China Merchants Holdings Pacific

[greengiraffe]

The above mentioned DBSV report can be viewed here - https://groups.google.com/group/brokerag...authuser=0 [Report]

According to DBSV, it is likely the management will tap into offshore loans (denominated in HKD and USD) to refinance the loans. Looking at the 2011 Annual Report, these offshore loans interest rates (used to finance YTW acquisition at Group level) were 2.92 - 4.01% for USD and 2.76 - 3.94% for HKD Facilities. The chart provided in pg 3 of the report highlights that if the cost of debt is reduced to 3.5%, the toll road will break even this year and possibly generate a profit in FY 2014. DBSV has also speculated that the enterprise value of the toll road is lesser than the cost of construction of the road which lends credence to what has been discussed in this thread ie CM Pacific was bailing out the road.

The Management also announced today that it has completed the disposal of Yuyao Highway on 28 December 2012 - http://info.sgx.com/webcoranncatth.nsf/V...70033562B/$file/Completion_Announcement-Yuyao_Highway.pdf?openelement - and have received the final third of the RMB 450 million proceeds.

CM Pacific closed at 78.5 cents which translates to 7.0% yield with approx 55 - 60% earnings payout. I am going to miss the days when the shares was trading at 9 - 10% yield ! I really hope the Group is able to maintain its EPS in 2014 onwards after the CB and RCPS are converted. CMG has been kind to not convert it yet.

(Vested)

I think CMG has been bounded by some regulation that prevented new shares on CM Pac to be issued below book value - i read it somewhere that state back companies are not allowed to issue new shares below their book values.

Hence if you observed, CM Pac has to structure convertible notes at 0.84 and priced new shares for asset purchases at 0.84 as well.

Don't think its a conincidence but neither there is any magic in the pricing.

[Nick]

Thanks GG. I was not previously aware of that rule affecting SOE.

I have long wondered why they have yet to convert the remaining 1/3 of the RCPS shares. It certainly makes no economic sense for CMG to continue accruing the 1.5% interest from the preference shares instead of converting it to common shares and enjoy the substantially higher yield. The par value of the preference shares is 50 cents so it is deep in the money. They have already converted the other 2/3 of the RCPS in 2 separate occasions so precedent has been set. My guess is that prior 2012, they were afraid of diluting the dividend per share ? It makes it likely that the conversion will take place in 2013 due to increased profit contribution from Beilun Port Expressway and Jiurui Expressway from 2014 onwards. Moreover, with the likely conversion of the convertible bonds and recent placement of new shares, conversion of the RCPS wouldn't further decrease the public free float. I think it might be a good idea if CM Pacific starts a DRP (ie scrip dividend) once the share price exceeds NAV.

CM Pacific is trading at 81.5 cents which translates to a dividend yield of 6.75%.

(Vested)

[greengiraffe]

Thanks GG. I was not previously aware of that rule affecting SOE.

I have long wondered why they have yet to convert the remaining 1/3 of the RCPS shares. It certainly makes no economic sense for CMG to continue accruing the 1.5% interest from the preference shares instead of converting it to common shares and enjoy the substantially higher yield. The par value of the preference shares is 50 cents so it is deep in the money. They have already converted the other 2/3 of the RCPS in 2 separate occasions so precedent has been set. My guess is that prior 2012, they were afraid of diluting the dividend per share ? It makes it likely that the conversion will take place in 2013 due to increased profit contribution from Beilun Port Expressway and Jiurui Expressway from 2014 onwards. Moreover, with the likely conversion of the convertible bonds and recent placement of new shares, conversion of the RCPS wouldn't further decrease the public free float. I think it might be a good idea if CM Pacific starts a DRP (ie scrip dividend) once the share price exceeds NAV.

CM Pacific is trading at 81.5 cents which translates to a dividend yield of 6.75%.

(Vested)

No worries. Chinese are fantastic financial engineers. After laying the foundation to accumulate a quality portfolio of toll roads, rest be assured they already have a comprehensive plan to ensure shareholders' wealth in CM Pac is enhanced over time. Do note that they have been sitting on a non core NZ prop division for more than a decade and the final clean-up is not a mere non core divestment exercise.

The recent increased leverage to actively increase the diversity of the toll road network is also no coincidence. Hence we can expect more proactive investor relations going forward.

