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Ho Chi Minh City Infrastructure Investment JSC (CII – Outperform), recently announced first 9M results showing revenues of VND1651.2 billion (190% y/y) and NPAT of VND242.7 billion (2224% y/y). The surge in revenue was accompanied by a 521% increase in COGS. However the bottom line still improved thanks to a decrease in financial expenses, increase in net financial income and a jump in profit share from associates and a finally a financial gain from the sale of shares in CII Bridges & Roads Investment JSC (LGC).
First 9M FY2014 revenue virtually doubled mostly thanks to one off the booking of the BT contract of Saigon Bridge which brought in VND1,010.5 billion. This has been awaited for a long time and was held up by paperwork issues but was finally booked in Q2/2014. Then a secondary sales driver was toll fee sales which rose by 10% in the first 9M FY2014 due to the 13-50% increase in toll fees (depending on the type of vehicle) which was implemented in January 2014. Plus the addition of the new Ha Noi Highway toll stations which brought the number of toll stations operated by CII to fHSC’s . However at the same time COGS jumped due to booking COGS of BT contract of Saigon Bridge that was VND1,010.7 billion.
Net financial income increased by 449% with financial income up 17% y/y to VND267.8 billion driven by increase in other financial activities. Then in contrast, financial expenses decreased by 25% to VND155.5 billion. Although, interest expense increased by 24% to VND155.3 billion as the total debt base increased by VND722.9 billion to VND5438 billion. However CII also posted an investment provision reversal totaling VND37.5 billion. Incidentally the debt base increase was due to the Q2 FY2014 issuance of convertible bonds totaling VND1,081 billion carrying a coupon of 12% and 5-years maturity. The bondholders are 30% foreign and 70% local.
Then in September, CII sold 6.9 million shares of LGC for a total consideration of VND144.7 billion at an average price of VND20,971 per share. The net financial gain from this deal was VND44.7 billion. Which was booked as financial income. After the transaction, CII still holds a 57.63% stake in LGC or equal to 12.98 million shares. This transaction is part of CII’s plan to reduce their holding in LGC to a simple controlling 51% stake. And is part of a series of intricate steps to complete (1) the transformation of LGC into CII Bridges & roads (CII B&R); a 51% subsidiary of CII under its holding group structure (2) transfer all relevant road and bridge from CII parent to this entity at book value (3) raise money for both the parent and LGC in order to fund pipeline execution. (Continued overleaf)
By late October, CII has already finished transferring all of the infrastructure projects to LGC with a total book value of about VND1,900 billion and total investment cost estimated at VND4 trillion.
For 2015, CII estimates total capex of VND4,900 billion with total VND1,300 billion for 3 real estate projects namely 152 Dien Bien Phu, Thu Thiem and Diamond; VND500 billion for Ha Noi highway, VND500 billion for Tan Hiep Waterplant, VND1,200 billion for Binh Trieu Phase 2 and then VND800 billion for Highway 1A Expansion.
To fund this pipeline, CII plan to (1) sell down their stake in CII Bridges and Roads, which they hope will bring VND600 billion (2) issue a VND1,500 billion bond to an insurance company, which has a longer-term investment horizon that matches the long-term payback time of infrastructure projects. This bond will have 15 years maturity and a fixed rate coupon of 9%-10% (3) issue a second corporate bond totaling about VND1,000 billion with details as yet not disclosed and then (4) borrow from banks for the three last projects including the Tan Tiep Water Plant, Binh Trieu Phase 2 and Highway 1A Expansion. CII plans to raise fund on a rolling basis with a financing structure of 80% debt and 20% equity.
For FY2014, HSC keep HSC’s net sales forecast of VND1,836 billion (+160% y/y) and net profit of VND323 billion (+276% y/y). As CII has booked one-off revenue of VND1,010 billion from the Saigon 2 bridge which the company has completed and handed over to the local government. HSC also estimate revenues of VND563 billion (+23% y/y) from toll fee collection and finally VND238 billion (+10.5% y/y) in revenues from construction and other activities. While HSC expect net financial income will come to VND74.5 billion (+46% y/y) thanks to gains from the Saigon 2 bridge and reversal on stock loss provisions.
For FY2015, HSC forecast sales of VND1,033 billion (-44%y/y) and NPAT of VND440 billion (+135% y/y). In HSC’s model HSC assume for now that next year’s revenues will not see one-off bookings from contracts such as Saigon Bridge that contributed VND1,010 billion this year. Now CII themselves expect that FY2015 earnings may see some important contribution from BOT contracts for Highway 1A Expansion and Thu Thiem which could be worth up to VND1,500 billion and VND1,600 billion respectively. However HSC do not include this in HSC’s forecast at this stage given the vagueness of the timeline.
However HSC do expect higher toll fee sales (+36% y/y) to VND770 billion with full year booking of toll fee sales from Rach Mieu Bridge and Binh Trieu Bridge Phase 2; higher construction sales of VND191 billion (+10% y/y) and higher goods sales of VND60 billion (+15% y/y). Accordingly, HSC forecast EPS of VND1,750 (-30%y/y) after over VND1.1 trillion convertible bond converts at price of VND11,000 resulting in 102.6 million shares. This will generate PE of 11.78 and PB of 1.56.
At the current price, this stock is trading at a forward FY2014 PE of 8.1 times given the forward basic EPS of VND2,488. However, if HSC include all the company’s CBs, forward PE jumps to 13.2 times based on the fully diluted EPS of VND1,525. Given CII’s so far smooth implementation strategy, namely to turn itself into a five pronged holding group structure with interests ranging from real estate (NBB); water infrastructure (SII); roads and bridges (LGC); construction and operating assets HSC think the company is a very interesting long term play on the development of HCMC infrastructure over the next decade. However given that parent FOL is full, buying into some of its subsidiaries such as NBB or SII may be a more focused way of accessing this theme.