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Singapore Company Focus

China Merchant Hldgs (Pacific)


Bloomberg: CMH SP

Reuters: CAEP.SI

DBS Group Research . Equity

13 Sep 2011

BUY S$0.56 STI : 2,743.58


Price Target : 12-Month S$ 1.02 (Prev S$ 1.08) Reason for Report : Update following completion of acquisition Potential Catalyst: Earnings growth and delivery DBSV vs Consensus: We are the only broker covering this stock Analyst Paul YONG CFA +65 6398 7951 paulyong@dbsvickers.com

On the Road to Success


Acquisition of Yongtaiwen Expressway completed with possibly more on the way FY12F revenue and earnings boosted to c. HK$1.6bn and HK$500m respectively Current valuations compelling at 6x FD FY12 PE and prospective 8.9% yield Recommend BUY with S$1.02 TP; stock is also trading cum dividend of 2.5Scts
R e la t iv e In d e x 217 197 177 157 137 117 97 77 57

Price Relative
S$ 1 .1 1 .0 0 .9 0 .8 0 .7 0 .6 0 .5 0 .4 0 .3 S e p -0 7 S e p -0 8 S e p -0 9 S e p -1 0

S e p -1 1

C h in a M e r c h a n t H ld g s ( P a c if ic ) ( L H S )

R e la t iv e S T I IN D E X ( R H S )

Forecasts and Valuation


FY Dec (HK$ m) 2010A 2011F 2012F 2013F

Transformational deal completed. On 6 July, CMHP completed the acquisition of a 51% stake in Yongtaiwen Expressway (YTW), Wenzhou, for RMB2.23bn and will be able to consolidate the P&L numbers of YTW from 6 July onwards. The acquisition will be funded via both internal resources and debt, and will nearly double CMHPs EPS from 4.9Scts in FY10 to 9.3Scts in FY12F on a fully diluted basis.
1,666 1,386 981 530 530 11.7 9.9 6 6 6.0 85.3 4.8 5.7 3.3 5.2 10.7 0.66 0.3 11.6 NEW H: -

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS (S cts) Fully Diluted EPS Gth (%) EPS Gth (%) - FD Net DPS (S cts) BV Per Share (S cts) FD PE (X) PE (X) Fully Diluted P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) - FD Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

131 245 281 261 220 5.8 4.9 15 (49) 4.0 73.3 9.7 11.5 nm 5.6 7.1 0.76 CASH 6.7

797 758 570 352 352 7.8 6.5 32 57 5.0 75.5 7.2 8.6 8.3 10.7 8.9 0.74 0.4 8.6 (26.6) B: -

1,594 1,324 935 502 502 11.1 9.3 43 43 5.5 80.4 5.1 6.0 3.5 5.8 9.8 0.70 0.3 11.7 0.1 S: -

More acquisitions could be on the way. As the only listed toll road subsidiary of China Merchants Group, we believe CMHP can leverage on the support and network of its parent, a leading toll road operator in China with investments in more than 5,000km throughout the country, to make further acquisitions to grow its toll road asset portfolio. Currently amongst the smallest listed PRC toll road companies, CMHP has the potential to grow to become one of the largest, with the right execution. High yield play with growth potential; BUY. Our target price of S$1.02 is based on explicit cash flow forecasts until the end of concessions for CMHPs various toll road assets (WACC of 9.7%). CMHP is trading at 8.6x FD FY11 PE, declining to 6x FD FY12 PE whilst offering FY11 dividend yield of 8.9%, rising to 9.8% and will sustain a high dividend payout level of 50%-70% while pursuing its acquisition strategy.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders China Merchants Group (%) Free Float (%) Avg. Daily Vol.(000)

ICB Industry : Industrials ICB Sector: Industrial Transportation Principal Business: Owns and operates toll roads in various provinces in China.

