China Merchants Holdings Pacific

[valuebuddies]

Sharing a DBS report in Jan 2013 when Jiurui acquisition was first proposed:

Debt restructuring could see Jiurui E’way breakeven in its
third year of operations, which is pretty remarkable.
Jiurui E’way was loss-making (to the tune of >HK$160m) in 2011, but note that it only opened to traffic in Jan 2011 and most of the losses can be attributed to its heavy debt burden, with interest costs of over HK$150m. On the revenue side, Jiurui’s monthly toll revenue has been growing rapidly, reaching over Rmb8m in November 2012, compared with just Rmb0.4m when it first opened. If CMP can restructure the debt of Jiurui (by tapping on offshore loans), we believe Jiurui can breakeven in 2013 and start to show a profit as soon as 2014, in just its 4th year of operations.

Jiurui Expressway's debts were approx. RMB1.9billion back in Dec 2011, 1.6billion in Dec 2013. With the anticipated loans restructuring, increases in traffics, lowered interest payments due to reduced loan principals, I think we can expect it to be profitable soon and free of debts in 5 years time.

[ vested and added ]

[piggo]

They forecast 159.7m revenue for Jiurui for 2014, while in the announcement document it's forecast shows 81.2m for the same year.

Meanwhile the 81.2m forecast is based on a higher vehicular traffic (7,384,000) than DBSV's (3,889,000)

[Greenrookie]

It Seems to me shareholders might have to endure short-term pains before mid to long term gains can be harvested.

From Page 2

NAV HK$372,325,493,
Net loss for 2013 HK$27,839,047. 2014Q1 HK$13,020,599. (Loss seem to have quicken)
Appraised value: HK$885.2 million

Price paid: RMB 697,408,049.93
Cash: RMB 116,776,469.41
Stock (at prenium) 119,374,987 new ordinary shares at S$0.985

Page 12,

EPS pre and post acquisition

61.34HKD to 52.09HKD

Converting back to Singapore dollars, EPS will be 8.8 cents, still able to sustain the 7 Cents dividends.

But that is assuming 2013 Loss, 2014 Q1 loss has quickens as shown above.

CMHP bought at a better price (taking into consideration concession years, and prenium price of stock), due to the valid reason of the widening of loss-making of Jiurui.

The cash upfront from CMHP is rather low as compared to its Q1 cash holding of 1.6 billion (less than 10%)


Target Group’s negative working capital position as at 31 December 2013 of HK$1,081 million.

The receivables owned to Hongda is RMB589,184,532.93

I am not sure if the loans of Jiurui expressway is all captured in the 589 mio receivables, if it is, the loans (Company to trust/company, should be higher than 6% assumed by Nick, and the refinancing by CMHP, should yield higher cost savings)

CMPH is also in a position to reduce some of the loans through cash.

Overall, not a sexy deal that market will adore for sure, but in the long run, it does not seem difficult to turn the expressway around.

The crux of the matter now, is if the 7 cents annual dividends will be reduced.

[marandaz]

It Seems to me shareholders might have to endure short-term pains before mid to long term gains can be harvested.

From Page 2

NAV HK$372,325,493,
Net loss for 2013 HK$27,839,047. 2014Q1 HK$13,020,599. (Loss seem to have quicken)
Appraised value: HK$885.2 million

Price paid: RMB 697,408,049.93
Cash: RMB 116,776,469.41
Stock (at prenium) 119,374,987 new ordinary shares at S$0.985

Page 12,

EPS pre and post acquisition

61.34HKD to 52.09HKD

Converting back to Singapore dollars, EPS will be 8.8 cents, still able to sustain the 7 Cents dividends.

But that is assuming 2013 Loss, 2014 Q1 loss has quickens as shown above.

CMHP bought at a better price (taking into consideration concession years, and prenium price of stock), due to the valid reason of the widening of loss-making of Jiurui.

The cash upfront from CMHP is rather low as compared to its Q1 cash holding of 1.6 billion (less than 10%)


Target Group’s negative working capital position as at 31 December 2013 of HK$1,081 million.

