Friday, February 12, 2016

Why am I adding CM pacific?

As announced in my previous post, I added CM pacific.

I got a gentle poke from Kyith, and decided to write a post to crystallize my thoughts.

So here go:

1) Expect 7 cents dividends to be maintained and sustained
Simple and only reason.

Why I expect CMPH to continue paying:

  1. Enlarged shares base would be about 1.8 billion shares
  2. They need to pay about 743 mio HKD if they want to keep this dividend payout. (1SGD : 5.9 HKD)
  3. 9 Months FCF is already is already in excess of 1 billion
  4. Full contribution of Yanping and part of Guixing and GuiYang would be captured in this quarter
  5. Negative goodwill of the 3 acquisitions will provide good headline numbers and perhaps fool Mr Market? LOL
  6. Operating numbers wise, Yanping managed to edge out a small profits. It is loss-making when the acquisition is announced. Jiurui revenue while falling, share the same story. It means one thing to me only, execution track records.
  7. Yongtaiwen, its biggest contributor, is still reporting strong operating numbers. Although the rest of the JVs and Beilun are all weakening.
  8. Since the 3 acquisitions are largely financed by equity and not loans, there is no risk of balloon interest cost

What are the risks:

1) China economic slowdown affecting revenues and cause all expressways to go down further.
That could happen. When it happens, I will suck thumb.

2) The dilution effect offset the benefits of contribution

If you look at the 3 acquisitions as one, it is a deal that really is nothing to shout about. If you look at the Net profits and the amount paid, it is very obvious the 3 deals is one package. You will be scratching your head why GuiXing is more expensive than GuiYang (beside the fact that they have 5 more concession years)

So taken together, the NP yield would be about 5%. and 15% based on acquisition costs and 2014 Net profits respectively, while the dilution is 33%.

However, I believed I should be more concerned about cash flow, which should be higher than 5%, since they pay dividends through cash flow.

3) The concession years are short:

Road toll concessions are 29/30 years long. Yongtaiwen Have only about 14 years left. If you are those who shun industrial reits because you think 30-60 years of lease is too short, then CM pacific is....

4) Regulation risk

Lower tolls to be mandated or more toll-free periods


  1. Thanks for the post.

    I think you sold it at a peak, you have done yourself proud than most investors who are still holding. YTW is a worry with 14 years concession left, and they have not really been able to transform any of the newer ones like jiurui and the more recent acquisitions, but that's a dark horse there.

  2. Hi B,

    That's just luck. While 14 years concession is a concern, it does not explain why it suddenly just dropped like nobody business. 14/15 or 16 years, they are all short, while valuation is so high just recently ?

    We could believe that Mr market is disappointed with the Growth. It is supposed to be able to find anotherYTW with its cash and strong parentage.

  3. Even if we dun think of the acquistions as dark horse, I think it's too little to think of it Not being able to even sustain its dividends.

    1. Hi SI

      Ahh, I don't mean the drop was due to the YTW shorter lease. I think the drop is primarily due to the devaluation of the Yuan which will impact quite a bit on the earnings when translated into SGD terms. Not only CMP, but also the parent company and all companies which has direct access to China assets.

    2. Actually, is CNY to SGD or HKD to SGD really depreciating ? Significantly I mean?

      I think USD strengthening is a better choice of word. HKD to 1 SGD is like around 6 for a few years already ??

      The same story goes for RMB. Going forward, the RMB might be under more pressure ... Maybe 1: 5 soon?

      Anyway, it's what Lippo REIT go through ...

  4. Hi SI,

    Thanks for the analogy. Me and Kyith discussed the biggest risk as CNY devaluation. Borrow in USD, earn in CNY and share in HKD.

  5. Hi Rolf,

    Thanks for adding to the risk list. Interest and currency risk. Indeed affecting many companies

  6. This is an obvious value trap, the recent acqusition was a big value destruction to shareholders

    Do not be blinded by dividends alone, else u shall suffer the same fate as sabana and lippo mall shareholders

    If management is bad, the stock's long term fundamentals will be in danger

    1. Value trap depends on the price of purchase Felix.

      Anyway, sabana and CM are a class of difference. CM bought expressways and booked accounting profits, and turn them into operating profitable roads.

      Sabana bought 50% vacant building and it stay that way for years and sold building at below IPO valuatio

    2. Anyway, you could be well right and I crying 12 months down the road

  7. This comment has been removed by the author.

  8. Intersting analysis and yes it is important to note, dividends are sustained by cashflow and not reported profits.

    However it is important to note average age of its expressways is about 20 years; so if CMP decides not to buy new expressways and amortizes their 4.7 Bil HKD debt, FCF is roughly about debt, one should note the annual free cashflow is about 1 Bil HKD (s 9.4cents per share). So MOS in terms of cashflow may not as big as expected

  9. Choon Yuan,

    You have a point! I will do another blog post on its loans. They are ammortized, at least the bulk of it is

  10. I came across this link on short term endowment plan, hope can provide more insights.

    short term endowment plans