Source of all data: Company, DBS Vickers, Bloomberg

718 402 / 326 82.5 17.5 137

www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: YM

Company Focus China Merchant Hldgs (Pacific)

Transformational deal completed


On 6 July, CMHP announced that it had completed the acquisition of a 51% stake in Yongtaiwen Expressway (YTW), Wenzhou, for RMB2.23bn (HK$2.7bn) and on 19 Aug, CMHP obtained confirmation of the registration of the legal transfer of the 51% equity interest from China Merchants Group to its wholly owned subsidiary China Merchants Pacific (Shenzhen) Investment Co. Ltd in accordance with PRC laws. CMHP will be able to consolidate YTWs P&L numbers from 6 July 2011 onwards. (For more details on YTW, please refer to page 5 and Appendix A.) The completion of this deal is significant in many ways. 1. The acquisition of YTW transforms both CMHPs top and bottom lines significantly

2.

CMHP has strong support from parent company China Merchants Group, a leading toll road investment group in China, to grow its road portfolio

We believe this deal could be the first of many to come for CMHP. Firstly, parent China Merchants Group (CMG) has strongly signaled its support for CMHP by selling this asset to CMHP at a reasonable valuation. CMHP can continue to leverage on its parents network and connections to buy more quality toll road assets either from CMG itself or other 3rd parties. CMG is a leading investor and operator of toll roads in China with investments in over 20 toll roads, bridges and tunnels with over 5,000km in over 18 provinces, autonomous regions and municipalities (c. 8% market share in China). This includes investment holdings in 12 other listed toll road companies. CMGs investments in other listed toll road companies
Companies CMG's stake As end of FY10 11.7% 21.4% 4.0% 26.8% 20.9% 17.9% 20.0% 13.9% 20.7% 20.9% 23.0% 17.9%

Funded by a combination of internal cash resources and bank debt (HK$1.4bn), the acquisition of YTW (CMHPs first majority owned toll road asset) will significantly boost the Groups revenue and earnings profile. With about half a years contribution from YTW, CMHPs revenue will jump from c. HK$130m in FY10 to c. HK$800m in FY11 and c. HK$1.6bn in FY12, whilst earnings are projected to nearly double from HK$267m in FY10 to c. HK$500m in FY12. It also raises the average remaining concession length of CMHPs road portfolio to about 16 years. Revenue, EBIT & Net Profit: FY08 to FY13F

1,800 1,600 1,400 1,200 m 1,000 $ K H 800 600 400 200 0 08 09 10 EBIT 11F 12F 13F

Jiangsu Expressway Ltd Shandong Expressway Co Shenzhen Expressway Ltd Huabei Expressway Ltd Sichuan Expressway Ltd Jilin Expressway Ltd Henan Zhongyuan Expressway Guangxi Wuzhou Communication Fujian Expressway Ltd Anhui Expressway Ltd Hubei Chutian Expressway Heilongjiang Transportation development

Source: CMH Huajian, Bloomberg, Companies

CMG also owns other significant assets in transportation and related infrastructure, banking and securities, and property development, and is amongst the top 10 state-owned enterprises in China. 3. Unlike most of its listed peers, CMHP has a pan-China road portfolio and mandate

Revenue
Source: Company, DBS Vickers

Net Profit

It is also important to note that CMHP has not restricted itself to just investing in toll roads in a single province (by circumstance or otherwise), unlike many of its listed peers. This ability and willingness to invest anywhere in China, along with the support of China Merchants Group, which is very influential in the toll road sector in China, could eventually propel CMHP to become a much bigger player.

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Company Focus China Merchant Hldgs (Pacific)

Dividends & Valuations


Expect a high level of sustained dividend payout. Backed by strong cash flows from its core toll road business, CMHP has been paying out a steady stream of dividends (50-70% payout on core earnings). With the strong boost to earnings from the acquisition of YTW, we expect CMHP to be able to raise its absolute dividend payout per share from 4Scts in FY10 (c. 70% payout) to 6Scts by 2013F (c. 50% payout). Note that CMHP has already declared an interim dividend of 2.5Scts for 1H11.

