China Merchants Holdings Pacific

[Jack31]

why did you think they are overstretching?

Hi kyeith, I havent goes thru the details yet, just briefly scan thru the report.
On 1st look eps is lesser than last year but are paying 1.5c more than last year.

earnings is less you are right. or the recurring one. but remember last year there was some one off item. at 712 outstanding shares this amount to 309 mil, which is a farcry from the 550 mil attributable to shareholders sans the 48 from discontinued operations.

Yup, there was a gain on disposal on yuyao.
Standing by at investmentmoat!

[Nick]

China Merchants Holdings (Pacific) posts 45% increase in net profit in FY2013

Declares higher final dividend of 4.25 cents per share, making total of 7.0 cents per share for the year

Directors target an annual dividend payout ratio of at least 50% of annual underlying net profit

http://infopub.sgx.com/FileOpen/FY2013-P...eID=276454 [Press Release]

http://infopub.sgx.com/FileOpen/FY2013-R...eID=276453 [Results]

http://infopub.sgx.com/FileOpen/FY2013-P...eID=276456 [Slides]

http://infopub.sgx.com/FileOpen/FY2013-A...eID=276455 [Toll Statistics]

While the operating results was hardly surprising, the increase in dividends to 7.00 SG cents was truly shocking. The guidance has also reverted to its norm of at least 50% payout in the coming years. I suspect dividends will be maintained at this level - have to see whether DBSV report will give us any hints about this.

A lot have been mentioned in this thread about CM Pacific cash generating abilities and the resilient nature of its toll roads. There was little surprises in the operating results - toll roads generated net income of HK$570 million. The Group FCF exceeded HK$1.4 billion enabling it to reduce its debt by HK$0.8 billion. Gearing has reduced significantly with net debt (including dividend owed to CMG) dropping from HK$3.56 billion to HK$2.62 billion. There is still significant debt headroom for future acquisitions. If no new acquisitions are made, I won't be surprised if the Group returns back to its net cash gearing in 2 years time. This is the strength of a business model which seeks to repay its debt, retain earnings for future acquisitions and paying a dividend. It fares well against the high cash extraction model from over-leveraged infrastructure business which will cause great deal of pain when refinancing or operational hiccups occurs in bad times.

1) EPS from the core operations

Core Toll Earnings: 572 mil
Total Shares: 718 mil
EPS: 12.7 SG cents

2) EPS when convertible bonds are converted.

Estimated Conversion Price: 82.5 cents
Total Shares: 718 + 223 = 941 mil
Estimated Core Net Income: 572 + 14 mil (CB interest) = 586 mil
EPS: 10.0 SG cents

3) EPS when convertible bonds and RCPS converted

Estimated Conversion Price: 82.5 cents
Total Shares: 718 + 223 + 136 = 1077 mil
Estimated Core Net Income: 572 (FY 2013 Toll NPAT) + 20 mil (CB & RCPS interest) = 592 mil
EPS: 8.8 SG cents

Personally, I would expect FY 2014 core profits to be higher due to organic growth and reduced interest expenses. Historically, CM Pacific did maintain 60-80% payout ratio in the past but it could be 'tweaked' with extraordinary items - old investors will recall Yuyao impairment in 4Q 09 resulting in a loss ! The figures shows that 7.0 cents dividend could be sustainable and in Case 3, it represents a payout of 80%. Will they do it ? It is hard to say.

So what's the strategy here ? I suspect a higher dividend is meant to help push up share prices so that it could be used to finance future acquisitions. Moreover, it will encourage the convertible bond holders (who gets to enjoy a lower conversion price due to dividends exceeding 5.50 cents) to convert their debt into common equity which will further reduce gearing making it easier to acquire new assets. The possible credit tightening in China could benefit SOEs with low debt and access to financing to acquire toll roads on a fire sale. Conversely, unfavourable governmental policies would impact CMP operating performances. I am not too certain how the toll relocation will impact Guihuang results in the coming years.

Please feel free to point out any errors here.

(Vested)

[greengiraffe]

Thanks Nick for his detailed analysis. CM Pac ended at $0.935 - if I am not wrong, it is an all-time record high. At $0.935, CM Pac is trading on historical yield of 7.5% and a discount to the fully diluted book value of $0.9765.

CM Pac first lifted its annual dividend guidance to 5.5 cents during FY2011 and declared back then to maintain dividends of 5.5 cents for two years - FY2012 and 2013.

To the surprise of many holders, they reset full year ordinary dividends to 7 cents for FY2013.

It is rare for a China based company to have sustained such strong track records of dividend payout let alone a rising trend. In addition, CM Pac provided investors with a rare opportunity to participate what I think is shaping up to be a Pan China toll road play unlike many current provincial based Chinese toll road companies listed on HKSE.

