China Merchants Holdings Pacific

[Nick]

China Merchants Holdings (Pacific) posts 91% jump in net profit at half-time. Company declares interim dividend of 2.75 cents

http://info.sgx.com/webcoranncatth.nsf/V...3002A12E4/$file/1H2012-PressRelease.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...3002A12E4/$file/1H2012-Presentation.pdf?openelement [Presentation Slides]

http://info.sgx.com/webcoranncatth.nsf/V...3002A12E4/$file/1H2012-Results.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...3002A12E4/$file/1H2012-Add_Info_on_Toll_Road_Operations.pdf?openelement [Toll Road Operating Statistics]

1H 2012 Toll Road Operating Performance:

The underlying performances of the toll roads based on 100% ownership.

YTW Expressway

Revenue: HK$691.0 million
NPAT: HK$285.4 million
Net Margin: 41.3%
1H ROE: 5.87%

Guiliu Expressway

Revenue: HK$237.9 million
NPAT: HK$135.2 million
Net Margin: 56.8%

Guihuang Highway

Revenue:HK$89.4 million
NPAT: HK$53.2 million
Net Margin: 59.5%

YTW and Guiliu reported stable operating performances with the latter showing double digit growth in traffic volumes. Guihuang was impacted by competition from a newly opened toll road and this has resulted in significant declines in its earnings in 1H 2012. The property division continues to be loss making with HK$27 million losses in 1H 2012. However, the Management seems to be more optimistic of improving housing prices and sales for the rest of the year.

Balance Sheet Analysis:

CM Pacific will be a highly geared company upon completion of the Beilun Port Expressway towards the end of the year assuming approval is granted from shareholders in the EGM and the various state bodies in PRC. I think it will be wise to examine the 3 'types' of assets currently held under the toll road division - namely, YTW, JVs (Guiliu and Guihuang) and Beilun - and their cash-flow going forward to determine the ability to repay debt and pay a decent dividend.

1H 2012:
YTW underlying debt: HK$1.281 billion
Debt at Holding Company level: HK$1.255 billion
Total Debt: HK$2.536 billion
M&A Payable to CMG: HK$0.537 billion
Dividend Payable: HK$0.343 billion
Total Cash: HK$1.586 billion (excludes RMB 0.3 billion to be paid in 2H 12)
Net Debt: HK$1.83 billion
Total Equity: HK$6.59 billion

I added the M&A and dividend payable as I felt it was 'inflating' the cash position.

The debt are primarily due to YTW M&A and we can expect cash-flow from YTW to repay it regularly. I suspect the underlying cash-flow at YTW asset level will be used to repay the underlying debt while profits accrued at Group level will be used to repay the HK$1.4 bil facility. The RMB 0.45 billion raised from the disposal of Yuyao Highway will be paid in 3 installments in FY 2012 and this will temporarily boost the cash position till the completion of the Beilun Port Expressway deal.

Yongtaiwen Expressway (2030):

CM Pacific acquired 51.0% stake in YTW for RMB 2.3 billion on 6 July 2011. This was financed by internal cash and HK$1.4 billion loan facility. YTW was fully consolidated into the Group B/S resulting in an increase in CM Pacific gearing in 2H 2011 from a net cash gearing.

2H 2011

Revenue: HK$0.687 billion (from 6 July 2011)
Net Profit: HK$0.248 billion (100% stake)
Net Profit + Amortization: HK$0.382 billion
Net Profit after MI: HK$0.127 billion

1H 2012

Revenue: HK$0.691 billion
Net Profit: HK$0.285 billion
Net Profit + Amortization: HK$0.426 billion
Net Profit after MI: HK$0.146 billion

We shall make 1 assumption - YTW pays out 100% of its earnings to their shareholders in the form of dividends. This leaves HK$0.14 billion (or HK$0.28 billion annualized) cash retained at the asset level for debt repayment. This was partially used to reduce debt from HK$1.60 billion to HK$1.28 billion in 1H 2012. Since the bulk of the debt is due in 2014 - 2015, and YTW held around HK$0.5 billion cash as of 31 Dec 2012, I expect a significant portion of it to be repaid over the next 2-3 years before a smaller loan is used to refinance it. Moreover, as loans are amortized, interest expense are reduced allowing more cash to be diverted to debt repayment at the underlying level or to be paid as dividends to their 2 shareholders (like CM Pacific). Eventually, once all the debt is repaid in approximately 5 years, this 'extra' cash deemed as amortization expenses can be used to replenish YTW shareholder's equity investment in the Company or purchase new toll roads.

