China Merchant Pacific Holdings 2014 Full Year Results

China Merchant Pacific Holdings (CMHP) declares a SG$0.035 dividends per share and its maiden results with their new toll road Jiurui expressway.

Outstanding no of shares: 1050 mil

Fully diluted no of shares: 1200 mil

Current share price: SG$ 1.06

Current dividend per share: SG$0.07 (6.6% dividend yield)

SGD to HKD: 5.69

SGD to RMB: 4.59

CMHP fourth quarter results: link

CMHP fourth quarter presentation: link

CMHP fourth quarter toll road statistics: link

CMHP bonus issue announcement: link

I will not go into the background of the company but for interested folks can refer to past write-ups consolidated at the summary section below. 

The yearly results look good in part due to much one off activities or activities that will not always be long standing. Gross results from Yongtaiwen expressway, Beilun expressway and Jiurui expressway result in a 70 mil improvement. Yongtaiwen, the biggest contributor to CMHP result, had a good year due to traffic diversion from a neighbouring Jiashao bridge. However this was balanced off by poor results from Beilun, from the same Jiashao bridge (don’t ask me why one bridge can cause such a difference to 2 roads)

In addition, results were helped by deferred income and effective interest on other receivables relating to compensation granted by local government as a result of relocation and removal of certain toll stations along Guihuang expressway. There is also a negative goodwill of $22.7 mil arising from the purchase of Jiurui expressway and higher foreign exchange gain.

In all I can see HK$110 mil in one-off that we will not see in next year.

Cash Flow, Earnings and Dividend Cover

Shareholders Earnings

Shareholders Profit(HK$):

  • 2005: 191 mil 
  • 2006: 229 mil 
  • 2007: 302 mil 
  • 2008: 296 mil
  • 2009: 195 mil
  • 2010: 267 mil
  • 2011: 319 mil
  • 2012: 655 mil
  • 2013: 613 mil
  • 2014: 739 mil

Shareholders profit, which excludes non controlling shareholders stake (49% Yongtaiwen) have been climbing. There are much one offs in the past results. 2009 looks bad considering CMHP took a one off 168 mil expense.

In this upcoming year, 110 mil is from one offs should be subtracted from future forecasts. The future shareholders profit should look like 630 mil.  That still looks like some little growth over 2013. Growth really ramp up with the purchase of Yongtaiwen in 2012.

The earnings per share with $630 mil fully diluted is SG$0.092 (earnings yield 8.7%, price earnings ratio 11.5 times). Based on this metric, CMHP doesn’t look overly overvalue versus peers such as Zhejiang Expressway and Jiangsu Expressway who trades closer to 13 times. Not a fair comparison considering both Zhejiang and Jiangsu have additional securities and property business respectively.

Free Cash Flow

CMHP calculate their free cash flow by adding dividends received from toll roads and proceeds from repayment of loans granted to toll road joint ventures to operating cash flow. These two items are found in the investing activities in the cash flow statements. Then they deduct capital expenditures from it.

What they got is a crazy free cash flow of HK$ 1.7 bil versus 1.5 bil over last year. How bonkers is this figure is that, last year they paid out $349 mil for their dividends. However, this figure isn’t really good gauge of the cash flow CMHP shareholders can enjoy because it includes the dividends due to non controlling shareholders (49% Yongtaiwen).

My formula is as such: Free cash flow to pay out dividends, acquisitions, buy back, pay down debt = operating cash flow + cash flow from joint venture + interest income  – capital expenditure – interest expense – dividends to non controlling shareholders. ( if all this operating cash flow, free cash flow seems confusing, I wrote about it in the past here that helps folks understand why these matters and how to get them)

My free cash flow:

  • 2005: 275 mil 
  • 2006: 319 mil 
  • 2007: 560 mil 
  • 2008: 139 mil
  • 2009: 388 mil
  • 2010: 357 mil
  • 2011: 483 mil
  • 2012: 883 mil
  • 2013: 1171 mil
  • 2014: 1301 mil

The figures for 2014 is much lower than what CMHP announced because they paid out $404 mil to non-controlling shareholders. We will talk about this pay out later. Still, the free cash flow have grown tremendously.

