CMP is currently trading at around a yield of 7.8x%, which is very attractive compared to other companies at this point in time. This is higher than even most REITs. The big difference in valuation prompted me to think more about the risks.
Here are some of them. (Part of my opinion is formed after reading this thread and some of your blogs, so forgive me if I seem to be rehashing some of the things already said.)
- Natural disasters (earthquakes)
Earthquakes are entirely possible, but mid-sized quakes should affect only some sections of roads. There will be a temporary loss of income due to repair costs and road closure. Impact should be limited, unless we are talking about huge earthquakes that lay waste to nearby cities, like the one that happened in Japan 2011.
- Competition from new roads
Unlikely that someone would want to build another highway that runs parallel to the existing roads, unless the traffic density is so high that such a project is justified, in which case there should be enough business for both roads.
- Recession
A recession reduces economical activity, so less trunks transporting building materials and goods for delivery, less people driving to sightseeing destinations, etc. However, impact should not be that significant. (I don't really notice much reduction of traffic in Singapore during recessions)
Perhaps a particularly bad scenario would be a road located in a region very dependent on an industry that is badly hit.
- Government policy on tolls
China government may impose caps on tolls, affecting revenue. Of all the risks, this one seems to be most pausible, especially if a recession occurs and the authorities feel the need to boost economical activity.
http://www.infrastructureviews.com/2013/...ad-sector/
- Accounting irregulalites, etc
S-chips here have a less than pristine reputation, with a number blowing up in various ways.
I read up on a few of the cases, and here are some reasons in the past:
- Cash on balance sheet turns out to be non-existent
Very unlikely for CMP since they have been playing out regular dividend for 10 years or more.
- Exaggerated earnings (hiding of losses)
Toll road revenue should not fluculate drastically in the short term, so it should be difficult to cook the books.
Also, cash is collected at the toll booths, so there should not any ballooning receivables.
Majority owner of CMP is China Merchants Huajian Highway, and most of the CMP directors are Huajian executives. Since Huajian is in the same line of business, I take it that Huajian can easily detect any kind of accounting irregularity in their subsidary.
- Rogue employee running away with company money
There is a recent case where the CEO of a China company listed in Germany simply took company funds and disappeared. (The person denied wrongdoing) I guess there is no guarantee (in any company) that an executive will not turn rogue and disappear with funds. For the case of CMP, the reputation of a major corporation is at stake, so I imagine the authorities would be serious about finding and prosecuting such a person. He would have few places to hide, whether in China or elsewhere. That should be enough deterrence for most people, I think.
But not impossible if a person is desperate enough?
- Forex risk
I am not well vested about Forex to form an opinion, but I read that RMB is doing fine right now.
I probably missed out some risks. Look forward to hearing your opinions
(vested, thinking of adding more)