At Group level, CM Pacific has received HK$0.146 billion profit from their investment in YTW. I suspect priority lies in repaying their HK$1.4 billion loan facility due by July 2015 so as to reduce their gearing and interest expense. As of 2Q 2012, they have managed to reduce the corporate debt by HK$0.3 billion. I think it is likely that all of YTW profits will be used for debt amortization and we can expect the remaining facility to be repaid over the next 4 years assuming no steep decline in YTW profitability. This is in line with the maturity of the current loan facility. Hence, I don't really expect cash-flow from YTW to be used to fund CM Pacific dividends over the near few years barring significant growth in profits.

Beilun Port Expressway (2023 est)

The Management has kindly included some historic performances of the toll road in slide 27-28 of the 1H 12 Presentation. The toll road seems to be relatively geared judging by the high liabilities. The traffic volume and revenue has been growing well from 2009 to 2011.

JV Assets

This compromises of 40% stake in Guiliu Expressway (2024) and 60% stake in Guihuang Highway (2027). The 60% stake in Yuyao Highway was disposed in FY 2012 for RMB 450 million and did not contribute to CM Pacific operating profits this year. It must be noted that there are extraordinary terms in the JV contract - CM Pacific receives 90% share of Guiliu profit + subsidy income till 31 Dec 2009 and 100% share of Guihuang profit + subsidy income till 31 Dec 2014 thereafter the profit sharing reverts back to their shareholding stakes in the JV and subsidy income ceases. These JV assets do not hold any debt at the underlying asset level.

FY 2009

Share of Results + Subsidy Income: HK$0.358 billion
Cash-flow from JV: HK$0.296 billion (Dividend Income + Repayment of Shareholder's loan)

FY 2010

Share of Results + Subsidy Income: HK$0.251 billion
Cash-flow from JV: HK$0.373 billion (Dividend Income + Repayment of Shareholder's loan)

FY 2011

Share of Results + Subsidy Income: HK$0.270 billion
Cash-flow from JV: HK$0.382 billion (Dividend Income + Repayment of Shareholder's loan)

1H 2012

Share of Results + Subsidy Income: HK$0.116 billion
Cash-flow from JV: HK$0.324 billion (Dividend Income + Repayment of Shareholder's loan)

These JV assets are the true cash cow for CM Pacific and will continue to generate cash over the remaining years of its life-span. In 2015, the profit sharing from Guihuang will revert to 60% and this will cause a slight blip then.

CM Pacific Dividends:

1) 1.5% RCPS remains unconverted.

Outstanding Shares: 718.4 mil shares
5.5 SG cents Dividends: HK$0.247 billion
6.0 SG cents Dividends: HK$0.270 billion

2) 1.5% RCPS converted to common shares.

Outstanding Shares: 854.2 mil shares
5.5 SG cents Dividends: HK$0.294 billion
6.0 SG cents Dividends: HK$0.321 billion

It is clear that even with the RCPS conversion, the cash-flow from the JV assets alone is more than sufficient is covering 5.5 SG cents dividend while allowing HK$0.1 billion to be used for debt repayment at Group level. A 6.0 SG cents dividends can be easily covered if no RCPS is converted this year. I am assuming the NZ property development business do not make substantial cash losses exceeding HK$30 million. I believe this is why the Management is confident of maintaining 5.5 cents dividend guidance in FY 2012 and FY 2013.

Conclusion:

1) The 5.5 cents dividend figure is highly sustainable and can be entirely funded by the cash-flow from the JV assets going forward.

2) YTW can repay debt with their retained cash over the next 4-6 years if profitability isn't impaired.

3) At Group level, the debt facility can be repaid with its share of YTW profits and remaining cash-flow from the JV assets.

4) It is likely Beilun Expressway will function in the same manner as YTW - self sufficient in using its total cash-flow to repay its debt and also the Group's borrowing which will be used to finance its acquisition. I expect the cash raised from the Yuyao disposal to partially finance the acquisition.

5) The property division is the wild card. A sharp rise in losses may curtail profitability and its ability to pay a dividend.

6) CM Pacific isn't well diversified yet and any material changes to any single toll road (especially YTW) in the form of toll rate reductions or natural disasters will severely impact its dividend capacity and even its ability to service its debt.

7) I expect equity fund raising in the form of share placements if share prices is sufficiently high enough to justify the dilution in stake by being EPS accretive in financing future M&A.

8) The toll-free period during holidays will impact its toll revenue slightly. Any addition to the toll-free periods may impact its performances.

CM Pacific closed at 72.0 cents giving rise to a dividend yield of 7.6%.

This represents my own analysis of the results and I welcome further discussions with fellow shareholders or interested forummers. If there any errors in the figures or misconceptions in my understanding, please feel free to point it out. This is definitely NOT a buy/sell call.

