China Merchant Pacific Holdings 2014 Full Year Results

China Merchant Pacific Holdings (CMHP) declares a SG$0.035 dividends per share and its maiden results with their new toll road Jiurui expressway.

Outstanding no of shares: 1050 mil

Fully diluted no of shares: 1200 mil

Current share price: SG$ 1.06

Current dividend per share: SG$0.07 (6.6% dividend yield)

SGD to HKD: 5.69

SGD to RMB: 4.59

CMHP fourth quarter results: link

CMHP fourth quarter presentation: link

CMHP fourth quarter toll road statistics: link

CMHP bonus issue announcement: link

I will not go into the background of the company but for interested folks can refer to past write-ups consolidated at the summary section below. 

The yearly results look good in part due to much one off activities or activities that will not always be long standing. Gross results from Yongtaiwen expressway, Beilun expressway and Jiurui expressway result in a 70 mil improvement. Yongtaiwen, the biggest contributor to CMHP result, had a good year due to traffic diversion from a neighbouring Jiashao bridge. However this was balanced off by poor results from Beilun, from the same Jiashao bridge (don’t ask me why one bridge can cause such a difference to 2 roads)

In addition, results were helped by deferred income and effective interest on other receivables relating to compensation granted by local government as a result of relocation and removal of certain toll stations along Guihuang expressway. There is also a negative goodwill of $22.7 mil arising from the purchase of Jiurui expressway and higher foreign exchange gain.

In all I can see HK$110 mil in one-off that we will not see in next year.

Cash Flow, Earnings and Dividend Cover

Shareholders Earnings

Shareholders Profit(HK$):

• 2005: 191 mil 
• 2006: 229 mil 
• 2007: 302 mil 
• 2008: 296 mil
• 2009: 195 mil
• 2010: 267 mil
• 2011: 319 mil
• 2012: 655 mil
• 2013: 613 mil
• 2014: 739 mil

Shareholders profit, which excludes non controlling shareholders stake (49% Yongtaiwen) have been climbing. There are much one offs in the past results. 2009 looks bad considering CMHP took a one off 168 mil expense.

In this upcoming year, 110 mil is from one offs should be subtracted from future forecasts. The future shareholders profit should look like 630 mil.  That still looks like some little growth over 2013. Growth really ramp up with the purchase of Yongtaiwen in 2012.

The earnings per share with $630 mil fully diluted is SG$0.092 (earnings yield 8.7%, price earnings ratio 11.5 times). Based on this metric, CMHP doesn’t look overly overvalue versus peers such as Zhejiang Expressway and Jiangsu Expressway who trades closer to 13 times. Not a fair comparison considering both Zhejiang and Jiangsu have additional securities and property business respectively.

Free Cash Flow

CMHP calculate their free cash flow by adding dividends received from toll roads and proceeds from repayment of loans granted to toll road joint ventures to operating cash flow. These two items are found in the investing activities in the cash flow statements. Then they deduct capital expenditures from it.

What they got is a crazy free cash flow of HK$ 1.7 bil versus 1.5 bil over last year. How bonkers is this figure is that, last year they paid out $349 mil for their dividends. However, this figure isn’t really good gauge of the cash flow CMHP shareholders can enjoy because it includes the dividends due to non controlling shareholders (49% Yongtaiwen).

My formula is as such: Free cash flow to pay out dividends, acquisitions, buy back, pay down debt = operating cash flow + cash flow from joint venture + interest income  – capital expenditure – interest expense – dividends to non controlling shareholders. ( if all this operating cash flow, free cash flow seems confusing, I wrote about it in the past here that helps folks understand why these matters and how to get them)

My free cash flow:

• 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

The figures for 2014 is much lower than what CMHP announced because they paid out $404 mil to non-controlling shareholders. We will talk about this pay out later. Still, the free cash flow have grown tremendously.

In 2014, $349 mil is paid out as dividend, $606 mil debt was repaid. CMHP have shown much sensibility in their deployment of free cash flow. Note that the pay out was when CMHP only have 718 mil outstanding shares, so they only require $349 mil to cover SG$0.07 in dividends.

