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Monday, August 3, 2015

Recent Action - China Merchant Pacific

I made some portfolio reshuffling by partial divesting 29,100 shares of CMPH at a price of $1.02 today. 

I am still left with 45,000 shares as of writing and they still remain one of the top holdings in my portfolio so the decision to sell was purely due to portfolio balancing than anything else. I will most likely direct the proceeds to two counters I have long been interested in which represents a better risk reward ratio and the recent market selloff does provide some opportunities to load in. I am still queuing for it and will post in due time should I happen to catch the train. 




But first, let me provide a little of my thought on CMPH since I received quite a few inquiries about this. 

I remain firmly in believe of CMPH business model and they provide very predictable cashflow to their quarterly results, though the short concession model they had on their toll roads would mean that the management needs to constantly look for new tolls that can execute the same high internal rate of returns they had on their existing portfolio. The execution risk will be there when that happens, so investors need to acknowledge it when it comes, along with the other risks not aforementioned. 

There has also recently an article written on CMPH about the company producing negative yields, giving out dividends only to take it all back when they issued rights. Investors need to know that this is a concept very similar to Reits since both business models have a limited span of concession life and they require acquisitions of assets to lengthen the portfolio WALE concession. Whilst what is being written is true, the writer obviously failed to consider the future cashflow the assets are able to generate which would in turn consummated into dividends for investors. In other words, the future returns resulting from the expansion capex purchase are not being considered, which means that it does not present the true picture of the whole story. Imagine borrowing $1m from the bank and you used the money to buy a property for rental. Does that mean that the purchase yields you negative returns right away? The answer is yes. But should you have considered too the future returns the property might yield you in 50 years time? If you are not convinced, just take a look at how CMT operates on their acquisitions for the past 10 years. 

The recent 1-for-2 rights they have issued has also bring some worries to investors. My take on this is that it is pretty obvious by now that no minority shareholders will take up the offer, which then means that the parents will probably take up all the excess shares to fund the 3 acquisitions. I take this as positive because the company have strong parents backing who are willing to take up a more expensive offer than if they are being issued at such a huge discounts. That would bring about even more dilution to existing shareholders. The results from this will be immediately dilutive, even with the acquisitions, though in the long term the hope is that the tolls will become a heavy-weight tolls like Yongtaiwen or Beilun who have outperformed.

One of our fellow blogger, Investment Moats, have blogged about the recent acquisitions proposal in much more detail. Everyone should take a look at the article he has written to understand the situation better.

With the divestment, my warchest has now increased to $126,000, though I'll have to wait if I am able to get the other counters I am eyeing on.



11 comments:

  1. Which counters are you currently eyeing on?

    ReplyDelete
    Replies
    1. Hi Zi Rong

      If you don't mind, I'd prefer to keep it under wrap until the purchase is materialized :)

      Delete
    2. Sure, looking forward to it! Always exciting to get stock ideas :)

      Delete
  2. B,

    I think it's wise move! Nothing relating to CMPH, but it's heavy at the top, since many months back it was noticeable.

    But frankly, no offence, the changes of portfolio relates to changes of mind. Of course, decisions change, situations change, portfolio change, it's natural to buy and sell and rebalance!

    Still there are many readers out there that idolize blindly. You know what I mean. But at least you tell you divest.


    ReplyDelete
    Replies
    1. Hi Rolf

      The recent oil crisis has certainly put me on high alert in the sense that things can go unexpectedly wrong, even if our conviction are very genuine in the first place.

      I guess like you said it's more of a rebalancing move, in case my these goes horribly wrong or there are hiccups in the execution along the way.

      Delete
  3. Hi B, I agree with that article you referred to in your post. The analogy you gave did not take into account the landlord buying fixed term asset say 30 year leasehold , he collects his rental but see what happens when there is six month left on the 30 year lease. So he ask for money from shareholders again to buy the next leasehold to collect rent.

    ReplyDelete
    Replies
    1. Hi Trademarksg

      Yes, I guess that was what I was trying to say.

      They couldn't have possibly keep things as they were as organic growth is not helping to lengthen the lease. The only way to do this is to go inorganic and they need huge amount of upfront payment in order to do this. Sounds like a chicken and egg problem but its not really the case.

      Delete
  4. Good move. I sold all at avg 1.05. Volitility is increasing. Hold cash and watch.

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    Replies
    1. Hi Richard

      Wah, seems like you are gearing up on cash big time!!!

      Delete
  5. Hi B, for the rights issue, is it confirmed or still in proposal phase? As my understanding, should be latter. Just ensure I haven't missed it yet.

    ReplyDelete
    Replies
    1. Hi AhJohn

      Are you intending to subscribe?

      Do note that if you do, you would not be entitled to the declared 3.5 cents dividends. With that said, it will be cheaper for you to get from the market right now than to wait for the rights.

      Delete

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