In 2014, $349 mil is paid out as dividend, $606 mil debt was repaid. CMHP have shown much sensibility in their deployment of free cash flow. Note that the pay out was when CMHP only have 718 mil outstanding shares, so they only require $349 mil to cover SG$0.07 in dividends.

The current situation is that all the convertible bonds and preference shares will be converted. This means that to pay the current SG$0.07 dividend per share, CMHP would need HK$ 477 mil. This is a 36% pay out of my free cash flow. Still leaves $824 mil to pay off debt.

If CMHP were to declare SG$0.08 dividend per share, they would require HK$546 mil in cash ( 41% FCF pay  out) and leaves $755 mil to pay off debt.

The business model of CMHP is such that you cannot think that they would pay out all these money since they prefer to pay out as much as dividends, and use debts and placement to fund new road purchase. The high dividend supports the share price, making placement more possible.

Interestingly, if CMHP declares SG$0.08 dividend per share (7.5% dividend yield), the pay out ratio out of share holders profit is  87%.

Leverage

Net debt (HKD) history:

  • 2005: (126) mil (net cash) 
  • 2006: (284) mil 
  • 2007: (800) mil 
  • 2008: (729) mil
  • 2009: (983) mil
  • 2010: (1,216) mil
  • 2011: 2,535 mil
  • 2012: 3,561 mil
  • 2013: 2,619 mil
  • 2014: 3,695 mil

CMHP have levered up from a rather net cash position but their cash flow profile is different now as well.  Out of the $3,695 mil net debt, $800 mil will eventually be converted to shares so the actual net debt is reduced further to $2,895 mil.

Net debt to asset stands at 18%. Net debt to equity at 29%(when equity increase fully diluted). CMHP have a target net debt to equity of around 60%, so they can still levered up.

For cash flow generating companies such as telecoms, a better layer to the level of leverage is the Net debt to EBITDA, but since CMHP EBITDA is not reflective of additional cash flow from investing, we will use CMHP’s free cash flow of HK$1.7 bil.

The net debt to free cash flow in this case is 1.7 times (meaning to say in times of need, cutting the dividends they should be able to clear the debt in 1.7 years), this looks safe to me.

The Ezion Way

I believe CMHP have ample room to leverage up further. I can see them doing the Ezion way of acquisition. Given the current financial structure, they can go acquire a HK$2000 mil toll road by issuing 160 shares of CMHP at SG$1.10 and leveraging up HK$1000 mil in debt. As long as the acquisition is accretive EPS wise to the existing shareholders prior to the placement, then it is good.

The whole structure comes crashing down when the quality of the acquisition comes into question, such that for the next 10 years it does not generate meaningful free cash flow.

Bonus Shares Issue

CMHP decided to issue a 1 for 20 bonus share dividend. Share dividends do not result in much monetary gains for the existing share holders, the net effect is that your returns will be the same.  Theoretically it means a reduction in future dividends. all else equal.

This is equivalent of a company choosing not to pay you high dividend but to keep the cash for investments. It will be beneficial if CMHP makes more profits (which if you think about it, is what almost all companies are suppose to aim for!)

The Company is proposing the Proposed Bonus Issue to increase the issued share capital base of the Company to reflect the growth and expansion of its business, and at the same time, to recognise and reward its Shareholders for their continuing support and loyalty to the Company. The Proposed Bonus Issue, if carried out, will also increase the accessibility of an investment in the Company, thereby improving the trading liquidity of the Shares, allowing for greater participation by investors and broadening the Shareholder base.

Frankly, there was a fair bit of dilution in recent years, and we know that the parent CMH have been trying to increase the liquidity but found it challenging.  Their holdings have been reduced by 10% due to the placement as part of Jiurui’s purchase and convertible bonds converted. This I thought should be good enough. I suppose they think otherwise.

I am just wondering if the dividends will be kept at $0.07. To pay this dividend out of the enlarge outstanding number of shares (est 1250 mil) would require HK$ 498 mil. This represents only HK$21 mil more than existing pay out.  The adjusted EPS due to the enlarged equity based would be SG$0.088.

