China Merchants Holdings Pacific

[greengiraffe]

CM Pac, cimb initiated coverage with ADD:

A road to value
We expect China Merchants Holdings Pacific's (CMH) strategic
expansion to be firmly supported by its very cheap financing and the
strong nationwide footprint of its parent, China Merchants Group
(CMG). The company pays the highest dividend among its peers while
having significant scope to further ramp up its investment returns.
The toll road operator’s recent
success in exiting a nonperforming
property development business has
refreshed its outlook. While we expect
strong expansion ahead through
acquisitions, our current target price
is conservatively based on the organic
growth of its toll income. We initiate
coverage with an Add rating and a
target price of S$1.06 based on CY14
residual income value.
A refreshed outlook
After successfully exiting a
nonperforming property business in
New Zealand, CMH has become a
pure toll road-focused business. The
toll road business rides on China’s
new initiative to develop the Yangze
River economic belt. CMH is expected
to benefit from the expanding income
from its toll assets in the region.
Strong parentage firmly
supports future expansion
CMG is one of the largest SOEs
directly under China’s State Council.
Being CMG’s largest listed vehicle in
terms of stake holding (82%), CMH is
a primary beneficiary of the former's
wide footprint across China. Through
its toll roads arm, Huajian Highway
Investment, CMG holds an
investment portfolio comprising toll
roads, bridges and tunnels with an
aggregate length of approximately
6,700 km in 14 provinces and two
municipalities. This provides CMH
with plenty of options to expand its
toll asset base through acquisitions.
Optimally geared, CMH is
worth S$1.52
CMH has the lowest borrowing cost at
c.3% (peers' at 4.5-6.0%). This gives it
unparalleled advantage to potentially
ramp up its toll asset investment
returns. Its net gearing level of c.21%
is very docile compared to the
maximum 60% that management is
comfortable with. In our opinion,
CMH could further ramp up its ROE
from the current decent level of 12%
to 16% through leveraged acquisitions
of toll assets, as what it has been
doing over the past few years. With
such an improved ROE, CMH would
be worth S$1.52. A 7 Scts DPS (7.5%
yield) is sustainable in the long term.