Road King Infrastructure launched an initial public offering for its Chinese toll road assets on Thursday in the hope of unlocking value and maximizing investor interest in a number of China’s landmark infrastructure initiatives.
In addition to the wide-ranging Belt and Road project, the government announced plans for a major new environmentally friendly metropolis close to Beijing this April. Since then stocks tied to the development of the Xiongan New Area in Hebei have soared.
Hong Kong-listed Road King’s new toll road vehicle, RKE International, derived 48% of its Ebitda from the province in 2016 and non-syndicate analysts say it hopes to the ride on the tail of Xiongan concept stocks, which have been a hot favourite with mainland investors over the past few months.
In particular, Shanghai-listed cement group BBMG Corp has shot up more than 50% and Tianjin Capital Environmental Protection is up 145%.
Xiongan has been designed as annex to relieve some of Beijing’s overcrowding and local officials want to make it the starting point for the Belt and Road project given that nearby Bohai Bay was once the Eastern end of the ancient Silk Road.
In its online roadshow, RKE International says it wants to take full advantage of the Belt and Road initiative by developing new expressways in China and in South East Asia serving the maritime Silk Road. However, unlike some of Hong Kong’s other listed toll road operators it does not yet have a project pipeline, or a parent with other assets to inject.
The listing vehicle has five toll roads covering 340 kilometres with a 16.6-year average concession life. The group has launched a HK$1.925 billion to HK$2.647 billion ($248 million to $341 million) flotation (post greenshoe), with a base deal size of 418.5 million shares.
Valuation
The price range has been set at HK44 to HK$5.5. This represents a 14.9 to 20.5 2017 price-to-earnings ratio and 12.4 to 17 times on a 2018 basis.
In terms of price to book, the deal is being marketed at 1.21 to 1.66 times on a 2018 multiple and 5.2 to 7.2 times 2018 EV/Ebitda.
One of the IPO’s key draws is the dividend yield: 5.8% to 8% for 2017 and 6.7% to 9.1% for 2018. The group has committed to pay out at least 90% of net earnings as dividends and even at the bottom end of the range it is offering a 28% discount to the sector’s 4.2% 2017 average yield.
Benchmarking the deal is easy in one respect since there are plenty of comparables, but difficult in another since they are all trading at very different levels to each other.
Single province focused groups on the Eastern Seaboard such as Zhejiang Expressway and Jiangsu Expressway are respectively yielding 6.2% and 6% on a 2018 basis.
But in terms of P/E, Zhejiang is trailing the sector because of the dragging effect of its securities arm, with its volatile earnings stream. However, it recently won approval to spin it off and in anticipation of the news, the stock has performed well, rising 32.03% in the year-to-Thursday’s close.
It is now trading on a consensus 2018 P/E ratio of 13.2 times compared to 15.2 times for Jiangsu Expressway, which is up 13.67% year-to-date.
Where the sector as a whole is concerned, Hopewell Highways is at one end of the pack on 23.3 times forecast 2018 earnings, with a 4.4% 2018 dividend yield. At the other is Yuexiu on 9.59 times 2018 forecast earnings and a 6.7% yield.
In its marketing materials, RKE says it had a comparable 2016 Ebitda margin of 83.8% compared to industry leader Zheijaing on 85.3%. It also said it was second behind Zhejiang in terms of return on equity – 15.1% against Zhejiang’s 16.1%.
New government legislation
Sector analysts believe the whole sector could get a lift later this year when the government institutes amendments to its National Toll Road legislation.
In an analysts’ briefing, Zhejiang Expressway executives said they expect the government to allow companies to carry on collecting tolls beyond their concession periods. They also said they believe the government will compensate companies for any negative acts relating to existing tolls, or for major capex to upgrade toll roads at the end of the concession periods.
RKE International says it intends to use its IPO proceeds to expand its portfolio and widen existing roads. Since it purchased its first toll road in 1997, it has typically added a new one every three to five-years.
The two Hebei-based toll roads are both now mature assets, as is its Changyi toll road in Hunan province, which contributed 31% of 2016 Ebitda. Two new tollroads: Longcheng in Shanxi and Machao in Anhui broke even in 2016 and are expected to start generating dividends at the end of 2017.
This is also why net profit growth in 2017 is forecast to record relatively modest 7.9% growth before jumping 20.3% in 2018. Over the past three years, traffic and toll revenues across the whole portfolio have grown by a compound annual growth rate of 10%.
The deal’s Hong Kong public offering begins on June 27, with pricing scheduled for June 30 and listing on July 7. There is a 90%/10% split between institutional and retail investors and a 74% and 26% split between primary and secondary shares.
Pre-greenshoe the group will list 27% of its enlarged share capital.
Joint global co-ordinators are DBS, HSBC and JP Morgan.
