I first covered China Merchant Pacific Holdings in Sep 2011 which is almost 5 years ago.
Today is probably one of the last post on CMHP because the parent made an offer for the shares it currently does not owned at $1.02 and the convertible bonds that are not converted.
This represents a 20% premium over the prevailing trading price of $0.80.
It is a bit bittersweet for me considering my history holding this company.
It started out as a company with a New Zealand property business plus some toll roads with a huge cash holdings. At that time, the appeal was that it is net cash but also that it is paying a good dividend from net earnings, unlike many of the trusts that is paying out of cash flow.
The problem is that, you are not so sure of it as a China firm.
Over time, we got to know this company better.
They sought so hard to acquire new roads, disappointing shareholders, until finally the parent gave them a bite in the form of YongTaiWen expressway a matured road, which significantly boost their earnings and the dividend yield.
The business has a them of using low cost overseas debts to refinance the more expensive debt when they acquire a new expressway. Instead of conserving cash, they would use whatever cash flow to pay out the dividends, so that the dividends sustain the share price. A good share price would enable them to fund acquisitions by placement of new shares and debt.
CMHP’s model is just like a trust manager. The roads are not too unique, except for where they passed through, and like the REITs, what is more important are the quality of management, to capital allocate well, to risk manage well.
To evaluate whether the manager is aligned, you look at the past actions both in how they manage operations and debt but also what they acquire and how astute they are.
YongTaiWen was a good purchase, but can be seen as the parents providing them this major road so that they can kick start a new direction.
Beilun is a very short concession expressway that had it not been the refinance, would not be as attractive. At least the ROE hit 10%.
It is after this that the recent acquisitions become questionable.
Jiurui, a young road was supposed to be purchased for the first time, but they couldn’t sell off the New Zealand property business and hence the deal was called off. Then they went back for Jiurui at a cheaper price.
This time we thought this is a distressed deal. That CMHP got a bargain. The results showed otherwise. A young road is suppose to show some better traffic and revenue growth figures. These are not my words, but the management words.
We are not seeing ‘great’ growth rates. To make matters worse, the result of Jiurui got worse.
Shortly after this, the management proposed doing a debt raising and rights issue to purchase three roads at Guilin. This heavily diluted current shareholders.
The way I look at rights issue is this: It gives you the existing shareholders a chance to participate in good initiatives and to boost your income.
That is, if the initiatives is really good.
The 3 roads come in a package and in truth we would rather buy one of the roads.
The rights issue didn’t go so well, as the stock market tanked and the price during the rights issue is below the offer price. No one in the right mind will subscribe to the rights issue. So the parent ate it up.
Their original aim in 2011, was to reduce their 82% stake. They managed to do that. Now its back up to this level.
The last AGM I did not attend, but from what I heard, there were a lot of questions asked.
I think the Chinese Management is fed up. What is the point of explaining to minority share holders in a stock market that is unappreciative of its real value. In the SGX, CMHP will not get its true value.
I beg to differ. If you look at the PE versus the Hong Kong listed toll road companies, CMHP is not very cheap. In the past, every AGM someone will ask if they will dual list over there. And they highlighted their aim is to be as big as Jiangsu and Zhejiang expressway.
I find that they realize, it is better to incubate the last 4 roads acquired.
There have been much commentary when the share price fell. The narrative have been its attractive dividend yield and “great cash flow”.
What befuddles me was how they derive the cash flow is great.
The profile of CMHP now versus that in say 2013 was completely different. They are more diluted now, with only 1 to 2 roads supporting the cash flow with the rest of the roads in a funk.
They have to do what Second Chance did by having the majority 80% owner taking scrip, or allocate the dividends to dividends payable.
The cash flow forecast shows that they are flirting very close to the 7 cents dividend, to the point that a conservative dividend should be 6 cents.
This is a far cry when you have a business that is paying of debt, with a stable YTW, and a Guiliu that is growing very well and dividend payout ratio of 50-60%.
I pared down when I saw the result 2 quarters ago. I gave Jiurui 2 quarters to show me the growth rate was a fluke and it is indeed a bargain. It only confirms my suspicion we got something that is not going to perform very well in the near term.
If these roads need time to mature, I think the communication could be better. Which is a problem for these China management in that while Jiang Yan Fei have been very cordial in explaining a lot of what we are blur blur on, making it clearer could address expectations.
The price offer of $1.02 does look like an escape. I think its low but it is still fair. Much of the magic might be seen in 2017 for Jiurui, but perhaps the 3 Guilin roads also need more time to mature?
CMHP taught me a few lessons, and I am grateful for that.
It is challenging in that every one was telling us “Don’t buy an S-Chip”
Until now where so many is buying this S-Chip and I am now skeptical.
During the challenging process, it also sharpens how we can try to determine if the cash flow is real. Specifically, take a look at how much tax is paid to withhold earnings from China that is flowing overseas, and the amount that CMHP have taken from us as minority shareholders versus what is being paid out.
I missed out on few thousand dollars but looking back I based my decisions on the results that I see business wise. I have no complains.
Unless I am an insider, I won’t know this offer is coming.
The biggest reward from this stock was the friendship build up.
I wouldn’t dig so deep in 2011 had it not been one young investor in Channel News Asia Forum who brought to my attention and I was gullible enough to dig the atrocious cash flow statement with him then (before YTW, most of the cash flow is from subsidy income and returns from joint venture that is not in the operating cash flow statement). Since then, I am glad to have someone who understands how I prospect stocks, and to critique upon the various nuances of various stocks listed on the SGX.
The readers of Investment Moats benefit a lot over time because his sharpness eliminates a lot of the stocks that I would have thought were good but actually have much flaws.
No CMHP, no friendship, no growth as an investor. That is more than I can ever ask for.
Now I move on to the next problem for all investors who got such offer: Where to redeploy the money.
Hope you guys can give me some suggestions.
My Past Write Ups:
- Investing in the economic moat of toll roads: CMHP
- CMHP: Dividend Yield on Track
- Purchase of Beilun
- Purchase of Jiu Rui
- Q1 2013 report and some AGM updates and analysis
- The dividend growth thesis
- Relocation and Removal of toll gates
- Full year results and dividend hike
- Restructuring of Management
- 2014 AGM Updates
- Acquires Jiurui expressway the second time
- 2014 Full Year Results
- 2015 First Quarter Results and AGM
- Acquires 3 expressways in Guilin
- 2015 Full Year Results