CHINA MERCHANTS HLDGS(PACIFIC)
C22.SI
China Merchants Holdings Pacific - Take the offer to steer clear of headwinds
- Major shareholder Easton Overseas has made a privatisation offer for the remaining 24.12% CMHP shares that it does not own.
- The offer price of S$1.02 represents 22-26% premium over the 1- and 3-month VWAP. It represents 15.9x CY16 core P/E and 1.07x trailing P/BV.
- We think the offer price is good and minority shareholders should accept the offer.
Conditional cash offer by major shareholder
- Easton Overseas Limited (the offeror), an indirect wholly-owned subsidiary of China Merchant Group, has launched a conditional cash offer to acquire the remaining 24.12% CMHP shares that it does not own.
- The offer price of S$1.02 represents a 23% premium over the S$0.83 closing price on 6 May, and 22-26% premium over the 1- and 3-month volume weighted average price (VWAP).
- The offer is conditional on the offeror collecting not less than 90% of the total issued shares (including the shares it already owns) at the close of the offer.
Rationale of the offer, in our view
- CMHP has not received the valuation it desires on the Singapore market. Toll road investment is an asset-heavy business and capital support is key for CMHP to expand its asset base and diversify the investment portfolio. Management has said repeatedly that the major shareholder is not willing to accept any dilutive share issuance at below 1.0x P/BV. Given that CMHP has almost always traded below book value, the major shareholder may have decided to delist CMHP.
- Privatising CMHP will give the offeror and management more flexibility to manage the business, optimise managerial and capital resources, as well as facilitate the implementation of any operational changes.
- The delisting would also allow CMHP to save on expenses relating to the maintenance of its listing status and focus its resources on business operations.
- For minority shareholders, the offer presents a clean cash exit opportunity to realise their entire investment in the stock at a significant premium and enable them to move capital to other bargains currently available.
The offer price is good and minority shareholders should take it
- The offer price of S$1.02 translates into 15.9x CY16 P/E, higher than the 8.9-14.7x of its Hong Kong-listed peers. The implied 1.07x trailing P/BV is also in line with its peer average of 1.1x, although CMHP’s CY16 ROE of 7.1% is lower than its peer average of 10.6%.
- Key near-term headwinds that CMHP faces include China’s slowing economic growth, possible interest rate hikes for its US$-denominated loans (over 60% of CMHP’s total borrowings as at end-1Q16) and possible further devaluation of Rmb.
- A long-term risk is that traffic growth at CMHP’s four newly-acquired toll roads may not meet the traffic consultant’s forecasts that were included in the past acquisition circulars. We think that the consultant’s projection of high-single-digit traffic growth beyond 2020 is overly aggressive, in view of the more matured Chinese economy by then. Constant failure to meet traffic growth projections would lead to an impairment in book value of the toll assets.
- We recommend that minority shareholders accept the offer, which is likely the biggest, if not the only, re-rating catalyst in the near term.
Roy CHEN
CIMB Securities
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William TNG CFA
CIMB Securities
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http://research.itradecimb.com/
2016-05-10
CIMB Securities
SGX Stock
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