and neither will an equity fund raising. When the acquisition was first announced back in August 2010, CMHP raised the possibility of issuing new shares (capped at 20% of basic shares outstanding or 143.7m new shares) to help partially fund the acquisition. However, with CMHPs share price currently well below its fully diluted book value per share and at depressed valuations, it is not surprising that CMHP has now chosen to complete the acquisition using just a combination internal cash resources and debt. On the other hand, if CMHPs share price does recover, we believe the Group will look to issue new shares to i) improve its share liquidity and ii) strengthen its balance sheet, both of which would be helpful for CMHP to make further acquisitions. Still, even with a full conversion of 135.8m RCPS and issuance of 143.7m new shares, we believe that CMHP can sustain our DPS projection as it would represent less than 70% payout, which is not demanding for any toll road company.
Dividend Payout and Net Debt-to-Equity Ratio Analysis
FYE Dec Earnings in HK$m Dividend per Share (S cts) FY10 261.3 4.0 5.9 42% 9.7 68% (0.31) 4.9 42% 11.4 80% (0.31) 5.0 11.4 80% (0.31) FY11F 351.6 5.0 7.8 35% 7.2 66% 0.43 6.5 35% 8.6 78% 0.43 6.4 28% 8.9 78% 0.30 FY12F 501.5 5.5 11.1 43% 5.1 51% 0.35 9.3 43% 6.0 60% 0.35 8.2 29% 6.9 67% 0.23 FY13F 530.1 6.0 11.7 6% 4.8 52% 0.27 9.9 6% 5.7 62% 0.27 8.8 6% 6.5 68% 0.15

CMHP Dividend Track Record and Projections


7.0 6.0 D P S ( S $ c t )s 5.0 3.00 4.0 3.0 2.0 2.75 1.0 0.0 07 08 09 Interim 10 Final 11F 12F 13F 2.75 2.50 2.00 2.50 2.75 3.00 2.75 2.25 2.00 2.00 2.75 2.50

Source: Company, DBS Vickers

RCPS conversion should not affect the Groups DPS... CMHPs parent company CMG currently holds 135.8m Redeemable Convertible Preference Shares (RCPS) in CMHP, which represents 19% potential dilution. With its internal cash resources now used for the YTW acquisition, we think it is very unlikely that CMHP will now redeem the shares and with plans to make further acquisitions, we believe these RCPS would eventually be converted by CMG. Nonetheless, it should not affect CMHPs future DPS payout as our projections still represent only about 60% payout on earnings (in FY12 and FY13) even with the RCPS conversion. This is a reasonable payout level that is also in line with CMHPs historical track record.

Basic EPS Growth PE Dividend Payout Ratio Net Debt-to-Equity (Cash) Fully Diluted (FD) EPS Growth PE Dividend Payout Ratio Net Debt-to-Equity Ratio FD EPS assuming EFR* Growth PE Dividend Payout Ratio Net Debt-to-Equity Ratio

*Assumes issue of 143m new shares at end 2010 Source: DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)

DCF-based target price of S$1.02. Our target price of S$1.02 is based on explicit discounted cash flow forecasts until the end of concessions for CMHPs various toll road assets, using a WACC of 9.7% and other assumptions that are in line with our DCF assumptions for HK-listed toll road companies that we cover. Our TP of S$1.02 translates into 10.9x FD FY12 PE, with 5.4% yield and 1.3x FY12 P/Book against 11.5% ROE. We have assumed a SGD/HKD rate of 6.30 and CNY/HKD rate of 1.22.
DCF Assumptions (Rf of 3.5% and market return of 12.5%)
Net Debt / Company Jiangsu Expressway Zhejiang Expressway Sichuan Expressway Hopewell Highway Shenzhen Expressway Anhui Expressway Yuexiu Transport CMH (Pacific) Beta 0.84 0.90 0.90 0.80 1.00 0.90 0.95 0.95 Equity 22% 12% 38% 37% 36% 36% 25% 30% WACC 9.6% 10.8% 8.9% 8.6% 9.6% 9.2% 10.2% 9.7%

and FY12F yields amongst HK-listed peers at 8.9% and 9.8% respectively. Comparing CMHPs fully diluted PE against its peers, it is also amongst the lowest at 6x FY12 PE. CMHP is also trading at an undemanding 0.7x FD FY12 P/B against projected FY12 ROE of 11.5%. Potential catalysts for re-rating. We believe there are several potential catalysts for CMHPs share price to re-rate. 1. Consolidation of YTWs P&L numbers will approximately double the Groups earnings and this should be apparent from 3Q11 numbers (reported by mid November). CMHPs sustained high dividend payout should assure investor of a sustainable dividend stream. Further value accretive acquisitions could help further boost the Groups valuations and visibility.

