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Singapore Company Focus

China Merchant Hldgs (Pacific)


Bloomberg: CMH SP

Reuters: CAEP.SI

DBS Group Research . Equity

27 Feb 2012

BUY S$0.69 STI : 2,978.08


Price Target : 12-Month S$ 1.12 (Prev S$ 1.10) Reason for Report : FY11 Results Potential Catalyst: Earnings execution; further acquisitions. DBSV vs Consensus: We were the first and of a few brokers to cover this stock. Analyst Paul YONG CFA +65 6398 7951 paulyong@dbsvickers.com

High growth and yield


FY11 profit of HK$320m (+20% y-o-y) was slightly below our expectations though final dividend of 3Scts was higher than our 2.5Scts forecast FY12 core earnings to grow by >50%, driven by Yongtaiwen Eway acquisition; CMHP continues to look out for new acquisitions CMHP targets at least 5.5Scts DPS for the next 2 years, translating to attractive 7.9% yield Maintain BUY with slightly raised TP of S$1.12
R e la t iv e In d e x 207 187 167 147 127 107 87 67 47

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

F e b -1 2

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 )

Core toll road earnings were in line though NZ property business was a drag. Contribution from Yongtaiwen Eway (from 3Q11 onwards) helped drive net earnings from toll roads up by 41% y-o-y to HK$350m in FY11. This was partly offset by higher than expected losses from the NZ business of HK$30m. A final dividend of 3Scts was declared, bringing FY11 total DPS to 5.5Scts, above our 5.0Scts expectation.
2013F

Forecasts and Valuation


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

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

131 245 281 261 220 5.9 5.0 15 (49) 4.3 4.0 74.8 11.7 13.9 16.1 nm 7.5 5.8 0.9 CASH 6.7

847 736 538 314 314 7.1 7.1 20 43 6.1 5.5 79.1 9.8 9.8 11.4 7.9 9.8 8.0 0.9 0.3 7.7

1,562 1,346 1,205 756 487 17.0 11.0 141 55 9.3 5.5 88.8 4.0 6.3 7.4 7.3 5.1 8.0 0.8 0.2 17.1 0.4 9.5 S: 0

1,639 1,404 979 512 512 11.5 11.5 (32) 5 9.8 6.0 93.8 6.0 6.0 7.0 3.7 4.4 8.7 0.7 0.1 10.6 (1.7) 10.0 H: 0

Acquisition(s) to drive growth amid steady dividend payout. We project CMHPs core earnings to grow by 55% in FY12, with full-year contribution from Yongtaiwen Eway, organic growth on all toll roads, and lower losses from NZ property development. FY13 core earnings are projected to improve 5% even without Yuhao Highways contribution, driven by organic traffic growth. At current net gearing of at 0.4x (consolidated net debt over shareholders equity excluding MI), CMHP has debt-headroom to make further acquisition(s) to drive earnings growth. Meanwhile, the Board targets to pay at least 5.5Scts DPS for the next 2 years, as CMHPs operating cash flow remains strong. Attractive valuation at 7.5x FY12 PE and 7.9% yield. Trading cum dividends of 3Scts, CMHP is undervalued at just 7.5x fully diluted FY12 PE, offering an attractive prospective yield of 7.9%. The stock also offers 60% upside to our DCF-based TP of S$1.12; BUY.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders China Merchants (%) Free Float (%) Avg. Daily Vol.(000) 718 495 / 394 82.6 17.4 151

B: 1

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

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

Company Focus China Merchant Hldgs (Pacific)

Results Summary and Comments FYE Dec (HK$m) FY10 121.6 9.0 130.6 FY11 160.8 686.6 847.4 % Chg 32 7510 549 Sale of Luomei in 2010 offset by maiden contribution from Yongtaiwen E'way (YTW) Comments

Property Revenue Toll Revenue


Total Revenue

Cost of Sales Gross Profit

(113.6) 17.0

(464.0) 383.5

308 2154

Includes provision for warranties and inventories written down for NZ property business of HK$19.5m

Other Operating Income Distribution Expenses Administrative Expenses Other Operating Expenses Finance Costs Subsidy Income Share of JV results Profit before tax Tax Profit After Tax Minority Interests PATMI PATMI Contribution Guiliu E'way Guihuang E'way Yuyao Highway Luomei Highway Yongtaiwen E'way Disposal Gain on Luomei Other Revenue & Expenses Property Segment Total
Source: Company, DBS Vickers

68.2 (7.2) (44.3) (0.1) (4.4) 16.2 235.6 281.0 (13.6) 267.4 0.0 267.4 FY10 88.3 141.6 21.8 1.8 0.0 41.3 (5.9) (21.6) 267.4

22.8 (9.4) (66.1) (0.2) (61.9) 17.3 252.5 538.5 (96.8) 441.7 (121.8) 319.9 FY11 98.1 151.8 19.9 0.0 126.9 0.0 (46.4) (30.4) 319.9

-66 31 49 327 1293 7 7 92 611 65 nm 20

2010 includes HK$41.3 Luomei disposal gain. 2010 forex gain of HK$26.5m vs HK$18m for 2011 Higher property sales

