Sunday, 3 August 2014

Added – China Merchant Holdings (Pacific) Limited

China - Long Term Prospect Bright

Over the years, I always fancy stocks or funds that have exposure in China market. After all, China achieved average of double digit GDP growth in the past ten years. We may argue that China real GDP growth decelerated from 10.4% in 2010 to 7.7% last year, and is expected to stagnate within 7-8% for the next few years. However I bet Singapore, US or any other European countries wouldn’t mind a 7% real growth for their nations. China is also a country dominated by “young and hungry” population unlike most developed countries including Singapore who face issues of an aging population. With close to 1.4 billion population and still growing, despite current birth control regulation, together with rapid urbanization, it is easy to understand why I am confident that China economy growth outlook is extremely bright in the long term.  

In line with the bright outlook of China, I added China Merchant Holdings (Pacific) Limited this week, which has complete China market exposure. 

Company Brief


China Merchant Holdings (Pacific) Limited (SGX: C22.SI) “CMP” is an investment holding company, invests in and manages toll roads in the People’s Republic of China (PRC). The company operates through two segments: 
  1. Toll Road Operations, where it operates 4 toll roads totalling approximately 367 kilometers located in Zhejiang province, Guangxi Zhuang Autonomous Region, and Guizhou province in PRC. 
  2. Property Development, which it is involved in the property development in New Zealand. However on 16 Apr this year, CMP successful completed disposal of this segment which had been incurring net losses of HK$4.2million in the last reporting quarter.
CMP is a subsidiary of Easton Overseas Limited which is part of PRC state-owned China Merchant Group (CMG).  CMG is one of the largest SOEs directly under China’s State Council and owned 82% of CMP.

Recent Acquisition of Jiurui Expressway

Two weeks ago, CMP announced to acquire entire 48.14km Jiurui Expressway for RMB697.4m or HK$879.4m (0.99x valuation / 2.4x NAV). The consideration will be paid via: 1) issuance of 119.37m new shares in CMP at S$0.985 worth a total of RMB580.6m, and 2) cash of RMB116.8m. Read Announcement here. 

Although Jiurui incurred net losses in 2013 due to high interest cost, CMP should be able to restructure Jiurui loans with an effective borrowing cost of ~3%. This is significantly lower than China’s benchmark borrowing rate of 6% (peers 4.5-6% see below chart) and is expected to contribute positively to CMP profits going forward.


Fundamentals

  • Price S$0.96; Mkt Cap S$707.2m
  • PE 7.3 (based on 2013 EPS and annualized 1Q EPS ~ HK81c = S$13c)
  • PB 0.86  (base on 1Q14 NAV) 
  • Dividend Yield 7.3% based on current price 

FY13 results, 
Strong Balance Sheet,
  • Cash and Equiv HK$1,448m
  • Operating Cashflow HK$1,107m
  • Free Cash Flow to firm at HK$1,516m
  • Net gearing at 21% (prior to Jiurui acquisition) which management is comfortable at 60%.This provides headroom for more acquisition of toll assets.
  • Current Ratio (current assets / current liabilities) =1.32

Rolf’s Summary

Pros
I like China long term economy prospective growth which will also drive road traffic growth. The total number of motor vehicles in China has risen by 20% pa on average over the past five years. CMP business model generates strong operating cashflow, with strong parental support from state owned CMG allowing it to enjoy cheaper financing cost than its competitors. Attractive dividend yield of >7% with reasonable PE and PB further gravitates my buy call. There exists potential growth in bottom line from recent acquisition and likelihood of more acquisitions stemming from CMG strong portfolio of toll roads, bridges and tunnels with an aggregate length of approximately 6,700 km in 14 provinces and two municipalities. The disposal of loss making property business in New Zealand will also further improve CMP's earnings. 

Cons
CMP currently operates a less-diversified portfolio of only four (five incl. recent acquisition) toll roads, and is subject to regional provinces traffic volume growth. There can also be risk of traffic diversion in view of opening of more competitive roads. The toll road business is subject to government regulations on the toll revenue. A toll concession typically expires after 10-20 years of operation. This means the requirement of constant investment of cash generated from the toll business to yield consistent profit. A bad acquisition decision may have detrimental and significant effect on its business. Roads are also susceptible to natural disaster and accidents, hurting toll receipts. There is also currency risk where toll charges are in RMB where reporting revenue is in HK$.

As at 31 Dec 2013, CMH had outstanding convertible preference shares, convertible bonds and share options. These, if fully converted, will translate to a total of 355.3m new ordinary shares. In view of the existing ordinary share base of 718.8m, the potential dilution impact from the conversion could be very substantial. The convertible bonds' conversion price is S$0.826; the holders of preference shares are entitled to convert the preference shares into fully-paid ordinary shares at the conversion rate of one ordinary share for every preference share; while the share option exercise price is S$0.789.


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