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Acquiring Jingdong Expressway, Capturing Central China’s Rapid Growth Joe Zhang 张化桥 Chief Operating Officer & Executive Director 2 August 2006 Disclaimers on final page. Asset disposals in progress. City Govt. Public. 55.9%. 44%. SHENZHEN INVESTMENT ( 0604 ). 80%. 24.3%. 19%. 91%.

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Asset disposals in progress

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Asset disposals in progress

Acquiring Jingdong Expressway,Capturing Central China’s Rapid GrowthJoe Zhang 张化桥Chief Operating Officer& Executive Director2 August 2006Disclaimers on final page


Asset disposals in progress

Asset disposals in progress

City Govt

Public

55.9%

44%

SHENZHEN INVESTMENT (0604)

80%

24.3%

19%

91%

31.1%

Transport

Property

development

Mawan

Power

Road King

Jingdong Expressway

  • Industrial

  • Color Display

  • PJLD, metal

Cable

TV

Property investment

(HK$2bn)

For sale

SHENZHEN INVESTMENT


Three major risks for our company

Three major risks for our company

  • We are an SOE, and are much more rigidly regulated than those in the private sector, and therefore, our efficiency is lower.

  • Our incentives system does not work nearly as effectively as in the private sector.

  • Our property business is very volatile and cyclical and subject to policy risks. Some of our associates are beyond our control and we are in the process of selling them.

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Asset disposals well on track

Asset disposals well on track

  • In April, we said to investors: We will sell substantially all non-core assets in one year.

  • Now, we aim to complete the program sooner

  • Aim: Not to make capital gains out of disposals, but rather to free up cash for core businesses, focus our efforts, and develop core competency

  • If we did not want to maximize the disposal proceeds, we would complete the process by end-2006

SHENZHEN INVESTMENT


Jingdong expressway

Jingdong Expressway荆东: 湖北荆州- 湖南东岳庙

  • 63 kilometers, two-way, 4 lanes

  • Part of the Erlianhaote to Guangzhou National Trunk Line (from Inner Mongolia to Shanxi, Henan, Hubei, Hunan, and Guangdong)

  • At the intersection of # 207 and the # 318 Hu-Rong (沪蓉 Shanghai to Chengdu) National Trunk Lines

  • Much of road is on elevated structure (+ 9 bridges). Therefore, the government allows higher toll charges, and we expect much lower maintenance costs in the road’s life

  • It links Jingzhou Bridge, the only bridge on Yangtze in central Hubei. Next bridge to the west is in Yichang (宜昌 about 110km), and that to the east is in Wuhan (武汉 about 240km)

  • Concession: 31 years from Aug-06 (early completion)

  • Expected IRR for our investment: 10.6% (internal: Worst-case scenario) or 14.7% (Sallmanns)

  • Will add HK$0.35-0.50 to our market-based NAV, and strengthen our infrastructure division, and add to long-term earnings stability

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Part of a national trunk line

Part of a national trunk line

Erlianhaote (Inner Mongolia)

Beijing

Taiyuan

Zhengzhou

Luoyang

Yangtze River

Huangshi

Yichang

Wuhan

Jingzhou

Dongyuemiao

Changde

Guangzhou

Hong Kong

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Zhuhai


Linking the west with the east zhang jiajie resort is to the southwest

Linking the West with the EastZhang Jiajie Resort 张家界is to the southwest

Erlianhaote (Inner Mongolia)

Taiyuan

Luoyang

Shanghai

Nanjing

Hefei

Chengdu

Yichang

Wuhan

Jingzhou

Zhang Jiajie

Resort

Dongyuemiao

Changde

Guangzhou

SHENZHEN INVESTMENT


Question 1 why toll roads toll roads vs investment property

Question 1: Why toll roads?Toll roads vs. investment property

  • Toll roads, like ports/airports, are best geared to China’s growth

  • Toll roads business is our second pillar

  • Property development is very profitable and fast-growing, but will always be cyclical and volatile (plus macro policy risks)

