China Merchants Holdings Pacific

[Nick]

China Merchants Holdings (Pacific) Limited wishes to announce that it will release its financial results for the first quarter ended 31 March 2013 on Thursday, 25 April 2013, after trading hours.

The AR 2012 has been released - http://info.sgx.com/listprosp.nsf/6c6be9...b001fb839/$FILE/China%20Merchant%20AR_Eng.pdf - and if I find something interesting, I will post about it.

For now, I wonder will the Convertible Bond investors convert their bonds into common equity to benefit from the 2H 2012 dividend considering it trades at 6.5% premium to the conversion price ?

(Vested)

[Nick]

I just did a quick review of the recent AR 2012 to get a better understanding of their cash-flow and debt profile in light of the corporate developments in the previous year. At first glance, it might seem that balance sheet strength has deteriorated - absolute net debt figure has increased from HK$1.678 billion to HK$3.175 billion and net debt to equity ratio has risen from 0.25 to 0.45. This would have thrown the earlier premise of the sustainability of CM Pacific business model into the deep end since I had believed that the cash-flow generated from the underlying business should be sufficient to repay the underlying debt, retain for new investments and maintain its dividend forecast. This will run counter to the typical business trust model which do not aim to repay debt but instead seek to maximize cash distributions to unit-holders. There is no right or wrong models - we just have to tweak our valuation method to find the intrinsic value and margin of safety (so I am not bashing business models here !).

In FY 2012, CM Pacific operated 4 expressways - 3 was held for the entire year and 1 was purchased in Nov 2012. It divested Yuyao Highway profitably in the year and did not accrue income from it. Of the 3 expressways, 2 were held under JV structure and did not contain any debt. Only the third and largest expressway - YTW (acquired in July 2011) held debts in its asset level and CM Pacific took on corporate debts at its holding level to partially finance the acquisition. I had expected this debt to be reduced in 2012 as the cash-flow generated from the business should be sufficient in amortizing its loans rapidly. During FY 2012, the Group generated net free cash-flow of HK$1.10 billion and it booked disposal proceeds of HK$0.55 billion from the sale of Yuyao. The cash generated was used to pay a dividend to YTW Minority Interest of HK$0.22 billion and HK$1.15 billion was used to repay debt. The remaining cash was retained for dividend payment to CM Pacific shareholders and working capital needs.

I have quoted a post written a year ago detailing the debts held in CM Pacific and let's see how it has changed this year.

FY 2011 Borrowings

I was very pleased that CM Pacific gave a breakdown of its loans in their latest Annual Report -

Loan A:
Principal: HK$21.7 mil
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties

Loan B:
Principal: HK$1,398.8 mil ($523 mil in USD Facility and $875 HKD Facility)
Interest: 2.92 - 4.01% for USD and 2.76 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.

Loan C:
Principal: $1,603 mil
Interest: 6.52 - 6.71%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.

Loan D:
Principal: $177.1 mil
Interest: 2.87%
Maturity: June 2017
Held by its subsidiary in China.

AR 2012

Loan A:
Principal: HK$0
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties

Loan B:
Principal: HK$741.9 mil
Interest: 2.94 - 4.01% for USD and 2.88 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.

Loan C:
Principal: HK$1,208.5 mil
Interest: 5.92 - 7.32%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.

Loan D:
Principal: HK$137.9 mil
Interest: 3.87%
Maturity: June 2017
Held by its subsidiary in China.

Loan E:
Principal: HK$1,212.5 mil
Interest: 5.90%
Maturity: Payable quarterly till Dec 2018
Held by Beilun Expressway at its asset level.

Loan F:
Principal: HK$49.3 mil
Interest: 7.04%
Maturity: Oct 2013
Held by Beilun Expressway at its asset level.

Convertible Bonds:
Principal: HK$1,064.2 mil
Interest: 1.25%
Maturity: Put Option Nov 2015. Conversion Price: $0.84
Used to partially finance the acquisition of Beilun Expressway in Nov 2012.

This clearly shows that the Management has been deleveraging on its existing Loan A - D while maintaining its dividend paying capability. The debt held by Beilun Port Expressway should be reduced this year steadily. I suspect the Convertible Bonds will be converted to equity prior 2015 as it is currently in the money. This will reduce gearing substantially and can be viewed as a placement at book value (share price was 71 cents during issue of CB). I expect further deleveraging this year on the existing debt. This is crucial as the underlying toll assets are concession based. After the completion of Jiurui Expressway M&A in 2013, the total debt and gearing level will spike further. The risk profile of CM Pacific has changed greatly over the past 4 years - from HK$1.1 billion net cash to a geared company. This isn't necessarily a bad thing as the Group now owns a more balanced and diversified portfolio of quality toll assets. Personally, as long as the Management doesn't acquire duds, the cash generative business should be sufficient in financing future debt repayments and dividend payments. As always, there are substantial risk involved and they have been discussed at length in this thread - if they are more risk yet to be uncovered, please feel free to share your thoughts.