[Nick]

The resolution to acquire Jiurui Expressway passed yesterday with 99.98% of the votes polled accepting it.

http://info.sgx.com/webcoranncatth.nsf/V...A0026AA16/$file/Results_of_EGM.pdf?openelement [EGM Results]

http://info.sgx.com/webcoranncatth.nsf/V...A0026AA16/$file/EGM_Presentation.pdf?openelement [EGM Presentation]

Any buddy attended the EGM yesterday and care to share what they learnt ?

(Vested)

[Nick]

China Merchants Holdings (Pacific) posts 105% jump in net profit in FY2012

Declares final dividend of 2.75 cents per share, making total of 5.5 cents per share for the year

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Press_Release.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Results.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Presentation.pdf?openelement [PPT Slides]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Add_Info_on_Toll_Road_Operations.pdf?openelement [Toll Operation Data]

My personal thoughts:

Overall satisfactory results despite decline in operating results from Guihuang and newly acquired Beilun Expressway. Overall revenue declined by 2% to RMB 2.1 billion and I believe this can be attributed to 2 factors - competing road causing Guihuang revenue to drop by 14% and the recently introduced measure of toll-free roads during public holidays. YTW generated its first full year contribution with net profits of HK$261 million which implies 10% return on their HK$2.556 billion investment.

The FCF generated in FY 2013 amounted to HK$1.2 billion of which HK$0.22 billion was paid to YTW minority interest and HK$0.25 billion will be paid to CM Pacific shareholders. The remaining cash-flow coupled with the sale proceeds of HK$0.55 billion was used to repay HK$1.15 billion debt. The Company also raised HK$1.163 billion convertible bonds to finance the acquisition of Beilun Port Expressway in November 2012 and to partially finance the proposed acquisition of Jiurui Expressway. Going forward, since the convertible bonds is deep in the money (strike price of $0.84 vs current price of $0.93), it might be converted to common equity. Together with the conversion of the RCPS and the issue of 72 million new shares to the Jiurui vendors, the total free float may increase to 1144 million shares. To maintain this level of distribution, the Company will need pay out HK$400 million and coupled with the HK$200 - 250 million paid to the YTW minority interest, this represent half of the FCF generated. Granted, the Company will benefit from a full year contribution from Beilun Port Expressway and that Jiurui may surprise with positive cash-flow, it will be interesting to see whether the dividend will be maintained in 2014 onwards.

I don't see an issue with their gearing at the moment. The bulk of the cash-flow is being diverted to repaying debt. Assuming the convertible bond is converted, I expect the debt to be repaid within 5 years (ie 600 mil amortized p.a). This is highly enticing since debt-free infrastructure assets are truly 'cash-cows' as evident from the 2 JV toll assets. I suspect M&A efforts will slow down in 2013 with focus on turning Jiurui around, repaying existing bank debt and restructuring the company post disposal of the property division. I cannot rule out the possibility of equity financed M&A since the share price is trading above the book value of $0.87. Any regulatory changes in China may lead to a decline in the toll revenue going forward. Lastly, Management has guided dividend payout of 5.5 cents in 2013 which translates to a dividend yield of 5.9%.

(Vested)

[greengiraffe]

Hi Nick,

Thanks for your in depth analysis once again.

Fundamentals aside, there will be several milestone to watch out for on CM Pac:

i) note that the parent company only saw day light on their investments recently - only recently did CM Pac start to trade above book value.

ii) as long as CM Pac sustain above book value for a period of time, we will finally see the conversion of RCCPS by the parent company.

iii) given that the notes issued recently is also in the money, this is an additional source of shares to enhance liquidity.

Already, CM Pac's trading liquidity has improved alongside with a steady appreciation of share price.

Given that CM Pac mgt team's good track record of acquiring and disposing off core businesses in toll road, a placement from the parent will be an interesting milestone as it will improve CM Pac's trading liquidity and result in a possible inclusion in a stock index. So far CM Pac has avoided the pitfall of scandal marred Chinese stocks and I do not expect its track record to be tainted even in the event of a share placement.

However, a share placement will serve as an indication of controlling shareholder's view on CM Pac's value.

Akan Datang
Vested

China Merchants Holdings (Pacific) posts 105% jump in net profit in FY2012

Declares final dividend of 2.75 cents per share, making total of 5.5 cents per share for the year

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Press_Release.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Results.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Presentation.pdf?openelement [PPT Slides]

http://info.sgx.com/webcoranncatth.nsf/V...F002ED86B/$file/FY2012-Add_Info_on_Toll_Road_Operations.pdf?openelement [Toll Operation Data]

My personal thoughts:

Overall satisfactory results despite decline in operating results from Guihuang and newly acquired Beilun Expressway. Overall revenue declined by 2% to RMB 2.1 billion and I believe this can be attributed to 2 factors - competing road causing Guihuang revenue to drop by 14% and the recently introduced measure of toll-free roads during public holidays. YTW generated its first full year contribution with net profits of HK$261 million which implies 10% return on their HK$2.556 billion investment.

