian Highway, and most of the CMP directors are Huajian executives. Since Huajian is in the same line of business, I take it that Huajian can easily detect any kind of accounting irregularity in their subsidary.

- Rogue employee running away with company money
There is a recent case where the CEO of a China company listed in Germany simply took company funds and disappeared. (The person denied wrongdoing) I guess there is no guarantee (in any company) that an executive will not turn rogue and disappear with funds. For the case of CMP, the reputation of a major corporation is at stake, so I imagine the authorities would be serious about finding and prosecuting such a person. He would have few places to hide, whether in China or elsewhere. That should be enough deterrence for most people, I think.
But not impossible if a person is desperate enough?

- Forex risk
I am not well vested about Forex to form an opinion, but I read that RMB is doing fine right now.

I probably missed out some risks. Look forward to hearing your opinions

(vested, thinking of adding more)

Another risk is pollution. If it gets really too hazy to the point that it's unsafe to drive, they might be forced to shut down the highway.

On forex risk, RMB might decline if PBOC decides to weaken the RMB to boost exports. That's not unexpected considering the fact that the major economies' central banks are currently engaged in "currency war".

^^ That is an interesting thought.
For revenue to be significantly impacted, the road will need to be closed for days or weeks.
It will take really unprecedented haze for them to do something so drastic.
Perhaps they will try a speed limit first.

(29-10-2014, 08:14 AM)gzbkel Wrote: ^^ That is an interesting thought.
For revenue to be significantly impacted, the road will need to be closed for days or weeks.
It will take really unprecedented haze for them to do something so drastic.
Perhaps they will try a speed limit first.

Just wish to share my thought...on an additional risk
Do you notice that the Chinese govt is building up more roads (in particular, roads parallel to the toll highway). Such roads are 国道。Such old roads are being widen and re-surfaced, and toll-free...some even 4 lanes each way! Obviously such alternatives took some profit away from the toll operators!
(vested before.)

(29-10-2014, 08:14 AM)gzbkel Wrote: ^^ That is an interesting thought.
For revenue to be significantly impacted, the road will need to be closed for days or weeks.
It will take really unprecedented haze for them to do something so drastic.
Perhaps they will try a speed limit first.

It is not uncommon for authorities to close highway due to weather condition in China. It is normally for hour(s) only, rather than day(s). I was trapped in the closure before during a business trip

The accumulative days of closure is a real concern IMO

(vested)

my concern is there are so many convertible in this stock.. how many shares will be converted in near future? how much dilution will that be?

For this counter, I guess we have to be patient. It is currently under-performing for my portfolio and sometimes I am really tempted to reallocate it to other companies I hold.

But knowing the great cash generating ability CMP has compared to its current valuation, coupled by the "support mountain" of being an SOE makes me want to wait longer.