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• Asia ports were the best performers among the regional infra
sectors; our top picks remain COSCO Pacific and ICT. Key trends in
2011: 1) Outlook for global trade remains positive despite recent natural
disasters in Japan; 2) The sector is one of the few regulated utilities with
pricing power despite the continued inflationary concerns; 3) Factory
migration accelerated with cost pressure and hence competition among
ports may intensify in South China region. We reiterate OW rating on
COSCO Pac and ICT.
• China infra construction contractors—Ripple effects from the
changes of the MOR’s top leadership have been far bigger than
previous expectations. The ongoing investigations into corruption
charges within the MOR have resulted in slowdown in approval for new
projects as well as toned down outlook for railway investment over the
next five years. Earnings miss by the sector has triggered a further round
of de-rating. We downgraded CRG and CRCC to UW but would be
buyers on dips for CSR.
• Malaysia E&C—the outlook for PPP projects is promising; IJM as
our top pick: Two highway projects—the long delayed West Coast
Expressway and the proposed New Pantai Elevated Highway Extension
have recently obtained approval. More such opportunities are abound as
the government will facilitate implementation in 2011 through a M#1
billion facilitation fund.
• China tollroads—a sector to stay OW in light of the defensive
growth outlook: Key trends in 2011 include: 1) We expect traffic
growth to start moderating this year but nonetheless positive; 2) Tariff
adjustments may be muted in light of inflationary concerns but
expectations are also low; 3) Chances of asset injection may rise with
policy tightening to continue. We like the sector’s strong cash
generation, defensive growth and attractive yield. Top picks: Shenzhen
Exy and Anhui Exy.
Asia port sector
FY10 results a mixed bag
Both CMHI and CP delivered strong results, with the net profit for both doubling
from a year ago (CMHI +114% Y/Y; CP: +90% Y/Y). However the results of these
two Chinese port operators have met with mixed response. ICT’s results on the other
hand were largely inline with our expectations.
Key trends in 2011:
• Trend #1: Outlook for global trade remains positive; though the second
order impact from Japan’s natural disasters may trim the outlook
lower: The US economy appears to be recovering from the worst recession
since WWII; in recent months, we have seen a steady stream of upside
surprises to US economic activity data. For the Euro area, the economy
suffered much less from fiscal tightening and sovereign stress than
expected. That said, the natural disasters in Japan may affect the rest of the
world through a drop in Japanese export volume, as some Japanese
materials/parts are vital to production somewhere with limited substitutes.
• Trend #2: The sector is one of the few regulated utilities with pricing
power, able to push through tariff hikes despite the continued
inflationary concerns: In 2011, China ports have once again demonstrated
the strong pricing power, helped by favorable market conditions. Major
container ports have announced to their customers tariff hikes in the range
of 5~15% since beginning of the year, which however met with strong
pushback from shipping liners. As such, the actual tariff increases
implemented may only amount to single-digits but still positive.
• Trend #3 Factory migration accelerated with cost pressure, and hence
competition among ports may intensify in South China region: Driven
by the rising costs for conducting business as well as labor shortage in the
coastal regions, exporters and factories first started in the Pearl River Delta
region have been relocating to the less developed inland areas to tap the
more abundant labor supply as well as to capitalize on government subsidies
and tax benefits offered there. We believe the competition among major
container ports, namely Hong Kong, Easter Shenzhen, Western Shenzhen
and Guangzhou, may intensify. Worth highlighting that expansion projects
in certain locations within the PRD region, e.g. Yantian and Guangzhou,
have been reactivated, having been put on hold over the last few years.
Our sector view for 2011
We keep our cautiously optimistic view on the port sector for 2011 in light of the
following macros trends: a) policy tightening and interest rate hikes; b) inflationary
concerns; c) slower DM growth prospects in light of Japan's quakes and Euro debt
crisis.
