China Merchants Holdings (Pacific) continues growth path with acquisition of Ningbo Beilun Port Expressway in China
http://info.sgx.com/webcoranncatth.nsf/V...2001ADF37/$file/Acquisition-PressRelease.pdf?openelement [Press Release]
http://info.sgx.com/webcoranncatth.nsf/V...2001D7627/$file/Acquisition_Announcement.PDF?openelement [SGX Announcement]
http://info.sgx.com/webcoranncatth.nsf/V...2001D7627/$file/Appendix_2-Executive_Summary_of_Traffic_Consultant_Report.PDF?openelement [Executive Summary of Traffic Consultant Report]
http://info.sgx.com/webcoranncatth.nsf/V...2001D7627/$file/Appendix_3-Valuation_Report.PDF?openelement [Valuation Report]
This marks the second acquisition made by CM Pacific since it ventured into the toll road operating business in Dec 2004. This is in line with the new plans of inorganic growth highlighted in the recent Annual Report and I think this is a good strategy since it diversifies their sources of revenue reducing the reliance on any single toll road.
Beilun Port Expressway:
Beilun Port Expressway is part of the China National Expressway System connecting Tongjiang of Heilongjiang province and Sanya of Hainan province and serves the north-south coastal traffic demand. Originating from the Beilun district of Ningbo at the east, it extends to the west and intersects with the Ningbo end of the Hangzhou-Ningbo Expressway and the Yongjin Expressway, at which it turns southwards and extends to connect with the Yongtaiwen Expressway. Beilun Port Expressway is an important route that connects Beilun Port, a natural deep water port in China to the prosperous regions in Zhejiang, including Hangzhou, Wenzhou and Taizhou.
Payment Details:
One interesting aspect of the deal is the ambiguity about the date of expiry of the toll operating rights since it depends on the approval of the provincial government. The minimum date of expiry is Dec 2023 and the maximum period is on or after Dec 2027. As a result, the payment has been split into 2 tranches - the first tranche assumes toll operating rights will expire in Dec 2023 and payment of RMB 890 million will be paid while the second tranche will be a variable sum of between 1 RMB to 400 million RMB depending on the date of expiry after Dec 2023. This is also subjected to possible toll rate reductions after Dec 2023.
Valuation and EPS Impact:
The toll road generated PBT of RMB 115 million in FY 2011 giving rise to underlying earning before tax yield of 12.9% (assuming RMB 890 million price). Based on the SGX Announcement, we can expect EPS to increase by approximately 1 SG cents after factoring in interest expense at Group level and taxation. This will enable CM Pacific to maintain their dividend guidance of at least 5.5 cents per share since EPS will be approx 11 cents (current share float) or approx 9 cents (full conversion of RCPS). Essentially, this isn't a game changer like YTW acquisition but a smaller one meant to complement its income and diversify its exposure to any single road.
Debt:
CM Pacific intends to finance the acquisition with HK$1.16 billion external debt and may also utilize their internal cash which was bolstered by the recent sale of Yuyao Highway for RMB 450 million. If I am not mistaken, the underlying toll road holds on to debt judging by pg 17 of the SGX Announcement where total debt had increased from HK$3.18 bil to HK$5.83 bil. Since HK$1.16 bil was raised to finance the acquisition, I suspect approx HK$1.5 bil debt is consolidated in Beilun Port B/S. However, I am not entirely apprehensive with the relatively high gearing post acquisition as CM Pacific only pays out 60% of its net profit to shareholder based on the 5.5 cents guidance. This leaves a further 30-40% of its profit and cash-flow (not considered as profit) like amortization of toll operating rights and repayment of JV shareholder loan available for debt repayment and to finance new toll roads purchase. To put things in perspective, since venturing into the toll road business in Dec 2004, CM Pacific has never raised a single cent of equity from shareholders - instead it paid a total 42.0 SG cents of dividends and boosted its NAV from HK$3.1 bil in Dec 2005 to HK$4.1 bil in Dec 2011.
My thoughts:
I look forward to the EGM Circular detailing more information about Beilun Expressway financials and its historic traffic performances. I am not certain whether is this a matured toll road like YTW or a growing one like Guiliu. Considering that this is linked to a port, I suspect traffic volumes is tied to the economic growth (in the form of exports) from the industries in that region. The capital recycling (disposing of Yuyao) must be justified by stronger performance of the newly acquired toll road over the next few years. I expect equity fund raising in the form of placements in the future if the share price rises to a reasonably high level to finance future acquisitions.
CM Pacific just started trading at 71.0 cents which gives rise to a dividend yield of 7.7% (assuming 5.5 cents div). The 1H results and interim dividends will be announced tomorrow.
Please feel free to point out any errors in my figures or misconception in my interpretation of the details behind this M&A deal.
(Vested)
Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.
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