2. 3.

Source: DBS Vickers

Assuming CMHP embarks on an equity fund raising (EFR) exercise by issuing 20% new shares (143.7m shares) at close to its NAV per share price of S$0.76, our TP will be adjusted down to S$0.98 though it will put CMHP in a stronger position to make further acquisitions. We currently have not assumed any EFR or acquisitions in our projections.

Highest dividend yield amongst peers, and attractive PE and PB multiples. CMHP offers the highest prospective FY11F
Comparable Peers Valuation (Prices as of 9 September 2011)
Mkt Cap Company Name Jiangsu Expressway Zhejiang Expressway Sichuan Expressway Hopewell Highway* Shenzhen Expressway Anhui Expressway Yuexiu Transport Average HK Toll Roads CMH (Pacific) - FD 330 S$0.56 S$1.02 Buy US$m 4,219 2,720 1,897 1,912 1,233 1,113 634 Closing Price HK$ 6.29 4.88 3.25 5.03 3.31 4.43 2.95 Target price HK$ 9.40 6.56 5.22 4.82 4.80 8.72 5.02 R'cmd Buy Buy Buy Hold Buy Buy NR^ 11F 9.9 11.0 7.0 14.6 7.9 6.6 6.9 9.1 9.6 P/E (x) 12F 8.3 10.7 6.7 15.0 7.0 5.7 6.2 8.5 6.0 11F 7.1 6.2 5.7 6.8 5.9 6.1 8.5 6.6 8.9 Yield (%) 12F 8.4 6.3 6.0 6.6 6.7 7.0 9.4 7.2 9.8 11F 1.5 1.2 0.9 1.7 0.7 0.9 0.5 1.0 0.8 P/B (x) 12F 1.4 1.1 0.8 1.7 0.6 0.8 0.5 1.0 0.7 11F 15.7 10.6 13.2 11.9 8.4 14.8 7.4 11.7 8.5 ROE (%) 12F 17.5 10.6 12.7 11.2 9.0 15.6 7.9 12.1 11.5

Source: Company, DBS Vickers. *June Year End, ^Rated 1 in our Equity Explorer

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Company Focus China Merchant Hldgs (Pacific)

Comparing Payout Ratios for China Toll Road Companies


FYE Dec Payout ratio Jiangsu Expressway Zhejiang Expressway Sichuan Expressway Hopewell Highway* Shenzhen Expressway Anhui Expressway Yuexiu Transport CMH (Pacific) 82% 71% 35% 75% 49% 45% 33% 68% 83% 56% 21% 77% 52% 61% 36% 52% 85% 71% 0% 97% 52% 57% 44% 58% 76% 73% 72% 98% 48% 50% 62% 88% 72% 72% 23% 99% 47% 44% 58% 68% 70% 68% 40% 99% 47% 40% 58% 67% 70% 68% 40% 99% 47% 40% 58% 51% FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011F FY 2012F

Source: Company, DBS Vickers, * FYE Jun, FY11 is Actual

Segmental Forecasts and Key Assumptions


Business Segment (HK$m) Total Revenue FY08 211.6 FY09 210.6 FY10 130.6 FY11F 797.4 FY12F 1593.7 FY13F 1665.9

