Three acquisitions at one shot
- We are in favour of China Merchants Holdings’ (CMH) intended acquisitions of three toll roads in Guangxi as the acquisitions would
- provide earnings diversification to CMH’s existing toll roads;
- increase the average remaining concession period of CMH’s toll portfolio and
- allow earnings enhancement by CMH via refinancing the debt associated with the acquired toll assets.
- Due to insufficient information, our estimates have yet to incorporate the impact of the acquisitions. Our target price (based on CY15 residual income valuation) is raised to S$1.18 as we rerate CMH and lower our discount rate applied from 9.5% to 9% to reflect the reduced concentration risk and the potential enlarged market cap of CMH.
- We upgrade our call from hold to Add.
What Happened
- CMH announced that it has entered into agreements to acquire the issued shares of three toll road companies that own the operating concessions of Guixing Expressway, Guiyang Expressway and Yangping Expressway in Guangxi, China.
- The acquisitions would elevate CMH’s scale of operations from five toll roads to eight (with total toll road length increased by 38% from 415km to 575km) and increase the average remaining concession period from 13.6 years to 16.9 years.
- The total purchase consideration of Rmb3.04bn represents a 5% discount to independent valuer’s DCF valuation of Rmb3.21bn (WACC: 10.9%) and would be financed by a combination of debt and equity issuance (see overleaf for the two possible financing plans as guided by management).
- The completion of the acquisitions is subject to CMH obtaining the relevant regulatory approvals and shareholders’ approval at the EGM.
What We Think
- We have said previously that CMH could and should add to shareholder value by acquiring quality toll assets that have decent investment IRRs and boosting IRR via its unparalleled cheap borrowing cost of c.3% vs. peers’ 4.5-6%. Although unconfirmed, either of the two financing plans would increase CMH’s gearing ratio (debt to the sum of debt and equity), hence further enhancing the group’s investment returns.
- Despite the dilution impact in the near term due to the potential equity issuance and the gestation period for the three target roads, the acquisitions are expected to be earnings and value-accretive in the long term given their substantial traffic growth potential.
What You Should Do
- CMH’s current 11.3x CY16 P/E ratio is below its Hong Kong peer average of 12x, as is its 1.05x CY15 P/BV vs. HK peers’ 1.35x.
(Roy CHEN, William TNG)
Source: http://research.itradecimb.com/