The FCF generated in FY 2013 amounted to HK$1.2 billion of which HK$0.22 billion was paid to YTW minority interest and HK$0.25 billion will be paid to CM Pacific shareholders. The remaining cash-flow coupled with the sale proceeds of HK$0.55 billion was used to repay HK$1.15 billion debt. The Company also raised HK$1.163 billion convertible bonds to finance the acquisition of Beilun Port Expressway in November 2012 and to partially finance the proposed acquisition of Jiurui Expressway. Going forward, since the convertible bonds is deep in the money (strike price of $0.84 vs current price of $0.93), it might be converted to common equity. Together with the conversion of the RCPS and the issue of 72 million new shares to the Jiurui vendors, the total free float may increase to 1144 million shares. To maintain this level of distribution, the Company will need pay out HK$400 million and coupled with the HK$200 - 250 million paid to the YTW minority interest, this represent half of the FCF generated. Granted, the Company will benefit from a full year contribution from Beilun Port Expressway and that Jiurui may surprise with positive cash-flow, it will be interesting to see whether the dividend will be maintained in 2014 onwards.

I don't see an issue with their gearing at the moment. The bulk of the cash-flow is being diverted to repaying debt. Assuming the convertible bond is converted, I expect the debt to be repaid within 5 years (ie 600 mil amortized p.a). This is highly enticing since debt-free infrastructure assets are truly 'cash-cows' as evident from the 2 JV toll assets. I suspect M&A efforts will slow down in 2013 with focus on turning Jiurui around, repaying existing bank debt and restructuring the company post disposal of the property division. I cannot rule out the possibility of equity financed M&A since the share price is trading above the book value of $0.87. Any regulatory changes in China may lead to a decline in the toll revenue going forward. Lastly, Management has guided dividend payout of 5.5 cents in 2013 which translates to a dividend yield of 5.9%.

(Vested)

[Nick]

Glad to hear your views GG !

The conversion of the RCPS could have taken place any time since 2010 - they had already converted 2/3 of the original RCPS (previously in 2010). I suspect they feared crashing the share price and destroying what little liquidity the equities possessed if they converted the remaining 1/3. I recall wondering how the dividend will be impacted in such a case then. This was before YTW was acquired. It is now 2013 - shares placed out to vendors, Convertible Bonds will most likely be converted before it XD, scale of the business is larger - conversion of the RCPS is ideal (and probably priced in). Will they do it ? I suspect they will. They are certainly a very patient lot having bidden their time well before engaging in corporate restructuring of their faraway listed subsidiary.

You brought up an interesting point on CMG placing out shares (like what Kep Corp is doing with its K-REIT stake) - certainly possible and probably coupled with issue of new shares to fund M&A. Ideally free float should be around 40% so that investments funds can start to trickle in and as you mentioned, being included in equity indices. I think a dividend paying, SOE-backed company dealing with infrastructure assets in China will be highly palatable to China centric and Asian dividend funds. Haha of course - I don't think this will take place in 2013 but the speed of the transformation since 2010 has been truly breath-taking.

[greengiraffe]

It ain't over till the fat lady sings. So much has been said about China and Chinese companies with their dealings. We still have to remain on guard.

Given that they are still holding on to a big chunk of stocks, I personally think they will not shoot themselves in their own foot.

However, once they are able to dilute their interests, then it would be a different story. Cosco was once touted as Chinese solution to rival the Kep Corps and Semb Corp Marines. However strict regulations prevails.

You are right in pointing out that SOE back Chinese infrastructure plays are rare. Indeed they are and CM Pac is a painstaking product. They will continue to nurture the goose so as to ensure that the supply of eggs will not run dry.

On the latest acquisition, I think they know what they are getting into. It is likely to be a bailout of an over-extended investor in a real estate business. Hence they manage to dictate their terms to dispose off a non-core. However, the side kick to that is that their timing can never be better - NZ prop mkt is starting to recover according to news that I have been reading.

In the meantime, enjoy the ride. Typical bull market placements will involve rising share prices prior to and post placements.

Cheers
GG

Glad to hear your views GG !

