China Merchants Holdings

Kim Eng on 22 May 2012

Background: China Merchants Holdings (Pacific) (CMHP) is a toll road operator in China. The company currently invests in and operates three toll roads in China. CMHP is 82.5% owned by the China Merchants Group (CMG), a state-owned enterprise and China’s leading investor and operator of toll roads with investments in 25 toll roads, bridges and tunnels.

Why are we highlighting this stock? CMHP recently reported a 150% YoY increase in its 1Q12 earnings,
mainly due to the contributions from Yongtaiwan Expressway. As stated in its 2011 annual report, the management has committed to paying dividends of at least SGD 0.055 per share over FY12-13. That translates to an attractive minimum yield of ~8.5% per annum.

Resilient earnings from toll roads. Excluding Yongtaiwen Expressway, which was acquired in last July, earnings from the other toll roads still grew by 10.9% YoY, mainly due to the 52.2% improvement in contribution from Guiliu Expressway on higher toll revenue, lower repair and maintenance cost and lower tax expenses. This is also despite the fact that CMHP is in the process of divesting its 60% stake in Yuyao Highway, which is no longer equity accounted.

Attractive and defensive dividends. The management has committed to a stable dividend policy and is targeting dividends of at least SGD 0.055 per share for FY12 and FY13 each, which translates to a minimum yield of 8.5% at the current share price. We believe that the resilience of its earnings can underpin the sustainability of the dividends, which is a virtue in today’s uncertain markets.

Still on the lookout for acquisitions. The Group is seeking acquisition opportunities to grow its toll road portfolio. It targets to keep net gearing at below 0.6x (currently 0.4x) and has not ruled out equity fund raisings to finance future acquisitions and improve the stock’s liquidity. The stock is currently tightly held by substantial shareholders China Merchants Group.