China Merchants Holdings Pacific

[greengiraffe]

CM Pac halted from trading tomorrow. Hopefully its good news (like acquisitions) not discovery of fraud...

[Nick]

Trading halted pending release of announcement.

(Vested)

[greengiraffe]

http://info.sgx.com/webcoranncatth.nsf/V...20057B1A3/$file/Acquisition-PressRelease.pdf?openelement

Transforming into a pure China toll road co via the purchase of a new expressway (still loss making) in Jiangxi using a combo of 72.66m new shares to be issued at $0.84, tranasfer of NZ prop business to seller and cash (RMB 75m).

Should be good news I supposed after they restructured the debt at the newco post taking over...

[Drizzt]

hi greengiraffe,

Will be interesting to see how long it takes to turn profitable.

[Nick]

China Merchants Holdings (Pacific) continues on the acquisition trail with the purchase of the Jiurui Expressway in Jiangxi Province, China

- Divests property development business
- Becomes a pure player in the toll road business after the divestment of its property development business in New Zealand

http://info.sgx.com/webcoranncatth.nsf/V...20057B1A3/$file/Acquisition-PressRelease.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Acquisition_Announcement.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_2-Executive_Summary_of_Traffic_Consultant_Report.pdf?openelement [Traffic Consultant Report]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_3-Toll_Road_Valuation_Report.pdf?openelement [Toll Road Valuation Report]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_4-Property_Business_Valuation_Report.pdf?openelement [NZ Property Business Valuation Report]

A fairly complicating transaction but one which I have been hoping for - divestment of the loss-making legacy business and investing in a toll road in the 'start-up' phase due to longer concession and able to enjoy significant revenue growth.

CM Pacific is acquiring Jinrui Expressway from the Sellers (unrelated to CMG) at RMB 675 million (independent valuation: RMB 730 million) and will finance this transaction by paying RMB 75 million cash, transferring the NZ property development division (consideration is RMB 290 million) and issuing 72.66 million new shares @ $0.84 (18% premium to last traded price of $0.71) to the Sellers. This will transform CM Pacific to a pure-play toll road operator with 5 toll roads and concessions stretching from 2025 to 2033.

Jinrui Expressway started operation in Dec 2010 and have seen significant traffic volume growth. It reported losses before tax of HK$115 million in 9M 2012 primarily due to high interest expense from the construction loans. CM Pacific intends to restructure the loans into amortizing loans in 2013 and it will be repaid with the asset cash-flow. The Management expects the completion of nearby expressways and bridges between 2013 to 2017 will increase traffic volume in this expressway. An EGM will be convened to approve this transaction.

My thoughts:

1) CM Pacific will have a more balanced portfolio consisting of very matured roads like YTW, stable growers and debt-free roads like Guiliu and Guihuang to support the dividend and high growth roads like Beilun and Jinrui.

2) This M&A extends the concession lifespan of the portfolio giving rise to further earnings visibility. It also diversifies the sources of revenue reducing the reliance on YTW.

3) This is another highly geared acquisition with around HK$2 billion debt held under Jinrui at its underlying level. Personally, I don't buy the non-recourse argument posited by some of the business trust - debt must be repaid at both the Group and underlying level if the asset has limited lifespan ! It is good that CM Pacific will continue to adhere to this via the restructuring of Jinrui debt into amortizing loans. I am very impressed by CM Pacific deleveraging efforts this year with over HK$1 billion debt repaid while being able to maintain its dividend and grow its equity.

4) This M&A adds an element of risk since the road is hugely loss-making. However, if one look at comparable - Hopewell Highway - the potential for traffic volume growth in new roads is immense. Hopewell Highway GS-Super Expressway daily revenue since 1994: http://www.hopewellhighway.com/WebSite_e...d_2012.htm

5) The final divestment of the non-core legacy asset will save cost since all of its assets are now in China.

6) I guess the most important question - in light of the share placement - can the dividend be maintained ? The Management seems to think 84 cents is a good base for equity fund raising. Will this affect the conversion price of the CB ?

The Market seems to approve of this transaction with the share price up 6% to 75.5 cents. Assuming the guided 5.5 cents dividend is maintained, the dividend yield is 7.28%.

(Vested)

[greengiraffe]

Hi Nick,

Thanks for your usual in depth analysis. CM Pac appears to be riding on their strong parentage and financial strength to pick up some of these over-extended but quality assets in China.

As we know with the tight liquidity and anti-speculation measure in China, some holders may have been forced to part with their prized assets due to their involvement in ill-fated property projects or commodity speculation that has gone sour.

