China Merchant Pacific (CMHP), a subsidiary of China Merchant Holdings, the China state-owned enterprise, acquires another expressway, a day before they announces their latest quarter results.
For my past articles on CMHP, you can view them [here]
To date, CMHP now owns 4 toll roads: Guihuang, Guiliu, Yongtaiwen (YTW) and now Beilun (BL).
Beilun will likely be funded by debts.
The quarterly results shows that Guihuang have falling traffic. Guiliu and Yongtaiwen have been stable.
Leveraged infrastructure play
The thing that people notice when glancing at the balance sheet is that CMHP have quite a lot of debts. Like most infrastructure and utility stocks, it is not uncommon to see 50% debt to asset ratio.
CMHP’s debt before the acquisition of Beilun was pretty good. They funded a HKD$2.7 bil purchase of YTW with part debts and part cash (they were net cash).
A caveat is that YTW have an underlying debt of HKD$2 bil as well. Those debts are consolidated under CMHP’s balance sheet, which make CMHP look like they have a lot of debt.
The good thing is that the underlying YTW is paying out to CMHP after depreciation and amortizing debts, meaning cash flow is kept at YTW level and they are paying down their debts. (China companies pay out profits, which means they don’t pay out the depreciation portion, so in reality YTW is keeping cash)
This BL purchase is gonna laden the company with more debts. One wonders if they are going to fund it with equity placement.
Unlike our dear REITs, they don’t do rights issues.
Paying down debts
The way CMHP’s management play this is that unlike Macquarie International Infrastructure Trust (MIIF) who pays out almost all they can, CMHP have a 50-75% payout ratio.
Since their underlying is amortizing their debts and the parent is paying down HKD $250-300 million debts per year, they make it sustainable.
I do estimate that if their strategy works, they can pay down their debts in 5-7 years.
Committed to pay SGD 5.5 cents for next two years
Their two year dividend policy is very sustainable. This 55-60% payout ratio pays a prevailing yield of 7.6%.
That sounds like a good yield.
The appeal is that unlike the REITs, CMHP is consistently deleveraging.
The unattractive thing is their short concession. BL could be the shortest concession toll road purchase at 11 years. The rest expires in 12-15 years. Hence the supposed high 15% earnings yield and 7.6% dividend yield.
Why buy Beilun?
We wonder why would they buy BL. If they are going to fund in total by debts, and after interest payment and tax they gain less than HKD$ 50 mil, yet still need other toll roads’ cash flow to pay down the debts, then is there a hidden agenda?
BL is an acquisition from Ping An Insurance, which means its not an asset dumped from parents.
In a yield starved world, structured products based on this will sell to gullible investors. DBS Vickers have a pretty good report on this. I will append it below.
I added a little bit recently bring my overall cost to $0.63. Although it yields well,it is still a China company. I feel there is always the slightest chance the state owned enterprise, which owns 82% of CMHP, will play me out. I just dunno how.
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