China Merchants Holdings Pacific

[Nick]

The intangible assets are the rights to operate toll roads during the concession periods. It is amortized and will be worth 0 when the concession period ends. If traffic volume is materially reduced, there will be an impairment in the intangible assets - this occurred in FY 2009 when Yuyao Highway (already divested) suffered a HK$168 million impairment loss due to a decline in traffic volume. This should not be confused with goodwill. In this case, the HKD 9.4 billion intangible asset are the toll operating rights of Yongtaiwen Expressway and Beilun Port Expressway.

(Vested)

There are two ways of accounting for concession arrangement, base on INT FRS. One way is by receivables, the other is by intangibles. It is not a free choice, but with a defined criteria.

In this case, it is accounted as intangible asset. In most, if not all waste-water treatment BOT projects, it is accounted as receivables.

Yes, agree with Nick, it should not be confused with goodwill. It is more tangible than that.

(not vested)

The exact criteria for accounting treatment as either recievables or intangibles is pretty complex and sometimes ambiguious in certain areas. As a rule of thumb, the more regulated and predictable the future revenue streams are, the more likely it will be treated as recievables. Vice versa for intangibles.

Yes, agree. Accountants will recommend the appropriate accounting. They are the professionals. AR should have a justification on their judgement.

The receivable model is more "tangible" than the intangible model, due to the "rule of thumb".

Thanks for the clarifications. So the amortization of this intangible assets is more or less tied up with the real revenues collected: less revenues collected then higher amortization in that year?

Amortization is an expense and not really linked with revenue. The simplest model is a straight line depreciation from the original 'fair value' to zero at the maturity of the concession (just like depreciation). However Management could adopt different models ie unit of usage (with CM Pacific does). IIRC, Hua Nan Expressway (owned by MIIF) uses unit of usage amortization profile so as to match its ballooning loan repayment with amortization expense which prevents cash from being locked at the asset coy in the early years - so amortization expense increases annually. In CM Pacific case, amortization expense has been fairly stable at HK$112 million for 1Q and 2Q 13 each.

Agree with Cityfarmer - toll roads (unlike regulated utilities) do not have a minimum tarriff or fixed rates and volumes so it is difficult to treat it as long term service receivables. Fortunately, as investors, one can easily look at the cash-flow generated by these assets and decide whether the valuation makes sense in the first place.