The receivables owned to Hongda is RMB589,184,532.93

I am not sure if the loans of Jiurui expressway is all captured in the 589 mio receivables, if it is, the loans (Company to trust/company, should be higher than 6% assumed by Nick, and the refinancing by CMHP, should yield higher cost savings)

CMPH is also in a position to reduce some of the loans through cash.

Overall, not a sexy deal that market will adore for sure, but in the long run, it does not seem difficult to turn the expressway around.

The crux of the matter now, is if the 7 cents annual dividends will be reduced.

Thanks for the analysis.

May I know are you assuming "the widening of loss" is recurring in nature may be due to operation weakness?

Is there any reason to believe that the widening loss could be due to one-off items or simply due to booking of certain cost in Q1?

[Jack31]

They forecast 159.7m revenue for Jiurui for 2014, while in the announcement document it's forecast shows 81.2m for the same year.

Meanwhile the 81.2m forecast is based on a higher vehicular traffic (7,384,000) than DBSV's (3,889,000)

159.7 is in hk, 81.2 in rmb.

Cmp figures 7384 is daily volume x (365 - 20 toll free day) = 2.55millions
DBS 3.89millions

Cmhp estimation should be more accurate I guess, since situation probably have change since the initiate forecast. ( can drag out previous jiurui acq report to compare if you like)

[CityFarmer]

They forecast 159.7m revenue for Jiurui for 2014, while in the announcement document it's forecast shows 81.2m for the same year.

Meanwhile the 81.2m forecast is based on a higher vehicular traffic (7,384,000) than DBSV's (3,889,000)

First of all, it is daily traffic volume in today's announcement, i.e. 7384 daily vehicle, rather than the annual traffic volume as in the old analyst report.

In the previous valuation done back in Dec 2012, the revenue estimation for 2014 was approx RMB 109 mil. As usual, analyst reports are always very optimistic.

A new valuation done 1.5 years later in today's announcement, shows a reduction from RMB 109 mil to 81 mil, about 25% down. As usual, the estimation is as good as the assumptions made.

(vested)

[greengiraffe]

I m no longer a number cruncher. I simply look at bigger picture and try to piece together some conspiracy theories.

I think the deal was first called off due to management's knowledge of how dire the financial situation was for the sellers (since they are part of China Merchant Group that owns a bank).

They pulled the deal and re-negotiated to squeeze the blood out from the vendors. Given the grim and tight liquidity situation facing the shadow banking borrowers, it is highly possible that even good projects will be under stressed.

Put it this way, when owners are under financial distress, chances are they will do the minimal to get by with the daily business. For infrastructure projects, once they are completed, operationally they are easy. It is also highly possible that the sellers would have "looted" the roads as "legally" as possible to help cover the potholes on their private side.

Anyway, CM Pac hardly cut and seals deal. For them to conclude a deal, there is a good chance that it is a good one. Moreover, the bulk of the considerations are being paid in shares priced at 98.5 cents (a level that hardly traded in good volume even recently) is a positive signalling on the part of management. I highly suspect that even the shares that will eventually be issued is likely held back by creditors for repayment of the loans owing by the sellers.

Vested
GG

[Nick]

It Seems to me shareholders might have to endure short-term pains before mid to long term gains can be harvested.

From Page 2

NAV HK$372,325,493,
Net loss for 2013 HK$27,839,047. 2014Q1 HK$13,020,599. (Loss seem to have quicken)
Appraised value: HK$885.2 million

Price paid: RMB 697,408,049.93
Cash: RMB 116,776,469.41
Stock (at prenium) 119,374,987 new ordinary shares at S$0.985

Page 12,

EPS pre and post acquisition

61.34HKD to 52.09HKD

Converting back to Singapore dollars, EPS will be 8.8 cents, still able to sustain the 7 Cents dividends.

But that is assuming 2013 Loss, 2014 Q1 loss has quickens as shown above.

CMHP [b]bought at a better price (taking into consideration concession years, and prenium price of stock), due to the valid reason of the widening of loss-making of Jiurui.
[/b]
The cash upfront from CMHP is rather low as compared to its Q1 cash holding of 1.6 billion (less than 10%)


Target Group’s negative working capital position as at 31 December 2013 of HK$1,081 million.