Property Development and Others Toll Road Operations


Toll Revenue (RMB)* Total

193.8 17.8
FY08 1421.0 246.0 179.0 107.0 871.0 FY08 302.3 (12.3) 314.6

195.2 15.4
FY09 1553.4 343.5 216.3 53.6 926.0 FY09 203.2 (10.1) 381.3

113.1 17.5
FY10 1890.3 444.5 211.3 122.6 1112.0 FY10 237.9 (19.0) 257.0

90.0 707.4
FY11F 1977.8 462.2 219.8 127.5 1168.3 FY11F 600.1 (9.0) 609.1

120.0 1473.7
FY12F 2045.2 480.7 228.6 132.6 1203.3 FY12F 995.3 (6.0) 1001.3

150.0 1515.9
FY13F 2106.5 495.1 235.4 136.5 1239.4 FY13F 1041.5 0.0 1041.5

Guiliu Expressway Guihuang Highway Yuyao Highway YTW Expressway


PBT Contribution (HK$m) Total Property Development and Others Toll Road Operations

Guiliu Expressway (Company) Guihuang Highway (Company) Yuyao Highway Luomei Highway YTW E'way Other revenue and expenses Subsidy Income
Traffic Vol. ('000 Vehicles)

85.4 112.9 33.3 9.3 0.0 6.3 67.4


FY08 3,457 15,301 13,555 7,559

153.7 120.9 15.6 9.2 0.0 14.1 67.9


FY09 3,883 19,680 12,172 8,249

88.3 125.5 21.8 0.0 0.0 5.2 16.2


FY10 4,251 20,995 16,743 9,481

94.7 134.0 23.6 0.0 335.5 5.2 16.2


FY11F 4,421 21,835 17,413 9,765

101.4 143.0 25.4 0.0 710.1 5.2 16.2


FY12F 4,598 22,708 18,109 10,058

105.8 148.7 26.8 0.0 738.9 5.2 16.2


FY13F 4,736 23,389 18,653 10,360

Guiliu Expressway Guihang Highway Yuyao Highway YTW E'way


Rev per Vehicle (RMB)

Guiliu Expressway 71.2 Guihang Highway 11.7 Yuyao Highway 7.9 YTW E'way 115.2 *Only YTWs revenue is consolidated (from 6 July onwards) Source: Company, DBS Vickers

88.5 11.0 4.4 112.3

104.6 10.1 7.3 117.3

104.6 10.1 7.3 119.6

104.6 10.1 7.3 119.6

104.6 10.1 7.3 119.6

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Company Focus China Merchant Hldgs (Pacific)

Appendix A: Acquisition details

Road portfolio expanded by 50%. CMHP entered into a deal with its parent China Merchants Group (CMG) in Aug 2010 to buy 51% equity interest in Yongtaiwen Expressway Company Ltd, which owns a 138-km long expressway located in Zhejiang Province, PRC, at a consideration of c. RMB2.23bn. The other two shareholders of the Yongtaiwen Expressway Co., Ltd. are Wenzhou Investment (34%) and Zhejiang Communications (15%) the parent of Zhejiang Expressway. The acquisition will increase CMHs road portfolio length by c. 50% from 274 km to 412 km. Yongtaiwen Expressway (YTW Eway) is a four-lane dualdirection expressway in the south-eastern area of Wenzhou Municipality, connecting with Taizhou Municipality in the east and Fujian Province in the west, with a remaining concession period of 19 years till September 2030.
Locality map of YTW Eway

A mature and highly profitable toll road. The YTW Eway lies in a relatively wealthy area in southeast China. Zhejiang Province, Wenzhou Municipality, Taizhou Municipality and Fujian Province all achieved GDP growth of over 13% per annum between 2000 and 2009. Additionally, the vehicle ownership in Zhejiang Province grew at >20% annual rate from 2002 to 2008. In 1H11, YTW recorded gross profit growth of 5.6% with PATMI at RMB235m, or over 40% net margin.
Summary of YTW E'way's Key Financials RMB m 2009 2010

1H10*

1H11

P&L Revenue Gross profit PBT PATMI Gross margin PBT margin PATMI margin

940 576 446 326 61.3% 47.4% 34.7%

1120 623 608 478 55.6% 54.3% 42.7%

543 341 377 305 62.8% 69.4% 56.2%

569 360 314 235 63.3% 55.2% 41.3%

*1H10 PATMI includes RMB90m dividends from LT investment Balance Sheet Current Assets Non-current Assets Current Liabilities Non-current Liabilities NAV
Source: Company

2009 61 6145 (2095) (449) 3662

2010 43 5957 (832) (1117) 4051

1H11 460 5853 (312) (1716) 4285

Source: DBS Vickers, Google

Location of YTW Eway

The consideration of RMB2.23bn for a 51% stake in YTW implies an acquisition core PE (excluding exceptional) of 11.3x FY10 earnings, and a price-over-NAV of 1.02x, which we see as reasonable.

