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China Merchant Pacific Q2 2013 Results

China Merchant Pacific (CMHP) yesterday announced second quarter results and declaration of 2.75 cents  dividends.

I was rather interested to see if the recent weakness in the share price is indicative of  the market anticipating a weak set of results.

Fortunately, the results are pretty predictable.

For new investors to this may want to  take a look at this 2 articles

If we take a look at full year profits it looks good in all areas. Net profit improved 37% for the first half from 222 mil to 304 mil. So did the top line.

Across the board, traffic actually improved. Nation wide toll reduction and toll free holidays look like its not affecting them in Q2.

The economic slow down doesn’t seem to have put a dampener on results. Yet.

You can see that the acquisition of Yongtaiwen provides much cash flow, but it is such a mature toll roads that it doesn’t give the kind of growth rate we see of Guiliu and Guihuang in the past.

(Click to see larger image)

You will be quick to extrapolate the results to full year. Do note that  traffic does fluctuate, and for different toll roads there are different peak quarters.

  • Q1 have 4 holidays
  • Q2 have 3 holidays
  • Q3 have 1 holidays
  • Q4 have 3 holidays

Forex Gain

One interesting thing is that for the quarter, CMHP made a 30 mil gain from forex movement of RMB vs HKD.

I always thought that those currencies are all pegged versus the USD

Resourceful folks can hop on to Yahoo Finance for a quite look at HKD versus RMB.  Compared to 2012, which was more stable, 2013 was more turbulent.

I would think you win some you lose some when it comes to forex movement.

The past 13 years have been either stable or RMB strengthening. I do worried that if I forecast correctly, a strong USD would be rather detrimental to CMHP when they convert from RMB to HKD.

However if HKD/USD Strengthen against SGD, this might indicate less cash flow to pay for our dividends.

Beilun’s Surprising Performance

The surprising thing about this earnings was the performance of Beilun. In first quarter earnings was 17 mil, this quarter it was 31 mil.

Massive improvement.  Traffic volume was 13% better, revenue 18% better. And since revenue figures are in RMB, its not fully a currency gain.

What we suspect is that this is due to a refinancing of Beilun’s debt at a lower interest rate.

Recall that Beilun owes 1200 mil in debt to 2018 (5 years) and recently there was a renewal of a loan facilities for USD 150 mil (1153 mil HKD). (Read here)

The outperformance of Beilun is likely a combination of better traffic  figures, currency appreciation and debt refinancing.

What would be a safe estimation of Beilun’s full year earnings next year? I suppose we can optimistically forecast 90-100 mil. Good enough for 27% of fully diluted dividend or 41% of undiluted dividend.

Forecasting full year earnings and dividends

A safe estimation will be that all else being equal, second half full year earnings should come in near 580-590 mil.

How much can 590 mil pay for? Do be aware that CMHP can dilute share holders 50% due to convertible preference shares and convertible bonds that are exercisable at a price of  84 cents.

This look up table can serve as a guide. You will notice that at full dilution number of shares is 1074 from CMHP’s spreadsheet. They are correct. I am wrong.

However, the difference is not too much of a difference.

If both parents and convertible bond holders don’t convert or if  one party convert, CMHP is capable of declaring up to 9.5 cents dividend.

At a share price of 84 cents, that’s a 11% yield.

If fully diluted, a safe zone will be 8.5 cents, for a 10.1% yield.

CMHP have indicated they won’t do that. And would likely pay out 5.5 cents. At fully diluted, that would represent 63% payout.

At 5.5 cents, this represent a 6.5% dividend yield out of earnings (compared to 90-100% cash flow payout for REITs and business trust)

Free Cash Flow

If you  think the dividend pay out of earnings is sick, take a look at the free cash flow. a Half year FCF of 1041 mil, we may be looking at a full year  FCF of 1800 mil.

You would have to deduct 140 mil of interest payment and 200 mil of taxes from this figure, and you will still get 1460 mil that CMHP and half of YTW that CMHP don’t own can call upon.

If I am correct, in 2 years, YTW will repay all their debts (the underlying have been amortizing debts, as is Beilun. What you see here are nett of those amortization). In 5 years, Beilun will clear the loans. The cash flow then of those free up cash flows can flow more to CMHP parent.

Of course, you can look at this and say that they can comfortably pay out a 25% dividend yield per year but do note that their toll roads concession is much much shorter than your 70 year land lease of retail malls, 30 years land lease for industrial buildings, 40 years land lease for typical China land lease.

  • YTW 17 years to go (2030)
  • Beilun 10 years to go (2023)
  • Guiliu 11 years to go (2024)
  • Guihuang 14 years to go (2027)

CMHP will have to buy more roads or assets, to replenish many expiring concessions.

Look at this as if they can pay out 400 mil in dividends yearly and use 1000 mil to buy 1 toll road every 2 years.

 

I am pretty glad they provided this slide. Shows a lot of information at a glance.

Leverage

One thing about about CMHP is that they do amortize their debts (unlike the REITs and Business trust that roll them over)

For the first half of the year, they repaid 500 mil. That should work out to 400 mil for YTW, 100 mil for Beilun.

YTW debt should be repaid in 2015 while Beilun 2018.

What we anticipate is that this freed up cash flow would go into future free cash flow for development.

I don’t quite agree with CMHP way of calculating their debt levels, considering that they omit 500 mil worth of dividends payable which is suppose to be dividends due to their parents (getting very strange why they keep them there)

Total debts:

  • Short term interest bearing liabilities: 271 mil
  • Dividends payable: 536 mil
  • Long term interest bearing liabilities: 3680 mil
  • Total: 4487 mil

Cash: 1593 mil

Net debt: 2894 mil

Net debt to asset: 2894/13455 = 21%

It gets more conservative considering 1100 mil worth can be converted to equity, in which case the gearing can be reduce to 14%

1894 mil is almost 1 year of free cash flow. HKT Trust holds 2.6 times EBITDA, APTT holds nearly 5 times EBITDA, the reits even more (note these are EBITDA while  for CMHP I am stating free cash flow)

The debt levels look very conservative on paper.

