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China Merchants: Enticing Dividend Yield Supported By Robust Earnings Outlook
Corporate Digest | 02 March 2012
By: Xavier Lim
Articles (51) Profile

Driven by rapid economic development and rising traffic demand, China has been building a nationwide expressway network based on toll roads. China is now the second largest globally, in terms of expressway network, next to the United States.

The Chinese government plans to construct three million kilometres of expressways and highways by the year 2020 and many market experts expect that the overall traffic volume in China will maintain at a high growth of 8 to 10 percent year-on-year during this period.

As a leading toll road company focused on investing in and managing toll roads in China, China Merchants Holdings (Pacific) Limited (CMHP), with a total assets of HK$11.5 billion and a net asset value of S$0.80 per share, is well-positioned to ride on the growth prospects of China’s economy.

FY11 Results Simply Outstanding
Indeed, CMHP chalked up record revenue of HK$847.4 million for the year ended 31 December 2011, as well as recorded an all-time high in net profit attributable to shareholders of HK$319.9 million. “The consolidation of results of Yongtaiwen Expressway and higher profit contributions from our jointly controlled entities contributed to the significant growth for FY11 performance,” Jiang Yan Fei, chief executive officer of CMHP told Shares Investment during an exclusive interview.

Year-on-year, CMHP booked a 548.8 percent surge in revenue while net profit attributable to shareholders registered an increase of 19.6 percent. “Higher interest expenses and lower foreign exchange translation gain pulled down our bottom line. However, we achieved a significant improvement in our gross profit margin at 45.2 percent in FY11 as compared to a 13 percent recorded in FY10,” said Jiang.

Delving deeper into the individual contribution of CMHP’s toll road operations, Gui Liu Expressway’s toll revenue and profit inched up 6 percent and 11 percent as compared to FY10 respectively. Meanwhile, Gui Huang Highway’s toll revenue grew 3.3 percent and profit improved by 7.2 percent year-on-year. On the other hand, profit from Yu Yao Highway decreased by 8.5 percent due to higher amortisation of toll road operating right and higher income tax incurred. However, its toll revenue managed to grow by 3.8 percent to Rmb127.2 million in FY11.

Needless to say, the overall increase in toll revenue was due to increase in traffic flow, but the growth in traffic volume had outpaced that of the overall toll revenue. Jiang was quick to explain that this was because the increase in small-sized and light vehicles was greater than that of heavy vehicles. “The toll rate charges for vehicles vary with the sizes, toll rate charges for heavy vehicle are higher than small-sized and light vehicle,” Jiang elaborated. Nevertheless, he foresees a recovery in heavy vehicles in 2012.

Jiang also told us that the fixed operating costs took up a bigger portion than variable operating costs in toll road operations, thus, increase in traffic volume will only lead to a less than proportionate rise in costs and expenses. This in turn will boost the bottom line with a higher profit margin.

Acquisition Lookout
When asked whether CMHP is looking to acquire more assets from its parent company, Jiang told us that most of the parent company’s toll road assets are minor stakes, not exceeding 25 percent in listed companies. Hence, this will take time for the parent company to reorganise and sort out ways in order to inject more toll road assets into CMHP.

However, Jiang believes that there will be a lot of acquisition deals with the parent company in the future. “Meanwhile, we continue to lookout for quality toll road assets to enlarge our toll road portfolio. Currently, we are more interested to acquire mature toll road. But we will not rule out buying new-built toll road if the potential future earnings is good,” Jiang added.

“Going forward, CMHP will acquire and manage toll road assets that are of a larger scale, especially expressways. This is the reason why we disposed Yuyao Highway, the company’s smallest toll road asset in terms of asset size to streamline our toll road portfolio,” Jiang remarked.

Jiang went on to tell us that the company will evaluate potential acquisition by looking into their existing traffic flow, vehicles growth rate and the toll rates. “We will analyse the traffic flow and vehicles growth rate to determine the future earning potential,” Jiang said. “We are more concerned on the growth in traffic rather than the prospect of high toll rates,” Jiang remarked. He explained that the provincial governments are unlikely to increase toll rates due to high inflation, but the growth in the number of vehicles has exceeded the rate of economic growth in the past five years.

Outlook Promising
At the same time, he told Shares Investment confidently that the company’s outlook remains positive for FY12. “The consolidation of results of Yongtaiwen Expressway was only recorded on a half-year contribution. CMHP will be recording a full 12-month contribution from Yongtaiwen Expressway in this year’s financial results,” Jiang said. Noteworthy to investors, the exceptional gain from the disposal of the Yuyao Highway will further boost CMHP’s performance in FY12.

Jiang further said that China’s stable economic growth should continue to underpin CMHP’s toll roads traffic and toll revenue growth going forward. Indeed, there is an increasing correlation between toll road traffic flow and economic growth due to expanding toll road network in China. According to the forecast by China Ministry of Communication, overall traffic demand in China will maintain robust until 2020 when per capita gross domestic product reaches US$3,500. In addition, the accelerating urbanisation in China is expected to boost the traffic growth in the short to long term. Moreover, the desire to own vehicle in China driven by rising household income will continue to spur traffic flow.

Besides the external factors, CMHP has a geographically diversified portfolio of toll road assets as compared to most of its competitors who concentrate in a specific region. It has roads along the developed coastal-east spanning Fujian to Zhejiang (Yongtaiwen), as well as in the lesser developed, rapidly growing regions such as Guangxi and Guizhou.

However, with all these strong fundamentals, CMHP does not ring a bell for many investors as evident from the company’s perennially thin trading volume and a share price that trades below book value. However, the company has been rewarding its shareholders extremely well. Based on the total amount of dividends it dished out in FY11, the company garners a yield of 7.8 percent as at 29 February 2012. Moreover, CMHP has committed an annual dividend payout target of at least 5.5 Singapore cents a share over the next two years.

Notably, the company has a free cash flow that covers almost a quarter of their total debts with gearing of 0.4 times. In addition, CMHP is currently hovering at an undemanding historical price-to-earnings ratio of 9.8 times. Meanwhile, CIMB research maintained ‘Buy’ for the company on the back that dividend yields will remain attractive at 8 percent for FY12 to FY13, with a target price of S$0.92.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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