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Non-performing China Toll Roads, Jiangsu expressway’s acquisition and CMHP

Two posts that I would like to link to that is of concern to China Merchant Pacific Holdings (CMHP)

The first post have been broadcast in not just one media but also Channel News Asia > Operators of Chinese Expressways live life in the fast lane

It talks about the expressways in China that are state owned racked up huge amount of losses. Yet, the 19 listed expressways racked up record profits and great margins.  This is not something new. Even in the AGM, the former CEO Jiang Yan Fei reflected on the gearing of CMHP to be conservative and that when asked whether toll rates can be cut, he said it is possible definitely, but in that scenario the other state owned expressway will basically have a seriously tough time.

I guess this report sort of validates this.

However, the general narrative seems to be that the toll rates are expensive and a result of toll road construction that are unnecessary spending that leads to no where. Because of the nature of such large deals were structured, the loans are dear and often times it takes years to pay off.

The narrative might point to the possibility that the toll rates have to be cut.  This is not surprising. MIIF had their toll rates cut with no compensation. There was a declaration of toll rate for 15 specific Chinese holidays.

The nature of a business operating in a communist regime is that you have to contend with risks like this. Imagine if the toll rates were cut in half. That would be catastrophic. I can see many state owned toll roads defaulting in that scenario ( you can’t nationalize what is already state owned right). The state own roads may bleed but the public listed roads will have it worse, since they exist to serve the share holders.

Speaking of the listed toll roads, that is where I point to the second article. It is a UOB Kayhian report on Jiangsu Expressway where they are acquiring 5 roads from parent Jiangsu Communications (read here)

No drag on earnings. In 9M14, net losses of Ningchang Zhenli and Xiyi were Rmb241m and Rmb3m respectively. The loss from Ningchang Zhenli came primarily from a huge finance expense. When JSE undertakes Ningchang Zhenli’s borrowings, the effective interest rate will drop by 0.5-1ppt, which will help slash the finance expense. Meanwhile, JSCH projects EBIT of Ningchang Zhenli to be no less than Rmb230.3m and Rmb269.1m in 2015 and 2016 respectively and agrees to compensate in cash if the EBIT misses projection. We expect both Zhenli and Xiyi to break even. If so, the five roads are unlikely to drag down 2015 earnings and will contribute to JSE’s earnings from 2016 alongside ADT and average daily revenue (ADR) growth.

The narrative seem to coincide with the situation that most infant roads are drowning in high interest rate RMB loans like CMHP’s Jiurui expressway.

The regime may be giving a cue to inject these non-performing roads into listed entities to provide transparency but also to improve them via cheaper loan refinancing. Essentially letting the public shareholders to take a burden of these not performing assets.


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Friday 9th of January 2015

Hi Kyith, how will this news be affecting your investing decision on this counter? Thanks!


Saturday 10th of January 2015

Hi Kelvin,

if you read my blog, you will know that i tend to try to limit my confirmation bias, my endowment bias by reading more negative things about the things that I own. These are real risks, and some experienced investors refuse to get in to cmp for this reason. I can understand them. At the end of the day, when it comes to investing we evaluate the risks daily. There are seldom perfect investments. For me, if you are aware of the risk, proper allocation sizes are important. Assessing what is different about china merchant as well. Talk to the management to get their point of view. some historical look in china but also in some major toll road countries would help.

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