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20-04-2014, 03:44 PM
(20-04-2014, 03:27 AM)Nick Wrote:(21-04-2013, 02:01 AM)Nick Wrote: I just did a quick review of the recent AR 2012 to get a better understanding of their cash-flow and debt profile in light of the corporate developments in the previous year. At first glance, it might seem that balance sheet strength has deteriorated - absolute net debt figure has increased from HK$1.678 billion to HK$3.175 billion and net debt to equity ratio has risen from 0.25 to 0.45. This would have thrown the earlier premise of the sustainability of CM Pacific business model into the deep end since I had believed that the cash-flow generated from the underlying business should be sufficient to repay the underlying debt, retain for new investments and maintain its dividend forecast. This will run counter to the typical business trust model which do not aim to repay debt but instead seek to maximize cash distributions to unit-holders. There is no right or wrong models - we just have to tweak our valuation method to find the intrinsic value and margin of safety (so I am not bashing business models here !).
In FY 2012, CM Pacific operated 4 expressways - 3 was held for the entire year and 1 was purchased in Nov 2012. It divested Yuyao Highway profitably in the year and did not accrue income from it. Of the 3 expressways, 2 were held under JV structure and did not contain any debt. Only the third and largest expressway - YTW (acquired in July 2011) held debts in its asset level and CM Pacific took on corporate debts at its holding level to partially finance the acquisition. I had expected this debt to be reduced in 2012 as the cash-flow generated from the business should be sufficient in amortizing its loans rapidly. During FY 2012, the Group generated net free cash-flow of HK$1.10 billion and it booked disposal proceeds of HK$0.55 billion from the sale of Yuyao. The cash generated was used to pay a dividend to YTW Minority Interest of HK$0.22 billion and HK$1.15 billion was used to repay debt. The remaining cash was retained for dividend payment to CM Pacific shareholders and working capital needs.
I have quoted a post written a year ago detailing the debts held in CM Pacific and let's see how it has changed this year.
(28-04-2012, 11:42 AM)Nick Wrote: FY 2011 Borrowings
I was very pleased that CM Pacific gave a breakdown of its loans in their latest Annual Report -
Loan A:
Principal: HK$21.7 mil
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties
Loan B:
Principal: HK$1,398.8 mil ($523 mil in USD Facility and $875 HKD Facility)
Interest: 2.92 - 4.01% for USD and 2.76 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.
Loan C:
Principal: $1,603 mil
Interest: 6.52 - 6.71%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.
Loan D:
Principal: $177.1 mil
Interest: 2.87%
Maturity: June 2017
Held by its subsidiary in China.
AR 2012
Loan A:
Principal: HK$0
Interest: 5.28%
Maturity: Oct 2012
Secured by NZ properties
Loan B:
Principal: HK$741.9 mil
Interest: 2.94 - 4.01% for USD and 2.88 - 3.94% for HKD Facilities
Maturity: Amortizing and to be paid fully by July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.
Loan C:
Principal: HK$1,208.5 mil
Interest: 5.92 - 7.32%
Maturity: Feb 2014 and Aug 2015
This debt is held by its 51% owned YTW at its asset level.
Loan D:
Principal: HK$137.9 mil
Interest: 3.87%
Maturity: June 2017
Held by its subsidiary in China.
Loan E:
Principal: HK$1,212.5 mil
Interest: 5.90%
Maturity: Payable quarterly till Dec 2018
Held by Beilun Expressway at its asset level.
Loan F:
Principal: HK$49.3 mil
Interest: 7.04%
Maturity: Oct 2013
Held by Beilun Expressway at its asset level.
Convertible Bonds:
Principal: HK$1,064.2 mil
Interest: 1.25%
Maturity: Put Option Nov 2015. Conversion Price: $0.84
Used to partially finance the acquisition of Beilun Expressway in Nov 2012.
This clearly shows that the Management has been deleveraging on its existing Loan A - D while maintaining its dividend paying capability. The debt held by Beilun Port Expressway should be reduced this year steadily. I suspect the Convertible Bonds will be converted to equity prior 2015 as it is currently in the money. This will reduce gearing substantially and can be viewed as a placement at book value (share price was 71 cents during issue of CB). I expect further deleveraging this year on the existing debt. This is crucial as the underlying toll assets are concession based. After the completion of Jiurui Expressway M&A in 2013, the total debt and gearing level will spike further. The risk profile of CM Pacific has changed greatly over the past 4 years - from HK$1.1 billion net cash to a geared company. This isn't necessarily a bad thing as the Group now owns a more balanced and diversified portfolio of quality toll assets. Personally, as long as the Management doesn't acquire duds, the cash generative business should be sufficient in financing future debt repayments and dividend payments. As always, there are substantial risk involved and they have been discussed at length in this thread - if they are more risk yet to be uncovered, please feel free to share your thoughts.
(Vested)
I reviewed AR 2013 and like previous years, it is useful to dissect the loan facilities to get an idea of how their capital structure is faring. As always, kudos to the Management for their transparency here.
AR 2013
Loan A:
Principal: HK$12.8 million
Interest: 5.11%
Secured by NZ properties
Loan B:
Principal: HK$499.2 mil
Interest: 2.71 - 2.94% for USD and 2.87 - 2.88% for HKD Facilities
Maturity: Amortizing and to be paid fully by 31 July 2015
This debt was raised at Group level to partially finance the YTW acquisition of RMB 2.3 billion in Aug 2011.
Loan C:
Principal: HK$839.5 mil
Interest: 5.90 - 7.32%
Maturity: 24 Aug 2015
This debt is held by its 51% owned YTW at its asset level.
Loan D:
Principal: HK$101.8 mil
Interest: 4.22%
Maturity: June 2017
Held by its subsidiary in China.
Loan E:
Principal: HK$0 mil
Interest: 5.90%
Maturity: Payable quarterly till Dec 2018
Held by Beilun Expressway at its asset level.
Loan F:
Principal: HK$0 mil
Interest: 7.04%
Maturity: Oct 2013
Held by Beilun Expressway at its asset level.
Loan G:
Principal: HK$1,163.1 mil
Interest: 2.62%
Maturity: June 2017 - June 2018
Held at holding company level to refinance Beilun loans.
Convertible Bonds:
Principal: HK$1,083.1 mil
Interest: 1.25%
Maturity: Put Option Nov 2015. Conversion Price: $0.84
Used to partially finance the acquisition of Beilun Expressway in Nov 2012.
Thoughts:
1) As speculated previously, the Management refinanced Beilun onshore debt with offshore loans borrowed at its holding company level. Loan G was used to refinance Loan E and F. This allows the Company to benefit from reduced interest cost since the cost of debt was reduced from 6-7% to 2.6%. This resulted in substantial increase in Beilun's profitability in FY 2013.
2) Debts held by YTW continues to be paid down substantially from HK$3.00 billion in 2011 to HK$1.34 billion in 2013 It is likely the debts associated with this huge acquisition will be repaid fully in 2015.
(Vested)
Nick,
It is interesting to note that borrowings of CMHP are predominantly in HKD, and it seems that the cost of borrowing in HKD are not cheap as compare to USD or SGD loans - like property development, it probably reflects the riskiness of toll roads business especially at "Build" phase.
(Not Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.