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)
(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
    , 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.

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
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.

  • 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 

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)

Rolf’s Summary
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. 
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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