Macquarie fund buys 81% of a toll concession in Guangdong (Canton) province China

Macquarie is making its first move in the the huge but uncertain toll business in China. A Macquarie fund MIIF (Macquarie International Infrastructure Fund) based in Singapore has bought an 81% interest in the Hua Nan Expressway (HNE), an urban tollroad in Guangzhou, the major city of Guangdong province, right by Hong Kong.

The HNE is 31km (19mi) long of 3+3 and 4+4 lanes running north-south through the metro area a few miles east of the city center. It has eleven interchanges, many of them expressway to expressway.

16km (10mi) of the HNE opened in late 1999 and the other 15km (9mi) opened in 2004. The highway was built by investors now selling most of their investment under a 27 year toll concession granted by the province that expires in 2026. The provincial government has a 10% shareholding in the project, Macquarie will have 81%, and the original Chinese investors maintain the remainder.

Average daily toll transactions are 125k comprising about an average 37k trips of an average 9.1km (5.6mi). The road clearly has plenty of spare capacity for traffic to grow on its existing roadway.

They expect strong traffic growth at least until 2020 when additional competing roads are planned to open. in the meantime most planned new ropads will help the HNE traffic by developing the area network.

Macquarie say in a presentation that the tollroad has a "strong management team", indicating they plan their normal practice of leaving staff in place.

'Canton' before they messed with the english names, Guangdong's Guangzhou metro area is China's third largest with about 9m people and is situated on the Pearl River delta about 125km (80mi) northwest of Hong Kong.

MIIF registered in Bermuda, managed out of Australia, is traded on the Singapore stock exchange so they use Singapore dollars. In US$s (based on S$=70c) MIIF is paying $548m split between $233m equity and $315m of senior debt.

That values the expressway concession at $677m, given Macquarie's 81% share.

The toll concession gives the provincial government arbitrary power to set the toll rates, which adds considerable risk to the investment and must depress the value of the business considerably. Macquarie assumed a constant nominal toll rate of 4.4c/km (7.2c/mi) RMB 60c/km (@RMB=US13.5c).

[They must assume Chinese officials are much better behaved than American or Canadian ones - TRnews]

Toll revenue is $62m/year (based on S$=70c), operating expenses are about $11m for EBITDA of $52m.

The road has electronic and manual toll collection and toll lanes are gated. Vehicle classification is done visually by toll collectors.

Heavy trucks are only 3.2% of traffic.

Traffic 125k/day

Transaction volume increased from 30k in 1999 whent he first half opened to 75k in 2003. Since the second half opened traffic has gone to 125k in 2006.

In 2007 traffic down slightly with the opening of a competing Xinguang Expressway. However late 2008 traffic should benefit by the opening of a third segment of the HNE allowing it to tap new traffic.

Debt on the project of $385m ($315m is Mac's share) is paying interest of 7.1%, or $27m/yr.

They sees little need for more capital expenditure. The asphalt pavement is in good condition and will only require overlays every 8 years.

Value/earnings multiple

Macquarie likes to describe its tollroads with an EV/EBITDA ratio with EV= enterprise value and EBITDA essentially operating surplus or revenues minus operating costs. They say the value/earnings multiple of the HNE is 12.6 based on 2007 numbers and 11.6 for 2006. This they say compares with an average multiple of 15.5 for comparable publicly listed Chinese tollroads.

Macquairie hopes to get an internal rate of return in the mid-teens (14 to 16%?). Early on they expect a high single digit yield.

The group's various funds have been investing in toll roads, bridges and tunnels since 1996 and now own 35 pikes with an enterprise value of $33b in eleven countries including Australia, Canada, China, France, Germany, Portugal, South Africa, South Korea, US, UK. They do 1.7m toll transactions/day.

JUST A THOUGHT: Buying a Chinese tollroad is  probably if nothing else  a smart currency bet especially if you raise a portion of the capital in US$s. American fiscal indiscipline and loose credit are finally taking their toll of what used to be the world's dominant currency.  The Canadian dollar is already worth more than the greenback, and the Australian, Hong Kong and Singapore dollars and the Swiss franc are closing on it too. The Chinese authorities are stubbornly resisting any unpegging of the RMB/US$ but market forces look likely to sweep their currency free of the peg before long.

TOLLROADSnews 2007-11-09