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17 Feb 2005
MOODY'S ASSIGNS Baa2 RATING TO CHINA MERCHANTS HOLDINGS (INTERNATIONAL) CO. LTD'S PROPOSED BONDS; OUTLOOK STABLE
Hong Kong, February 17, 2005 -- Moody's Investors Service has assigned a Baa2 senior unsecured rating
to the proposed 10-year bonds to be issued by CMHI Finance (Cayman)
Inc. and guaranteed by China Merchants Holdings (International)
Co. Ltd (CMHI). At the same time, the rating agency
has assigned a Baa2 senior unsecured issuer rating to CMHI. The
ratings outlook is stable. This is the first time that Moody's
has assigned ratings to CMHI. The proposed bond proceeds will be
used to refinance existing debts and fund potential investment opportunities
in the PRC.
Moody's says that the Baa2 rating reflects CMHI's quality
port portfolio with its well-located ports, long-established
operating track record, as well as its other diversified assets,
including its investment in a world leading container manufacturing company
and toll roads in China. The rating further reflects the strategic
benefits of its recent acquisition of a 30% stake in Shanghai International
Port (Group) Co. (SIPG), CMHI's dominant market share
(over 45%) of China's total container throughput as a result
of the SIPG investment, and the significant anticipated accretive
financial benefits that such investment will bring to CMHI in the medium
Furthermore, proper execution of the acquisition and successful
integration of the expanded port portfolio will significantly enhance
CMHI's port network and operational competitiveness in China,
positioning it to take advantage of the growing trade flows in and out
of the Mainland. It will further result in CMHI improving cash
flow certainty. The rating also reflects Moody's expectation
that CMHI will achieve earnings growth primarily through organic expansion
as well as the consolidation and maximization of synergies from its existing
port investments, instead of further acquisitions in the next 2
On the other hand, the rating is tempered by the following challenges:
 geographic concentration of its assets, primarily in China,
 the company does not have a controlling stake in some of its
core assets;  high leverage due to the recent acquisition
and sizeable committed capital expenditure program in the coming 3 years;
 competitiveness in the port business is evolving quickly as handling
capacity at existing ports continues to expand and operators and investors
construct new ports;  organizational complexity, arising
from a large number of private joint venture investments; and 
CMHI's management team and strategy are still developing as the
company becomes more commercial-driven and return-focused.
Port and port-related businesses - including the manufacture
of containers - represent CMHI's core activities and are
expected to remain so for the foreseeable future. It is expected
that its port business accounted for over 45% of pre-tax
profits in FY2004 and the company is one of China's leading public
berth operators. CMHI's current port portfolio has an aggregate
handling capacity of 13.2 million TEU and comprises up to 45 operating
berths. It has 14 investments in ports in Hong Kong, Shenzhen
and other parts of China, including new investments in Ningbo,
Qingdao and Tianjin. The SIPG acquisition will substantially strengthen
CMHI's presence in the Yangzi River Delta, an important growth
engine for China. It will also double its share of China's
total container throughput to over 45%, making it one of
the largest port operators in the Mainland. After consideration
of the new berths planned, CMHI's total number of berths in
operation is expected to double to 100 in 2005 from 55 in 2004.
With these new investments, the company has secured material positions
in China's three most active economic regions, namely the
Pearl River Delta, the Yangzi River Delta and the Bohai Coastal
Area, thereby forming a nationwide network. The GDP of these
3 areas contributes to more than 60% of national GDP and over 80%
of total imports and exports.
Modern Terminal (MTL) in Hong Kong as well as Chiwan Container Terminal
(CCT) and Sekou Container Terminal I - both in western Shenzhen
- are major cash flow contributors and significant port operations
with major market positions. The 3 ports have long-established
operating track records dating back as far as 1969. Furthermore,
the contribution from the port business is expected to rise to about 65%
of pre-tax profits in the medium term, given the company's
various planned investments.
A current weakness in CMHI's business profile is that it does not
have controlling interests in some core port investments. Moody's
expects this issue to continue for the foreseeable future, but to
be partially mitigated by the company's strategy of seeking majority
ownership control or management and/or operation rights over its new investments.
Success in delivering on this strategy would be positive for the rating.
Furthermore, CMHI's strategy aims to enhance the competitiveness
of its existing facilities both through the expansion and provision of
value-added logistic services. At the same time, it
is building new berths to increase its handling capacity nationwide.
The company's operating capacity is expected to grow by about 27
million TEU in the coming 2 years as it currently has 25 container berths
under construction. Six berths were completed and operational in
2004 and over 12 new berths are to be added annually in the 2 years thereafter.
The company has also undertaken several other major initiatives,
namely port-bond zone collaboration, barge shuttle services,
and the implementation of electronic data interchange platforms at its
ports to further improve efficiency.
