Qilu Expressway
Qilu (‘Company’) is the toll operator of the Jihe expressway in Shandong
province. It entered into a build-operate-transfer agreement with the Shandong
transport authority to operate the expressway till 2034.
The latest balance sheet as at June 30th is relatively simple with
intangibles representing the toll operating rights of $2.9b and excess net cash
of $1b – arising from a public offering in 2018 to acquire other toll rights.
Net book value was reported at $3.9b. Average net earnings (after amortization)
were roughly $530m/year.
The stock sells for $3.5b representing apparently attractive multiples
of 6.6x earnings and a modest discount from book value, along with a 9%
dividend yield.
But this misses a significant acquisition made after the interim report
that changes the face of the financials.
On September 14th, the company acquired toll rights to two
expressways from Qilu Transportation, which were: a) Deshang expressway
(expiring in 2040) and b) Shennan expressway (expiring in 2043) for a
consideration of $2.5b.
This consideration was in exchange for net assets of $1.3b (including toll
rights valued at $3.7b) and earnings of $87m – representing almost 2x book
value and 29x earnings, which doesn’t strike us as a bargain.
The net impact is a reduction in the company’s book value to $2.7b implying
a revised market multiple of almost 1.5x net assets (including the assumption
of debt of $1.9b of the target company).
No further analysis is necessary as this stock no longer represents a
clear-cut bargain based on the revised financials.
This appears to be a case of the controlling shareholder abusing the
minority shareholders by entering into an acquisition that materially changes
the value of the company.
On a side note, it would be worthwhile for the myriad consultants engaged
in similar projects (and paid with shareholders’ dime) to focus on the price
paid in exchange for existing resources before waxing lyrical about rosy
future prospects and doing the controlling shareholder’s bidding. The least
they can do is to abstain from insulting minority shareholders by advising that
such deals are in their interest.