Toll road operator China Merchant Pacific Holdings, listed in Singapore on the SGX announced some proposed changes to one of their joint venture toll roads yesterday
Some past readings that may interest you:
- 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
The summary is that, in a previous announcement, the government authorities of Guizhou province have exercised their authority to relocate and remove certain toll stations along Guihuang Highway as part of the urban transportation plan for development of Guiyang City.
In the framework agreement, CMHP is also will replace the concession to operate the Eastgate Expressway, with a total length of 13.69 km that links Guiyang Airport with parts of Guiyang city and Majiang city with a new concession for the operation of a section of a proposed new expressway to be constructed between Xiaobi and Jianpo in Guiyang City.
This new concession will commerce from 30 Jan 2016 (2 years later) . This concession will run to April 2027, which is the old concession for Guihuang expressway before an earlier announcement shorten it to 2021.
A compensation of HKD 238 mil will be paid in 4 batches on 25 Jan 2014 (tomorrow), 15 Dec 2014, 30 Jun 2015, 31 Jan 2016, or half yearly.
CMHP has indicated, in both this and previous announcement that due to the compensation, impact is not material:
Taking into account the Compensation Amount to be received by GHPL and GEPL as a result of the Toll Station Relocations, the entry into the Guihuang Highway Agreements is not expected to have a material impact on the net tangible assets or earnings of the Company and its subsidiaries.
Seems to me that it indicates more that the impact is offset by the compensation amount more than talking about the new concession.
Guihuang contributes roughly HKD 120 mil yearly to CMHP’s profits plus roughly HKD 35 mil in Repayment of Shareholder loans. There after 2018, the toll profit is likely to fall to 72 mil as per the last announcement, which runs to 2021.
The compensation of 238 mil makes up for the removal of toll gates and the profit loss for this 2 years.
It is the performance of the new toll roads that we will not know. Infant toll roads are not immediately profitable, and very likely will suffer from losses and takes some time to grow.
The opportunity here is that the concession for the new toll road will push for a further 6 years to 2027.
I seriously think the management have no idea if there will be a material impact for the new concession. Perhaps they are using projection figures (which should be rather assumption based)
Still, there shouldn’t be any impact to the dividend. Hell, this compensation and the sale of the New Zealand property business can pay for 2 full years of 5.5 undiluted dividends.
I think I will see if I can take a look at the Agreement in detail in their office. It may reveal more information.
There are some who have reservations investing in a business like this, and this announcement, the previous announcement, together with the toll free holidays for all China toll roads, have indicated how tied to government policy it can be.
It also highlights that there are compensation agreements that can protect the businesses in the event of government redevelopment.
Its up to you to choose whether you can live with such an operating environment, but I felt comfortable that for such an investment there is a prudent use of cash flow to pay out dividends instead of choosing to pay out all the free cash flow to us shareholders (in that case the yield can be in excess of 10%)