(Vested)

[HitandRun]

Interest charged on Loan E should 5.9%.

Incidentally, according to some friendly competitors, CM Bank should be setting up a branch in Singapore within the next 6 months or so.

[greengiraffe]

Hi Nick,

Fantastic work, Mate. Take a bow.

GG

I just did a quick review of the recent AR 2012 to get a better understanding of their cash-flow and debt profile in light of the corporate developments in the previous year. At first glance, it might seem that balance sheet strength has deteriorated - absolute net debt figure has increased from HK$1.678 billion to HK$3.175 billion and net debt to equity ratio has risen from 0.25 to 0.45. This would have thrown the earlier premise of the sustainability of CM Pacific business model into the deep end since I had believed that the cash-flow generated from the underlying business should be sufficient to repay the underlying debt, retain for new investments and maintain its dividend forecast. This will run counter to the typical business trust model which do not aim to repay debt but instead seek to maximize cash distributions to unit-holders. There is no right or wrong models - we just have to tweak our valuation method to find the intrinsic value and margin of safety (so I am not bashing business models here !).

In FY 2012, CM Pacific operated 4 expressways - 3 was held for the entire year and 1 was purchased in Nov 2012. It divested Yuyao Highway profitably in the year and did not accrue income from it. Of the 3 expressways, 2 were held under JV structure and did not contain any debt. Only the third and largest expressway - YTW (acquired in July 2011) held debts in its asset level and CM Pacific took on corporate debts at its holding level to partially finance the acquisition. I had expected this debt to be reduced in 2012 as the cash-flow generated from the business should be sufficient in amortizing its loans rapidly. During FY 2012, the Group generated net free cash-flow of HK$1.10 billion and it booked disposal proceeds of HK$0.55 billion from the sale of Yuyao. The cash generated was used to pay a dividend to YTW Minority Interest of HK$0.22 billion and HK$1.15 billion was used to repay debt. The remaining cash was retained for dividend payment to CM Pacific shareholders and working capital needs.

I have quoted a post written a year ago detailing the debts held in CM Pacific and let's see how it has changed this year.

FY 2011 Borrowings

I was very pleased that CM Pacific gave a breakdown of its loans in their latest Annual Report -

Loan A:
Principal: HK$21.7 mil
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties

Loan B:
Principal: HK$1,398.8 mil ($523 mil in USD Facility and $875 HKD Facility)
Interest: 2.92 - 4.01% for USD and 2.76 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.

Loan C:
Principal: $1,603 mil
Interest: 6.52 - 6.71%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.

Loan D:
Principal: $177.1 mil
Interest: 2.87%
Maturity: June 2017
Held by its subsidiary in China.

AR 2012

Loan A:
Principal: HK$0
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties

Loan B:
Principal: HK$741.9 mil
Interest: 2.94 - 4.01% for USD and 2.88 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.

Loan C:
Principal: HK$1,208.5 mil
Interest: 5.92 - 7.32%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.

Loan D:
Principal: HK$137.9 mil
Interest: 3.87%
Maturity: June 2017
Held by its subsidiary in China.

Loan E:
Principal: HK$1,212.5 mil
Interest: 2.87%
Maturity: Payable quarterly till Dec 2018
Held by Beilun Expressway at its asset level.

Loan F:
Principal: HK$49.3 mil
Interest: 7.04%
Maturity: Oct 2013
Held by Beilun Expressway at its asset level.

Convertible Bonds:
Principal: HK$1,064.2 mil
Interest: 1.25%
Maturity: Put Option Nov 2015. Conversion Price: $0.84
Used to partially finance the acquisition of Beilun Expressway in Nov 2012.

