China Merchant Pacific 2011 sep 13 vickers

8/4/2019 China Merchant Pacific 2011 sep 13 vickers

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www.dbsvickers.com

Refer to important disclosures at the end of this reported: JS / sa: YM

BUY S$0.56 STI : 2,743.58Price Target : 12-Month S$ 1.02 (Prev S$ 1.08)Reason for Report : Update following completion of acquisitionPotential Catalyst: Earnings growth and deliveryDBSV vs Consensus: We are the only broker covering this stockAnalystPaul YONG CFA +65 6398 [email protected]

Price Relative

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C h in a M e r ch a n t H l dg s (P ac if ic ) ( LH S ) R e la tiv e S T I IN D E X ( R H S )

Forecasts and ValuationFY Dec (HK$ m) 2010A 2011F 2012F 2013FRevenue 131 797 1,594 1,666EBITDA 245 758 1,324 1,386Pre-tax Profit 281 570 935 981Net Profit 261 352 502 530Net Pft (Pre Ex.) 220 352 502 530EPS (S cts) 5.8 7.8 11.1 11.7EPS (S cts) Fully Diluted 4.9 6.5 9.3 9.9EPS Gth (%) 15 32 43 6EPS Gth (%) - FD (49) 57 43 6Net DPS (S cts) 4.0 5.0 5.5 6.0BV Per Share (S cts) FD 73.3 75.5 80.4 85.3PE (X) 9.7 7.2 5.1 4.8PE (X) Fully Diluted 11.5 8.6 6.0 5.7P/Cash Flow (X) nm 8.3 3.5 3.3EV/EBITDA (X) 5.6 10.7 5.8 5.2Net Div Yield (%) 7.1 8.9 9.8 10.7

P/Book Value (X) - FD 0.76 0.74 0.70 0.66Net Debt/Equity (X) CASH 0.4 0.3 0.3ROAE (%) 6.7 8.6 11.7 11.6

Earnings Rev (%): (26.6) 0.1 NEWConsensus EPS (S cts): - - -Other Broker Recs: B: - S: - H: -ICB Industry :IndustrialsICB Sector: Industrial TransportationPrincipal Business: Owns and operates toll roads in various provincesin China.

Source of all data: Company, DBS Vickers, BloombergAt A Glance Issued Capital (m shrs) 718Mkt. Cap (S$m/US$m) 402 / 326Major Shareholders

China Merchants Group (%) 82.5

Free Float (%) 17.5Avg. Daily Vol.(000) 137

DBS Group Research . Equity 13 Sep 2011

Singapore Company Focus

China Merchant Hldgs (Pacific)Bloomberg: CMH SP | Reuters: CAEP.SI

On the Road to Success

Acquisition of Yongtaiwen Expressway completedwith 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 PEand prospective 8.9% yield

Recommend BUY with S$1.02 TP; stock is alsotrading cum dividend of 2.5Scts

Transformational deal completed. On 6 July, CMHPcompleted the acquisition of a 51% stake inYongtaiwen Expressway (YTW), Wenzhou, forRMB2.23bn and will be able to consolidate the P&Lnumbers of YTW from 6 July onwards. The acquisitionwill be funded via both internal resources and debt, andwill nearly double CMHPs EPS from 4.9Scts in FY10 to9.3Scts in FY12F on a fully diluted basis.

More acquisitions could be on the way. As the onlylisted toll road subsidiary of China Merchants Group, webelieve CMHP can leverage on the support and networkof its parent, a leading toll road operator in China withinvestments in more than 5,000km throughout thecountry, to make further acquisitions to grow its tollroad asset portfolio. Currently amongst the smallestlisted PRC toll road companies, CMHP has the potentialto grow to become one of the largest, with the rightexecution.

High yield play with growth potential; BUY. Our

target price of S$1.02 is based on explicit cash flowforecasts until the end of concessions for CMHPsvarious toll road assets (WACC of 9.7%). CMHP istrading at 8.6x FD FY11 PE, declining to 6x FD FY12 PEwhilst offering FY11 dividend yield of 8.9%, rising to9.8% and will sustain a high dividend payout level of50%-70% while pursuing its acquisition strategy.


