CMPac $0.935 - How To Grow A Dragon
CMPac is a China SOE backed cash generative defensive infrastructure business with exposure in China's toll roads. It is a Singapore incorporated company with no finanical engineering (non business trust) and boast of sustainable 7 cents dividends payable twice a year. At 93.5 cents and dividend yield of 7.5%, CMPac is rare Garang Guni Gem riding on the back of parent China Merchant Group's sharpened focus to drive growth in a unit that boast of a 10 year track record in China toll road industry. Concerns over its pure China based business have been overplayed given its strong cashflows and management track record in enhancing shareholders' wealth through consistently growing dividend stream.
Hidden Dragon
CM Pac was incorporated in Singapore as a private limited company under the name Hotel Tai-Pan Pte Ltd on 27 March 1981 and was converted to a public limited company on 11 May 1981. The Company was officially listed on the main board of the Singapore Exchange Securities Trading Limited (“SGX-ST”) on 17 August 1981. Upon the sale in 1989 of its flagship hotel, then known as Tai-Pan Ramada Hotel, the Company changed its name to HTP Holdings Limited.
China Everbright Holdings Co., Ltd took over the control of the Company in August 1993 and the Company’s name was changed to China Everbright Pacific Limited. In May 2001, China Merchants Holdings (International) Company Limited (“CMHI”) acquired a 23.9% stake in the Company from China Everbright Holdings Co., Ltd and became the single largest shareholder of the Company. The Company further changed its name to China Merchants Holdings (Pacific) Limited so as to directly identify the Company’s strong ties with the China Merchants Group. On 30 December 2004, the Company was transformed into a significant toll road player following the acquisition of equity interests in five toll roads in China from CMHI. - Annual Report
http://www.cmhp.com.sg/milestones.htm
http://www.cmhp.com.sg/tollroad-overview.htm
Cash Generator Rich Dividend Yielder
Since FY2004, CM Pac has established an unbroken track record of rich dividends ranging from 4 cents (FY2011) to 7 cents (Fy2013). Currently, the Board has a long-term commitment to an annual dividend payout ratio of at least 50% of underlying net profit.
The Awakening
CMP share price has long been trading below its NAV of around mid S$0.80s - a major hindrance for the company to issue new shares to fund acquisitons (There is an guideline that Chinese State Owned Enterprises (SOEs) are not allowed to issue new shares below NAV). However, foundations being laid starting in 2011 to acquire 51% equity interest in Zhejiang Wenzhou Yongtaiwen Expressway Co., Ltd which owns and operates the Wenzhou Yongtaiwen Expressway (Wenzhou Section) from parent CMG set stage for the start of acceleration in earnings growth momentum.
CMP successfully issued an aggregate principal amount of HK$1,163,000,000 1.25 per cent. convertible bonds due 2017 (credit enhanced until 2015) to fund the purchase of another toll road - the entire issued ordinary share capital of Beilun (Hong Kong) Investment Limited (“Beilun HK”) from China Ping An Insurance Overseas (Holdings) Limited. Beilun HK is the holding company of Beilun Port Expressway Co which owns the rights to operate the Ningbo Beilun Port Expressway.
On the back of accelerating earnings momentum and rising dividends, CMP share price steadily rose above its NAV which help activated an important alternative avenue of fund raising for new acquisitions - issuance of new shares.
Sharpened Management Focus To Drive Growth
In Mar 2014, The Company has effected an organisational restructuring (the “Restructuring”) in March 2014 which involves, inter alia, certain senior managers of China Merchants Huajian Highway Investment Co., Ltd (“Huajian”) being appointed to the Board and forming part of the senior management team of the Company. Huajian is a wholly owned subsidiary of China Merchants Group Limited, the controlling shareholder of the Company.
The Restructuring forms part of the strategic direction of the Company, Huajian and the China Merchants Group to use the Company as the platform for the China Merchants Group to expand its toll road business and presence in the People’s Republic of China. The aim of the Restructuring is to streamline and optimize the human resources of both Huajian and the Company in order to focus on the growth of the Company’s business.
Jiurui Acquisition Reinforced Management's Deal Making Capability
Quick glance on the following announcements by CM Pac will reveal the shrewed and patient deal making ability by the management team within a year:
Old deal:
http://infopub.sgx.com/FileOpen/Acquisit...leID=57001
New deal:
http://infopub.sgx.com/FileOpen/Acquisit...eID=306007
Old deal: consideration RMB 891m (adjusted for comparable concession life), net debt HK$1.94bn
New deal: RMB 697m, net debt HK$1.59bn
Difference - 21.8% cheaper in consideration, 18% less net debt absolute certainty in concession life. New shares issued as consideration @ $0.98 is 16.7% dearer than previously indicated price of $0.84 (ie less dilution should same amount of shares are issued)
Vast Potential For Growth
At the end of 2013, the total length of the expressway network in China was 104,500 km, of which 8,260 km of expressways were built in 2013 alone. We will draw on our knowledge of the toll road industry and business connections in China to acquire quality toll road projects to enlarge our toll road portfolio and further accelerate the Group’s growth and development. - Annual Report 2013
1.25% Convertible Short Term Overhang, Enhance Trading Liquidity Over The Medium Term
As the 1.25% Convertible Bonds (CB) are in the money, professional traders who are arbitraging the mispricing between the CB and shares appears to be creating an overhang for share price in the short term. However, trading liquidity has been substantially enhanced by the conversion of CBs and over time any potential inclusion in major stock indices cannot be ruled out.