Container manufacturing - the second major contributor to profits
- is a competitive business with thin margins. The rating
agency, however, notes that China International Marine Containers
Group (CIMC) -- in which CMHI has a 22.7% interest
- has scale advantages: it is the world's largest manufacturer
of dry cargo containers, accounting in 2004 for 55% of such
containers and approximately 50% of reefers. Furthermore,
CMHI holds 64% of Hempel-Hai Hong - China's
largest manufacturer of marine and container coatings - which commands
35% of the Mainland market for container paints and 30%
of that for marine paints.
Moody's comments that CMHI's port and container businesses
are highly concentrated in China. Both have opportunities to benefit
from the rapid growth in China trade, and which is expected to continue
over the long term. Nevertheless, this situation entails
a high degree of volatility risk, given the fast-evolving
nature of China's economy and the potential for upsets. Moody's
also notes that CMHI's port businesses are not monopolies and face
competition from neighboring terminals and ports as well as the risk of
large-scale competitors emerging over time, and which could
disrupt current shipping patterns. Over the short-to-medium
term, CMHI's ports are insulated from such developments,
given the sector's tight handling capacity and the fact that the
company's ports generally have 12-to-18-month
contracts with shipping companies. However, over the longer
term, margins could come under pressure, if capacity grows
faster than trade.
Moody's notes that CMHI's consolidated financial reports do
not fully reflect the company's financial position as most of its
ports and toll roads businesses are equity-accounted, given
that its investments in these are either below 50%, or are
joint ventures in which it does not exercise management control.
Meanwhile, in FY2004, investments in associates and joint
ventures represented about 49% of total assets, while cash
contributions from the same entities were about 57% of gross cash
flow. In order to assess the significance of the liabilities of
its off-balance sheet investments and contingent liabilities (arising
mainly from operating leases) to its financial profile, Moody's
adjusted leverage to include contingent liabilities, the debt of
its toll road joint ventures, and the pro-rata liabilities
of its port associates. Adjusted Gross Debt/Total Capital and Adjusted
Net Debt/Total Capital were still low at about 15% and 10%
respectively. As at December 31, 2004, CMHI has provided
over HKD1.3 billion in shareholder loans to its port and toll road
Leverage will rise substantially to over 40% as a result of the
HKD5.25 billion SIPG acquisition, of which about 70-75%
will be debt financed. Leverage is expected to stay high at around
this level in the coming 2 years due to sizeable committed capital expenditure
and investments for 2004-2007, estimated at around HKD17.5
billion, primarily for the expansion of its port business.
This capex is expected to be funded by a combination of internal cash
flow, borrowings and non-recourse project loans. The
above will prompt CMHI's Total Debt/GCF to rise to about 7.5x,
a relatively high level for its rating. The Baa2 rating reflects
Moody's expectation that the anticipated strong growth of its port
investments will help improve the company's financial parameters
in the next 2 years, bringing TD/GCF down to 5x and GCF/GI to 6x
on a sustainable basis.
CMHI's liquidity is adequate. It had about HKD2.0
billion cash and cash equivalent on hand as of December 2004 and most
of its cash holding is in the form of short-term fixed deposits.
A substantial portion of the cash is expected to be utilized to fund the
SIPG acquisition, but Moody's anticipates CMHI will keep its
cash liquid reserve above HKD700 million at any point of time.
CMHI maintains a close relationship with its 53% owner, the
China Merchant Group (CMG). CMG has since 1998 been injecting assets
into CMHI to help the latter build its ports portfolio and provides strong
guidance, especially regarding major investment decisions on ports.
Five of CMHI's 8 Board of Directors hold positions at CMG.
Moody's understands that CMHI manages its cash flow and daily operations
independently, despite the close ties with its parent.
Moody's says that it is unlikely that CMHI's rating will be
upgraded in the next 2 years as CMHI's debt service coverage measures
are modest for the rating level, unless it manages to deleverage
such that TD/GCF will improve to and sustain at 3x. Furthermore,
for upward rating pressure to emerge, CMHI also has to demonstrate
solid execution of its growth strategy, particularly a successful
integration of its port investments over the next 3 years, and retaining
a clear focus on acquiring or developing controlling stakes in port operations
in major trade routes in and out of China. In addition, Moody's
expects management to formulate clear financial and risk management policies
and systems as well as build a track record for strong financial discipline.
On the other hand, the rating could experience downward pressure
if the company fails to maintain GCF/GI ratio at 6x or above, lower
TD/GCF to 5x and improve RCF/TD to above 12% over the next 3 years.
The rating will also experience downward pressure if operational strategy
changes, such that it diverges from that stated above; investments
suffer significant competitive pressure, such that revenue losses
and/or margin pressures emerge, or another material debt-funded
China Merchants Holdings (International) Co. Limited, headquartered
in Shenzhen, is engaged in port investments, container and
paint manufacturing, toll roads and shipping.
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
No Related Data.
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