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China Merchant Hldgs (Pacific)

Page 2

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 andbottom lines significantlyFunded 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

Source: Company, DBS Vickers

2. CMHP has strong support from parent company ChinaMerchants Group, a leading toll road investment groupin 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 stakeAs end of FY10

Jiangsu Expressway Ltd 11.7%

Shandong Expressway Co 21.4%

Shenzhen Expressway Ltd 4.0%

Huabei Expressway Ltd 26.8%

Sichuan Expressway Ltd 20.9%

Jilin Expressway Ltd 17.9%Henan Zhongyuan Expressway 20.0%

Guangxi Wuzhou Communication 13.9%

Fujian Expressway Ltd 20.7%

Anhui Expressway Ltd 20.9%

Hubei Chutian Expressway 23.0%

Heilongjiang Transportation development 17.9%

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-Chinaroad portfolio and mandateIt 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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Dividends & Valuations

Expect a high level of sustained dividend payout. Backed bystrong cash flows from its core toll road business, CMHP hasbeen 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.

CMHP Dividend Track Record and Projections


RCPS conversion should not affect the Groups DPS... CMHPsparent 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 RCPSwould 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.

and neither will an equity fund raising. When theacquisition 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 helppartially 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 FY10 FY11F FY12F FY13FEarnings in HK$m 261.3 351.6 501.5 530.1Dividend per Share (S cts) 4.0 5.0 5.5 6.0Basic EPS 5.9 7.8 11.1 11.7

Growth 42% 35% 43% 6%

PE 9.7 7.2 5.1 4.8

Dividend Payout Ratio 68% 66% 51% 52%Net Debt-to-Equity (Cash) (0.31) 0.43 0.35 0.27

Fully Diluted (FD) EPS 4.9 6.5 9.3 9.9

Growth 42% 35% 43% 6%

PE 11.4 8.6 6.0 5.7

Dividend Payout Ratio 80% 78% 60% 62%

Net Debt-to-Equity Ratio (0.31) 0.43 0.35 0.27

FD EPS assuming EFR* 5.0 6.4 8.2 8.8

Growth - 28% 29% 6%

PE 11.4 8.9 6.9 6.5

Dividend Payout Ratio 80% 78% 67% 68%

Net Debt-to-Equity Ratio (0.31) 0.30 0.23 0.15

*Assumes issue of 143m new shares at end 2010

Source: DBS Vickers

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DCF-based target price of S$1.02. Our target price of S$1.02is 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 withour 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 Beta Equity WACCJiangsu Expressway 0.84 22% 9.6%

Zhejiang Expressway 0.90 12% 10.8%

Sichuan Expressway 0.90 38% 8.9%

Hopewell Highway 0.80 37% 8.6%

Shenzhen Expressway 1.00 36% 9.6%

Anhui Expressway 0.90 36% 9.2%

Yuexiu Transport 0.95 25% 10.2%

CMH (Pacific) 0.95 30% 9.7%

Source: DBS Vickers

Highest dividend yield amongst peers, and attractive PE andPB multiples. CMHP offers the highest prospective FY11F

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 againstprojected FY12 ROE of 11.5%.

Potential catalysts for re-rating. We believe there are severalpotential catalysts for CMHPs share price to re-rate.

1. Consolidation of YTWs P&L numbers will approximatelydouble the Groups earnings and this should be apparent

from 3Q11 numbers (reported by mid November).

2. CMHPs sustained high dividend payout should assureinvestor of a sustainable dividend stream.

3. Further value accretive acquisitions could help furtherboost the Groups valuations and visibility.

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.