(Vested)

[Nick]

DBSV has written a research report covering the latest results and the recent M&A deal titled "Another solid acquisition" -

http://www.remisiers.org/cms_images/rese...12_buy.pdf [Report]

There are more details about the Beilun Port Expressway deal and it includes a table computing the impact of share placements on the EPS. It is interesting to note that DBSV is forecasting 6.0 cents dividends in FY 2013 and has $1.09 TP.

(Vested)

[l0nEr]

Just curious, while the company appears to be moated, isnt there risk that the monopoly can be eroded easily, just by a change in government stance (especially to curtail inflation). The toll road operators do not have the ability to set prices, which are under the control of the local government.

Below is a an extract from a Moody's report published on 9 Aug (i think), on Shenzhen International, also a toll road operator.

Moody's Investors Service said China's new toll-free policy is credit negative for Shenzhen International (Baa3 stable)(00152). Last Thursday, China's State Council announced its approval of a Ministry of Transport policy proposal to waive toll fees for passenger cars with seven or fewer seats during four important national holidays, making road travel toll-free approximately 20 days every year.
The holidays include the Spring Festival, Tomb Sweeping Festival, Labour Day and National Day as well as their subsequent days. All toll roads in China will be affected with the exception of airport expressways, over which local authorities have discretion. Shenzhen International invests in and operates 17 toll roads in China. Moody's estimated that its toll income will decline 3%-5%, or about HK$170 million per year. This, coupled with a less favorable economic environment this year, will significantly slow the company's year-on-year growth in toll road revenues to low-single digits from 11.6% in 2011.
The toll-free policy will induce more traffic than usual on Shenzhen International's highways, which are heavily used by local commuters between the Shenzhen municipality and neighboring regions including Hong Kong. Management will have challenges monitoring and controlling traffic volume and will incur higher operating costs during affected holidays. As a result, the agency expects a modest drop in profit margins for the company's toll roads.
The announced policy further indicates that the concession and regulatory framework for toll-road operators is less transparent in China than in developed countries for setting tariffs and protecting against events outside of the control of the concessionaire. In the past decade, there has been no tariff increase for Shenzhen International because toll road operators are already more profitable than other industry sectors in China. The central government authorities, including the State Council and Ministry of Transport, have been studying policy changes including a gradual reduction of toll fees for toll roads, as in this case.
Moody's believes adverse policy changes will be gradually implemented, but their scope will be limited and the negative effect is likely to be mitigated by long-term traffic growth.

[Drizzt]

the traffic growth is kinda crazy. guiliu and guihuang didnt have that kind of traffic last time. ytw looks very mature. cmhp is definitely harping on future growth projections.

china slow down will definitely affect them but i see the increase traffic due to toll revision balancing off.

the downside is that the toll roads are at the mercy of the china government. still wondering why they purchase beilun, unless they expect guihuang kind of growth.

the traffic growth far outweighs the toll rates i feel

[Nick]

I think memories of HNE toll revision remains fresh for MIIF investors resulting in a potential 20-25% reduction in revenue and a sharp decline in HNE valuation from $244 mil in FY 2011 to $140 mil in 1H 2012. HNE was purchased for $297 million in 2007 and received $85.6 million cash distributions (for FY 07 - FY 10). So is there a risk of toll rate reduction - answer is yes ! But looking at the context, HNE was deemed to be one of the most expensive toll road in China and I guess action was taken against it. [Source: http://www.wantchinatimes.com/news-subcl...0602000067]

In CM Pacific case, I would hope the SOE's 82% stake will mitigate such threats. Yuyao Highway was meant to be detolled by the State Govt and no unilateral action occurred. Instead, the Government repurchased the Highway in Jan 2011 for HK$551 million (book value: HK$282 million). Past performance isn't a guide for the future so I will not rule out toll reduction. Its a risk hence the higher earning yield demanded judging by the share price. There are other risk like natural disasters destroying the toll road etc.

In the long run, traffic growth (and not toll rate increase) will be the revenue driver for toll roads in China.

[Nick]

I am a pleasantly surprised to see Nextinsight featuring an article based on their exclusive interview with the CEO of CM Pacific. I think it gives a pretty decent summary of their toll road business in China (started in Dec 2004) and the strength of the Management team.

http://www.nextinsight.net/index.php/sto...g-with-ceo

On another note, I think this announcement from HKSE-listed Hopewell Highway gives a pretty good idea of how the toll-free period during public holidays will affect toll road investors - http://www.hopewellhighway.com/announce/...8_2012.pdf

CM Pacific is largely a yield stock with decent growth prospect.

