China Merchants Holdings Pacific

[Drizzt]

GG, what do you think of this as a advantage, when quized about whether toll charges will be further reduced, the CEO said that the other government roads are more massively leverage, a reduction in toll would impact them more than CMP.

This should act as an indicator that it wouldn't get out of hand.

[greengiraffe]

Latest DBS Securities Update:

Record earnings with good
dividends
• Core toll road earnings in line with expectations; net
profit of HK$656m (+105% y-o-y) is a record for CMP
• Yongtaiwen E’way drove earnings growth in FY12 while
Ningbo-Beilun Port E’way will drive growth in FY13
• Final DPS of 2.75Scts declared
• Maintain BUY and S$1.20 TP
Highlights
Core toll road earnings largely in line. Revenue growth of 110%
to HK$1.4bn was due to full year consolidation of Yongtaiwen
E’way’s numbers, which also helped to improve core toll road
earnings by 25% to HK$495m. Ningbo-Beilun Port E’way also
contributed 1.5 months of earnings or HK$5.2m profit.
Exceptional gain of HK$365m on sale of Yuyao Highway. CMP
also registered a gain of HK$365m on the completion of the disposal
of its stake in Yuyao Highway.
Loss-making NZ property business to be sold. Losses at Universal
Homes widened to HK$32.7m from HK$27.8m a year ago, and CMP
booked a further HK$55.6m impairment loss on remeasurement of
the business itself, which is slated for disposal as part of the
consideration for the proposed acquisition of Jiurui E’way.
Our View
Continues to execute on growing its toll road business. CMP
has been executing on its plan to transform itself into a pure China
expressway play, as proven by its recent transactions. As a result, its
earnings and asset quality have improved significantly. Core earnings
are projected to grow from HK$373m in FY12 to HK$475m in FY13,
boosted by Ningbo-Beilun Port acquisition and organic traffic
growth.
More acquisitions could be on the way. In addition to strong
organic growth, backed up by the firm outlook for the Chinese
economy, CMP could further expand by looking at more toll road
assets, either from its parent or third parties.
Recommendation
Growth with dividends; Maintain BUY. Despite the recent
rerating, the stock is still offering close to 6% yield and trading at c.
10x PE. Our target price of S$1.20 is based on DCF and would be
adjusted to S$1.13 if all the convertible bonds were converted into
shares.

[greengiraffe]

Hi Drizzt,

China is a big country and hence the toll roads are likely to have vastly different terms as it was concessioned by various different parties.

I got a feeling that some national agencies could well be tasked to consolidate these roads in terms of toll charges and possibly how much revenue could be extracted to the national levels, provincial levels from the concession holders.

This is my imaginations - may be right or far wrong.

Then will come the preferred operators since China remains a centrally managed economies.

CM Pac being one of the leading preferred SOE will then leverage on its pedigree to consolidate. If I am not wrong, there are plenty of provincial domiciled operators that are listed on HKSE but probably a lacking of national toll road owners.

CM Pac has probably emerged after successfully operating toll roads in various parts of China and with the track record has leveraged itself to the current status.

If anyone is familiar with M'sia's North-South Expressway, CM Pac is likely to be the former UEM with its parent China Merchant Holdings the Renong.

With Chinese economy maturing and rules and regulations becoming clearer, toll rates will standardise and returns will normalise (lower) as well. However, given that road usage world is demand inelastic, the volume growth and road upgrades will ensure that returns with proper gearing will remain attractive for investors.

CM Pac may well turn out to be a coffin money stock.

GG, what do you think of this as a advantage, when quized about whether toll charges will be further reduced, the CEO said that the other government roads are more massively leverage, a reduction in toll would impact them more than CMP.

This should act as an indicator that it wouldn't get out of hand.

[Drizzt]

thanks for sharing some insights. certainly hope it pans out that way.

[greengiraffe]

Further to the discussion on HPH as a quasi China infrastructure play via Yantai Port, CM Pac could well turn out to be a theme play on domestic China consumption story.

Whilst road transport remains tied to economic momentum, it should be less geared towards export activities. With China focus on sustaining income growth to shift towards a more balance economy underpinned by domestic consumptions, vehicle ownership will rise overtime with a more affluent population.

As long as there is positive economic growth, vehicle population growth will remain positive and hence demand for road usage will rise.

On a pure yield basis, the guided 6.1% div yield remains respectable especially with growth underpinned by new toll roads acquired since 2012.

Furthermore, with liquidity in CM Pac remaining tight due to legacy issues, more corporate plays ahead will sustain investors' interests in CM Pac.