Comparable Peers Valuation (Prices as of 9 September 2011)Mkt Closing Target P/E Yield P/B ROECap Price price (x) (%) (x) (%)

Company Name US$m HK$ HK$ R'cmd 11F 12F 11F 12F 11F 12F 11F 12FJiangsu Expressway 4,219 6.29 9.40 Buy 9.9 8.3 7.1 8.4 1.5 1.4 15.7 17.5

Zhejiang Expressway 2,720 4.88 6.56 Buy 11.0 10.7 6.2 6.3 1.2 1.1 10.6 10.6

Sichuan Expressway 1,897 3.25 5.22 Buy 7.0 6.7 5.7 6.0 0.9 0.8 13.2 12.7

Hopewell Highway* 1,912 5.03 4.82 Hold 14.6 15.0 6.8 6.6 1.7 1.7 11.9 11.2

Shenzhen Expressway 1,233 3.31 4.80 Buy 7.9 7.0 5.9 6.7 0.7 0.6 8.4 9.0

Anhui Expressway 1,113 4.43 8.72 Buy 6.6 5.7 6.1 7.0 0.9 0.8 14.8 15.6

Yuexiu Transport 634 2.95 5.02 NR^ 6.9 6.2 8.5 9.4 0.5 0.5 7.4 7.9

Average HK Toll Roads 9.1 8.5 6.6 7.2 1.0 1.0 11.7 12.1CMH (Pacific) - FD 330 S$0.56 S$1.02 Buy 9.6 6.0 8.9 9.8 0.8 0.7 8.5 11.5

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


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Comparing Payout Ratios for China Toll Road Companies

FYE Dec FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011F FY 2012FPayout ratioJiangsu Expressway 82% 83% 85% 76% 72% 70% 70%

Zhejiang Expressway 71% 56% 71% 73% 72% 68% 68%

Sichuan Expressway 35% 21% 0% 72% 23% 40% 40%

Hopewell Highway* 75% 77% 97% 98% 99% 99% 99%

Shenzhen Expressway 49% 52% 52% 48% 47% 47% 47%

Anhui Expressway 45% 61% 57% 50% 44% 40% 40%

Yuexiu Transport 33% 36% 44% 62% 58% 58% 58%

CMH (Pacific) 68% 52% 58% 88% 68% 67% 51%

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

Segmental Forecasts and Key Assumptions

Business Segment (HK$m) FY08 FY09 FY10 FY11F FY12F FY13FTotal Revenue 211.6 210.6 130.6 797.4 1593.7 1665.9Property Development and Others 193.8 195.2 113.1 90.0 120.0 150.0

Toll Road Operations 17.8 15.4 17.5 707.4 1473.7 1515.9

Toll Revenue (RMB)* FY08 FY09 FY10 FY11F FY12F FY13FTotal 1421.0 1553.4 1890.3 1977.8 2045.2 2106.5

Guiliu Expressway 246.0 343.5 444.5 462.2 480.7 495.1

Guihuang Highway 179.0 216.3 211.3 219.8 228.6 235.4

Yuyao Highway 107.0 53.6 122.6 127.5 132.6 136.5

YTW Expressway 871.0 926.0 1112.0 1168.3 1203.3 1239.4

PBT Contribution (HK$m) FY08 FY09 FY10 FY11F FY12F FY13FTotal 302.3 203.2 237.9 600.1 995.3 1041.5Property Development and Others (12.3) (10.1) (19.0) (9.0) (6.0) 0.0

Toll Road Operations 314.6 381.3 257.0 609.1 1001.3 1041.5

Guiliu Expressway (Company) 85.4 153.7 88.3 94.7 101.4 105.8

Guihuang Highway (Company) 112.9 120.9 125.5 134.0 143.0 148.7

Yuyao Highway 33.3 15.6 21.8 23.6 25.4 26.8

Luomei Highway 9.3 9.2 0.0 0.0 0.0 0.0

YTW E'way 0.0 0.0 0.0 335.5 710.1 738.9

Other revenue and expenses 6.3 14.1 5.2 5.2 5.2 5.2

Subsidy Income 67.4 67.9 16.2 16.2 16.2 16.2

Traffic Vol. ('000 Vehicles) FY08 FY09 FY10 FY11F FY12F FY13FGuiliu Expressway 3,457 3,883 4,251 4,421 4,598 4,736