The sector is cash generative, offers defensive growth (though slower than last year),
has margin pressure even though tariff hikes may be lower than previously
anticipated (as ports have few variable costs to deal with; EBITDA margin averages
at 80-85% across all operators).
Key conviction calls
Top pick #1 COSCO Pacific: We stay bullish on CP based on the following
reasons:
• Pricing and profitability continued rising for the leasing and manufacturing
segments, benefiting from the global container shortage.
• For the port segment, a turnaround trend has been confirmed in 4Q10 for the
two major loss-making ports—Piraeus and Guangzhou Nansha. Overall
throughput by CP’s ports is guided at 15% for 2011 (vs. our assumption of
10% volume growth); on the other hand, average pricing is expected to be
raised by low single-digits, slightly less than the announced tariff hikes at
the beginning of the year due to inflationary concerns as well as pushback
from shipping liners (vs. nil in our model).
• Better cash flow profile a major positive, in our view: (1) Payout from
Yantian ports (which CP currently holds a 15% effective stake) has been
recently raised to be based on EBITDA, rather than on accounting, profit;
(2) Guangzhou Nansha has been reclassified as a consolidated subsidiary
effective from the beginning of this year, though we have yet to factor this
into our model.
Top pick #2 International Container Terminal Services: ICT, covered by Jeanette
Yutan, is one of the region’s top infra plays based on the following reasons:
• Positive 2011 outlook: Management guided that overall throughput growth
is likely to hit between 6-10% Y/Y with revenue expansion of 10-12%. It
expects EBITDA to grow between 12-15% with margin expansion driven
by operating leverage from the newly acquired ports.
• Update on the three green-field projects in Argentina, Colombia and
Mexico. ICT indicated that it is seeing progress on the three green-field
terminals being built in Colombia, Mexico, and Argentina. ICT expects to
incur US$240 million for the Argentina port whose construction has begun
and will be finished by 2Q12. Construction of Mexico port should start by
July 2011, and Colombia by end of 2011 or early 2012, both with a 24-
month construction lead time.
• Growth via new project acquisition: ICT indicated that there are about
160 ports with annual capacity of 500k TEU or below that are still being run
by government. This means that there are still ample privatization
opportunities that ICT can take advantage of. ICT's acquisition strategy
primarily focuses on terminals or ports that are 500k TEU or below as this
size brings less strain on the company's balance sheet and fits into ICT's
extensive experience in running small to mid-size ports. ICT has four
business development offices across the globe that looks for new
opportunities; the offices are located in Hong Kong, Philippines, Miami
(USA), and Dubai.
China infra construction sector
FY10 results—largely disappointing
CRG, CRCC and CSR all missed market expectations by 10~19%. CCCC was the
only odd one out that reported better results, beating estimates by 13%. The earnings
miss by CRG and CRCC resulted in a further round of de-rating post the results.
Key trends in 2011:
• Trend #1: Ongoing investigations into corruption charges within the
Ministry of Railway cast doubt on growth outlook for China’s railway
investment: China may slow down the pace of railway investment, which
creates uncertainties, particularly for new projects which have not yet been
included in existing plans.
• Trend #2: Potential margin squeeze driven by ongoing cost inflation:
Even though the majority of the contracts have cost-plus formulas, margins
could still disappoint on timing mismatches. As a result, CRG’s earnings
quality and margin sustainability remain poor in light of recent cost
escalations as well as the prolonged cycle for cost reimbursements by the
Ministry of Railway.
• Trend #3: A sharp rise in new contract growth during 2010 may lead to
continued depressed margin in 2011 due to accounting policies on GP
recognition: CRG’s new contracts rose by 22% Y/Y; meanwhile, its gross
margin deteriorated sharply in 2H10 (particularly in 4Q10) in part because
of the accounting policies which disallow gross profit recognition in initial
periods.
Our sector view for 2011
We downgraded the rating on CRG and CRCC to Underweight post the results,
particularly given that recent changes in the MOR’s top leadership have cast doubt
on the sector’s investment outlook.
