Outstanding No of Shares: 1064 mil
Current Share price: SG$ 1.18
Current Dividend per share: SG$0.07 (5.9% dividend yield)
China Merchant Pacific Holdings (CMHP), a toll road operator whose parents are the Chinese state owned enterprise China Merchant Holdings, announced their first quarter results on Thursday, after their annual general meeting.
I manage to attend the AGM, and while there weren’t much questions officially asked, I manage to observed some questions that Mr Jiang Yan Fei, the ex-CEO was able to answer.
I will firstly review their first quarter results, and then share some of the points explained by Mr Jiang.
First Quarter Earnings and Cash Flow
In terms of overall profitability, there weren’t much difference. Results were rather flat. In terms of administrative expenses and interest expenses there were not much changes as well.
Traffic results was rather subdued. We didn’t see the kind of explosive growth that we were looking for in Jiurui. Typically a young road like Jiurui should be growing at above GDP rate. Perhaps we should wait for full year to comment.
Guihuang continues to disappoint in terms of revenue. Despite the traffic growth over the last year, perhaps a change in vehicle mix result in a poorer revenue.
I was rather disappointed that the miracle that is Guiliu have stopped contributing great growth for 2 quarters. The toll revenue growth rate moderated due to the change in road network and traffic diversion by high speed train services.
Guihuang showed the biggest disappointment. Toll revenue was further affected by the decrease in traffic flow of large goods vehicles following the use of a large local road transportation logistic center and the traffic diversion by a neighboring toll road after the completion of its major maintenance work. Profit contribution from Gui Huang Highway decreased 35.7% compared to the same period of last year, which was much higher than the decrease in toll revenue of 5.6%, mainly due to one time compensation of RMB13 million received from a local government linked enterprise for the loss of toll revenue resulted from the construction and use of a link road that connects to Gui Huang Highway in the first quarter of 2014. Excluding the one time compensation, profit contribution from Gui Huang Highway would have increased 10% over the corresponding period of last year.
In terms of free cash flow (operating cash flow – interest expense – capex – tax), I computed that the quarterly cash flow to be HK$ 303 mil versus HK $331 mil. If not for an addition of HK$62 mil capex, free cash flow will be similar.
Some one at the AGM did highlight to me something we should consistently monitor and that is when earnings increases, we should observe similar increase in contribution from free cash flow as well.
For new readers, it should be noted, that Guiliu and Guihuang’s cash flow contribution does not take place every quarterly since they are received as dividends under the Investing Activities under Cash Flow Statements.
Assets , Debt / Leverage
Total Assets tallied at HK$ 15.8 billion. Cash stands at HK$1.36 billion. Total debts, including dividend payable stands at HK$ 4.59 billion.
The net debt to asset is 20%. This is low by REIT or business trust standards, but you have to bear in mind the concession period is much shorter as well.
Of the debts, HK$ 600 mil is in convertible bonds, which should be converted by the end of the year.
Interestingly, Mr Jiang mentioned that there are clauses in the bonds that, if i read what he says correctly, allow CMHP to mandate they convert the bonds.
So the net debt should be closer to HK$ 2.63 billion.
The full year 2014 free cash flow for CMHP was HK$1.3 billion, and so the net debt to free cash flow ratio is 2 times, which is rather conservatively low.
Its even lower if you compare it to the net debt to EBITDA of the REITs and business trusts.
In this quarter HK$62 mil from free cash flow was used to repay debts.
CMHP share price have ran up a fair bit, perhaps heavily influence by the developments in China where the stock market have been on a good run.
The current SGD to HKD exchange rate: 5.82
Assuming all convertible bonds converted, the diluted outstanding number of shares will be 1200 million. Market Cap in HKD is $8,241 million.
In the full year annual report, Yongtaiwen’s 49% minority shareholding stake was made clear, that the debts accounted all this while by CMHP was for their 51% stake.
In this case the Enterprise Value is $8241+ $2630 in net debt = HK$10871.
EV/FCF = 8.36 times.
Since we are using FCF instead of EBITDA, we can tolerate a higher number. My usual undervalue indicator for EV/EBITDA was 6 times, with 8 times being fair. This makes CMHP looks reasonable at 8.36 times.
But when you compare against peers, which are usually around 6-7 times, CMHP does not look cheap.
Price earnings = $8241/ $626 = 13 times. I use the full year 2014 share holder’s profit, taking out the one time income items.
13 times looks on par with the Hong Kong listed toll roads Jiangsu and Zhejiang. This likely indicates that CMHP isn’t cheap at this price.
Even if you purchase it at this price there isn’t much margin of safety.
When a stock reaches fair valuation, it is time to switch, but my caveat here is, you better have something that is cheaper or higher yielding to switch to.
Much of the valuation can change if CMHP is able to leverage up their conservative balance sheet and acquire HK$4 billion worth of roads. From the looks of things, which i explain below, that looks possible.
