China Merchant Pacific 2015 Full Year Result

China Merchant Pacific Holdings (CMHP) recently announced their 4th quarter and full year results. This will be a short review of the results.

Current Share Price: $0.81

Outstanding Number of Shares: 1795 mil

Dividend per share: $0.07 (8.6% dividend yield)

In my last post on CMHP in June, it was during the time when the management did a combination of debt and rights issue at a price of $1.00 to purchase 3 expressways, Yang Ping, Guixing and Guiyang for HK$4 bil.

Since then the share price have fallen to around $0.80.

In the post, I voiced my reservations whether these roads will eventually turned out well and whether they can contribute adequately after the equity base expanded from 800 mil to 1200 mil to now 1800 mil.

The profile of CMHP have changed a fair bit.

4th quarter and Full year results

Profit attributable to share holders fell from HK$739 mil to HK$597 mil. This was largely due to one off negative good will in 2014 due to the acquisition of Jiurui.

This time round we can see how the organic profit looks like.

Based on a possible fully diluted outstanding number of shares of 1850 mil, the earnings per share is SG$0.057 (exchange rate 5.61)

For the first time in a long time, the EPS cannot cover the dividends.

However do note that this result do not factored in the 3 new roads in Guilin.

There are some one offs for CMHP over the years such as the sale of the New Zealand property business and the negative goodwill for acquisitions.

But if we take them out the profit attributable to shareholders is as follows:

2005: 191 mil

2006: 229 mil

2007: 302 mil

2008: 296 mil

2009: 363 mil

2010: 267 mil

2011: 319 mil

2012: 346 mil

2013: 546 mil

2014: 626 mil

2015: 532 mil

The profit’s significance is that for China companies, the dividends have to be paid out from profits. If they cannot hit that profit, then they couldn’t pay out that much.

Profit over the years have been rising organically, except in 2010 and 2015 is the year it shows that this is going down.

To pay SG0.07 in dividend, CMHP probably need HK$726 mil. This compared to the time when they only need HK$250-$350 mil to pay the same SG$0.07 dividend.

If we look at the way we compute free cash flow, which is operating cash flow + cash flow from  joint venture + interest income – interest expense – capex – dividends paid to Yongtaiwen (YTW) minority share holders, we get the following free cash flow records:

2005: 275 mil

2006: 319 mil

2007: 560 mil

2008: 139 mil

2009: 388 mil

2010: 357 mil

2011: 483 mil

2012: 883 mil

2013: 1171 mil

2014: 1301 mil

2015: 1001 mil

CMHP have always generated good free cash flow, but the free cash flow have to be used to pay down amortized debts.

With Jiurui and the 3 new roads, there would be greater cash flow but also a greater amount of debt to amortized. Debt repayment would have to be prioritized over dividend payout.

Yongtaiwen

YTW have been the good performer out of all the expressway. It was able to get the good spillover effect from the diversion at Shangshan.

Here are the profit figures for YTW:

2012: 261 mil

2013: 295 mil

2014: 333 mil

2015: 375 mil

Beilun

Beilun, after the debt restructuring turned out to be profitable and earning well. 2014 saw its profits going down but since the improvement have been made to the roads, profitability have returned.

2013: 116 mil

2014: 102 mil

2015: 116 mil

Guiliu

2007: 117 mil

2008: 137 mil

2009: 207 mil

2010:  88 mil (% contribution to CMHP reduced versus owners)

2011: 98 mil

2012: 107 mil

2013: 146 mil

2014: 153 mil

2015: 150 mil

Guiliu have been one of the main pillars supporting CMHP dividends, and the growth have been great despite the reduction in contribution in 2010.

Performance in 2015 have been affected by road diversions, and this annual figure does not show the drop off in the traffic in the 3rd and 4th quarter.

