China Merchants Holdings Pacific

[Nick]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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)

[zz...]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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)

Thanks for the reply. So this 9.4b intangible assets can be seen as the potential expected revenues during the two roads' concession periods?

[CityFarmer]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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)

[mobo]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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.

[CityFarmer]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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".

[zz...]

It has 9.4b intangible assets on the balance sheet, any potential risks to destroy this?

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?

[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.

[CityFarmer]

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.

Yes, the most important is the real cash flow from the assets, either intangible assets, or receivables.

With a good understanding of the accounting method, one should be able to derive the "real" cash flow, base on the AR. Of course, assuming the AR is without fraud.

(not vested)

[Nick]

On another note, I did wish CM Pacific would provide monthly toll statistics operating data like most of the listed SEHK peers. Considering that 2 of their toll roads are in Zhejiang Province (YTW and Beilun) and close proximity to the expressways owned by Zhejiang Expressway - http://www.zjec.com.cn/uploads/2013051562307361.jpg [Map] - we could use their monthly figures to get a sense of how the toll roads in the province is faring.

http://www.zjec.com.cn/en/upload/2013081...789010.PDF [July 2013]
http://www.zjec.com.cn/en/upload/2013091...535910.PDF [August 2013]

Their results seems fairly positive and hopefully we can see some organic growth in 3Q 13. However, we can't simply extrapolate the figures since their roads are in different locations or serve different target groups but I think it could still be used as a crude 'sentiment' indicator.

(Vested)

[mobo]

The theoretically most accurate way of amortizing intangibles is the fair value modelling of intangibles on a cash generating basis over the remaining tenure.

However as a matter of practice due to the fact that such a method often introduces significant accounting judgements, most accountants will either expense using a prefixed amortization curve or set certain criterias and formulae in which a portion of the revenue "unlocked" is translated into amortization.