      Confusing things

      There are a few items that I am having difficulties explaining. The first thing is, if we look at the past dividends to Yongtaiwen’s 49% minority shareholders:

      • 2011: 276 mil
      • 2012: 217 mil
      • 2013: 228 mil
      • 2014: 404 mil

      The level of increase of dividends looks astoundingly high. Although YTW have performed well, its hard to explain why the increase in pay out. Even then, it should only be fair that CMHP enjoys the same level of pay out yet we do not see the same increase in operating cash flow.

      The second thing is, under the investing cash flow statements, there is a cash paid to a related party pursuant to the acquisition of subsidiaries amounting to HK$916 mil. This was what I thought to be payment for Jiurui expressway but someone pointed out to me that Jiurui was paid by a combination of placement and $134 mil in cash ( which was shown in the investing cash flow statement).

      If it is a repayment of some loans to settle the purchase of Jiurui, it should be under financing cash flow statements instead. The guess is that this is to settle some large working capital repayment for the previous owner of Jiurui as part of the purchase agreement. Big sum of money and I do not have a good explanation for it.

        Yongtaiwen

        profit before tax (HKD)

        • 2012: 261 mil
        • 2013: 295 mi
        • 2014: 333 mil

        Traffic for YTW turn out to be better. I was expecting this matured road not to grow much but positive luck shines on the road.

        Guihuang

        4th Qtr traffic:

        • 2007: 3761
        • 2008: 3977
        • 2009: 6450
        • 2010: 5694
        • 2011: 5736
        • 2012: 6033
        • 2013: 6438
        • 2014: 4660

        revenue (RMB):

        • 2007: 42 mil
        • 2008: 45.9 mil
        • 2009: 52.7 mil
        • 2010: 54.8 mil
        • 2011: 52.3 mil
        • 2012: 48.3 mil
        • 2013: 54.2 mil
        • 2014: 50.6 mil

        profit before tax (HKD)

        • 2007: 18.2 mil
        • 2008: 36.9 mil
        • 2009: 11.7 mil
        • 2010: 31.6 mil
        • 2011: 33.7 mil
        • 2012: 20.6 mil
        • 2013: 13.3 mil
        • 2014: 19.7 mil

          Guihuang’s concession was shorten in a past announcement and the government is paying compensation for toll road stations reduction. The statistics showed a dramatic reduction in traffic while earnings was able to stay stable. My only explanation for this is less organic growth but more of the loss in revenue made up by government compensation.

          Jiurui

          This is the quarter with full quarter contribution from Jiurui and we only had the profit before tax to work with. The profit of 9.4 mil is nothing to shout about, and perhaps the profit is only positive because of refinancing of high interest debt.

          Its dangerous to annualize this, but a $40 mil contribution will result in a 4.7% ROE. it is still far from contributing fully to replace Guihuang. A sensible 8% ROA on 3.6 bil asset will mean we expect it to reach 288 mil in profit, this perhaps in 15 years time.

          Valuation

          Competitors’ PE:

          • CMHP : 11.5 times
          • Jiangsu Expressway: 14.85 times
          • Zhejiang Expressway: 15.57 times
          • Anhui Expressway: 11.79 times
          • Hopewell Highway Infrastructure: 18.53 times
          • Yuexiu Transport Infrastructure: 12.12 times
          • Sichuan Expressway: 7.15 times
          • Bangkok Expressway: 11 times

          CMHP doesn’t look overvalued even with the recent run up.  Compared to its peers it doesn’t look overly cheap PE wise either.

          To calculate the EV/EBITDA we use HK1,700 mil + 50 mil capex + 337 mil taxes = 2,087 mil. The enterprise value work out to $6,332 mil + $3,695 mil net debt + $3,000 estimated 49% YTW non controlling stake = $13,027 mil.

          The EV/EBITDA works out to be 6.24 times. Based on EV/EBITDA this does not look too expensive.  However, its peers tend to trade at 4-7 times EV/EBITDA thus if we are looking for exceptional value, I don’t think this is it.

          Summary

          Overall, results look inline. I think the result of Yongtaiwen have offset poor performance in other areas.  This remains a holding, but likely I won’t add much unless I see changes in the value of the business.  We hope to see that Guiliu’s weak results relative to past performance is a one off, and see if Beilun is able to turn around.

