On the back of a fully debt funded acquisition of Beilun expressway and a 1.25% convertible bond issue, China Merchant Pacific (CMHP) announces that they will be purchasing a new expressway.
[Acquisition Bulletin|Read here]
This expressway is newly built and is loss making due to high financing costs. Concession life span at least 21 years.
The acquisition will extend the concession life of portfolio from 13 years to 15 years.
CMHP will be divesting their New Zealand property business to the sellers, in addition to issuing 72.66 mil additional CMHP shares at SGD $0.84 and RMB $75 mil to the sellers.
The placement look to be worth SGD $61 mil/RMB $ 312 mil/HKD $ 387 mil.
Compare to Beilun, which is likely to be purchased for a minimum of RMB $890 mil, this seem to be valuing the New Zealand property business to be less than RMB $503 mil. Honestly I don’t think the property business is worth that much since Beilun have much better near term earnings power compare to Jiurui.
To Restructure Debts
CM Pacific will restructure the existing bank borrowings upon completion of acquisition to reduce the financing costs.
It is not surprising for a new toll road to be laden with debts. The owners must have worked out a return on investment and how debts are repaid.
If the current owners are small players they may not be able to secure a more detailed favorable financing compare to China merchant.
Restructuring of debts and repayment perhaps make sense, but although I doubt they will reduce the gearing at this point.
Jiurui turns out to be a very new expressway. Judging by the traffic numbers there have been a near 100% jump in traffic from 2011 to 2012.
The revenue jumped 150% during this period.
To be honest it will be difficult to forecast without additional information the growth rate of the expressway. In different province the growth rate can vary based on the ecnonomy, vehicle type.
Jiurui looks to have a large amount of volume with 2012 having 1.5 mil vehicles using it. Compare that to Beilun, Beilun should be forecasting 19 mil vehicles using it for 2012.
Conservative estimate of revenue for Beilun in 2012 comes to RMB $325 mil/HKD $402 mil. Jiurui last Revenue was RMB $46 mil /HKD $57 mil.
Based on conservative growth projection we shouldn’t expect any significant performance from Jim rui in the near term.
At most we hope that the restructuring will make it break even.
I don’t expect this deal and the purchase of Beilun to contribute substantially to near term profit targets.
The issue of 72 mil shares to the owners at 84 cents is puzzling. We would have thought a placement at current price is more attractive to the seller’s.
This looks 10% dilutive to current shareholders with a loss making asset and Beilun likely to only break even with minimal contribution.
To closely monitor management decisions and results
Moves like this, the purchase of Beilun, the convertible bond issue are what we judge the management by.
Honestly not a fan of the aggressive moves. We do hope that the management really sees good things that we don’t. [Economic Moat:Is Management a Moat? |Read]
Beilun was purchase entirely on debt and this purchase is carried out with cash and equity.
With this kinds of financing we judge if the management will play out existing minority share holders.
It is worth to note that currently parent China merchant owns 80% of outstanding shares meaning they must have some national agenda to bail out Beilun or Jiurui.
The business is simple, but it looks further to me that a lot will hinge on whether the management are aligned to the interest of shareholders, and whether they are taking on more risk than necessary.
Dividends still depends on 3 major expressway
Sgd 5.5 cents dividend should not be affected unless traffic of the three major road deteriorate significantly.
Management have been aggressive in paying down debts at group and expressway level at a frantic pace.
This may improve future distribution to share holders.
The good thing about management not paying a 100% payout is the capital allocation flexibility.