Source: DBS Vickers, Google

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Company Focus China Merchant Hldgs (Pacific)


Appendix B Other toll road assets Guiliu Expressway Local map

Length: 139 km Width: Dual direction with a total of 4 lanes Design speed: 80 to 120 km per hour Route: Between Guilin and Liuzhou, both in Guangxi Zhuang Autonomous Region of the PRC Year of opening: 1996 Profit sharing: 2000 to 2009 90% 2010 to 2024 40%

Traffic growth

Location of the road

Source: Company, DBS Vickers, Google

Guihuang Highway

Local map

Length: 39 km Width: Dual direction with a total of 4 lanes Design speed: 80 to 100 km per hour Route: Between Guiyang and Qingzhen in Guizhou Province of the PRC Year of opening: 1991 Profit sharing: 2000 to 2014 100% 2015 to 2027 60%

Traffic growth

Location of the road

Source: Company, DBS Vickers, Google

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Company Focus China Merchant Hldgs (Pacific)


Yuyao Highway Traffic growth

Length: 96 km Route: Between Guilin and Liuzhou, both in Guangxi Zhuang Autonomous Region of the PRC Year of opening: 1996 Profit sharing: 2008 to 2015 50% 2015 to 2024 60%

Source: Company, DBS Vickers, Google


PE (x)

PE (x) 16 14 12 10 8 6 4 2 0 2007 2007 2008 2009 2010 2011 -1sd Avg -2sd +2sd +1sd

PBV (x)

PB (x) 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 2007
Source: DBS Vickers

+2sd +1sd Avg -1sd -2sd

2007

2008

2009

2010

2011

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Company Focus China Merchant Hldgs (Pacific)


Dividend Yield (%)

(%) 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 2007
Source: DBS Vickers

+2sd +1sd Avg -1sd -2sd

2007

2008

2009

2010

2010

2011

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Company Focus China Merchant Hldgs (Pacific)

Income Statement (HK$ m)


FY Dec 2009A 2010A 2011F 2012F 2013F

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

211 (174) 37 (19) 18 68 290 (4) (168) 203 (8) 0 (11) 184 352 377 (0.5) 19.3 13.9 (35.4)

131 (114) 17 (25) (8) 16 236 (4) 41 281 (14) 0 (6) 261 220 245 (38.0) (34.9) (143.0) 41.9

797 (357) 440 (68) 372 16 252 (71) 0 570 (95) (123) (7) 345 345 758 510.6 208.9 (5,002.5) 32.0

1,594 (720) 874 (84) 790 16 270 (141) 0 935 (172) (261) (7) 495 495 1,324 99.9 74.8 112.3 43.5

1,666 (753) 913 (88) 825 16 281 (141) 0 981 (180) (272) (7) 524 524 1,386 4.5 4.6 4.4 5.8

Revenue boost from consolidation of YTWs top line from July 2011 onwards

Contribution from the three toll road associates/JVs

Margins Trend
193.0%

143.0%

93.0%

43.0%

-7.0% 2009A 2010A 2011F 2012F 2013F


Operating Margin % Net Income Margin %

17.4 8.4 87.4 4.9 4.7 0.4 87.5 4.1

13.0 (5.8) 200.1 6.7 6.5 (0.2) 67.7 (1.7)

55.2 46.7 43.3 8.6 4.6 4.3 67.2 5.3

54.8 49.6 31.1 11.7 4.6 6.3 51.5 5.6

54.8 49.5 31.4 11.6 5.0 6.7 53.1 5.8

Boost from acquisition of 51% stake in Yongtaiwen Expressway

Quarterly Income Statement (HK$ m)