The current situation is that all the convertible bonds and preference shares will be converted. This means that to pay the current SG$0.07 dividend per share, CMHP would need HK$ 477 mil. This is a 36% pay out of my free cash flow. Still leaves $824 mil to pay off debt.

If CMHP were to declare SG$0.08 dividend per share, they would require HK$546 mil in cash ( 41% FCF pay  out) and leaves $755 mil to pay off debt.

The business model of CMHP is such that you cannot think that they would pay out all these money since they prefer to pay out as much as dividends, and use debts and placement to fund new road purchase. The high dividend supports the share price, making placement more possible.

Interestingly, if CMHP declares SG$0.08 dividend per share (7.5% dividend yield), the pay out ratio out of share holders profit is  87%.

Leverage

Net debt (HKD) history:

• 2005: (126) mil (net cash) 
• 2006: (284) mil 
• 2007: (800) mil 
• 2008: (729) mil
• 2009: (983) mil
• 2010: (1,216) mil
• 2011: 2,535 mil
• 2012: 3,561 mil
• 2013: 2,619 mil
• 2014: 3,695 mil

CMHP have levered up from a rather net cash position but their cash flow profile is different now as well.  Out of the $3,695 mil net debt, $800 mil will eventually be converted to shares so the actual net debt is reduced further to $2,895 mil.

Net debt to asset stands at 18%. Net debt to equity at 29%(when equity increase fully diluted). CMHP have a target net debt to equity of around 60%, so they can still levered up.

For cash flow generating companies such as telecoms, a better layer to the level of leverage is the Net debt to EBITDA, but since CMHP EBITDA is not reflective of additional cash flow from investing, we will use CMHP’s free cash flow of HK$1.7 bil.

The net debt to free cash flow in this case is 1.7 times (meaning to say in times of need, cutting the dividends they should be able to clear the debt in 1.7 years), this looks safe to me.

The Ezion Way

I believe CMHP have ample room to leverage up further. I can see them doing the Ezion way of acquisition. Given the current financial structure, they can go acquire a HK$2000 mil toll road by issuing 160 shares of CMHP at SG$1.10 and leveraging up HK$1000 mil in debt. As long as the acquisition is accretive EPS wise to the existing shareholders prior to the placement, then it is good.

The whole structure comes crashing down when the quality of the acquisition comes into question, such that for the next 10 years it does not generate meaningful free cash flow.

Bonus Shares Issue

CMHP decided to issue a 1 for 20 bonus share dividend. Share dividends do not result in much monetary gains for the existing share holders, the net effect is that your returns will be the same.  Theoretically it means a reduction in future dividends. all else equal.

This is equivalent of a company choosing not to pay you high dividend but to keep the cash for investments. It will be beneficial if CMHP makes more profits (which if you think about it, is what almost all companies are suppose to aim for!)

The Company is proposing the Proposed Bonus Issue to increase the issued share capital base of the Company to reflect the growth and expansion of its business, and at the same time, to recognise and reward its Shareholders for their continuing support and loyalty to the Company. The Proposed Bonus Issue, if carried out, will also increase the accessibility of an investment in the Company, thereby improving the trading liquidity of the Shares, allowing for greater participation by investors and broadening the Shareholder base.

Frankly, there was a fair bit of dilution in recent years, and we know that the parent CMH have been trying to increase the liquidity but found it challenging.  Their holdings have been reduced by 10% due to the placement as part of Jiurui’s purchase and convertible bonds converted. This I thought should be good enough. I suppose they think otherwise.

I am just wondering if the dividends will be kept at $0.07. To pay this dividend out of the enlarge outstanding number of shares (est 1250 mil) would require HK$ 498 mil. This represents only HK$21 mil more than existing pay out.  The adjusted EPS due to the enlarged equity based would be SG$0.088.