While we do not know if this current deal could be one of the above mentioned by-product, the fact that the toll road is excessive leverage is an indication of why the bankers could have presented CMPac with such a deal.

There is no doubt that there is risks involved with the restructuring of the finances at the new expressway but it should be adequately compensated by the growth the accompanies the start up expressway.

Still waiting for CM Pac to rise to book value.

Cheers
GG

China Merchants Holdings (Pacific) continues on the acquisition trail with the purchase of the Jiurui Expressway in Jiangxi Province, China

- Divests property development business
- Becomes a pure player in the toll road business after the divestment of its property development business in New Zealand

http://info.sgx.com/webcoranncatth.nsf/V...20057B1A3/$file/Acquisition-PressRelease.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Acquisition_Announcement.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_2-Executive_Summary_of_Traffic_Consultant_Report.pdf?openelement [Traffic Consultant Report]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_3-Toll_Road_Valuation_Report.pdf?openelement [Toll Road Valuation Report]

http://info.sgx.com/webcoranncatth.nsf/V...20056782D/$file/Appendix_4-Property_Business_Valuation_Report.pdf?openelement [NZ Property Business Valuation Report]

A fairly complicating transaction but one which I have been hoping for - divestment of the loss-making legacy business and investing in a toll road in the 'start-up' phase due to longer concession and able to enjoy significant revenue growth.

CM Pacific is acquiring Jinrui Expressway from the Sellers (unrelated to CMG) at RMB 675 million (independent valuation: RMB 730 million) and will finance this transaction by paying RMB 75 million cash, transferring the NZ property development division (consideration is RMB 290 million) and issuing 72.66 million new shares @ $0.84 (18% premium to last traded price of $0.71) to the Sellers. This will transform CM Pacific to a pure-play toll road operator with 5 toll roads and concessions stretching from 2025 to 2033.

Jinrui Expressway started operation in Dec 2010 and have seen significant traffic volume growth. It reported losses before tax of HK$115 million in 9M 2012 primarily due to high interest expense from the construction loans. CM Pacific intends to restructure the loans into amortizing loans in 2013 and it will be repaid with the asset cash-flow. The Management expects the completion of nearby expressways and bridges between 2013 to 2017 will increase traffic volume in this expressway. An EGM will be convened to approve this transaction.

My thoughts:

1) CM Pacific will have a more balanced portfolio consisting of very matured roads like YTW, stable growers and debt-free roads like Guiliu and Guihuang to support the dividend and high growth roads like Beilun and Jinrui.

2) This M&A extends the concession lifespan of the portfolio giving rise to further earnings visibility. It also diversifies the sources of revenue reducing the reliance on YTW.

3) This is another highly geared acquisition with around HK$2 billion debt held under Jinrui at its underlying level. Personally, I don't buy the non-recourse argument posited by some of the business trust - debt must be repaid at both the Group and underlying level if the asset has limited lifespan ! It is good that CM Pacific will continue to adhere to this via the restructuring of Jinrui debt into amortizing loans. I am very impressed by CM Pacific deleveraging efforts this year with over HK$1 billion debt repaid while being able to maintain its dividend and grow its equity.

4) This M&A adds an element of risk since the road is hugely loss-making. However, if one look at comparable - Hopewell Highway - the potential for traffic volume growth in new roads is immense. Hopewell Highway GS-Super Expressway daily revenue since 1994: http://www.hopewellhighway.com/WebSite_e...d_2012.htm

5) The final divestment of the non-core legacy asset will save cost since all of its assets are now in China.

6) I guess the most important question - in light of the share placement - can the dividend be maintained ? The Management seems to think 84 cents is a good base for equity fund raising. Will this affect the conversion price of the CB ?

The Market seems to approve of this transaction with the share price up 6% to 75.5 cents. Assuming the guided 5.5 cents dividend is maintained, the dividend yield is 7.28%.

(Vested)

[greengiraffe]

DBS V maintained BUY:

