CHINA MERCHANTS HLDGS: DBS Vickers says expressway acquisition is positive

Excerpts from analysts' reports

Analyst: Paul Yong, CFA

• Acquiring 100% of 48km Jiurui Expressway for RMB697m
• Consideration via issue of 119.4m shares at S$0.985 and RMB117m cash
• Acquisition positive for CMH (Pacific)’s long term growth prospects and earnings
• Maintain BUY and S$1.32 TP

What has happened ?
350_expressways Expressways are an increasingly common part of China's landscape.China Merchants Holdings (Pacific) announced that it has entered into a conditional sale & purchase agreement to acquire 100% of Jiurui Expressway for RMB697.4m or HK$879.4m. The independent valuation for Jiurui Expressway is RMB702m.
The NAV of Jiurui as at 1Q14 was HK$372.3m.

Jiurui Expressway is part of the G56 National Expressway System of China and is a four-lane carriageway (Dual-2) located at the east-western area of Jiujiang Municipality connecting with Ruichang Municipality in the west of Jiangxi Province, with a total length 48.14 kilometres. The Jiurui Expressway starts at Caojiakan in Jiujiang Municipality, running through the Lushan district Saiyang town, Shanhe economic development zone, the towns of Shizi, Xinhe and Xintang, Ruichang city, and the towns of Hongling, Gaofen and Xiafan. Jiurui Expressway connects with the Hangzhou – Ruili Expressway (G56) at the boundary of Hubei Province, PRC. Jiurui's concession lasts until Dec 2040.

The consideration for Jiurui Expressway will be paid via: 1) the issuance of 119.37m new shares in CMH (Pacific) at S$0.985 worth a total of RMB580.6m, and 2) cash of RMB116.8m.

DBS Research View
cmhP7.14

Sources: Company, DBS Bank, Bloomberg Finance L.P If successfully completed (this is the second attempt to buy Jiurui Expressway), this would be a good acquisition for the company as it would:

1) expand and diversify the Group's business,
2) lengthen the average remaining concession of the Group's roads from 12.7 years to 15.3 years,
3) potentially help improve the Group's share trading liquidity, given most of the consideration is via share issuance (furthermore at a premium to current trading price), and 4) improve the Group's long-term earnings’ growth (although there could be some EPS dilution in FY14 and FY15).

Share dilution from this transaction assuming RCPS and convertible bonds are all fully converted is c.11%.

Jiurui Expressway incurred losses in 2013 (net loss before tax, MI and exceptional items of HK$27.8m) due to high interest costs but CMH (Pacific) should be able to restructure Jiurui's existing loans, and coupled with traffic growth in 2014, turn it around. Hence, we believe Jiurui should start contributing positively to the Group's bottom line from 2015 onwards.

No changes to our estimates, recommendation and TP for now. We will update our numbers and TP when this deal is completed. Maintain BUY and S$1.32 TP.

CHINA MERCHANTS HLDGS: DBS Vickers says expressway acquisition is positive

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