Toll-road operator to diversify

Shenzhen Expressway will accept lower project returns and aims at diversifying away from its core road businesses in a bid to expand its asset base.

The firm was confident of plugging its profit shortfall within three years after last month announcing the 1.93 billion yuan (about HK$1.82 billion) sale of two profitable national highways to its parent, chairman Chen Chao said yesterday.

'We are looking for toll-road projects in Guangdong and the Pearl River Delta and ports and logistics projects in Shenzhen,' Mr Chen said.

The company's net profit fell 14.57 per cent to 359.93 million yuan last year due largely to expiry of tax allowances and reduced construction management income.

The two recently sold sections of national highways 107 and 205 contributed 120 million yuan to its bottom line last year - representing one-third of group profit.

In a bid to expand its asset base, the firm plans to lower its threshold for choosing new projects to an internal rate of return (IRR) of 10 per cent.

'We missed a number of investment opportunities in the last few years because we set the IRR too conservatively, at 16 per cent,' Mr Chen said.

Corporate transactions are generally considered to add value when they generate returns above their cost of capital.

However, ING estimates that Shenzhen Expressway has a weighted average cost of capital of 11.7 per cent, suggesting that the company could be embarking on a value destroying strategy.

'We hope to announce some good news [on acquisitions] when we reveal our 2003 interim results,' Mr Chen said.

The firm sold highways as a result of a Shenzhen municipal government policy change, leading to a one-off 600 million yuan gain to be booked this year.

Mr Chen said the firm was attracted by the city's fast-growing ports and logistics business, although the sector placed it in competition with its main-board listed parent, Shenzhen International Holdings.

Shenzhen International, which counts blue chip Cheung Kong (Holdings) as the second largest shareholder after a Shenzhen municipal government investment arm, holds 30.03 per cent of Shenzhen Expressway.

Mr Chen, who also sits on the board of Shenzhen International, defended the move.

'In terms of our ability to raise funds and experience in constructing and managing infrastructure, Shenzhen Expressway is better.'

However, he said the municipal government would prioritise Shenzhen International when allocating investments.

A key part of Shenzhen International's operations is running marine and land transportation of cargo between Shenzhen and Hong Kong.

In its core toll-road business, Shenzhen Expressway was eyeing the municipality's planned 270km of expressways to be built at a cost of 20 billion yuan in the next 10 years, he said.

Funding acquisitions was not a problem given the company's strong cash flow, 1.93 billion yuan proceeds from its asset sales and credit facilities of five billion yuan, Mr Chen said.

Shenzhen Expressway shares closed yesterday 1.71 per cent lower at HK$1.72.