Explaining Flat Traffic Growth but Revenue Improvement
Some one was puzzled how come there are some roads where, over the years showed not much improvement in traffic yet revenue and profits were better.
Mr Jiang explained that this was due to the changing in the mix of traffic. Typically the vehicles using the expressway can be group as passenger vehicles and transport vehicles. The transport vehicles make up 30% of traffic but 70% of the revenue and the passenger vehicles the opposite.
So a change in the mix would result in a change in revenue.
In a past post I talked about how the government are looking to redevelop the areas around Guihuang and that the concession will be cut short to 2021. Some one asked Mr Jiang more on this and he draws up and explanation to us more details.
Excuse the poorly drawn picture. The red rectangles represent toll stations current and future while the white indicates roads.
Basically the toll station was in the way of urban development works so CMHP was compensated and the toll gates was shifted out. From the look of things, Mr Jiang do not expect it to be an adverse development.
It might even be better considering there are much traffic from trucks in the round about circle that weren’t captured in the past when the toll stations were in the current location.
The results in this quarter looks worse off partly due to the relocation of the toll station, as well as a road put up to divert the traffic away from Guihuang expressway.
No figures was given, nor updates whether revenues will be restored to previous levels.
Total Addressable Market
Mr Jiang was asked about the potential acquisition prospect for CMHP. He highlighted that publically listed roads in China forms 10% of total amount of expressways. The rest is made up of unlisted small companies owning roads but also government own roads.
From reports, the following are the toll length of listed roads:
- Sichuan – 573 km
- Jiangsu – 850 km
- Shenzhen – 413 km
- Zhejiang – 533 km
- Yuexiu – 301 km
- Anhui – 484 km
They total up to 3,154 km. While I may have missed out some, this covers most of the main companies.
Mr Jiang provides the figure that the total amount of toll roads is roughly 100km with listed amount 10km, so the figures doesn’t add up. The important thing here is that there are many not listed still. Whether they are unfragmented enough to acquire is another matter all together.
He also highlighted that based on statistics, the long term growth of expressway tends to mirror that of the GDP growth rate of China.
The state government looks to continue with spending on infrastructure as cars become the main form of transportation as the people becomes more affluent.
Mr Jiang explains that to acquire the toll roads from parent China Merchant Huajian or Holdings is difficult, as the majority of them are partially owned by listed entities. As such most of the deals that they look at are likely to be from third party.
When question whether there are more and more government or private operated roads, that are heavily financed getting into delinquent situation, Mr Jiang stated that they are seeing more of such potential deals.
In a short span, they are evaluating 20 such deals or that they have 20 deals being pimped to them (cannot make this out well)
The outlook for replenishment of tolls, where concessions will expire, seems promising.
We hope that this translates to another Jiurui type of acquisition, but this time more matured.
I enjoyed this CMHP price run up but firmly focus on the business side of things. CMHP currently is rather conservatively leveraged and with 1.3 bil in FCF i can see them paying out 500 mil and using 800 mil to pay down debt.
CMHP’s advantage is buying reasonably serviceable expressways, that are in distress with 5.9% interest rate China debt and refinance them with low interest rate USD debt to earn the spread. Of course it is up to the management to be stringent about the expressway that they purchase instead of going for every expressway available to them.
Much of the growth lies in these acquisition and without them, CMHP doesn’t look like an attractive purchase at current price.
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
Monday 27th of July 2015
Good write-up and analysis of CMHP's result and development. Basing on its FCF Yield of around 20%, the sustainability of their dividends seem rather high with its dividend yield only at a high 6%. A good stock to keep for income investors.
Monday 27th of July 2015
Hi Seth, not exactly. the free cash flow still needs to pay down debt a very necessary means as well as buy roads to replenish short concessions. the recent rights issues have diluted the equity based, which means the amount needed to pay the div needs to be a larger amount.
Saturday 25th of July 2015
May I ask where did you get the breakdown of the toll revenue and traffic volume by the toll roads? The published financial results by CMHP do not include the result breakdown.
Saturday 25th of July 2015
It is included as an annex as part of the results release usually
Monday 4th of May 2015
Hi Kyith Thanks for the write-up. The FCF runs very strongly at 2x its net debt but the worries remain that the short concession of those toll roads mean that they need to constantly look out for potential acquisitions in order to replenish those older toll roads. This is unlike Reits who has much higher concessions even if we are talking by industry Reits standard, they can take the time to find an accretive acquisition that suits their needs or wait for a bad cycle to run in. Not sure if CMPH can do the same waiting for a bad cycle to run to take those opportunities when the timing is shorter.
Monday 4th of May 2015
Hi Brian, I have stated the two factors, addressible market and the carry trade strategy . the issue is management conservative and that deal making is complex.