Guihuang

2007: 89 mil

2008: 128 mil

2009: 135 mil

2010: 141 mil

2011:  151 mil

2012: 121 mil

2013: 124 mil

2014: 134 mil

2015: 103 mil

Guihuang’s traffic doesn’t look that bad on the surface, but we have to remember for these 2 years, the profit factors in some payments due to the relocation of toll gates in concession agreement.

The toll traffic for Guihuang fell from 25800 in 2013 to 21000 in 2014 to 7800 in 2015.

Jiurui

There isn’t much data on Jiurui to compare against, but again it made me puzzled why this road is suppose to be  “distressed”

The full year profit before tax contribution is 19 mil. This is after debt restructuring.

The 4th quarter traffic figures look really low and the profit figures look very weak.

Management seem to indicate the bad result was due to a different mixed in vehicles. Had there been more trucks the figures would be better.

This does not seem like what we expected from an undervalued road when they purchased it after they tried to purchase it unsuccessfully the first time round.

To be fair, 2016 and 2017 will see more roads funneling to Jiurui, with 2017 being the significant one.

The 3 new roads

The positive news for the 3 roads is that all of them end up profitable. However, there was no full quarter contribution and it is difficult to project  what would be the likely full year contribution.

My estimation is a full year profit before tax of HK$200 mil.

Leverage

With the new underlying debt from Jiurui and the 3 new roads, this will take net debt from HK$3.7 bil to HK$7.3 bil. In terms of net debt to asset, this is still a comfortable 29%.

If we judge CMHP’s ability to service debt by Net Debt to Operating Cash Flow + JV Cash Flow, it is an uncomfortable 4.8 times.

However, keep in mind that, we haven’t factor in much operating cash flow from the 3 new roads. I am expecting the estimated full year 2016 operating cash flow to be around HK$2 bil, which will bring the Net Debt to Operating Cash Flow + JV Cash Flow to 3.65 times.

Chinese Yuan devaluation against USD

One of the financial engineering carried out by CMHP was to refinance expensive RMB debts in USD. This would provide a 2-3% savings in interest expense.

This is how they swung Jiurui and Yang Ping from unprofitable roads to be profitable.

However, with the possible devaluation of the Yuan versus USD, CMHP might lose this advantage.

As long as the currency depreciation is within 2%, the interest expense savings are still worth it.

Since Aug 2015, the USD have strengthen almost 5% versus the RMB.

Summary

The earnings outlook of CMHP looks cloudy, especially at this juncture where some roads are not doing well, and there are roads that we have yet to see full year contributions.

Assuming the 3 roads bring in $200 mil in profit before tax, and an of $50 mil in interest expense for corporate debts borrowed to purchase the new roads, this would add HK$150 mil to FY2016 earnings.

If organic earnings of HK$532 mil do not grow, FY2016 projected earnings may be HK$682 mil.

The EPS then is SG$0.065.

The PE is 12.3 times or an earnings yield of 8.1%.

If the growth of the 3 roads surprised on the upside, then they may be able to maintain the 7 cents dividend. Else the dividend might be cut.

A 8.1% dividend yield, assuming a full dividend payout is still attractive, baring in mind that the dividend is paid out of earnings not cash flow, which is what most REITs and business trusts are doing.

This ensures that cash flow are set aside to pay down debts or to recycled in new assets.

However the profile of CMHP have changed. The margin of safety when it comes to the dividends is much different now. It used to be that they have 500 mil in earnings and they are paying out 300 mil, with roads growing in traffic well.

Now it is they are paying out more dividends then earnings, with only 2 roads still growing earnings positively.

CMHP is like a business trust or REIT, an empty shell managed by managers. If the managers work for the shareholders, and is able to recycle capital, or raise capital and purchase good performing assets, then this makes a good investment (provided you do not get it too expensive!)

The purchase of Jiurui and the 3 roads have left me being more unsure if Jiurui is more of a bailout then an opportunity, and make me question whether the 3 new roads would show that the managers are shrewd in their evaluation of assets.

Past Articles on China Merchant Pacific Holdings

• 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

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