Where MIIF failed in the Chinese infrastructure sector, CM Pac has steadily and quietly achieved over the last decade. Hence in Rome, do what the Romans do while in the Middle Kingdom, one must ride on the right connections.

Parent China Merchant Group has been carefully steering CM Pac in its bid to become one the leading Chinese toll road operator. CM Pac finally sold its non-core NZ property development, Universal Homes that was legacy from the JCMPH / Hotel Taipan days last year to fully concentrate on its core toll road operations. Management has also walked away from deals that they deemed to be dubious after due diligence. With credit tightening and shadow banking crisis, I personally think that CM Pac will be able to capitalised on emerging opportunities on the horizon.

I agree with Nick that CM Pac presented investors with an exposure to the high growth Chinese infrastructure sector without the confusing business trust structure. In addition, the steadily growing dividends and discount to reported book value should continue to provide the margin of safety for investors.

Vested
GG

[greengiraffe]

CMP, DBS Vickers maintained BUY with higher target of $1.32:

Cash cow that keeps giving
• FY13 earnings outperform due to strong
operating performance and forex gains; final
dividend of 4.25Scts also a positive surprise
• Firm cash flows and healthy balance sheet
provide room for potential acquisitions
• Valuations attractive as earnings growth has
outstripped share price re-rating; stock is
trading below book value and offers 7.5% yield
• Maintain BUY with higher TP of S$1.32 (DCF)
Earnings and dividends impress, as CMHP reported a
FY13 net profit of HK$614m, which was 16% higher
than our forecast. Earnings from toll road operations,
excluding the gain on disposal of Yuyao Highway in
2012, rose by 36% y-o-y to HK$571.2m. This was
driven by 7.9% y-o-y growth in traffic for CMHP’s road
portfolio and full-year consolidation of Beilun-Port
Expressway’s results (1.5 months in 2012). A S 4.25Scts
final DPS was proposed - 1.5Scts better than expected
Commitment to pay at least 50% of recurring
profit, which means the S 7cts DPS is sustainable and
even if the convertible bonds and RCPS are converted,
the resulting lower net debt-to-equity allows CMHP to
raise its payout to maintain this dividend payout.
Room for further acquisitions. With strong cash
flow generation, CMHP paid down over HK$800m in
loans and improved its net debt-to-equity from 0.45x as
at end FY12 to 0.29x as at end FY13, which leaves
significant debt capacity for it to embark on more valueaccretive
acquisitions. The sale of its NZ property
business for RMB290m will also strengthen its coffers.
TP raised to S$1.32 to reflect stronger operating
earnings and cash flow. CMHP’s core earnings has
climbed over 60% in the last two years, versus a less
than 50% increase in share price and hence, valuations
remain attractive at 8x FY14 PE (diluted for the RCPS),
less than 1x P/B and offering 7.5% dividend yield; BUY.

[greengiraffe]

CM Pac has faced resistance for the longest time around 90. Assuming that is the max that long term investors willing to pay based on 5.5 cents guidance, based on the "reset" DPS of 7 cents, the fair price should also be adjusted upwards to $1.15.

Vested
GG

[valuebuddies]

I have a gut feeling that we are not long from either:

1. a private placement, and/or
2. a right issues, and/or
3. the conversion of bonds held by the parent company

Following this, perhaps another acquisition?

[Jacmar]

I have a gut feeling that we are not long from either:

1. a private placement, and/or
2. a right issues, and/or
3. the conversion of bonds held by the parent company

Following this, perhaps another acquisition?

Items 2 and 3 will not happen. For item 2, their gearing is low by toll road stds and mgt has indicated that they are comfortable with current gearing and can gear up much higher if there is an attractive acquisition. For item 3, majority ownership is already very high and the bonds conversion will aggravate the ownership issue which they have been trying to reduce at an attractive price.

the share placement is possible and it can come from 2 angles. the cm group can place out their shares to reduce the holdings and make it more liquid, hence higher share price eventually. another possibility is share placement by cmp itself. this would be for possible acquisition. they tried that including the nz property swap but that fell through.

in any case, let's wait for an accreditive acquisition. not easy unless the cm group wants to be generous and give cmp some of their toll roads on the cheap, which is possible since they own a lot of cmp. to them it makes not much a difference(just shuffling of assets among their subs) but for us minority we benefited from the better performing cmp.

[Nick]

ORGANISATIONAL RESTRUCTURING

http://infopub.sgx.com/FileOpen/Organisa...eID=277559

1) The Senior Managers from the Parent Company (CM Huajian) are taking executive control of CM Pacific. The current non-executive Chairman (who is the MD of the Parent) will be the new Executive Chairman and CEO.

