China Merchants Holdings Pacific

[Drizzt]

in order for cmhp not to dilute the eps, the new toll road have to produce a net profit of 70 mil. if you look at rev projection of 81 mil, that will be a tall order.

[Dividend Warrior]

What I mean is that Jiurui Expressway is not making profit (ie. trouble), and thus CMPac's proposed acquisition may be at a right time. Market seems don't like the deal, let see what DBS says tomorrow.

I see... Thanks for the clarification.

[Jack31]

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

I like your theory, I always wonder why they didn't extend the agreement until the Nz authority approve the transfer of cmph(Nz) to jiurui seller. They extend the agreement with cmh (property) when Nz authority delay the approval. Not a totally bizarre theory if u ask me.

[Nick]

China Merchants Holdings Pacific (AD, TP:S$1.06) - A better balanced toll portfolio
China Merchant Holdings (CMH) is revisiting the acquisition of Jiurui Expressway on better terms, with an updated price of Rmb697m to be financed by cash and 119m new shares. While there is short-term pain from EPS dilution during the gestation period, we believe that CMH will be compensated by the more sustainable growth in the long term. Note that we have not factored in this deal. We keep our Add rating and target price of S$1.06 based on fully diluted FY14 residual income value.

https://brokingrfs.cimb.com/iJFFMxRR2H-r...XXgVU1.pdf

(Vested)

[valuebuddies]

China Merchants Holdings Pacific (AD, TP:S$1.06) - A better balanced toll portfolio
China Merchant Holdings (CMH) is revisiting the acquisition of Jiurui Expressway on better terms, with an updated price of Rmb697m to be financed by cash and 119m new shares. While there is short-term pain from EPS dilution during the gestation period, we believe that CMH will be compensated by the more sustainable growth in the long term. Note that we have not factored in this deal. We keep our Add rating and target price of S$1.06 based on fully diluted FY14 residual income value.

https://brokingrfs.cimb.com/iJFFMxRR2H-r...XXgVU1.pdf

(Vested)

It's good that DBS is not alone, S$1.06 seems too conservative IMO.

[ vested ]

[greengiraffe]

Quick glance on the following announcements by CM Pac will reveal the shrewed and patient deal making ability by the management team within a year:

Old deal: http://infopub.sgx.com/FileOpen/Acquisit...leID=57001

New deal: http://infopub.sgx.com/FileOpen/Acquisit...eID=306007

Old deal: consideration RMB 891m (adjusted for comparable concession life), net debt HK$1.94bn

New deal: RMB 697m, net debt HK$1.59bn

Difference - 21.8% cheaper in consideration, 18% less net debt absolute certainty in concession life. New shares issued as consideration @ $0.98 is 16.7% dearer than previously indicated price of $0.84 (ie less dilution should same amount of shares are issued)

DBS Vickers in the old analysis when the old deal was announced estimated a borrowing costs of 6.55% back then. Given that overall credit situation in China has deteriorated over the last 18 months, it is highly likely that borrowers with inferior credit ratings are likely to have paid higher interest rates in order to roll over their loans.

Simply assuming a tax rate of 20%, every 1% savings on the latest net debt of HK$1.59bn will lift Jiurui net earnings by HK$12.7m. Assuming a conservative 5% savings on interest simply due to CM Pac credit standing, Jiurui would easily enjoy a HK$63.6m uplift in net earnings.

In the short term at least until further details on the targeted company are revealed in the EGM circular, the market and analysts can only guess. In the meantime, the ongoing conversion of the in-the-money CB is likely to provide explanation of the seemingly "never-ending" supply of CMP shares (assuming there are actively traders arbitraging between the CB and the mother shares).

Vested
GG

[valuebuddies]

Hi GG, I think the old announcement has no mention about the toll collection increment, but this is not the case in the new announcement. So in fact can we also conclude that the cheaper price is because of the entitlement for the toll increment?

[greengiraffe]

PV of the steep discount now surely more than PV of future cashflow forgone right? If inflation rate is higher, wouldn't one prefer the discount now?

Everyone likes discount right, otherwise why would there be GSS?

Hi GG, I think the old announcement has no mention about the toll collection increment, but this is not the case in the new announcement. So in fact can we also conclude that the cheaper price is because of the entitlement for the toll increment?

