The deal was done via a 90% stake in South China Highway Development (SCHD), a Hong Kong company. Macquarie International Infrastructure Fund (MIIF) is buying its stake in SCHD from Preciseway Management and Topwise Consultants. These two will retain a 10% stake in SCHD. Macquarie will run the concession until 2026. The original length of the concession was 27 years.
The consideration comes to Rmb3.957 billion ($532 million), comprising Rmb2.271 billion of senior debt and Rmb1.686 billion of equity. The price is equivalent to 11.6x enterprise value-to-Ebitda for the 12 months ending December 2006. The prospective EV/Ebitda is 12.6x for the 12 months ending December 2007.
Clearly, that means earnings have trended down. But Gavin Kerr, MIIFÆs managing director explains this by saying that another toll road (the Xinguang expressway) had recently been built. On the other hand, itÆs not likely that competition will intensify given the geographical limitations of the route. ôThe route has substantial bridges and tunnels. In addition, much of the route is in dense urban areas, making further development very difficult,ö he says.
The stretch managed by Macquarie is just part of a much longer road, which runs northeast on the east side of Guangzhou and then further into southern China. Currently, some 37,000 vehicles travel on the road per day. MacquarieÆs typical strategy is to improve shareholder returns by enhancing the asset it manages. The fund estimates ôhigh single digitö yields over an average of five years, and an internal rate of return in the "high teens". Revenue in 2006 was S$95 million ($63 million), S$91 million in 2005 and is expected to be S$89 million in 2007.
One consideration will be the tolls paid by car users. These tolls are set by the government, currently at Rmb0.60 per km for the whole of the province. Macquarie uses a conservative approach in its predictions, assuming that the tolls wonÆt rise. However, Kerr estimates that tolls will rise, if only for the government to demonstrate to private sector investors that these expensive infrastructure projects are worth taking on. Tolls have not risen since 2002. Traffic volume growth was 13% CAGR from 2004 to 2006, according to Macquarie.
ThatÆs surprisingly low given rapidly growing levels of car ownership. This correspondent recalls travelling from Nanjing to Shanghai in 2003. In an effort to force drivers onto the brand-new elevated highway, the provincial government was letting the previous road fall into ruin. Nevertheless, penny-conscious Chinese drivers were shunning the pristine highway and forming traffic jams on the disintegrating lower road. Presumably, as average wealth levels rise, drivers will be more likely to pay for the new roads.
In these days of credit panic, MacquarieÆs debt levels on the deal are interesting. At fund level, there is only S$280 million of debt, on a market cap (the fund is listed in Singapore) of S$1.5 billion. At the level of the asset, the debt to the total of debt and equity is 57% (S$450 million to S$783 million).
Kerr refused to be drawn on whether this was a high or low level, merely saying there were regulations capping debt levels in China and that the loan was non-recourse to fund investors. At asset level, the debt is raised in local markets. Although a toll road would seem like a very safe bet for creditors (predictable cash flows) Kerr says there are other, even safer investments, mainly involving government guarantees. Kerr said that debt costs had risen, making debt less attractive than before the credit panic began in August.
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