Railway spending outlook has indeed been toned down. Based on CRG’s latest
guidance given out at the briefing held on April 7, 2011, the cumulative investment
for the next 5 year period would only amount to Rmb2.6 trillion. In further details,
mgmt expects railway capex to be maintained at Rmb700 billion for FY11 and to
drop slightly in FY12. From FY13, railway capex would further reduce but
nonetheless stabilize at the level close to an annual spending of Rmb400 billion until
FY20. CRG's latest guidance was apparently below the earlier guidance from key
government officials prior to the changes in the MOR’s leadership (at the 7th
World’s HSR forum, officials from the State Council guided that railway capex
would exceed Rmb3~4 trillion for FY11-15).
Key conviction calls
Top pick—CSR: remains our sector’s top pick based on the following reasons:
• Demand outlook remains solid despite recent changes in the MOR's top
leadership; orders look secure, given they are from half-completed railway
tracks, while further upside can be derived from CSR’s developments in
subway, wind power and overseas markets.
• Even though FY10 headline results disappointed, CSR’s underlying
fundamentals remained solid: The earnings miss was driven by one-off
impairment losses on patents and F/X losses. CSR reported 4% higher
revenue and a better GP margin (FY10: 17.2%, vs. 15.7% in FY09 and
JPM’s 16.0%) against our forecast. Balance sheet strength retained; net cash
position remained as of end-FY10; CSR also remained cash generative.
• Valuation turned more attractive post recent corrections: YTD, CSR has
underperformed the HSCI Index by 21%; the stock trades at 11.8x P/E
FY13E, while offering 39% EPS CAGR over FY11-13E.
Malaysia E&C
Our analyst Hoy Kit Mak stays positive on Malaysia construction sector, with IJM
as our top pick, which is likely to benefit in 2011 from increased infra spending via
PPP type of projects.
Two highway projects– the long delayed West Coast Expressway (WCE) and the
proposed New Pantai Elevated Highway Extension to Ampang-Kuala Lumpur, have
received letters from the Public Private Partnership Unit of the Prime Minister’s
Department approving in principal the projects. The long-delayed WCE project,
estimated to cost more than M$5B is to be privatized on a Build-Operate-Transfer
(BOT) basis, and is subject to further negotiation on the technical and financial terms
and conditions of the project and the concession agreement.
The outlook for PPP-type projects is promising as several projects identified under
the 10MP will be implemented in 2011 through private investment of M$12.5B (we
think the figure could be higher on current prices). The government will facilitate
implementation in 2011 through a M$1B facilitation fund. Among the PPP projects
include construction of seven highways (estimated to cost M$19B), power plants,
hospitals and government buildings. This excludes infrastructure projects identified
under the M$1.4T Economic Transformation Programme (ETP) such as the MRT,
HSR, and River of Life.
Top pick—IJM Corporation: We remain positive on the Malaysian construction
sector, top pick being IJM (OW). We rate WCT (OW) and Gamuda (N). We expect
project wins to drive re-rating for IJM with the following two highlights:
• Potential project win of the West Coast Expressway project (WCE):
IJM has received an approval in principal from the PPP Unit of the Prime
Minister’s Department on the proposed construction. The WCE project,
privatized on a BOT basis with a project cost of over M$5 billion, is likely
to be a substantial addition to IJM’s order book. Our current forecasts have
not yet factored in any contribution from the WCE project.
• Approval obtained on the NPE extension: IJM has also recently obtained
approval in principal from the PPP Unit of the Prime Minister’s Department
on the extension of the New Pantai Elevated Highway Extension to
Ampang-Kuala Lumpur (NPE). The extension project has an estimated
construction cost of over M$0.6 billion.
China tollroad sector
FY10 results beat expectations by 4~10%
Overall the sector delivered better than expected results, while smaller operators
offered larger positive earnings surprises as compared to the larger peers. Both
Shenzhen Exy and Anhui Exy beat expectations by 8~10% for FY10 results, on
rapidly improving profitability enabled by the operating leverage.