  • To us, toll roads are similar to (and better than) investment property (stable cash flows, lower cyclicality, potential for asset appreciation and thus high re-sale value)

  • Compared to elsewhere, Chinese property tends to have a short economic life due to construction quality & poor maintenance

  • We have accumulated expertise in the roads sector via our partnership with Road King, and at the parent company level

  • We have built a pool of expertise with significant recent hires

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15 expressways revenue average 7 yr cagr 22 95

15 expressways’ revenue: average 7-yr CAGR 22.95%

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National nbs data passengers rely more on highways at expense of railways

National NBS data: Passengers rely more on highways at expense of railways

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Nbs freight opting for highways too

NBS: Freight opting for highways, too

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Question 2 why us long history in toll roads sector

Question 2. Why us?Long history in toll roads sector

  • Parent has operated Dong Baosong 东宝松, a toll road manager for a decade

  • Since 2005, parent has been building Guanghe 广河 and Huiao惠澳 Expressways. Total investments will soon exceed HK$10bn

  • In 2006, we hired Mr. Liu Xiuqi (刘秀奇), one of the most prominent visionaries in Chinese infrastructure sector to head our efforts. He won the State Council’s medals for his achievement and was Head of Hebei Institute of Transport Planning & Architecture. 国务院特殊津贴获得者, 河北省交通规划设计院院长

  • As a 25% shareholder of Road King, we have actively participated in its operations and learned from the fine team there

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Question 3 why this road

Question 3: Why this road?

  • Strategic location (intersection of two national trunk lines)

  • Low costs of construction (about Rmb40m/km) due to effective management

  • Construction phase was cut by from 4 to <3 years

  • Central China’s economy is about to take off, and land and resettlement costs are still much lower than in coastal China

  • Hubei-focused partner (Huayin 华银) has extensive experience in property & infrastructure, has an enviable reputation, and will retain a 9% stake in the road

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A major road to transport coal other commodities

A major road to transport coal & other commodities

  • Inner Mongolia, Shanxi, Shaanxi, and Henan Provinces are major producers of coal, alumina, iron ore and soft commodities (wheat)

  • Hubei, Hunan and Henan are major wheat/grain producers

  • Labour migration is significant between central and southern China

  • Coastal China’s OEM economy faces mounting challenges from exchange rates, anti-dumping, rising raw materials prices, and a saturated world of low-end manufactures

  • Central China is based on domestic consumption and production of commodities (hard and soft)

  • A key passage from Wuhan武汉and east Hubei to Zhang Jiajie Resort 张家界(in northwest Hunan)

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Financial arrangement

Financial arrangement

  • We pay Rmb1.05bn to Huayin (road developer) for a 91% stake in Jingdong Expressway, plus

  • If the road achieves a revenue target of Rmb140m in year 1, we will pay another Rmb201m (we will make the payment by April-07, collateralized by Huayin’s 9% stake and general guarantee)

  • We will meet all payments with internal cash (our net gearing was 14% as of end-2005)

  • Our cash flows from non-core asset disposals (total book value about Rmb1.2bn) will be used to increase land bank and/or investments in toll roads & bridges

  • Unlikely to issue new shares in next 12 months

  • Dividend payout ratio to stay above 50%

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Consultants 15 irr for our investment and 12 at road level

Consultants: 15% IRR for our investment and 12% at road level

  • We engaged Parsons Brinckerhoff (Asia), Sallmanns, BOCI, and Zhongqihua for traffic & financial analysis

  • They forecast 15% IRR for our investment and 12% IRR at road level

  • Our internal forecast on worst-case scenario: 10.6% IRR for our investment, assuming a much lower starting traffic and a flatter growth trajectory

  • Internal analysisin a 5-month period plus 4 months of cooling-off

  • More leverage at operating level to enhance ROE & IRR

  • Expected lower maintenance costs due to the road’s elevated structure

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Irr to our investment sensitivity internal analysis worst case scenario

IRR to our investment: sensitivityInternal analysis: Worst-case scenario

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Asset re sale as fall back

Asset re-sale as fall-back

  • We are very bullish on Jingdong Expressway, and believe it will prove to be rewarding to our shareholders

