The shares of China Merchant Ports Holdings (CMPorts or the company) jumped 22% on 27 April 2020 as a Bloomberg report deliberated that China Merchant Group (CMG), its parent company, is considering to take CMPorts private after the recent slump in its share price. CMG is a Hong Kong based conglomerate with interests in transportation, property and finance businesses and currently holds c.63% in CMPorts. The company’s stock has underperformed the broader Hang Seng Index on a YTD basis. Until 26 April 2020 (before this news became public) on YTD basis, CMPorts declined 31%, significantly underperforming Hang Seng Index which fell 13% during the same period.
CMPorts’ share price has been continuously falling from the start of 2018, when the trade conflict between the US and China began, and registered some consolidation just before the outbreak of COVID-19 when both sides agreed to Phase 1 of the trade deal. The spread of the pandemic undid these slight gains and led the stock to fall 30% in 2020 (YTD).
In our last note on CMPorts (published: 04 December 2020), we highlighted that the company has been pursuing a debt-fuelled acquisition strategy in the recent past, which has resulted in elevated total debt/EBITDA ratio (refer to Figure 3). The company’s acquisition targets were broadly dictated by the Chinese BRI roadmap, with the return or ROIC taking a backseat (1.1% vs industry average of 5.2%). However moving forward, we believe CMPorts will try to reduce this spread by increasingly shifting its focus on extracting value from the deals done in the past. Recently, CMPorts solely financed, TL’s acquisition of CMA CGM assets worth USD 968mn, which has ensured the company a fixed return of 6% for next eight years on the complete amount (term of the deal).
Given its strategic importance in the government’s the BRI initiative, we assume implicit support from the Chinese government. In the recent times, China’s Belt and Road Initiative has been struggling to overcome the impact of ruptured supply chains, travel restrictions and stringent border controls (the ill effects of COVID-19). This has further resulted in project delays and cost overruns raising more questions about the viability of overall project.
It is worth noticing that the current fall in stock prices world over has motivated various companies to privatise their publically listed subsidiaries. If CMG privatises CMPorts, the former will be the second company in our ports and terminals portfolio to go private. Recently, Port & Free Zone World, parent of Nasdaq-listed DP World, announced its intention to privatise its subsidiary. Drawing parallels, both companies are majority owned by governments, their share prices fell sharply in the recent times and both are facing challenging operating conditions. We view that similar to DPW, CMPorts’ return to private ownership will free it from the demands of the public market expectation for short-term returns, while also enabling it to focus on future growth strategy. CMPorts’ short-term returns have fallen in recent times.
We had previously estimated a fair value of HKD 13.8 on CMPorts. The stock hit our target in mid-January, before sliding. The company’s valuation gets adversely affected by the increased concerns about its leveraged acquisition strategy and major impact of COVID 19 on world seaborne trade. Offsetting these limitations, the valuation benefits from the company’s higher geographical diversification, its strategic importance in Chinese BRI initiative and its possession of strategically important port assets. With stock up 22%, the valuation enters into an overvalued zone with EV/EBITDA multiple (10.1x) trading at a premium on the industry average (9x). We still have to update our model to reflect the current scenario. However, our valuation should be revised downwards reflecting the halt in the world trade led by the spread of COVID 19.
Source: Drewry