Key trends in 2011:
• Trend #1: We expect traffic growth to start moderating this year to
possibly single-digits, but nonetheless stay positive: The moderating trend
will be most visible for operators in coastal regions, while those in inland
provinces, such as Anhui Exy and Sichuan Exy may fare better.
• Trend #2: Tariff adjustments may be muted this year in light of the
continued inflationary concerns: Jiangsu Exy and Sichuan Exy are the
two affected as they may have to delay their plan for tariff hikes this year.
That said, expectations are low so if tariff hikes do go through, that would
be a huge positive surprise (Anhui Exy's tariff hikes in early-Nov-2010
triggered a re-rating for the sector.
• Trend #3 Chances of asset injection likely rising with policy tightening
to continue: Zhejiang Exy and Sichuan Exy are the two with potential asset
injection plans. We view asset injection as an alternative funding source for
the SOE parent of the listed companies.
Our sector view for 2011
We keep our positive view on the entire tollroad sector for 2011 in light of the
following macros trends: a) policy tightening and interest rate hikes; b) inflationary
concerns; c) slower DM growth prospects in light of Japan's quakes and Euro debt
crisis.
Chinese tollroads are a sector to stay OW given that the sector is cash generative,
offers defensive growth (though slower than last year), have less margin pressure
even though tariff hikes may be muted (as tollroads have few variable costs to deal
with; EBITDA margin averages at 80-85% across all operators).
Key conviction calls
Top pick #1 Shenzhen Exy: Rising profitability which continues to offer positive
earnings surprise with maturation of tollroad assets and falling gearing; valuation
also attractive compared to the larger peers such as Jiangsu Exy and Hopewell Hwy
while yield is comparable.
Top pick #2 Anhui Exy: Earnings growth for this year is likely to be better than
current market forecasts as the fixed costs related to NingXuenHang Exy Phase 1
continues to be capitalized.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Asia ports were the best performers among the regional infra
sectors; our top picks remain COSCO Pacific and ICT. Key trends in
2011: 1) Outlook for global trade remains positive despite recent natural
disasters in Japan; 2) The sector is one of the few regulated utilities with
pricing power despite the continued inflationary concerns; 3) Factory
migration accelerated with cost pressure and hence competition among
ports may intensify in South China region. We reiterate OW rating on
COSCO Pac and ICT.
• China infra construction contractors—Ripple effects from the
changes of the MOR’s top leadership have been far bigger than
previous expectations. The ongoing investigations into corruption
charges within the MOR have resulted in slowdown in approval for new
projects as well as toned down outlook for railway investment over the
next five years. Earnings miss by the sector has triggered a further round
of de-rating. We downgraded CRG and CRCC to UW but would be
buyers on dips for CSR.
• Malaysia E&C—the outlook for PPP projects is promising; IJM as
our top pick: Two highway projects—the long delayed West Coast
Expressway and the proposed New Pantai Elevated Highway Extension
have recently obtained approval. More such opportunities are abound as
the government will facilitate implementation in 2011 through a M#1
billion facilitation fund.
• China tollroads—a sector to stay OW in light of the defensive
growth outlook: Key trends in 2011 include: 1) We expect traffic
growth to start moderating this year but nonetheless positive; 2) Tariff
adjustments may be muted in light of inflationary concerns but
expectations are also low; 3) Chances of asset injection may rise with
policy tightening to continue. We like the sector’s strong cash
generation, defensive growth and attractive yield. Top picks: Shenzhen
Exy and Anhui Exy.
Asia port sector
FY10 results a mixed bag
Both CMHI and CP delivered strong results, with the net profit for both doubling
from a year ago (CMHI +114% Y/Y; CP: +90% Y/Y). However the results of these
two Chinese port operators have met with mixed response. ICT’s results on the other
hand were largely inline with our expectations.