          Previous written articles on this company are listed here.

          To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.
          Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.
          For my best articles on investing, growing money check out the resources section.

          The SG Govt’s 2 Asset Retirement Model

          In the business times this morning, Christopher Tan of Fee Based Advisory Providend, who is on the CPF Advisory  Panel wrote a good summary of how the 2015 Budget gels with what the CPF Advisory Panel recommends.

          The SG Govt’s 2 Asset Retirement Model 6U93rjN

          Particularly, this graphic shows how everything add up together. It probably shows a better illustration than what all the stuff CPF folks tries to create before hand.

          If we zoomed in to the plan to provide adequate cash flow during retirement, the two asset cash flow model of annuity plus an additional wealth machine seems to be the direction that they are going.

          1. Annuity

          The annuity I felt, is sound in that it pooled the citizens of Singapore together to share risk, and provide a life time cash flow. This alleviates longevity risk which the more i read the more i felt most of us underestimate how medical science will step up.  To deliberately side track, how many of your grand parents are great grand parents right now versus your parents’ grand parents. 

          2. an additional Wealth Machine

          The SG Govt’s 2 Asset Retirement Model HcGUHmu

          The second part, an additional wealth machine, rewards your acumen in building wealth wisely (read my wealthy formula). Different citizens have different degree of wealth building capabilities. Failure to do it well, even to the extend of losing wealth will not impact the citizen because he will have the annuity to fall back on.

          To live a better life, building wealth is required and being successful with it rewards you to have a better quality of financial independence.

          How much do statistics determine a retiree needs

          The SG Govt’s 2 Asset Retirement Model ehmrtMP

          The annuity in this case is more important to your degree of success in building your wealth machine, and hence the government focus the budget on helping upcoming retirees to meet the retirement sum.

          For those that were not able to meet the minimum sum, especially the lower income,  the Silver Support Scheme which provides a fixed sum of roughly $200 per person in addition to their CPF Life pay out. My gripe with this is that this isn’t a rather long going scheme. It seems the government is listening to the environment and provide only when required, so this doesn’t provide the right level of assurance to the group of people requiring this amount to live.

          The interesting stats is  this:

          The Department of Statistics says that the average monthly household expenditure per household member for the 21st to 40th expenditure quintile will be about S$657 in 10 years’ time. And for the 61st to 80th expenditure quintile, it will be S$1,338. We can assume that the former are individuals with lower income and the latter with higher income in their working years. This is a good guide for what you will at least need for a basic retirement.

          The number happens to be rather coincidental with the amount the basic and full retirement sum will provide! How convenient! Note that this is for one person.

          I can see many asking the question what can you do with $657 per month. A break down is something like this:

          • Transport 30 days senior discount concession 2 trips per day: $2 x 30 = $60
          • Meals : $350
          • Household improvement, repair: $70
          • Left over: $177 (no idea what else this will be for)

          This amount is not going to give you splendid quality of life (which you need your second part of the equation, your wealth machine to do well), but more or less it prevents the government from having a big problem on their hand.

          Medical Needs not comprehensive enough

          The diagram Christopher provides address the large bills medication, and Medisave aims to pay for the deductibles and co-payment. However, the weak point is that recurring medical complications that requires frequent consultation may not be addressed by Medisave and Medishield Life. (perhaps thats what the $177 is for)

          There are much abstraction there, but I wish this breakdown of how the $657 is derived can be brought to light to enhance discussion.

          Experiment: How much a Wealth Machine can generate $700 per month

          As an on-going exercise to see how much a person need to generate $700 per month without an annuity, I use the formula that I talked about in my financial independence article here:

          Wealth Machine Fund required in FI = (Next year’s Expenses in FI per month x 12)/Rate of Return to generate cash flows in FI

          To generate $8,400 annually:

          1. $420,000 @ 2% rate of return
          2. $280,000 @ 3%
          3. $210,000 @ 4%
          4. $168,000 @ 5%

          A high earning couple can build up a $320,000 portfolio to offset a couple’s basic needs. This lets the couple focus on the work and family better with the backing of this Wealth Machine.

          To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.
          Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.
          For my best articles on investing, growing money check out the resources section.