Guihang Highway 15,301 19,680 20,995 21,835 22,708 23,389

Yuyao Highway 13,555 12,172 16,743 17,413 18,109 18,653

YTW E'way 7,559 8,249 9,481 9,765 10,058 10,360

Rev per Vehicle (RMB)Guiliu Expressway 71.2 88.5 104.6 104.6 104.6 104.6

Guihang Highway 11.7 11.0 10.1 10.1 10.1 10.1

Yuyao Highway 7.9 4.4 7.3 7.3 7.3 7.3

YTW E'way 115.2 112.3 117.3 119.6 119.6 119.6

*Only YTWs revenue is consolidated (from 6 July onwards)



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Appendix A: Acquisition details

Road portfolio expanded by 50%. CMHP entered into a dealwith its parent China Merchants Group (CMG) in Aug 2010

to buy 51% equity interest in Yongtaiwen ExpresswayCompany 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 dual-

direction expressway in the south-eastern area of Wenzhou

Municipality, connecting with Taizhou Municipality in the

east and Fujian Province in the west, with a remainingconcession period of 19 years till September 2030.

Locality map of YTW Eway

Source: DBS Vickers, Google

Location of YTW Eway

Source: DBS Vickers, Google

A mature and highly profitable toll road. The YTW Eway liesin a relatively wealthy area in southeast China. Zhejiang

Province, Wenzhou Municipality, Taizhou Municipality andFujian 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* 1H11P&LRevenue 940 1120 543 569Gross profit 576 623 341 360

PBT 446 608 377 314

PATMI 326 478 305 235

Gross margin 61.3% 55.6% 62.8% 63.3%

PBT margin 47.4% 54.3% 69.4% 55.2%

PATMI margin 34.7% 42.7% 56.2% 41.3%

*1H10 PATMI includes RMB90m dividends from LT investment

Balance Sheet 2009 2010 1H11Current Assets 61 43 460

Non-current Assets 6145 5957 5853

Current Liabilities (2095) (832) (312)

Non-current Liabilities (449) (1117) (1716)

NAV 3662 4051 4285

Source: Company

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.


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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



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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%


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Dividend Yield (%)

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Income Statement (HK$ m)

FY Dec 2009A 2010A 2011F 2012F 2013FRevenue 211 131 797 1,594 1,666

Cost of Goods Sold (174) (114) (357) (720) (753)

Gross Profit 37 17 440 874 913Other Opng (Exp)/Inc (19) (25) (68) (84) (88)Operating Profit 18 (8) 372 790 825Other Non Opg (Exp)/Inc 68 16 16 16 16

Associates & JV Inc 290 236 252 270 281

Net Interest (Exp)/Inc (4) (4) (71) (141) (141)Exceptional Gain/(Loss) (168) 41 0 0 0Pre-tax Profit 203 281 570 935 981Tax (8) (14) (95) (172) (180)Minority Interest 0 0 (123) (261) (272)

Preference Dividend (11) (6) (7) (7) (7)Net Profit 184 261 345 495 524Net Profit before Except. 352 220 345 495 524

EBITDA 377 245 758 1,324 1,386

GrowthRevenue Gth (%) (0.5) (38.0) 510.6 99.9 4.5

EBITDA Gth (%) 19.3 (34.9) 208.9 74.8 4.6

Opg Profit Gth (%) 13.9 (143.0) (5,002.5) 112.3 4.4

Net Profit Gth (%) (35.4) 41.9 32.0 43.5 5.8

Margins & Ratio

Gross Margins (%) 17.4 13.0 55.2 54.8 54.8

Opg Profit Margin (%) 8.4 (5.8) 46.7 49.6 49.5

Net Profit Margin (%) 87.4 200.1 43.3 31.1 31.4

ROAE (%) 4.9 6.7 8.6 11.7 11.6

ROA (%) 4.7 6.5 4.6 4.6 5.0

ROCE (%) 0.4 (0.2) 4.3 6.3 6.7

Div Payout Ratio (%) 87.5 67.7 67.2 51.5 53.1

Net Interest Cover (x) 4.1 (1.7) 5.3 5.6 5.8Quarterly Income Statement (HK$ m)