Summary

All in all, pretty satisfied with the result. The only thing not satisfied was me buying nearly half at an average price of 90 cents.

That is still a  rather nice 6.1% yield at that price.

CMHP is rather heavy in the portfolio, but let me evaluate whether what is developing in China will have any bearings on future cash flow.

Bullet trains, railway and improving alternative transport may affect  future earnings.

Perhaps, if all goes well I can bump this up to 10% of my portfolio.

As always, I feel that CMHP can provide more prompt reporting of traffic figures so as to smooth out any surprises.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

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Musicwhiz

Sunday 11th of August 2013

Thanks for your reply. How about in comparison with other listed toll road operators? Would their debt level seem high by comparison? Is it common for toll road companies to carry this level of debt on their Balance Sheet? Also, I always assumed operating toll roads is a no brainer kind of business which is very FCF-generative; so why is the Company carrying so much debt? Is there any intention to pay off this debt gradually (i.e. are they doing so already or making plans to do so)? What is their track record of M&A? How much did they pay for their assets and what is the payback period like? Is there an IRR hurdle rate for their M&A? Thanks again!

Kyith

Sunday 11th of August 2013

Ho Musicwhiz, CMP was as early as 2010 net cash with 2000mil HKD in cash.

They wanted to buy toll roads but kept couldn't find any.

We did look up Hong Kong listed toll roads. YOu have hopewell expressway, zhejiang expressway, jiangxu expressway. Toll road companies are expected to be highly leverage, and jiangxu and hopewell are leveraged but managable.

Zhejiang is net cash, and they own a bank.

What the CEO Mr Jiang said is that their debt/equity is lower than that of China local toll roads. Their financiers say they can go 70% debt/equity but they are more conservative only going at most 60% debt/equity.

The China toll roads according to CEO is higher leverage.

So if there is a reduction in tolls, such as the toll free holidays or crunch in cash flow, these toll roads will feel it more than CMP, and thus unless the government want to cause massive distress at the local government i think that will not happen.

Toll roads cash flow generative capability will depend on the maturity of the toll road.The infant toll road, like Jiurui, whom CMP unsuccessfully purchase, will be losing money, and FCF negative. It will take some time for it to ramp up to break even. Could take 4 years.

Most toll roads Build Transfer Operate are heavily finance by debt.

In the case of their 2 toll roads guihuang and guiliu, their underlying is debt free,

YTW was aquired with a mixture of cash and debt. Without debt, CMP cannot buy this cash generative asset. The underlying in YTW are leveraged as well.

But the debt is amortizing, which means that the toll road is paying off the debt instead of rolling it over. They will be paid by 2015 (2 years) we hope that by then more cash will be freed up for reinvestment and dividends.

Beilun have debt underlying as well and is financed by debt. the debt is amortizing as well.

I think with any business its ok to operate with a 20% net debt to asset leverage.

With regards to M&A, i am not sure, but YTW is yielding 290 mil profit and bought at 2700mil giving it a 11% ROA. This is a matured toll road, which means you dont expect much growth. Their IRR seem to be aiming 13%. For jiurui, they were targeting that as well.

Beilun looked weak and short duration initiatlly but this quarter have surprised us.

The management have shown that they are rather conservative. Jiu rui seem to interest them because the previous owner have financing issues. So this might be a distressed buy (which is good for CMP)

Kam Chuanhui

Saturday 10th of August 2013

Thank you for your research. I came to be aware of CMPacific while researching on other stocks and I was wondering what sort of economic moat the toll road business have.

Kyith

Saturday 10th of August 2013

Although toll roads are an example Buffett used to illustrate economic moat in reality their moat may not be that strong.

In main roads, to get to another province or town you have to go through these roads but there are other alternative in the form of air travel or bullets trains.

But because of different fares, comfort, affordability and convenience, toll roads are still relevant.

Moats can be wide or narrow. I would think the moat of these roads are narrow. If it's too expensive relative to substitutes people might just rely on the substitute

Musicwhiz

Friday 9th of August 2013

What is their cost of debt? I didn't see it anywhere in your post. Could this rise/fall and what difference would it make to the results? Considering they have quite a huge net debt balance, this may be significant. Also, what could derail growth? What are the risks to the toll roads which would make them not able to meet their forecast(s)? Thanks!

Kyith

Friday 9th of August 2013

Not sure about any updates in average cost of debt. Average should be 5-7%

The growth in toll roads uses much assumptions and that it should growth with population or GDP. It depends much on the commerce and tourism between the regions it served.

There are competitive substitutes in the form of air travel, railways.

Additional risks in the form of new expressway created to alleviate congestions or take away the importance of the expressway.

And they don't do forecast, so probably no forecast to meet.

I don't think the debts are significant.

Amos

Thursday 8th of August 2013

Thks for posting this. I read it.

Kyith

Friday 9th of August 2013

Hope it's useful.wat do you think of the result

Sent from my iPad

在 Aug 8, 2013,11:10 PM,"Disqus" 写道:

Kyith

Thursday 8th of August 2013

at 84 cents, Exchange rate 6.2 HKD to 1 SGD, EV = 7300mil. This includes the debt burdened by YTW Minority shareholders.

If we deduct 400 mil, the EV will be 6900mil.

FCF could come up to 1400mil.

This will give a EV/FCF of 4.9 times.

EV/Net profit of 11 times.

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