  • However, we do not reject asset trades if/when necessary

  • We consider the rising re-sale value of toll roads in general as extra comfort for our investment: secondary-market liquidity

  • Value of toll roads across China has appreciated in the past decade along with urbanisation & globalisation

  • We expect this trend to continue, particularly in central China

  • The focus of China’s economy is shifting to central from the coast due to pressure on the OEM economy

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More roads bridges

More roads & bridges

  • We are analysing 3 toll bridges in Hubei (湖北) given their strategic locations, including Yangtze River bridges in Jingzhou 荆州, Yichang 宜昌, and Huangshi 黄石 for potential acquisitions

  • Toll roads will eclipse our portfolio of investment property

  • Relative to investment property, we consider toll roads as having similar cash flow profile, better appreciation potential but less managerial risks

  • Our partner Huayin has been mandated by the Central Government to build a Yangtze River bridge in Huangshi 黄石, Hubei (the project has started)

  • More partnership projects between us and Huayin are in the making

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Forecasts by sallmanns and us rmb m we will use traffic adjusted depreciation

Forecasts by Sallmanns and us (Rmb m)We will use traffic-adjusted depreciation

* Adjusted for lower interest payment on the basis of Sallmanns’s forecasts

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Toll roads depreciation some examples

Toll roads’ depreciation: some examples

  • Straight-line method: Anhui, Zhejiang and Shandong Expressways

  • Traffic-adjusted method: Shenzhen, Jiangsu, Sichuan, Fujian, Guangdong and Road King

SHENZHEN INVESTMENT


Jingdong s higher fee is due to uniqueness 9 bridges and much of road is on elevated structure

Jingdong’s higher fee is due to uniqueness: 9 bridges; and much of road is on elevated structure

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Internal forecast of worst case scenario is on a lower 2007 revenue and lower cagr in the 30 years

Internal forecast of worst-case scenario is on a lower 2007 revenue, and lower CAGR in the 30 years

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Asset disposals in progress

Both internal forecast of worst-case scenario & consultants’ forecast assume a Rmb0.40/km per base vehicle in 2007 but we have secured Rmb0.70/km

SHENZHEN INVESTMENT


Asset disposals in progress

Parallel 京珠高速 Beijing - Guangdong Zhuhai Expressway (Hubei section): Strong revenue growthHigh fuel prices did not seem to matter much

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Cross check on our toll revenue forecasts 31 expressways toll revenues part 1

Cross-check on our toll revenue forecasts31 expressways’ toll revenues (Part 1)

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31 expressways toll revenues part 2

31 expressways’ toll revenues (Part 2)

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10 expressways construction costs rmb44 6m km

10 expressways’ construction costs: Rmb44.6m/km

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China s road construction costs rose 50 in a decade fuel tax has become more elusive than ever

China’s road construction costs rose 50% in a decade.Fuel tax has become more elusive than ever

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Our two year plan

Our two-year plan

  • Sell all non-core (legacy) assets (by April-2007)

  • Increase landbank by 3m sqm

  • Increase property development completion to 500,000 sqm in 2008

  • Acquire 1-2 toll bridges

  • Overhaul our incentive system

  • Dividend payout ratio: >50%

  • ROE to reach 20% by 2008

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Asset disposals in progress

Our NAV estimate (un-audited)(Jingdong Expressway will add HK$0.35-0.50 per share to the figure below)Refer to disclaimers on final page

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2005 results vs 2004

2005 results vs. 2004

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Disclaimers

Disclaimers

  • This presentation is prepared in good faith, based on audited financial data, publicly available information, and management’s outlook as of today. Macroeconomic parameters could change unexpectedly. The company’s operating environment and thus strategies could change as a result and without notice.

  • This presentation does not constitute an invitation to trade this or any other stock. Stocks can go down as well as up. Historical performance is no guarantee for the future.

  • The company has announced that it is in the process of selling some non-core assets. However, the NAV estimates in this document are for reference only, and have nothing to do with our views of potential realizable values.

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