Key trends in 2011:
• Trend #1: Outlook for global trade remains positive; though the second
order impact from Japan’s natural disasters may trim the outlook
lower: The US economy appears to be recovering from the worst recession
since WWII; in recent months, we have seen a steady stream of upside
surprises to US economic activity data. For the Euro area, the economy
suffered much less from fiscal tightening and sovereign stress than
expected. That said, the natural disasters in Japan may affect the rest of the
world through a drop in Japanese export volume, as some Japanese
materials/parts are vital to production somewhere with limited substitutes.
• Trend #2: The sector is one of the few regulated utilities with pricing
power, able to push through tariff hikes despite the continued
inflationary concerns: In 2011, China ports have once again demonstrated
the strong pricing power, helped by favorable market conditions. Major
container ports have announced to their customers tariff hikes in the range
of 5~15% since beginning of the year, which however met with strong
pushback from shipping liners. As such, the actual tariff increases
implemented may only amount to single-digits but still positive.
• Trend #3 Factory migration accelerated with cost pressure, and hence
competition among ports may intensify in South China region: Driven
by the rising costs for conducting business as well as labor shortage in the
coastal regions, exporters and factories first started in the Pearl River Delta
region have been relocating to the less developed inland areas to tap the
more abundant labor supply as well as to capitalize on government subsidies
and tax benefits offered there. We believe the competition among major
container ports, namely Hong Kong, Easter Shenzhen, Western Shenzhen
and Guangzhou, may intensify. Worth highlighting that expansion projects
in certain locations within the PRD region, e.g. Yantian and Guangzhou,
have been reactivated, having been put on hold over the last few years.
Our sector view for 2011
We keep our cautiously optimistic view on the port sector for 2011 in light of the
following macros trends: a) policy tightening and interest rate hikes; b) inflationary
concerns; c) slower DM growth prospects in light of Japan's quakes and Euro debt
crisis.
The sector is cash generative, offers defensive growth (though slower than last year),
has margin pressure even though tariff hikes may be lower than previously
anticipated (as ports have few variable costs to deal with; EBITDA margin averages
at 80-85% across all operators).
Key conviction calls
Top pick #1 COSCO Pacific: We stay bullish on CP based on the following
reasons:
• Pricing and profitability continued rising for the leasing and manufacturing
segments, benefiting from the global container shortage.
• For the port segment, a turnaround trend has been confirmed in 4Q10 for the
two major loss-making ports—Piraeus and Guangzhou Nansha. Overall
throughput by CP’s ports is guided at 15% for 2011 (vs. our assumption of
10% volume growth); on the other hand, average pricing is expected to be
raised by low single-digits, slightly less than the announced tariff hikes at
the beginning of the year due to inflationary concerns as well as pushback
from shipping liners (vs. nil in our model).
• Better cash flow profile a major positive, in our view: (1) Payout from
Yantian ports (which CP currently holds a 15% effective stake) has been
recently raised to be based on EBITDA, rather than on accounting, profit;
(2) Guangzhou Nansha has been reclassified as a consolidated subsidiary
effective from the beginning of this year, though we have yet to factor this
into our model.
Top pick #2 International Container Terminal Services: ICT, covered by Jeanette
Yutan, is one of the region’s top infra plays based on the following reasons:
• Positive 2011 outlook: Management guided that overall throughput growth
is likely to hit between 6-10% Y/Y with revenue expansion of 10-12%. It
expects EBITDA to grow between 12-15% with margin expansion driven
by operating leverage from the newly acquired ports.
• Update on the three green-field projects in Argentina, Colombia and
Mexico. ICT indicated that it is seeing progress on the three green-field
terminals being built in Colombia, Mexico, and Argentina. ICT expects to
incur US$240 million for the Argentina port whose construction has begun
and will be finished by 2Q12. Construction of Mexico port should start by
July 2011, and Colombia by end of 2011 or early 2012, both with a 24-
month construction lead time.