The conversion of the RCPS could have taken place any time since 2010 - they had already converted 2/3 of the original RCPS (previously in 2010). I suspect they feared crashing the share price and destroying what little liquidity the equities possessed if they converted the remaining 1/3. I recall wondering how the dividend will be impacted in such a case then. This was before YTW was acquired. It is now 2013 - shares placed out to vendors, Convertible Bonds will most likely be converted before it XD, scale of the business is larger - conversion of the RCPS is ideal (and probably priced in). Will they do it ? I suspect they will. They are certainly a very patient lot having bidden their time well before engaging in corporate restructuring of their faraway listed subsidiary.

You brought up an interesting point on CMG placing out shares (like what Kep Corp is doing with its K-REIT stake) - certainly possible and probably coupled with issue of new shares to fund M&A. Ideally free float should be around 40% so that investments funds can start to trickle in and as you mentioned, being included in equity indices. I think a dividend paying, SOE-backed company dealing with infrastructure assets in China will be highly palatable to China centric and Asian dividend funds. Haha of course - I don't think this will take place in 2013 but the speed of the transformation since 2010 has been truly breath-taking.

[Nick]

Thanks once again for articulating your views GG. I do agree - lets see where this ride take us (hopefully not headlong into a speeding car !).

On another note, MIIF has recently restructured their Management fees to promote asset divestment with a slashing of their base fee by 50% and a $15 million success fee payable if the Management divest the 3 assets at the current valuation. Interestingly, the total proceeds will be used to determine whether the proceeds gained entitles MIMAL to its fees ie the success fee hinges on the total proceeds from all 3 assets as opposed to any single asset giving much leeway to MIMAL to divest assets selectively. Essentially, it could use the gains from one asset to offset the losses from another. I am not sure how much time they will wait before they divest but considering the current liquidity of CM Pacific (especially after a potential CB conversion), I will not rule out a bid placed for Hua Nan Expressway to further diversify their geographical presence into the highly urban Guangdong this year. Granted, this asset carries much baggage with its high toll fees (partially mitigated by toll cuts) - perhaps CM Pacific could reduce the toll rates even further in return for a restructuring of loan rate and lower acquisition price to please the population ! Of course, there will be many suitors for this matured toll road so one can only hope.

[greengiraffe]

Hi Nick,

In Rome do what the Romans do. The MIIF experience served to remind us that you need the right connections to successfully operate a business in China.

So far, CM Pac has demonstrated this important ingredient - when there are detrimental changes to the tolling ability (such as detolling) of its roads, it has sold roads back to local governments and reinvested somewhere. This is the X-factor that is rarely available to any free market enterprise.

The Macquarie model has expired. MIIF alongside with renamed Sydney Airports are the remaining listed infrastructure entities within the downsized Macquarie Bank fund management model. Its a legacy and a pale shadow of what used to be a money spinner for the Australian Investment Banks. Angmo testing their stringent models in emerging economies - like the old chinese saying goes - Door Also Don't Have.

Anyway, MIIF is currently in an exit mode and has designed the new structure in Mac Banks favour to milk the remaining available fees. I personally doubt that CM Pac will be interested in acquiring MIIF's toll road when there are plenty of distressed assets currently available from over zealous local businesses.

CM Pac by virtues of its conservatively run conglomerate parent is likely to have access to such information in land vast China. Don't forget they have a bank within the Group and hence and perhaps that is the source of such distress asset sales.

Its about connections in China and such connections are delicate and unpredictable. In China, expect the unexpected.

GG

Thanks once again for articulating your views GG. I do agree - lets see where this ride take us (hopefully not headlong into a speeding car !).

On another note, MIIF has recently restructured their Management fees to promote asset divestment with a slashing of their base fee by 50% and a $15 million success fee payable if the Management divest the 3 assets at the current valuation. Interestingly, the total proceeds will be used to determine whether the proceeds gained entitles MIMAL to its fees ie the success fee hinges on the total proceeds from all 3 assets as opposed to any single asset giving much leeway to MIMAL to divest assets selectively. Essentially, it could use the gains from one asset to offset the losses from another. I am not sure how much time they will wait before they divest but considering the current liquidity of CM Pacific (especially after a potential CB conversion), I will not rule out a bid placed for Hua Nan Expressway to further diversify their geographical presence into the highly urban Guangdong this year. Granted, this asset carries much baggage with its high toll fees (partially mitigated by toll cuts) - perhaps CM Pacific could reduce the toll rates even further in return for a restructuring of loan rate and lower acquisition price to please the population ! Of course, there will be many suitors for this matured toll road so one can only hope.