This clearly shows that the Management has been deleveraging on its existing Loan A - D while maintaining its dividend paying capability. The debt held by Beilun Port Expressway should be reduced this year steadily. I suspect the Convertible Bonds will be converted to equity prior 2015 as it is currently in the money. This will reduce gearing substantially and can be viewed as a placement at book value (share price was 71 cents during issue of CB). I expect further deleveraging this year on the existing debt. This is crucial as the underlying toll assets are concession based. After the completion of Jiurui Expressway M&A in 2013, the total debt and gearing level will spike further. The risk profile of CM Pacific has changed greatly over the past 4 years - from HK$1.1 billion net cash to a geared company. This isn't necessarily a bad thing as the Group now owns a more balanced and diversified portfolio of quality toll assets. Personally, as long as the Management doesn't acquire duds, the cash generative business should be sufficient in financing future debt repayments and dividend payments. As always, there are substantial risk involved and they have been discussed at length in this thread - if they are more risk yet to be uncovered, please feel free to share your thoughts.

(Vested)

[Nick]

China Merchants Holdings (Pacific) posts 14% rise in net profit in 1Q2013

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Results.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Press_Release.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Add_Info_on_Toll_Road_Operations.pdf?openelement [Toll Statistics]

This was a fairly steady quarter with no extraordinary items making it a lot easier to digest. It also marks the first full quarter contribution from Beilun Port Expressway with HK$17 million incremental net profit. The toll roads continue to generate organic growth which managed to off-set the toll-free holiday period for passenger vehicles. Debt continues to be repaid as per schedule and it is likely, the debts associated with the YTW transaction and the underlying YTW debt will be substantially repaid in 2015. As a result, I do hope an eventual increment in dividends to 6.0 cents will take place by then. The only interesting event in 1Q 2013 was the drawdown of US$150 million of short term loans. Considering that the Jiurui Expressway acquisition requires RMB 75 million cash out-flow, this debt is surprising. I wonder is it being used to refinance Jiurui underlying debt upon completion ? Management isn't worried about the debt level currently and have a self imposed 60% net debt to total equity limit (FY 2012: 45%).

To further test the sustainability of the 5.5 SG cents dividend, I decided to assume the conversion of the Convertible Bonds and RCPS into common stock.

Annualized 1Q 2013 NPAT: HK$128 million x 4 = HK$512 million
Interest Savings from CB and RCPS + tax shield = HK$12 million (estimated)
Number of Shares: 718.8m + 135.8m + 218.5m = 1073.1m
EPS = 48.8 HK cents = 7.8 SG cents

This implies that even with full conversion, there is significant room for dividend growth and if we were to use the REIT / Trust model of cash payout (depreciation is not deemed to be an expense), the current dividends are pretty conservative. This isn't a bad deal since the Company is deleveraging to strengthen its balance sheet for future M&A. Personally, while I like the direction the Management is heading, this is not a company or a business that is without risk so we must value it carefully. Based on the closing price of 89 cents, the guided dividend yield is 6.1%.

(Vested)

[greengiraffe]

Hi Nick,

Once again, thanks for the summary. YTW and Beilun appears to matured cash cow but really in life as we aged we cant really have the best of both worlds.

CM Pac is one rare China company that has an excellent track record of returning cash - that for one is a big positive for me.

CM Pac is a UEM in the making - key difference - its a pure owner operator in a huge economy - its a big blue chip in progress.

GG

China Merchants Holdings (Pacific) posts 14% rise in net profit in 1Q2013

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Results.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Press_Release.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...8002D646F/$file/1Q2013-Add_Info_on_Toll_Road_Operations.pdf?openelement [Toll Statistics]

This was a fairly steady quarter with no extraordinary items making it a lot easier to digest. It also marks the first full quarter contribution from Beilun Port Expressway with HK$17 million incremental net profit. The toll roads continue to generate organic growth which managed to off-set the toll-free holiday period for passenger vehicles. Debt continues to be repaid as per schedule and it is likely, the debts associated with the YTW transaction and the underlying YTW debt will be substantially repaid in 2015. As a result, I do hope an eventual increment in dividends to 6.0 cents will take place by then. The only interesting event in 1Q 2013 was the drawdown of US$150 million of short term loans. Considering that the Jiurui Expressway acquisition requires RMB 75 million cash out-flow, this debt is surprising. I wonder is it being used to refinance Jiurui underlying debt upon completion ? Management isn't worried about the debt level currently and have a self imposed 60% net debt to total equity limit (FY 2012: 45%).

To further test the sustainability of the 5.5 SG cents dividend, I decided to assume the conversion of the Convertible Bonds and RCPS into common stock.

