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
- Investing in the economic moat of toll roads
- China Merchant Pacific: Dividend Analysis, AGM Updates and Q1 report
- Results can be view here, here and here
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
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.
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)
- 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.
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.
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