FY Dec 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011Revenue 28 44 31 14 18

Cost of Goods Sold (24) (38) (29) (13) (14)Gross Profit 4 7 2 1 4Other Oper. (Exp)/Inc 8 (5) (20) (6) (11)Operating Profit 12 2 (18) (5) (7)Other Non Opg (Exp)/Inc 4 4 4 4 4

Associates & JV Inc 61 61 53 49 79

Net Interest (Exp)/Inc (1) (1) (1) (1) 0

Exceptional Gain/(Loss) N/A N/A N/A N/A N/APre-tax Profit 75 65 38 48 76Tax (3) (3) (5) (3) (4)

Minority Interest N/A N/A N/A N/A N/ANet Profit 72 62 32 45 71Net profit bef Except. 72 62 32 45 71

EBITDA 75 65 38 48 76

GrowthRevenue Gth (%) 4.2 56.8 (30.9) (54.0) 30.1

EBITDA Gth (%) 22.8 (13.2) (42.1) 25.9 58.7

Opg Profit Gth (%) (547.3) (86.7) (1,273.5) (72.8) 47.2

Net Profit Gth (%) (28.5) (13.8) (47.9) 38.7 59.1

MarginsGross Margins (%) 13.5 15.2 5.0 7.9 21.2

Opg Profit Margins (%) 41.3 3.5 (59.3) (35.1) (39.8)

Net Profit Margins (%) 254.7 139.9 105.5 318.3 389.2


Margins Trend

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Revenue Trend

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Revenue boost fromconsolidation of YTWs top

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Contribution from the threetoll road associates/JVs

Boost from acquisition of51% stake in YongtaiwenExpressway


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Balance Sheet (HK$ m)FY Dec 2009A 2010A 2011F 2012F 2013FNet Fixed Assets 14 14 6,944 6,746 6,535

Invts in Associates & JVs 2,438 2,366 2,366 2,366 2,366Other LT Assets 14 13 66 66 66

Cash & ST Invts 1,012 1,282 564 379 611Inventory 0 0 0 0 0Debtors 73 22 23 30 38Other Current Assets 454 396 948 948 948Total Assets 4,006 4,093 10,911 10,535 10,564ST Debt 28 66 1,466 816 566

Other Current Liab 139 69 416 427 437

LT Debt 0 0 2,000 2,000 2,000

Other LT Liabilities 22 12 272 272 272

Shareholders Equity 3,817 3,946 4,114 4,378 4,646Minority Interests 0 0 2,643 2,643 2,643Total Cap. & Liab. 4,006 4,093 10,911 10,535 10,564Non-Cash Wkg. Capital 388 350 555 552 549

Net Cash/(Debt) 984 1,216 (2,902) (2,437) (1,955)

Debtors Turn (avg days) 147.1 133.4 10.2 6.0 7.4Creditors Turn (avg days) 210.4 275.5 63.8 28.4 35.2Inventory Turn (avg days) N/A N/A N/A N/A N/AAsset Turnover (x) 0.1 0.0 0.1 0.1 0.2Current Ratio (x) 9.2 12.6 0.8 1.1 1.6Quick Ratio (x) 6.5 9.7 0.3 0.3 0.6Net Debt/Equity (X) CASH CASH 0.4 0.3 0.3Net Debt/Equity ex MI (X) (0.3) (0.3) 0.7 0.6 0.4Capex to Debt (%) 0.0 1.3 0.7 1.8 2.1

Z-Score (X) 6.3 8.0 0.7 1.1 0.0

Cash Flow Statement (HK$ m)FY Dec 2009A 2010A 2011F 2012F 2013FPre-Tax Profit 203 281 570 935 981