• Growth via new project acquisition: ICT indicated that there are about
160 ports with annual capacity of 500k TEU or below that are still being run
by government. This means that there are still ample privatization
opportunities that ICT can take advantage of. ICT's acquisition strategy
primarily focuses on terminals or ports that are 500k TEU or below as this
size brings less strain on the company's balance sheet and fits into ICT's
extensive experience in running small to mid-size ports. ICT has four
business development offices across the globe that looks for new
opportunities; the offices are located in Hong Kong, Philippines, Miami
(USA), and Dubai.
China infra construction sector
FY10 results—largely disappointing
CRG, CRCC and CSR all missed market expectations by 10~19%. CCCC was the
only odd one out that reported better results, beating estimates by 13%. The earnings
miss by CRG and CRCC resulted in a further round of de-rating post the results.
Key trends in 2011:
• Trend #1: Ongoing investigations into corruption charges within the
Ministry of Railway cast doubt on growth outlook for China’s railway
investment: China may slow down the pace of railway investment, which
creates uncertainties, particularly for new projects which have not yet been
included in existing plans.
• Trend #2: Potential margin squeeze driven by ongoing cost inflation:
Even though the majority of the contracts have cost-plus formulas, margins
could still disappoint on timing mismatches. As a result, CRG’s earnings
quality and margin sustainability remain poor in light of recent cost
escalations as well as the prolonged cycle for cost reimbursements by the
Ministry of Railway.
• Trend #3: A sharp rise in new contract growth during 2010 may lead to
continued depressed margin in 2011 due to accounting policies on GP
recognition: CRG’s new contracts rose by 22% Y/Y; meanwhile, its gross
margin deteriorated sharply in 2H10 (particularly in 4Q10) in part because
of the accounting policies which disallow gross profit recognition in initial
periods.
Our sector view for 2011
We downgraded the rating on CRG and CRCC to Underweight post the results,
particularly given that recent changes in the MOR’s top leadership have cast doubt
on the sector’s investment outlook.
Railway spending outlook has indeed been toned down. Based on CRG’s latest
guidance given out at the briefing held on April 7, 2011, the cumulative investment
for the next 5 year period would only amount to Rmb2.6 trillion. In further details,
mgmt expects railway capex to be maintained at Rmb700 billion for FY11 and to
drop slightly in FY12. From FY13, railway capex would further reduce but
nonetheless stabilize at the level close to an annual spending of Rmb400 billion until
FY20. CRG's latest guidance was apparently below the earlier guidance from key
government officials prior to the changes in the MOR’s leadership (at the 7th
World’s HSR forum, officials from the State Council guided that railway capex
would exceed Rmb3~4 trillion for FY11-15).
Key conviction calls
Top pick—CSR: remains our sector’s top pick based on the following reasons:
• Demand outlook remains solid despite recent changes in the MOR's top
leadership; orders look secure, given they are from half-completed railway
tracks, while further upside can be derived from CSR’s developments in
subway, wind power and overseas markets.
• Even though FY10 headline results disappointed, CSR’s underlying
fundamentals remained solid: The earnings miss was driven by one-off
impairment losses on patents and F/X losses. CSR reported 4% higher
revenue and a better GP margin (FY10: 17.2%, vs. 15.7% in FY09 and
JPM’s 16.0%) against our forecast. Balance sheet strength retained; net cash
position remained as of end-FY10; CSR also remained cash generative.
• Valuation turned more attractive post recent corrections: YTD, CSR has
underperformed the HSCI Index by 21%; the stock trades at 11.8x P/E
FY13E, while offering 39% EPS CAGR over FY11-13E.
Malaysia E&C
Our analyst Hoy Kit Mak stays positive on Malaysia construction sector, with IJM
as our top pick, which is likely to benefit in 2011 from increased infra spending via
PPP type of projects.
