China Merchants Holdings Pacific

[greengiraffe]

Stock has just gone cd 3 cents y'day.

Co has committed for the 1st time a clear dividend policy in years - at 5.5 cents for the next 2 years. It is trading at below NTA in excess of S$0.85.

What is the main risks in CM Pac given its defensive earnings from infrastructure ownership in high growth China.

I understand that liquidity is a big issue given that main holder controls 82.5% and possible 85% post conversion of long outstanding RCPS.

Any buddies care to educate fellow forumers?

[Nick]

My brief comments -

Co has committed for the 1st time a clear dividend policy in years - at 5.5 cents for the next 2 years. It is trading at below NTA in excess of S$0.85.

The previous policy was a minimum of 50% of net profit to be distributed to shareholders. Historically, the payout ratio was approx 60 - 70% due to the low capex and being debt-free in both Group level and in the under-lying asset level. This gave it flexibility in declaring high payouts. However, with the debt-funded acquisition of YTW (which also carries debt in its books) coupled with the gains on disposal of Yuyao Highway, I believe the Management is being conservative by guiding a 5.5 cent payout for the next 2 years. A 50-60% payout policy may be too much for them to handle at this stage. An absolute dividend figure do have its advantages - I recall being shocked when they slashed the dividend to 2.0 cents due to impairment of Yuyao Highway in 2H 2009 despite a growth in the core profits.

What is the main risks in CM Pac given its defensive earnings from infrastructure ownership in high growth China.

Competition from toll-free roads and natural disasters. Possible asset dumping from CMG. Dilutive placements etc.

Since these assets are concession based assets, they do have a terminal life-span. Hence, it is imperative for CM Pacific to build up its cash hoard over the years to finance new acquisitions to extend the average concession period of its portfolio. If they are unable to purchase new toll roads (due to high prices) or lack of opportunities, they might end up with no revenue generating assets in the next 2 decades. Its small size also prevents it from engaging in BOT investments unlike its larger SEHK peers. I don't think debt is an issue here with its low gearing and consistent debt repayment. Its not self-liquidating as cash is being retained for asset replenishment.

[Drizzt]

there are still a risk of dilution. currently the number of outstanding shares is 719 while if the shares are converted the total outstanding shares will reach 854.

i talk a fair bit of the sustainablilty of the dividends up to 2015 (estimation) in my post here http://www.investmentmoats.com/money-man...-on-track/

still toll roads are terminal and if massive earthquake hits thats an issue. i am not sure if they are insured against that.

[greengiraffe]

Thanks many buddies for their invaluable experience and views on CM Pac.

One question that arose on my mind:

How come many S chips always cited inability or a big hassle to remit RMB out of their mainland operations to pay dividends while CM Pac doesn't seem to have much problems since they started their toll road businesses in 2005?

Moreover, the amount of dividends that they have paid is quite sizable over the years - without ease of rmb remittance, they could hardly afford a generous and sustainable div payout - why are they so different?

[portuser]

My understanding is that shareholders obtain the declared dividends from S-chip companies on time, except that in one year, dividend from Changtian Plastic arrived a day later. It would appear that remitting money out of China for dividend payments poses little problems.
Recently, Fung Choi and China Essence took a while to remit money to pay bondholders. Shanghai Asia received the asset sale proceeds two months after the sale had been finalised.

[chaosdiablo]

Hi Guys,

Do take a look at Sichuan Expressway if you are interested in toll business. As sichuan is growing at 2x china gdp, I think the growth in car will be high there and hence toll business.....

http://en.cygs.com/

A well managed company....

[Nick]

Thanks many buddies for their invaluable experience and views on CM Pac.

One question that arose on my mind:

How come many S chips always cited inability or a big hassle to remit RMB out of their mainland operations to pay dividends while CM Pac doesn't seem to have much problems since they started their toll road businesses in 2005?

Moreover, the amount of dividends that they have paid is quite sizable over the years - without ease of rmb remittance, they could hardly afford a generous and sustainable div payout - why are they so different?

i) YZJ has maintained a 30% payout to shareholders over the past 5 years and did not face any problems doing so. The cash out-flow for FY 2011 dividend of 5.5 cents is S$210 million.

ii) MIIF has two infrastructure investments in China - a) 37% owned Changshu Xinghua Port which has paid $24.3 mil dividends since Dec 2005 and b) 81% owned Hua Nan Expressway which has paid $85.6 mil dividends since Nov 2007. MIIF has faced no problems collecting dividends from these PRC infrastructure assets and paying a semi-annual distribution to their shareholders.

iii) CM Pacific has paid at least 50% of its net profits to their shareholders semi-annually since 2H 2004. It didn't face a problem.

So I am guessing that if the company plans ahead of time, there shouldn't be any problems.

[greengiraffe]

I uncovered some of the following links:

http://wwwen.cmhk.com/n128/index.html

Seems like parent CMG is a pte holding company and appears to be government linked company - in China, its more commonly known as SOE - state owned enterprise.

If you look through the lists of investment holdings - Huajian Transportation Economic Development Center Holding is the main vehicle for toll road investments. Looking at the investee companies, it appears that CMG is the defacto SOE - aka Chinese government investment vehicle.


Chairman Message:
http://wwwen.cmhk.com/n124/n134/c12380/content.html

Introduction:
http://wwwen.cmhk.com/n124/n135/c12935/content.html

Principal Subsidiaries:
http://wwwen.cmhk.com/n124/n136/n139/c12...ntent.html

[Drizzt]

hi greengiraffe, thats was one of the considerations when we look at cmpacific. still due to natural disasters and the history of china companies, we are pretty vigilant in how much should be allocated to it even though how well it sounds.

[Nick]

That's right Greengiraffe - or else, I wouldn't really dared to have invested in this S Chip. The Management would have to think twice before deciding to defraud the Company when the largest investor is linked to the very same government of the land. Of course, it may happen like in the case of China Aviation Oil but I can live with that small risk considering more than half of the profits are paid as dividends and the retained earnings over the years was used to acquire YTW Expressway in Aug 2011 hence implying the cash is real. In any case, in such a business (ie infrastructure / public service etc), it is best to pick a company with links to the Establishment. Nonetheless, as Drizzt mentioned, we are still vigilant !

I don't see much catalyst going forward unless the Company deploys the RMB 450 million raised from the disposal of Yuyao, gears up and raises new equity to purchase more toll roads to boost the EPS (and the dividends) further. The conversion of the remaining 1/3 of the 1.5% RCPS may be a drag as well. And the NZ Property Development business (a legacy business) may continue to bleed cash. Let's see how it goes.

Though the share price has had a solid run since the M&A of YTW. Regrettably, I didn't scoop up shares when it fell below 50 cents (prior the M&A) as I thought the dividend was going to be the usual 4 cents !

http://www.investmentmoats.com/money-man...lacements/ [Article from The Edge]

(Vested)