2) CMG intend to use CM Pacific as "the platform for the China Merchants Group to expand its toll road business and presence in the People’s Republic of China".

3) Formalize ROFR for business opportunities or disposals by the Parent.

4) 2 more Independent Directors will be appointed to ensure half of the board is independent.

Thoughts:

Much have been speculated here about CM Pacific becoming a major pan-China toll road player and hence the need to reduce the discount to the NAV ce so that new equity could be raised to acquire toll roads rapidly. The announcement does seem to lend some credence to this speculative eventuality. Even if this speculation is incorrect, the Company do have significant debt capacity to acquire toll roads or BOT projects in the future if deem to be accretive. I do like the organic growth + potential for inorganic expansion angle in this investment.

CM Pacific closed at 97.0 translating to a dividend yield of 7.2%.

(Vested)

[greengiraffe]

The latest announcement by CM Pac is significant coming hot the heels of a above expected set of final results for 2013 and dividend payout. I think we are on the verge of witnessing an inflexion point for CM Pac and the share price. With share price once again nearing book value of S$0.9765, it appears that CM Group is stepping up its gear to sustain the momentum of CM Pac as the parent group's flagship for a pan-China toll road play as oppose to provincial based toll road 'H' shares listed on HKSE.

The parent group's commitment to the potential transformation is underpinned by the right of first refusal granted to CM Pac. The addition of 2 extra independent directors is also indicative of the corporate governance expected of an expanding group.

Akan Datang
Vested
GG

1.2 Rationale. The Restructuring forms part of the strategic direction of the Company, Huajian, CMG and Easton (collectively, the “China Merchants Group”) to use the Company as the platform for the China Merchants Group to expand its toll road business and presence in the
People’s Republic of China. The aim of the Restructuring is to streamline and optimize the human resources of both Huajian and the Company in order to focus on the growth of the Company’s business.

2.3 Independent directors. Pursuant to the recommendations of Guideline 2.2 of the Code of Corporate Governance 2012, in view of the concurrent appointment of Mr Luo Hui Lai as the Executive Chairman and Chief Executive Officer of the Company, the Company intends to appoint two additional independent directors as soon as practicable such that the independent directors of the Company will make up at least half of the Board. The Company is in the process of shortlisting and assessing suitable candidates to be appointed as the two additional independent directors and will make an appropriate announcement when the appointments have been finalized and effected.

6. RIGHT OF FIRST REFUSAL
As part of the Restructuring, in line with the China Merchants Group’s commitment to use the Company as the platform for the China Merchants Group to expand its toll road business and presence in the People’s Republic of China, Huajian has also undertaken to the Company that, in the event that:

(i) Huajian intends to acquire an interest in, or has access to, any opportunity to acquire an interest of any kind in the business of holding concession(s) for, or for developing, building, owning or operating, toll roads (a “Business Opportunity”); and/or

(ii) Huajian intends to dispose of an interest of any kind in the business of holding concession(s) for, or for developing, building, owning or operating, toll roads (a “Business Disposal”), then the Company shall have a right of first refusal to participate in such Business Opportunity or Business Disposal.

ORGANISATIONAL RESTRUCTURING

http://infopub.sgx.com/FileOpen/Organisa...eID=277559

1) The Senior Managers from the Parent Company (CM Huajian) are taking executive control of CM Pacific. The current non-executive Chairman (who is the MD of the Parent) will be the new Executive Chairman and CEO.

2) CMG intend to use CM Pacific as "the platform for the China Merchants Group to expand its toll road business and presence in the People’s Republic of China".

3) Formalize ROFR for business opportunities or disposals by the Parent.

4) 2 more Independent Directors will be appointed to ensure half of the board is independent.

Thoughts:

Much have been speculated here about CM Pacific becoming a major pan-China toll road player and hence the need to reduce the discount to the NAV ce so that new equity could be raised to acquire toll roads rapidly. The announcement does seem to lend some credence to this speculative eventuality. Even if this speculation is incorrect, the Company do have significant debt capacity to acquire toll roads or BOT projects in the future if deem to be accretive. I do like the organic growth + potential for inorganic expansion angle in this investment.

CM Pacific closed at 97.0 translating to a dividend yield of 7.2%.

(Vested)

[Art or Science]

Been eyeing this stock for some months now (even though it is a s-chip) because of it's good numbers.

Nonetheless, what are the chances of the chinese government amending the laws/regulations relating to toll roads that could have a major negative impact on CMP? Any precedence of chinese government changing their regulations (besides the chinese holidays ruling?)

As in, can the chinese government impose a cap on the toll rate fee or is there a fee structure in the first place? Cant seem to find anything on this on the net..