The receivables owned to Hongda is RMB589,184,532.93

I am not sure if the loans of Jiurui expressway is all captured in the 589 mio receivables, if it is, the loans (Company to trust/company, should be higher than 6% assumed by Nick, and the refinancing by CMHP, should yield higher cost savings)

CMPH is also in a position to reduce some of the loans through cash.

Overall, not a sexy deal that market will adore for sure, but in the long run, it does not seem difficult to turn the expressway around.

The crux of the matter now, is if the 7 cents annual dividends will be reduced.

In FY 2011, Jiurui reported net loss before tax of HK$161 million (compared to HK$27 million in 2013) so losses have reduced significantly since the original deal.

I don't think the annual dividends will be reduced. Sometimes, I wonder if CMP was a business trust and paid out all of its cash-flow, would it be trading at $2 ?

[piggo]

They forecast 159.7m revenue for Jiurui for 2014, while in the announcement document it's forecast shows 81.2m for the same year.

Meanwhile the 81.2m forecast is based on a higher vehicular traffic (7,384,000) than DBSV's (3,889,000)

159.7 is in hk, 81.2 in rmb.

Cmp figures 7384 is daily volume x (365 - 20 toll free day) = 2.55millions
DBS 3.89millions

Cmhp estimation should be more accurate I guess, since situation probably have change since the initiate forecast. ( can drag out previous jiurui acq report to compare if you like)

Haha... Thanks, pardon my carelessness

[Nick]

China Merchants Hldgs (Pacific): BUY S$0.915; CMH SP
Jiurui E'way acquisition back on;
Price Target : 12-Month S$ 1.32

By: Paul YONG CFA +65 6682 3712; paul...@dbs.com


• Acquiring 100% of 48km Jiurui Expressway for RMB697m
• Consideration via issue of 119.4m shares at S$0.985 and RMB117m cash
• Acquisition positive for CMH (Pacific)’s long term growth prospects and earnings
• Maintain BUY and S$1.32 TP

What has happened ?
China Merchants Holdings (Pacific) announced that it has entered into a conditional sale & purchase agreement to acquire 100% of Jiurui Expressway for RMB697.4m or HK$879.4m. The independent valuation for Jiurui Expressway is RMB702m.

The NAV of Jiurui as at 1Q14 was HK$372.3m.

Jiurui Expressway is part of the G56 National Expressway System of China and is a four-lane carriageway (Dual-2) located at the east-western area of Jiujiang Municipality connecting with Ruichang Municipality in the west of Jiangxi Province, with a total length 48.14 kilometres. The Jiurui Expressway starts at Caojiakan in Jiujiang Municipality, running through the Lushan district Saiyang town, Shanhe economic development zone, the towns of Shizi, Xinhe andXintang, Ruichang city, and the towns of Hongling, Gaofen and Xiafan. Jiurui Expressway connects with the Hangzhou – Ruili Expressway (G56) at the boundary of Hubei Province, PRC. Jiurui's concession lasts until Dec 2040.

The consideration for Jiurui Expressway will be paid via: 1) the issuance of 119.37m new shares in CMH (Pacific) at S$0.985 worth a total of RMB580.6m, and 2) cash of RMB116.8m.

DBS Research View
If successfully completed (this is the second attempt to buy Jiurui Expressway), this would be a good acquisition for the company as it would: 1) expand and diversify the Group's business, 2) lengthen the average remaining concession of the Group's roads from 12.7 years to 15.3 years, 3) potentially help improve the Group's share trading liquidity, given most of the consideration is via share issuance (furthermore at a premium to current trading price), and 4) improve the Group's long-term earnings’ growth (although there could be some EPS dilution in FY14 and FY15). Share dilution from this transaction assuming RCPS and convertible bonds are all fully converted is c.11%.

Jiurui Expressway incurred losses in 2013 (net loss before tax, MI and exceptional items of HK$27.8m) due to high interest costs but CMH (Pacific) should be able to restructure Jiurui's existing loans, and coupled with traffic growth in 2014, turn it around. Hence, we believe Jiurui should start contributing positively to the Group's bottom line from 2015 onwards.

No changes to our estimates, recommendation and TP for now. We will update our numbers and TP when this deal is completed. Maintain BUY and S$1.32 TP.