Increased debt to finance YTW acquisition

10% below our forecast

11 7 -8 nm nm nm 690 41 20

6% higher toll revenue in RMB terms 3% higher toll revenue in RMB terms Higher tax and amortisation costs Contribution from July 2011 onwards Higher financing costs at holding company Wider than expected losses

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Company Focus China Merchant Hldgs (Pacific)

Income Statement (HK$ m)


FY Dec 2009A 2010A 2011A 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) 17.4 8.4 87.4 4.9 4.7 0.4 87.5 4.1

131 (114) 17 (25) (8) 16 236 (4) 41 281 (14) 0 (6) 261 220 245 (38.0) (34.9) (143.0) 41.9 13.0 (5.8) 200.1 6.7 6.5 (0.2) 67.7 (1.7)

847 (464) 383 (53) 331 17 252 (62) 0 538 (97) (122) (6) 314 314 736 548.9 200.1 (4,454.8) 20.0 45.3 39.0 37.0 7.7 4.0 3.8 78.1 5.3

1,562 (675) 887 (82) 805 17 248 (135) 270 1,205 (175) (268) (6) 756 487 1,346 84.3 82.8 143.6 141.2 56.8 51.6 48.4 17.1 6.6 6.6 32.4 6.0

1,639 (713) 927 (86) 840 17 259 (138) 0 979 (181) (279) (6) 512 512 1,404 4.9 4.3 4.3 (32.3) 56.5 51.3 31.2 10.6 4.6 6.4 52.2 6.1

Yongtiawen Eway contribution from 2H11 onwards

FY12: Gain from sale of Yuyao Highway

Margins Trend
193.0%

143.0%

93.0%

43.0%

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


Operating Margin % Net Income Margin %

Source: Company, DBS Vickers

FY12: 50% payout based on core earnings

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Company Focus China Merchant Hldgs (Pacific)


Quarterly / Interim Income Statement (HK$ m)
FY Dec 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011

Revenue Trend
450 400 2000% 350 300 250 1000% 200 150 100 0% 50 0 9 0 0 2 Q 3 9 0 0 2 Q 4 0 1 0 2 Q 1
Revenue

2500%

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 (%)

31 (29) 2 (20) (18) 4 53 (1) N/A 38 (5) 0 32 32 38

14 (13) 1 (6) (5) 4 49 (1) N/A 48 (3) 0 45 45 48

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

390 (169) 221 7 228 4 66 (25) N/A 274 (53) (71) 150 150 274

425 (268) 157 (43) 115 4 58 (35) N/A 142 (37) (51) 54 54 142

1500%

500%

-500% 0 1 0 2 Q 2 0 1 0 2 Q 3 0 1 0 2 Q 4 1 1 0 2 Q 1 1 1 0 2 Q 2 1 1 0 2 Q 3 1 1 0 2 Q 4

Revenue Growth % (QoQ)

(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

2,024.0 262.2 (3,226.1) 109.8 56.7 58.5 38.5

9.0 (48.3) (49.8) (64.3) 37.0 27.0 12.6

Source: Company, DBS Vickers

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Company Focus China Merchant Hldgs (Pacific)


Balance Sheet (HK$ m)
FY Dec 2009A 2010A 2011A 2012F 2013F

Asset Breakdown (2011)


Inventory 0.0% Bank, Cash and Liquid Assets 37.1% Debtors 5.2%Net Fixed Assets 4.3%

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)

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 NA

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

176 2,165 7,081 1,505 0 211 389 11,528 664 1,320 2,519 365 4,171 2,488 11,528 (719) (1,678) 50.2 506.2 N/A 0.1 1.1 0.9 0.3 0.0 0.3 0.9

168 1,882 6,817 1,937 0 30 389 11,223 664 504 2,519 365 4,683 2,488 11,223 (85) (1,247) 28.1 409.8 N/A 0.1 2.0 1.7 0.2 0.3 0.1 1.4

161 1,882 6,539 2,242 0 38 389 11,250 414 514 2,519 365 4,949 2,488 11,250 (88) (691) 7.5 40.6 N/A 0.1 2.9 2.5 0.1 0.1 0.1 1.5

Associates'/J Vs 53.4%

Cash Flow Statement (HK$ m)


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

Capital Expenditure
10 9 8 7 6 5 4 3 2 1 0 2010A 2011A 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)

538 136 (14) (252) (22) 0 386 (9) (1,567) 107 275 0 (1,193) (318) 1,317 0 0 1,000 30 223 56.8 52.5

1,205 274 (175) (248) (635) 0 422 (2) 0 282 248 0 529 (520) 0 0 0 (520) 0 431 147.1 58.5

979 288 (181) (259) 3 0 829 (2) 0 0 259 0 257 (530) (250) 0 0 (780) 0 305 115.0 115.1

Capital Expenditure (-)

Acquisition of YTW Eway in 2011

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 27 Feb 2012, 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 23 Feb 2012 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 27 Feb 2012. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may 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 company mentioned. 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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