Buys Jiurui Expressway; exits
NZ property business
• Buying 48.1km Jiurui E’way for Rmb675m
• Consideration includes disposal of NZ property
business and issue of 72.7m new shares at
S$0.84 to the sellers of Jiurui E’way
• Transaction will a) lengthen CMHP’s average
concession period b) streamline its focus to
expressways only and c) improve liquidity
• Maintain BUY, TP raised to S$1.20
Buying Jiurui E’way – a new road with potential.
Part of the Hangzhou – Ruili Expressway (G56), Jiurui
E’way is a key route in Jiangxi province and was newly
opened to traffic in Jan 2011, and has a remaining
concession period of c. 22 years. This will lengthen the
Group’s average remaining concession period by 11%
to over 15 years. CMP is looking to restructure its debt
i.e. borrow at a lower cost than the current 6.55% to
help this road achieve breakeven by 2013. This road
should contribute positively from 2014 onwards.
Deal structure is positive in many ways. The
consideration of Rmb675m is to be satisfied through a)
the transfer of CMP (NZ) i.e. the property development
business valued at Rmb290m, b) issue of 72.66m new
shares at S$0.84 each valued at RMB310m and c) cash
payment of Rmb75m to the sellers of Jiurui E’way. We
see this payment structure as positive for shareholders
as it would allow CMP to exit its non-core New Zealand
property business at a fair price (close to NAV), issue
new shares at a premium of >10% to its trading price,
which could also help alleviate its illiquidity issue.
Maintain BUY with raised TP of S$1.20. Factoring in
this acquisition, we raise our DCF-based TP to S$1.20,
adjusted to S$1.13 if all the convertible bonds were
converted to new shares in the company.

[Nick]

Thanks for the report GG. CM Pacific has risen to 77.0 cents with relatively decent volume today resulting in further yield compression to 7.15%. At this rate, the convertible bond owners may very well end up converting the shares prior 2015 reducing CM Pacific leverage thereby enabling it to acquire more toll roads in the future.

An announcement from China International Holdings - http://info.sgx.com/webcorannc.nsf/Annou...endocument - regarding the cessation of toll collection at Zuowei Yanghe Bridge is a timely warning on the possibility of unilateral regulatory actions from the government which may curb revenue growth in the future.

(Vested)

[greengiraffe]

Hi Nick,

China International Holdings has its name change right - it was previously known as another name.

China is not a free market and in many instances, the law and order only favours those that are well connected. I think after this many years of experience with China, many buddies should be well aware of the risks with China companies and hence the low valuations that are assigned with Chinese listings.

On CM Pac, the immediate price target is S$0.84 - the conversion price of the bond and the issue price of the new shares. Looking at the deal, I suspect that the present owner has been hit by over-leveraging and poor credit rating - basically a victim of over-stretching from the previous round of pump priming post GFC.

CM Pac has probably been alerted by bankers and came in as a white knight. Given that China Merchant Group continues to be a substantial shareholder in CM Pac, the risks of any adverse policy changes against its portfolio of toll roads should be mitigated.

I would start to review CM Pac when China Merchant Group's stake in CM Pac starts to reduce in absolute terms. As it is, liquidity in CM Pac remains tight and RCCPS have yet to be converted.

From the grand scheme of things, CM Pac's status as a diversified toll road operator has yet to cross the mid way mark. It is good to keep taps of the evolution of CM Pac but the exponential part of the curve has yet to kick in.

GG

Thanks for the report GG. CM Pacific has risen to 77.0 cents with relatively decent volume today resulting in further yield compression to 7.15%. At this rate, the convertible bond owners may very well end up converting the shares prior 2015 reducing CM Pacific leverage thereby enabling it to acquire more toll roads in the future.

An announcement from China International Holdings - http://info.sgx.com/webcorannc.nsf/Annou...endocument - regarding the cessation of toll collection at Zuowei Yanghe Bridge is a timely warning on the possibility of unilateral regulatory actions from the government which may curb revenue growth in the future.

(Vested)

[Nick]

The above mentioned DBSV report can be viewed here - https://groups.google.com/group/brokerag...authuser=0 [Report]

According to DBSV, it is likely the management will tap into offshore loans (denominated in HKD and USD) to refinance the loans. Looking at the 2011 Annual Report, these offshore loans interest rates (used to finance YTW acquisition at Group level) were 2.92 - 4.01% for USD and 2.76 - 3.94% for HKD Facilities. The chart provided in pg 3 of the report highlights that if the cost of debt is reduced to 3.5%, the toll road will break even this year and possibly generate a profit in FY 2014. DBSV has also speculated that the enterprise value of the toll road is lesser than the cost of construction of the road which lends credence to what has been discussed in this thread ie CM Pacific was bailing out the road.

The Management also announced today that it has completed the disposal of Yuyao Highway on 28 December 2012 - http://info.sgx.com/webcoranncatth.nsf/V...70033562B/$file/Completion_Announcement-Yuyao_Highway.pdf?openelement - and have received the final third of the RMB 450 million proceeds.

CM Pacific closed at 78.5 cents which translates to 7.0% yield with approx 55 - 60% earnings payout. I am going to miss the days when the shares was trading at 9 - 10% yield ! I really hope the Group is able to maintain its EPS in 2014 onwards after the CB and RCPS are converted. CMG has been kind to not convert it yet.

(Vested)