[Jack31]

Quick glance on the following announcements by CM Pac will reveal the shrewed and patient deal making ability by the management team within a year:

Old deal: http://infopub.sgx.com/FileOpen/Acquisit...leID=57001

New deal: http://infopub.sgx.com/FileOpen/Acquisit...eID=306007

Old deal: consideration RMB 891m (adjusted for comparable concession life), net debt HK$1.94bn

New deal: RMB 697m, net debt HK$1.59bn

Difference - 21.8% cheaper in consideration, 18% less net debt absolute certainty in concession life. New shares issued as consideration @ $0.98 is 16.7% dearer than previously indicated price of $0.84 (ie less dilution should same amount of shares are issued)

DBS Vickers in the old analysis when the old deal was announced estimated a borrowing costs of 6.55% back then. Given that overall credit situation in China has deteriorated over the last 18 months, it is highly likely that borrowers with inferior credit ratings are likely to have paid higher interest rates in order to roll over their loans.

Simply assuming a tax rate of 20%, every 1% savings on the latest net debt of HK$1.59bn will lift Jiurui net earnings by HK$12.7m. Assuming a conservative 5% savings on interest simply due to CM Pac credit standing, Jiurui would easily enjoy a HK$63.6m uplift in net earnings.

In the short term at least until further details on the targeted company are revealed in the EGM circular, the market and analysts can only guess. In the meantime, the ongoing conversion of the in-the-money CB is likely to provide explanation of the seemingly "never-ending" supply of CMP shares (assuming there are actively traders arbitraging between the CB and the mother shares).

Vested
GG

Hi GG,
Thank you for the analysis, agree with you mostly but why is 5% saving on interest conservative? I thought 5% should be a very very optimistic assumption. Even if we assume a high interest rate of 7% and cmp is able to pull it down to 3%, it's only 4%. (And I consider a 4% savings optimistic). Unless u r assuming interest rate now is 8-9% and cmp can easily down it to 2-3%. I highly doubt the interest rate they are paying now are so sky high at 8-9%? If we can take Beilun refinance as a gauge, the interest rate was abt 6% to 2.6% for a 3+% savings.

[greengiraffe]

Quick glance on the following announcements by CM Pac will reveal the shrewed and patient deal making ability by the management team within a year:

Old deal: http://infopub.sgx.com/FileOpen/Acquisit...leID=57001

New deal: http://infopub.sgx.com/FileOpen/Acquisit...eID=306007

Old deal: consideration RMB 891m (adjusted for comparable concession life), net debt HK$1.94bn

New deal: RMB 697m, net debt HK$1.59bn

Difference - 21.8% cheaper in consideration, 18% less net debt absolute certainty in concession life. New shares issued as consideration @ $0.98 is 16.7% dearer than previously indicated price of $0.84 (ie less dilution should same amount of shares are issued)

DBS Vickers in the old analysis when the old deal was announced estimated a borrowing costs of 6.55% back then. Given that overall credit situation in China has deteriorated over the last 18 months, it is highly likely that borrowers with inferior credit ratings are likely to have paid higher interest rates in order to roll over their loans.

Simply assuming a tax rate of 20%, every 1% savings on the latest net debt of HK$1.59bn will lift Jiurui net earnings by HK$12.7m. Assuming a conservative 5% savings on interest simply due to CM Pac credit standing, Jiurui would easily enjoy a HK$63.6m uplift in net earnings.

In the short term at least until further details on the targeted company are revealed in the EGM circular, the market and analysts can only guess. In the meantime, the ongoing conversion of the in-the-money CB is likely to provide explanation of the seemingly "never-ending" supply of CMP shares (assuming there are actively traders arbitraging between the CB and the mother shares).

Vested
GG

Hi GG,
Thank you for the analysis, agree with you mostly but why is 5% saving on interest conservative? I thought 5% should be a very very optimistic assumption. Even if we assume a high interest rate of 7% and cmp is able to pull it down to 3%, it's only 4%. (And I consider a 4% savings optimistic). Unless u r assuming interest rate now is 8-9% and cmp can easily down it to 2-3%. I highly doubt the interest rate they are paying now are so sky high at 8-9%? If we can take Beilun refinance as a gauge, the interest rate was abt 6% to 2.6% for a 3+% savings.

Times have changed for highly leveraged high risks borrowers. If you recollect, Trust Loans almost equal to that of Ah Long rates - never say never especially when this is a key asset that borrower can collateralised for other risky ventures like property developments or commodities trading...