CHINA MERCHANTS HLDGS(PACIFIC)
C22.SI
China Merchants Holdings Pacific - Slowing Chinese economy takes its toll
- 9M15 below expectations, core net profit at 72% of FY15F (4Q seasonally weaker).
- Four of the five existing toll roads saw declines in traffic volume in 3Q15.
- Net gearing lifted to 68% post acquisitions of Yangping, Guixing, and Guiyang.
- Cut FY15-17F EPS by 14-36% to reflect 1) lower profitability due to higher interest burden, and 2) the dilution from the acquisitions (adjusted for 1-for-2 rights issue).
- We lower FY16-17F DPS to 6.0 and 6.5 Scts; Downgrade to Hold from Add.
Flat 3Q core net profit
- CMH’s 3Q15 core net profit of Rmb162m was largely flat yoy (3Q14: Rmb163m).
- Profit contribution of Yongtaiwen rose 7.7% yoy to Rmb103m in 3Q15 (3Q14: Rmb95m). The gain, however, was offset by the lower profit contributions of Beilun (-2.7% yoy), Guiliu (- 3.8%), and Guihuang (-18.7%).
- 3Q15 also saw the full-quarter contribution from Jiurui, compared to 3Q14’s 22 days contribution.
Slight decline in total traffic volume; Jiurui still slow
- Total traffic volume fell 0.4% yoy in 3Q15 (2Q15: 1.3% yoy drop).
- For the 5 existing toll roads, only Yongtaiwen continued to perform, with a 3.5% yoy traffic growth; Beilun was largely flat yoy; Guiliu and Guihuang fell 3.0% and 3.4%, respectively, affected by adverse economic conditions and traffic diversions from the change of road network; traffic growth at Jiurui (acquired in Sep-14) trailed expectations, with 9M15 volume up just 1% yoy, compared to the 9% yoy growth projected in the M&A circular.
Expanded share base and lifted net gearing post acquisitions
- CMH completed the acquisitions of Yangping in Sep, Guixing and Guiyang in Oct for a total consideration of HK$4.03bn, financed by the 1-for-2 rights issue and external debt.
- Together with the potential conversion of convertible bonds (HK$339m outstanding in 3Q15), we expect CMH’s share base to expand 78% yoy to 1,863m shares by end-15 (end-14: 1,046m); net gearing would rise to 68% by end-15 (end-14: 36%).
The once favourable factors have turned against CMH
- In our view, CMH is a key loser from the potential Fed rate hike and strengthened US$ (HK$), as it used to borrow cheap US$ and HK$ loans in the offshore market to finance its business expansion in China.
- CMH may have to switch to the dearer onshore loans to contain FX risk. Despite a few rounds of rate cuts, PBOC’s current 1-year benchmark lending rate of 4.35% is still higher than the < 3% interest CMH used to enjoy offshore.
Downgrade to Hold; cut FY16-17 DPS forecast
- While the 3 newly-acquired toll roads are expected to inject growth to the group in the long term, we see near term headwinds from China’s economic slowdown, increasing interest burden and unfavourable FX.
- We cut our FY16F and FY17F DPS forecasts to 6 Scts and 6.5 Scts respectively (FY14/15F: 7Scts), due to the significantly enlarged share base and the limited contributions by newly-acquired toll roads in the gestation period.
- We lower our target price to S$1.02, based on CY16 residual income valuation.
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2015-11-10
CIMB Securities
SGX Stock
Analyst Report
1.02
Down
1.18