Vested

[Drizzt]

cm pacific is much more leverage, and a more complex monster. but would you add at this yield gg?

[greengiraffe]

There is this saying - buy high sell higher. Easier said than done but fundamentally there is nothing wrong yet with CM Pac.

I started buying at below 70 and may consider adding on to average up.

The only factor that is holding me back is the Ching factor. I am mindful of the noises in the background and has to keep the leap of faith with these chaps till they start to wine and dance.

So far, they have yet to start sending invites - ie yet to place out shares to enhance liquidity.

Tapping on my experiences for market strategies especially from susbstantial holders that will want to unlock cash from their long term holdings, the first party will be a successful one so that they can hold more parties and bigger ones.

Sorry to have stretch your imaginations on parties.

GG

cm pacific is much more leverage, and a more complex monster. but would you add at this yield gg?

[Nick]

I consider HPH Trust to be far more leveraged.

Both have similar net debt to equity of approximately 0.4 (after the recent HPH Trust M&A) and cash coverage ratio of 9 - 10x EBITDA. It must be noted that HPH Trust ROA is significantly lower than CM Pacific due to the high price of acquisition hence the liquidity ratios alone don't tell the full story. CM Pacific debt interest is far more 'normal' at 2-4% for USD/HKD loans and 6-7% for RMB loans. This runs contrary to HPH Trust bank loan interest rate of 1.6% as of 31 Dec 2011. In 2014 onwards, it will have to refinance its loans - considering the large gearing and relatively low return of the Trust, any increment in interest rate (due to macro concerns ie rise in interest rates) will cause a decline in cash-flow. Both own concession based asset - yet only one is actually repaying debt and retaining a portion of the profit for growth while the other is paying out all of its cash earnings. Similar asset and liquidity ratio but vastly different models. One of my greatest regret in the stock market was missing out on Portek - similar model with CM Pacific.

I do agree with GG about the growth in traffic volume in the long run. As long as toll road rates do not face a cut, I suspect traffic volume will drive revenue going forward. To put it simply, in tiny Singapore, people are already so car crazy - I can't imagine how car crazy China citizens will be once they grow to be more affluent. I doubt CMG will divest its stake in CM Pacific - they could have profited heavily post 2010 will conversion of RCPS - I suspect they are trying to sweeten the ground for an eventual placement and CB conversion. They are even deferring dividend distribution from CM Pacific ! A whole series of M&A with equity financed deals could be in the works to drive EPS and scale hopefully. In the mean time, prospective investors will be paying attention to how they turn Jiurui around and the positive impact (if any) Beilun will have on the 2013 bottom-line.

(Vested)

[greengiraffe]

Hi Nick,

Always good to hear from your fundamental analysis.

On Jiurui, I have always deemed it as a bailout by a financially stronger company.

While CM Pac has not come out boasting and I don't think they will ever do it, it is basically it. China Merchant Group has by far been a stringent and financially well keel state back group at least from my impressions.

Recently, the other part of the parent has acquired some ports overseas and I think it reflects well on their status since some state owned companies are designated from leaders to spearhead diversification drives.

How CM Pac ended up buying Jiurui is likely to be the result of potential stress debt fishing by the CM Bank. Surely bankers have a better idea of bottom fishing for financially viable assets that is under pressure due to excessive and irresponsible borrowings.

China is a black box. I can only imagine how things are done is a well connected but centrally directed economy.

Pardon me for all these imaginations but i need some justifications to swim with the sharks.

GG

I consider HPH Trust to be far more leveraged.

Both have similar net debt to equity of approximately 0.4 (after the recent HPH Trust M&A) and cash coverage ratio of 9 - 10x EBITDA. It must be noted that HPH Trust ROA is significantly lower than CM Pacific due to the high price of acquisition hence the liquidity ratios alone don't tell the full story. CM Pacific debt interest is far more 'normal' at 2-4% for USD/HKD loans and 6-7% for RMB loans. This runs contrary to HPH Trust bank loan interest rate of 1.6% as of 31 Dec 2011. In 2014 onwards, it will have to refinance its loans - considering the large gearing and relatively low return of the Trust, any increment in interest rate (due to macro concerns ie rise in interest rates) will cause a decline in cash-flow. Both own concession based asset - yet only one is actually repaying debt and retaining a portion of the profit for growth while the other is paying out all of its cash earnings. Similar asset and liquidity ratio but vastly different models. One of my greatest regret in the stock market was missing out on Portek - similar model with CM Pacific.