Dep. & Amort. 1 1 117 248 263

Tax Paid (14) 0 (95) (172) (180)

Assoc. & JV Inc/(loss) (290) (236) (252) (270) (281)

Chg in Wkg.Cap. 39 (35) (27) 3 3

Other Operating CF 146 (33) 0 0 0Net Operating CF 85 (21) 312 744 787Capital Exp.(net) 0 (1) (23) (50) (53)

Other Invts.(net) 106 133 (2,676) 0 0

Invts in Assoc. & JV 0 0 0 0 0

Div from Assoc & JV 221 285 252 270 281

Other Investing CF 0 0 0 0 0Net Investing CF 327 418 (2,447) 220 229Div Paid (152) (177) (183) (499) (533)

Chg in Gross Debt (26) 32 1,600 (650) (250)

Capital Issues 0 0 0 0 0

Other Financing CF 0 0 0 0 0Net Financing CF (178) (145) 1,417 (1,149) (783)Currency Adjustments 3 19 0 0 0

Chg in Cash 238 270 (718) (185) 232

Opg CFPS (HK cts) 7.9 1.9 47.3 103.1 109.1Free CFPS (HK cts) 14.6 (3.1) 40.2 96.6 102.2Source: Company, DBS Vickers

Asset Breakdown (2011)

Net FixedAssets -70.2%

Associates'/JVs 23.9%

Bank, Cashand Liquid

Assets -5.7%

Inventory -0.0%

Debtors -0.2%

Capital Expenditure

0

10

20

30

40

50

60

2010A 2011F 2012F 2013F

Capital Expenditure (-)

Debt leverage rises in FY11Fdue to acquisition ofYongtaiwen Expressway butwill decline from FY12onwards on stron cash flow

Debt taken on in FY11F tofund acquisition ofYongtaiwen Expressway

Debt assumed fromYongtaiwen Expressway

49% minority shareholders ofYongtaiwen Expressway


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Company Focus


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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

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg(DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMERThis report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities

(Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report isintended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by anymeans or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which acceptsresponsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein shouldcontact DBS Vickers Securities (USA) Inc (DBSVUSA) directly and not its affiliate.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers toDBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressedare subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this documentdoes not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This documentis for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtainseparate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given inrelation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is awholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time totime have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or

employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking,investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and therecan be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or r iskassessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete orcondensed and it may not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates andassumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates onwhich the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly fromactual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TOBE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaidentities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or riskassessments stated therein.Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating tothe commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or researchdepartment, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any USpersons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in anysecurity discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about thecompanies 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 Sep2011, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securitiesrecommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).


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Company Focus


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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned asof 09-Sep-2011

2.DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of13 Sep 2011.

3. 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 ChinaMerchant Hldgs.

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investmentbanking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussedin this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTIONGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident

of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or usewould be contrary to law or regulation.

Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to holdan Australian financial services licence under the Corporation Act 2001 [CA] in respect of financial services providedto the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [MAS] under the lawsof Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investorswithin the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated bythe Hong Kong Securities and Futures Commission.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Advisers licence and is regulated bythe MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G),

which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by aforeign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to Institutional Investors, ExpertInvestors or Accredited Investors as defined in the Securities and Futures Act, Chap. 289 of Singapore. Anydistribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to Accredited Investorsis provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the FirstSchedule to the FAA.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in themeaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Researchdistributed in the UK is intended only for institutional clients.

Dubai/

United ArabEmirates

This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3rd

Floor,Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSAregulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBSBank Ltd, Dubai is regulated by the Dubai Financial Services Authority.

United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. personexcept in compliance with any applicable U.S. laws and regulations.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only forqualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such

jurisdictions.

DBS Vickers Research (Singapore) Pte Ltd 8 Cross Street, #02-01 PWC Building, Singapore 048424Tel. 65-6533 9688

Company Regn. No. 198600295W

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