(Vested)

[Nick]

PROPOSED ISSUE OF CONVERTIBLE BONDS DUE 2017

http://info.sgx.com/webcoranncatth.nsf/V...C00653288/$file/Pricing_Announcement.pdf?openelement [SGX Announcement]

CM Pacific intends to raise HK$1.163 billion Convertible Bond with 1.25% coupon due 2017 with initial conversion price of S$0.840. The proceeds will be used to finance the recent proposed RMB 890 million acquisition of Beilun Port Expressway at the end of 2012. It is interesting to note that the bonds are credit enhanced with standby letter of credit from DBS Bank for 3 years and 30 days. The conversion price will be adjusted if CM Pacific pays a FY dividend in excess of 5.50 cents.

In the near term, this can be viewed positively as the financing for the acquisition is done at relatively cheap cost. If the share price fails to improve and the bonds redeemed in 5 years time, this is akin to a bank debt. However, if the share price do exceed 84 cents for a sustained period of time, the conversion of the shares will increase the free float and lower the gearing.

Assuming full conversion of the RCPS shares and CB, the total share float will 1.072 billion shares. Assuming 5.5 cents dividends is maintained, this requires cash out-flow of $59.0 million or approx HK$0.375 billion. To put this figure in perspective, in 1H 2012, CM Pacific generated PATMI of HK$0.222 billion. This figure excludes any contribution from the proposed acquisition of Beilun Port Expressway.

I expect more details to be revealed in the EGM Circular.

CM Pacific is currently trading at 0.720 SG cents and it has guided dividend yield of 7.6%.

(Vested)

[greengiraffe]

If you look at the details of the convertible, there is a put option that bondholders can exercise to require CM Pac to redeem the bonds after 3 years.

If you look at the convertible, one can be surprised that anyone will be interested to buy it:

i) the annual interest is not exciting at 1.25% versus the current indicative yield of ordinary shares at 7.6%;
ii) the conversion price at $0.84 is quite high given that a bondholder has to forgo the ordinary dividends that is being paid out while holding the bonds.

In any event, it will be in CM Pac's interests to move the share price above the conversion price of $0.84 in 3 years time. This will help reduce the gearing of the company via the conversion of debt into equity.

CM Pac has already been using high dividend yield as a carrot to enhance the appeal of its ordinary shares. Accretive acquisitions will be another organic avenue to generate more cashflows that will lead to higher dividend payout.

In addition, a higher share price may also enable the controlling shareholders to place out shares to improve its liquidity.

PROPOSED ISSUE OF CONVERTIBLE BONDS DUE 2017

http://info.sgx.com/webcoranncatth.nsf/V...C00653288/$file/Pricing_Announcement.pdf?openelement [SGX Announcement]

CM Pacific intends to raise HK$1.163 billion Convertible Bond with 1.25% coupon due 2017 with initial conversion price of S$0.840. The proceeds will be used to finance the recent proposed RMB 890 million acquisition of Beilun Port Expressway at the end of 2012. It is interesting to note that the bonds are credit enhanced with standby letter of credit from DBS Bank for 3 years and 30 days. The conversion price will be adjusted if CM Pacific pays a FY dividend in excess of 5.50 cents.

In the near term, this can be viewed positively as the financing for the acquisition is done at relatively cheap cost. If the share price fails to improve and the bonds redeemed in 5 years time, this is akin to a bank debt. However, if the share price do exceed 84 cents for a sustained period of time, the conversion of the shares will increase the free float and lower the gearing.

Assuming full conversion of the RCPS shares and CB, the total share float will 1.072 billion shares. Assuming 5.5 cents dividends is maintained, this requires cash out-flow of $59.0 million or approx HK$0.375 billion. To put this figure in perspective, in 1H 2012, CM Pacific generated PATMI of HK$0.222 billion. This figure excludes any contribution from the proposed acquisition of Beilun Port Expressway.

I expect more details to be revealed in the EGM Circular.

CM Pacific is currently trading at 0.720 SG cents and it has guided dividend yield of 7.6%.

(Vested)

[Nick]

Hi GreenGiraffe,

I see it as a win-win deal for CM Pacific. If the share price fails to improve and the bond-holders exercise the put option, this is no different from a 3 year 1.25% p.a bank loan with bullet payment. If it improves, it is akin to the share placement which they have been seeking to raise for the past 18 months. Minority shareholder benefit from capital appreciation in the process.

I believe the credit enhancement feature is a possible reason for the low cost of debt. DBS has provided irrevocable standby letter of credit (SBLC) for a period of 3 years and 30 days which bondholders could make a claim under certain circumstances. This will coincide with the put option maturity date.

(Vested)

[Nick]

The dividend book closure dates has been revealed. The 1H 2012 dividend of 2.75 cents will XD on 23 Oct 2012 and be paid on 9 Nov 2012.

http://info.sgx.com/webcorannc.nsf/Annou...endocument