I do agree with GG about the growth in traffic volume in the long run. As long as toll road rates do not face a cut, I suspect traffic volume will drive revenue going forward. To put it simply, in tiny Singapore, people are already so car crazy - I can't imagine how car crazy China citizens will be once they grow to be more affluent. I doubt CMG will divest its stake in CM Pacific - they could have profited heavily post 2010 will conversion of RCPS - I suspect they are trying to sweeten the ground for an eventual placement and CB conversion. They are even deferring dividend distribution from CM Pacific ! A whole series of M&A with equity financed deals could be in the works to drive EPS and scale hopefully. In the mean time, prospective investors will be paying attention to how they turn Jiurui around and the positive impact (if any) Beilun will have on the 2013 bottom-line.

(Vested)

[greengiraffe]

http://www.bloomberg.com/news/2013-01-05...rsens.html

China to Boost Urban Transport as City Congestion Worsens
By Bloomberg News - Jan 7, 2013 12:00 AM GMT+0800
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China to Boost Urban Public Transport
China pledged measures to ease traffic congestion with a goal of public transport accounting for 60 percent of all motor vehicle use in towns and cities.
The government will support the development of environmentally friendly urban transport systems and offer tax breaks and fuel subsidies for mass transit vehicles, according to a statement by the State Council, or cabinet, posted on the central government’s website on Jan. 5. It didn’t specify the current percentage of public transport use.
As many as 300 million of China’s 1.4 billion people will move from the countryside by 2030 to join the 600 million already living in cities, according to Organization for Economic Cooperation and Development estimates. Traffic congestion and worsening pollution is forcing the government to improve public transport to cope with the influx.
“As China’s urbanization accelerates, the development of urban transport faces new challenges,” the State Council said. The government “must prioritize the development of public transit systems to ease traffic congestion, transform urban transport, improve people’s quality of life and improve the provision of public services,” according to the document.
Li Keqiang, No 2 in the ruling Communist Party’s hierarchy, is championing urbanization as a new growth engine that will boost incomes and consumption. The focus on improving public transport comes as the government faces growing discontent over pollution that’s caused partly by surging car ownership.
Car Ownership
The number of private passenger vehicles in China was 62.4 million at the end of 2011, a sevenfold increase on the 8.45 million at the end of 2003, according to National Bureau of Statistics data. The number of cars may surpass 200 million by 2020, the official Xinhua News Agency reported on July 31, citing the Ministry of Transport.
The State Council statement fleshes out a broad policy guideline issued in October to support the transport goals in the nation’s current five-year plan which runs through 2015.
The government will aim to make public services the “dominant” form of transport in urban areas and boost the use of electric vehicles such as buses and street cars in addition to rail transit, it said.
Special shuttle services, including airport and school buses, will be allowed to use public transport lanes and parking may be banned in congested areas. Local authorities should aim to put a bus stop every 500 meters in city centers, according to the statement.
The government will encourage the development of smart cards and mobile payment systems, and initiatives such as increasing the use of vehicle rental and better taxi-booking facilities will be supported.
Strategic Investors
The statement didn’t provide details about financing, how public transport companies and local governments can fund projects or how much the tax breaks and subsidies will cost the government. The State Council did say it will encourage local providers to attract strategic investors, and raise private capital through trusts and equity investments.
Companies that may benefit from the policies include BYD Co. (1211), the Shenzhen-based automaker partially owned by Warren Buffett’s Berkshire Hathaway Inc., which is developing electric buses and taxis for the public transport sector.
China, home to 16 of the world’s 20 most polluted cities, according to the World Bank, has accelerated approvals for the construction of local transport networks across the country.
Subway Expansion
The National Development and Reform Commission last month authorized the construction of 456 kilometers of subway in Changsha, the capital of Hunan province, involving initial investment of 63.7 billion yuan ($10 billion) and has allowed similar projects in cities including Fuzhou and Urumqi.
Hangzhou, capital of the eastern Zhejiang province, in November opened its first subway line and plans to build another nine by 2020, according to a Nov. 24 Xinhua report.
Beijing put four subway routes into operation on Dec. 30, bringing the number of lines in the Chinese capital to 16. The city, with a population of more than 20 million, already caps the number of new auto registrations and limits the use of private vehicles on designated days based on their license plate numbers. The government is planning to build a road-congestion charging system, the city’s transport commission said in August.
Shanghai, Guangzhou and Guiyang are among cities that also impose restrictions on vehicle ownership. Xi’an, capital of Shaanxi province, broadened traffic controls from Jan. 1, banning vehicles deemed heavily polluting based on their emissions from inside the city’s second ring road.
--Tian Ying, Feifei Shen. Editor: Nerys Avery
To contact Bloomberg News staff for this story: Nerys Avery in Beijing at navery2@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net