Confusing things

There are a few items that I am having difficulties explaining. The first thing is, if we look at the past dividends to Yongtaiwen’s 49% minority shareholders:

• 2011: 276 mil
• 2012: 217 mil
• 2013: 228 mil
• 2014: 404 mil

The level of increase of dividends looks astoundingly high. Although YTW have performed well, its hard to explain why the increase in pay out. Even then, it should only be fair that CMHP enjoys the same level of pay out yet we do not see the same increase in operating cash flow.

The second thing is, under the investing cash flow statements, there is a cash paid to a related party pursuant to the acquisition of subsidiaries amounting to HK$916 mil. This was what I thought to be payment for Jiurui expressway but someone pointed out to me that Jiurui was paid by a combination of placement and $134 mil in cash ( which was shown in the investing cash flow statement).

If it is a repayment of some loans to settle the purchase of Jiurui, it should be under financing cash flow statements instead. The guess is that this is to settle some large working capital repayment for the previous owner of Jiurui as part of the purchase agreement. Big sum of money and I do not have a good explanation for it.

Yongtaiwen

profit before tax (HKD)

• 2012: 261 mil
• 2013: 295 mi
• 2014: 333 mil

Traffic for YTW turn out to be better. I was expecting this matured road not to grow much but positive luck shines on the road.

Guihuang

4th Qtr traffic:

• 2007: 3761
• 2008: 3977
• 2009: 6450
• 2010: 5694
• 2011: 5736
• 2012: 6033
• 2013: 6438
• 2014: 4660

revenue (RMB):

• 2007: 42 mil
• 2008: 45.9 mil
• 2009: 52.7 mil
• 2010: 54.8 mil
• 2011: 52.3 mil
• 2012: 48.3 mil
• 2013: 54.2 mil
• 2014: 50.6 mil

profit before tax (HKD)

• 2007: 18.2 mil
• 2008: 36.9 mil
• 2009: 11.7 mil
• 2010: 31.6 mil
• 2011: 33.7 mil
• 2012: 20.6 mil
• 2013: 13.3 mil
• 2014: 19.7 mil

Guihuang’s concession was shorten in a past announcement and the government is paying compensation for toll road stations reduction. The statistics showed a dramatic reduction in traffic while earnings was able to stay stable. My only explanation for this is less organic growth but more of the loss in revenue made up by government compensation.

Jiurui

This is the quarter with full quarter contribution from Jiurui and we only had the profit before tax to work with. The profit of 9.4 mil is nothing to shout about, and perhaps the profit is only positive because of refinancing of high interest debt.

Its dangerous to annualize this, but a $40 mil contribution will result in a 4.7% ROE. it is still far from contributing fully to replace Guihuang. A sensible 8% ROA on 3.6 bil asset will mean we expect it to reach 288 mil in profit, this perhaps in 15 years time.

Valuation

Competitors’ PE:

• CMHP : 11.5 times
• Jiangsu Expressway: 14.85 times
• Zhejiang Expressway: 15.57 times
• Anhui Expressway: 11.79 times
• Hopewell Highway Infrastructure: 18.53 times
• Yuexiu Transport Infrastructure: 12.12 times
• Sichuan Expressway: 7.15 times
• Bangkok Expressway: 11 times

CMHP doesn’t look overvalued even with the recent run up.  Compared to its peers it doesn’t look overly cheap PE wise either.

To calculate the EV/EBITDA we use HK1,700 mil + 50 mil capex + 337 mil taxes = 2,087 mil. The enterprise value work out to $6,332 mil + $3,695 mil net debt + $3,000 estimated 49% YTW non controlling stake = $13,027 mil.

The EV/EBITDA works out to be 6.24 times. Based on EV/EBITDA this does not look too expensive.  However, its peers tend to trade at 4-7 times EV/EBITDA thus if we are looking for exceptional value, I don’t think this is it.

Summary

Overall, results look inline. I think the result of Yongtaiwen have offset poor performance in other areas.  This remains a holding, but likely I won’t add much unless I see changes in the value of the business.  We hope to see that Guiliu’s weak results relative to past performance is a one off, and see if Beilun is able to turn around.

Previous written articles on this company are listed 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
• 2014 AGM Updates
• Acquires Jiurui expressway the second time

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