Two highway projects– the long delayed West Coast Expressway (WCE) and the
proposed New Pantai Elevated Highway Extension to Ampang-Kuala Lumpur, have
received letters from the Public Private Partnership Unit of the Prime Minister’s
Department approving in principal the projects. The long-delayed WCE project,
estimated to cost more than M$5B is to be privatized on a Build-Operate-Transfer
(BOT) basis, and is subject to further negotiation on the technical and financial terms
and conditions of the project and the concession agreement.
The outlook for PPP-type projects is promising as several projects identified under
the 10MP will be implemented in 2011 through private investment of M$12.5B (we
think the figure could be higher on current prices). The government will facilitate
implementation in 2011 through a M$1B facilitation fund. Among the PPP projects
include construction of seven highways (estimated to cost M$19B), power plants,
hospitals and government buildings. This excludes infrastructure projects identified
under the M$1.4T Economic Transformation Programme (ETP) such as the MRT,
HSR, and River of Life.
Top pick—IJM Corporation: We remain positive on the Malaysian construction
sector, top pick being IJM (OW). We rate WCT (OW) and Gamuda (N). We expect
project wins to drive re-rating for IJM with the following two highlights:
• Potential project win of the West Coast Expressway project (WCE):
IJM has received an approval in principal from the PPP Unit of the Prime
Minister’s Department on the proposed construction. The WCE project,
privatized on a BOT basis with a project cost of over M$5 billion, is likely
to be a substantial addition to IJM’s order book. Our current forecasts have
not yet factored in any contribution from the WCE project.
• Approval obtained on the NPE extension: IJM has also recently obtained
approval in principal from the PPP Unit of the Prime Minister’s Department
on the extension of the New Pantai Elevated Highway Extension to
Ampang-Kuala Lumpur (NPE). The extension project has an estimated
construction cost of over M$0.6 billion.
China tollroad sector
FY10 results beat expectations by 4~10%
Overall the sector delivered better than expected results, while smaller operators
offered larger positive earnings surprises as compared to the larger peers. Both
Shenzhen Exy and Anhui Exy beat expectations by 8~10% for FY10 results, on
rapidly improving profitability enabled by the operating leverage.
Key trends in 2011:
• Trend #1: We expect traffic growth to start moderating this year to
possibly single-digits, but nonetheless stay positive: The moderating trend
will be most visible for operators in coastal regions, while those in inland
provinces, such as Anhui Exy and Sichuan Exy may fare better.
• Trend #2: Tariff adjustments may be muted this year in light of the
continued inflationary concerns: Jiangsu Exy and Sichuan Exy are the
two affected as they may have to delay their plan for tariff hikes this year.
That said, expectations are low so if tariff hikes do go through, that would
be a huge positive surprise (Anhui Exy's tariff hikes in early-Nov-2010
triggered a re-rating for the sector.
• Trend #3 Chances of asset injection likely rising with policy tightening
to continue: Zhejiang Exy and Sichuan Exy are the two with potential asset
injection plans. We view asset injection as an alternative funding source for
the SOE parent of the listed companies.
Our sector view for 2011
We keep our positive view on the entire tollroad sector for 2011 in light of the
following macros trends: a) policy tightening and interest rate hikes; b) inflationary
concerns; c) slower DM growth prospects in light of Japan's quakes and Euro debt
crisis.
Chinese tollroads are a sector to stay OW given that the sector is cash generative,
offers defensive growth (though slower than last year), have less margin pressure
even though tariff hikes may be muted (as tollroads have few variable costs to deal
with; EBITDA margin averages at 80-85% across all operators).
Key conviction calls
Top pick #1 Shenzhen Exy: Rising profitability which continues to offer positive
earnings surprise with maturation of tollroad assets and falling gearing; valuation
also attractive compared to the larger peers such as Jiangsu Exy and Hopewell Hwy
while yield is comparable.
Top pick #2 Anhui Exy: Earnings growth for this year is likely to be better than
current market forecasts as the fixed costs related to NingXuenHang Exy Phase 1
continues to be capitalized.
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