China Merchants Holdings Pacific - Still a preferred platform for toll investment


■ Being the only toll company with exposure to multiple provinces in China, CMHP remains our preferred platform of toll investment.

■ We believe CMHP would continue to see strong support from China Merchant Group (CMG), one of the top 10 SOEs directly under China’s central government.

■ Our FY15-17F EPS have incorporated stepped-up interest cost, from 2.8% in FY15 to 3.5% in FY16, to 4.0% in FY17, to reflect the impact of potential Fed rate hikes.

We upgrade CMHP from Hold to Add, with an unchanged TP of S$1.02.

The only toll company with multi-province exposure
Being the only toll company with exposure to multiple provinces, CMHP can be more selective in choosing its investment targets. This, in our view, is a key advantage against its provincial SOE peers whose investments are confined within their home provinces. CMHP also has the flexibility to adopt a longer investment horizon and capitalize on the opportunities when private investors who are under financial stress decide to sell off their toll investments at bargain prices.

Strong heritage and support from parent CMG
With a 76% stake in CMHP, CMG is one of China’s 10 largest central government SOEs. We see CMHP as a key beneficiary from CMG’s wide footprint across China (CMG has a toll investment portfolio with total length of c.6,700 km in 16 provinces in China). CMHP has also been receiving strong financial support from CMG, as evidenced by CMG’s irrevocable undertaking of full subscription of CMHP’s 1-for-2 preferential offering (at S$1.00 per share) related to the recent acquisition of three toll roads.

More diversified toll portfolio with traffic growth potential
CMH completed the acquisitions of Yangping in Sep 2015, Guixing and Guiyang in Oct 2015. After the acquisitions, the number of toll roads of CMHP’s portfolio has increased from five to eight and the average remaining concession period of the portfolio increased from previously 13.6 years to 16.0 years. According to a traffic consultant’s report, the traffic volume of the three new toll roads is expected to grow by a five-year CAGR of 15% in FY15-20.

Higher interest cost ahead, but can be comfortably managed
We estimate that CMHP’s net gearing would ascend to 68% by end-15 (end-14: 36%), due to the debt financing related to the above acquisitions. CMHP should be able to comfortably service its debt, with its FY16-18F interest coverage at above 6x. Our FY15- 17F EPS have duly incorporated a step-up effective interest cost, from 2.8% in FY15, to 3.5% in FY16, and to 4.0% in FY17, to reflect the impact from the US rate hike.

Technical Analysis
Daily Chart
Upgrade from Hold to Add, with unchanged target price of S$1.02
CMH’s share price has dropped 8% since early Nov. Our target price of S$1.02 (based on CY16 residual income value) represents a 13.7% capital gain, on top of an attractive 6.7% dividend yield. We believe the negatives from rising interest cost have been priced in. We upgrade CMHP from Hold to Add. Key risks include devaluation of Rmb and lower-than-expected traffic growth at the newly acquired toll roads. (Read Report)

Source : CIMB Research

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