FY Dec 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011

Revenue Trend
120 200% 100 150%

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

28 (24) 4 8 12 4 61 (1) N/A 75 (3) N/A 72 72 75

44 (38) 7 (5) 2 4 61 (1) N/A 65 (3) N/A 62 62 65

31 (29) 2 (20) (18) 4 53 (1) N/A 38 (5) N/A 32 32 38

14 (13) 1 (6) (5) 4 49 (1) N/A 48 (3) N/A 45 45 48

18 (14) 4 (11) (7) 4 79 0 N/A 76 (4) N/A 71 71 76

80

100%

60

50%

40

0%

20

-50%

0 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011

-100%

Revenue

Revenue Growth % (QoQ)

4.2 22.8 (547.3) (28.5) 13.5 41.3 254.7

56.8 (13.2) (86.7) (13.8) 15.2 3.5 139.9

(30.9) (42.1) (1,273.5) (47.9) 5.0 (59.3) 105.5

(54.0) 25.9 (72.8) 38.7 7.9 (35.1) 318.3

30.1 58.7 47.2 59.1 21.2 (39.8) 389.2

Source: Company, DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)

Balance Sheet (HK$ m)


FY Dec 2009A 2010A 2011F 2012F 2013F

Asset Breakdown (2011) 14 2,438 14 1,012 0 73 454 4,006 28 139 0 22 3,817 0 4,006 388 984 147.1 210.4 N/A 0.1 9.2 6.5 CASH (0.3) 0.0 6.3 14 2,366 13 1,282 0 22 396 4,093 66 69 0 12 3,946 0 4,093 350 1,216 133.4 275.5 N/A 0.0 12.6 9.7 CASH (0.3) 1.3 8.0 6,944 2,366 66 564 0 23 948 10,911 1,466 416 2,000 272 4,114 2,643 10,911 555 (2,902) 10.2 63.8 N/A 0.1 0.8 0.3 0.4 0.7 0.7 0.7 6,746 2,366 66 379 0 30 948 10,535 816 427 2,000 272 4,378 2,643 10,535 552 (2,437) 6.0 28.4 N/A 0.1 1.1 0.3 0.3 0.6 1.8 1.1 6,535 2,366 66 611 0 38 948 10,564 566 437 2,000 272 4,646 2,643 10,564 549 (1,955) 7.4 35.2 N/A 0.2 1.6 0.6 0.3 0.4 2.1 0.0
Bank, Cash and Liquid Assets 5.7% Inventory 0.0% Debtors 0.2%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Associates'/J Vs 23.9%

Net Fixed Assets 70.2%

Debt assumed from Yongtaiwen Expressway

49% minority shareholders of Yongtaiwen Expressway

Debt leverage rises in FY11F due to acquisition of Yongtaiwen Expressway but will decline from FY12 onwards on strong cash flow

Cash Flow Statement (HK$ m)


FY Dec 2009A 2010A 2011F 2012F 2013F

Capital Expenditure
60 50 40 30 20 10 0 2010A 2011F 2012F 2013F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (HK cts) Free CFPS (HK cts)

203 1 (14) (290) 39 146 85 0 106 0 221 0 327 (152) (26) 0 0 (178) 3 238 7.9 14.6

281 1 0 (236) (35) (33) (21) (1) 133 0 285 0 418 (177) 32 0 0 (145) 19 270 1.9 (3.1)

570 117 (95) (252) (27) 0 312 (23) (2,676) 0 252 0 (2,447) (183) 1,600 0 0 1,417 0 (718) 47.3 40.2

935 248 (172) (270) 3 0 744 (50) 0 0 270 0 220 (499) (650) 0 0 (1,149) 0 (185) 103.1 96.6

981 263 (180) (281) 3 0 787 (53) 0 0 281 0 229 (533) (250) 0 0 (783) 0 232 109.1 102.2

Capital Expenditure (-)

Debt taken on in FY11F to fund acquisition of Yongtaiwen Expressway

Source: Company, DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends


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ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 13 Sep 2011, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

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Company Focus China Merchant Hldgs (Pacific)

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 09-Sep-2011 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 13 Sep 2011. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the China Merchant Hldgs. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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