China Merchant Pacific’s (CMHP) AGM took place this morning and there are some take always.
I will not go through the report as it was business as usual. I would just update on some minor financial details and what was updated at the AGM.
Most of my past writings on this company can be found here:
- 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
The Acquisition Plan Going Forward
The management restructuring is to aid the acquisition strategy going forward. The parent, Huajian do not own substantial stakes but fragmented stakes of 9 to 23% across 17 provinces. This will make acquisitions difficult.
What they intend to do is to swap the small stakes with other investors to create a substantial stake, enough to make an acquisition the kind like YTW.
One shareholder managed to force it out of the new CEO Mr Luo’s mouth that they are looking to make a 1 billion acquisition this year.
Nothing was promised and it looks like this depends a lot on Mr Luo’s deal making capabilities.
The Guihuang Situation
The management clarified that Guiyang is running out of space and the road will have to make way in face of urbanization. There are compensation and lengthening of toll contribution, which was supposed to be reduced from 100% to 60% in 2015. The plan after development completed is to run another road. The management felt that the compensation should not create a material loss and they are satisfied with it.
Much is up in the air, especially how the new road are being develop, whether there are attributable capital expenditure. It is still early days.
The convertible bond and RCPS
Every year this discussion on whether the bond and preference shares will be converted, how it affects dividend, liquidity and forced privatization was brought up. Much can be clarified by reading the annual report. The more AGM I attended, the more I realize they expect much spoon feeding from the management, or that, they reprimand the management for something that isn’t the case.
We know that the convertible bond is not issued to the parent, or related parties, and likely, CMHP will want the bonds to be converted to improve liquidity and diversity in share holders.
There is a share holder who is unhappy with the RCPS and Bond where he thinks the holders enjoyed better benefits. The last I check both instruments have interest returns of less than 1.25% versus 7% for the dividends. These are really low cost debts to the shareholders and they should be enjoying these cheap financing instead of complaining.
What is unique about CMHP is that they have short term dividend payable that doesn’t go away. Mr Jiang explained that these are dividends payable to the parent, and because the parent do not need the money they left it in the company. we can think of this as loans to CMHP but interest free. CMHP have enough cash to pay for it should they require.
Yongtaiwen’s Cash Flow plan after paying off debt
Judging by YTW’s debt payment plan, they should be debt free after the next two years. Would free cash flow channel back to parent? The management updated that because they don’t own 100% of the company, they have to discuss with the other share holders (they updated that they just have a meeting with other YTW shareholders not too long ago) on what do they intend to do with the cash.
Once debt is paid off, tax payable will increase.
This is rather significant since YTW is used as a blue print where future acquisitions will be structured as.This will mean
- CMHP cannot restructure underlying debt to lower interest debt like how Beilun does it.
- Depreciation and debt payment cash flow freed up cannot be easily allocated by parent since they do not directly own it.
Here is a tabulation of how CMHP’s debt progress the past three years and likely next year. In one year, they would pay off an estimated HK$700-800 mil. Of this amount, 400 belongs to a debt amortization program under YTW. This is loan C, their highest interest but likely to be paid off in 2 years.
Since they do not own YTW fully, they cannot focus on paying this off, or refinance this. This should be a note for future partial stake acquisition.
The high interest Loan E and F, which is under Beilun was refinance to loan G at much lower interest due to a USD debt facility.
CMHP have HK$ 1.6 bil in cash, HK$300 mil from the sale of NZ property and a dividend payable of HK$340 mil.
Net debt is HK$2bil, of which $1 bil is convertible bonds.