China Merchants Pacific

China Merchants Pacific: (S$0.985) 3Q15 results on track; look to 4Q15 for better growth
The toll road operator, China Merchants Pacific posted 3Q15 results that were generally in line even though net profit rolled back 20.2% y/y to HK$168.4m in the absence of a HK$22.8m negative goodwill booked in 3Q14, as 9M15 earnings of HK$505.7m accounted for 76% of FY15 forecast.

Revenue expanded 3.8% to HK$548.8m, while gross margin improved 2.4 ppt to 61%. A breakdown of individual expressway performance is as follows:

1) Yongtaiwen Expressway
Traffic: 2.97m (+3.6%), revenue: HK$339.5m (+3.2%); net profit: HK$102.7m (+7.7%)
Yongtaiwen's better performance came from higher toll revenue, and lower finance costs following the repayment of some long term loans. The expressway also incurred lower maintenance costs, offset by higher staff and amortisation costs.

2) Beilun Port Expressway
Traffic: 2.64m (-0.9%), revenue: HK$82.4m (+0.3%); net profit: HK$30.6m (-2.7%)
Beilun Port’s profit contribution slipped in light of the absence of a tax subsidy as well as higher amortisation costs but mitigated by lower operating costs.

3) Jiurui Expressway
Traffic: 0.35m (-0.8%), revenue: HK$16.5m (-13.1%); net profit: HK$4.5m (+57.1%)
Revenue fell on lower traffic, while profit contribution was higher due to a full quarter’s contribution after it was acquired in Sep ‘14.

4) Guiliu Expressway (JV)
Traffic: 1.14m (-2.9%), revenue: Rmb152.0m (-7%); net profit: Rmb38.4m (-3.8%)
Toll revenue at Guiliu was affected by traffic diversion caused by a change in road network, high speed rail services, upgrading work carried out at certain sections of the road and bad weather conditions.

5) Guihuang Highway (JV)
Traffic: 2.11m (-3.4%), revenue: Rmb56.2m (-11.1%); net profit: Rmb30.5m (-18.7%)
Guihuang was also hit by change in road network, drop in traffic flow of large vehicles following the use of a large road transportation logistics centre and adverse weather, as well as higher staff costs.

Bottom line was weighed by exchange losses of HK$2.1m (3Q14: profit of HK$3.7m) and higher effective tax rate of 25.2% (3Q14: 21.4%).

Operating cash flow remains free-flowing at the rate of Rmb542.8m, up from Rmb367.5m in 3Q14.

Management continues to expect its toll road operations to deliver positive results on the back of growth in car ownership in the respective regions where its toll roads are situated.

The recent cut in purchase tax on small cars by half could support ownership figures with Maybank-KE expecting China's passenger vehicle sales to grow by 6.2%, 12% and 0.5% for 2015, 2016, and 2017.

Coupled with two acquisitions (Guixing and Guiyang) which were completed in the current quarter, CM Pacific should see better 4Q15 results.

It is currently trading at 10.3x forward P/E. The street has 2 Buy calls on the counter with a consensus TP of $1.45.

Based on a $0.07 dividend payout, the group offers a 7.1% yield. CM Pacific is a constituent of the Market Insight Yield portfolio.