Annualized 1Q 2013 NPAT: HK$128 million x 4 = HK$512 million
Interest Savings from CB and RCPS + tax shield = HK$12 million (estimated)
Number of Shares: 718.8m + 135.8m + 218.5m = 1073.1m
EPS = 48.8 HK cents = 7.8 SG cents

This implies that even with full conversion, there is significant room for dividend growth and if we were to use the REIT / Trust model of cash payout (depreciation is not deemed to be an expense), the current dividends are pretty conservative. This isn't a bad deal since the Company is deleveraging to strengthen its balance sheet for future M&A. Personally, while I like the direction the Management is heading, this is not a company or a business that is without risk so we must value it carefully. Based on the closing price of 89 cents, the guided dividend yield is 6.1%.

(Vested)

[Jack31]

Hi Nick & GG,
Many thanks for the great analysis on cmph. Have been reading both ur analysis for almost a year, very detail and informative. Many information I can't even extract from the report (maybe I dont know cause still quite new to stock, only 4 years). If fact the only reason I register at valuebuddie was to thanks you 2.

Pls keep up the good work!!

Have been holding cmph for 1 year plus now. Avg price 0.67. Hope it Cheong more!!! Huat ah!!!

Thanks again & god bless u!

Oh ya btw, somehow I really like this CEO jiang.. Seems very trustworthy guy. Haaaaaa..

[greengiraffe]

Hi Jack,

Thanks for your compliments. Nick is the "godfather" of CMP on vb.

I just add my views from my experience that's all. I have to thank Nick for being so passionate on CMP.

Word of caution - never fall in love with a stock - especially certain pedigree type of counter.

End of the day - investment is about the process of uncovering value. Hopefully the process is rewarding and can help sustain one's lifestyle.

FYI, i only added on to CMP big time round about the same time as you after holding on to odd lots for the longest time. The timing was JIT as the transformation of CMP really only started round about the time we added to position.

GG

Hi Nick & GG,
Many thanks for the great analysis on cmph. Have been reading both ur analysis for almost a year, very detail and informative. Many information I can't even extract from the report (maybe I dont know cause still quite new to stock, only 4 years). If fact the only reason I register at valuebuddie was to thanks you 2.

Pls keep up the good work!!

Have been holding cmph for 1 year plus now. Avg price 0.67. Hope it Cheong more!!! Huat ah!!!

Thanks again & god bless u!

Oh ya btw, somehow I really like this CEO jiang.. Seems very trustworthy guy. Haaaaaa..

[Jacmar]

Hi Nick & GG,


Have been holding cmph for 1 year plus now. Avg price 0.67. Hope it Cheong more!!! Huat ah!!!

Thanks again & god bless u!

Oh ya btw, somehow I really like this CEO jiang.. Seems very trustworthy guy. Haaaaaa..

Since you are new in this forum, there is an unwritten rule that admin says we cannot come here and shout huat here etc. If you have reason to think that prices should go up then pls share your thinking/analysis.

Anyway ,for those invested in cmp, drizzt detailed down more points an analysis of the AGM at his blog.

From my conversation with the CEO after the AGM, it looks like the RCPs is not going to be converted anytime soon(I take it as this yr at least). The reason is that they still own a significant share and if they convert it would aggravate the situation. They have been trying to reduce this %age by issuing convertible bonds.

For those who own MIIF shares, CMP has look at the HNE and they walk away from it as they see Guangdong province and the pricing presents significant risk for it to be an attractive acquisition. It has to be a very significant discount before CMP is interested. This I thought is very prudent as I think MIIF over paid for it last time and now suffering from the toll fee reduction force by the govt.

[greengiraffe]

Hi Nick & GG,


Have been holding cmph for 1 year plus now. Avg price 0.67. Hope it Cheong more!!! Huat ah!!!

Thanks again & god bless u!

Oh ya btw, somehow I really like this CEO jiang.. Seems very trustworthy guy. Haaaaaa..

Since you are new in this forum, there is an unwritten rule that admin says we cannot come here and shout huat here etc. If you have reason to think that prices should go up then pls share your thinking/analysis.

Anyway ,for those invested in cmp, drizzt detailed down more points an analysis of the AGM at his blog.

From my conversation with the CEO after the AGM, it looks like the RCPs is not going to be converted anytime soon(I take it as this yr at least). The reason is that they still own a significant share and if they convert it would aggravate the situation. They have been trying to reduce this %age by issuing convertible bonds.

For those who own MIIF shares, CMP has look at the HNE and they walk away from it as they see Guangdong province and the pricing presents significant risk for it to be an attractive acquisition. It has to be a very significant discount before CMP is interested. This I thought is very prudent as I think MIIF over paid for it last time and now suffering from the toll fee reduction force by the govt.

Sorry,I just like to acknowledge the other sifu on CMP - Drizzt. Both Nick and Drizzt are the "god fathers" of CM Pac on VB.

GG