Highlights:
- CTF Services intends to seek disposal of toll roads in Mainland China. If the news is true, it is not in line with the Group’s development strategy. We believe that apart from optimizing the business and asset portfolio, the major sales proceeds from the toll roads could be used for distribution of special dividends.
- The distribution of special dividends is not favourable to bondholders. Even under this extreme assumption, the credit metrics would still be considered relatively strong. The remaining segment will continue to provide a solid cash flow. The operational and credit risks remain low.
- Investors could still consider its 2028 or 2029 bonds, with net yield to maturity of up to 7.6%, which has certain attractiveness.
Disposal of Toll Roads is not in line with Group's Development Strategy
Recently, according to a Bloomberg report, CTF Services (formerly known as NWS Holdings) intends to sell its toll roads in Mainland China (for around USD 2 billion). Yuexiu Group (a China SOE) could be the potential buyer.
Typically, the asset acquisition from POEs by SOEs takes a longer time. Taking reference from the recent acquisition where China Merchants Expressway Network & Technology Holdings acquired toll roads from Road King, the time from the announcement of the transaction to its completion took about six months. This suggests that CTF Services' sale of the toll road business will not be completed in the short term.
As shown in Chart 1, CTF Services' primary profit contribution comes from roads, accounting for about 28% of the attributable operating profit (including dividends received from JVs and associates). The road segment is the largest profit-contributing sector for the Group.
Chart 1: FY24 Attributable Operating Profit Breakdown (Including Dividends from JVs and Associates)
CTF Services has previously sought exits from core businesses or asset divestments (refer to Table 1). However, if the news is accurate, the disposal of toll roads is not in line with the Group's development strategy. This is because the toll road business is one of the cash-flow generating businesses for the Group, and the Group’s development strategy is seeking “solid businesses with strong cash flow generation supporting value accretive acquisitions & sustainable dividend” over the past few years.
Table 1: CTF Services’s Recent Asset Disposal
| Announcement Date | Buyer | Target Company / Introduction | Equity Stake (%) | Business Nature | Attributable Consideration / Valuation |
| Nov-21 | SUEZ ASIA | SUEZ NWS Limited | 42% | Environmental | HKD 4.173 billion |
| May-22 | SMBC | Aircraft Leasing Business | 50% | Aircraft Leasing | USD 800 million |
| Jan-24 | / | Chengdu Jintang Power Plant | 35% | Energy | / |
| Sep-24 | Avolta | Duty-free Retail Business | 100% | Facility Management | / |
| Oct-24 | JOST | Hyva Holding | 50% | Industrial | USD 156 million |
| TBC | Yuexiu Group | Toll Road Business in Mainland China | TBC | Toll Road | USD 2.0 billion |
| (Potential Buyer) | (Scale TBC) | ||||
| Source: Company's Announcement, iFAST Compilations Data as at 31 December 2024 | |||||
Incentive to Distribute Special Dividends is Substantial
In recent months, the liquidity issue faced by its sister company (New World Development) (related article) have brought market attention to the movements of CTFE (a major shareholder of both New World Development and CTF Services).
In fact, when CTFE made a tender offer to acquire CTF Services from New World Development, they indicated intentions regarding CTF Services (as shown in Table 2), including increasing dividends, proposing the possibility of special dividends and optimise its business and asset portfolio.
Table 2: 3 Intentions of The Offeror (CTFE) with regard to CTF Services in Tender Offer Document
| Intention | Details |
| Rationalise and develop a sustainable and balanced financing strategy with a view to optimising its capital structure | Proactively pursuing financing and re-financing opportunities |
| Increase its total dividend payout | Delivering a sustainable and progressive dividend policy, which aims to steadily increase or at least maintain total dividend in each year Besides regular dividends, the Offeror requests to maximise the total dividend payout by paying special dividends |
| Proactively optimise its business and asset portfolio | To enhance the value to its shareholders and corporate efficiency in the long run, by acquisition and asset disposal |
Sources: Tender Offer Document, iFAST Compilations Data as at 26 June 2023 | |
CTF Services has already distributed a special dividend after FY24 1H result (related article), and the last time special dividend (except for 2024) can be traced back to 2017. This indicates that these intentions are not all talk but hold certain practical significance.
Therefore, we believe that apart from optimizing the business and asset portfolio, the major sales proceeds from the toll roads could be used for distribution of special dividends. Here are three possible scenarios and the potential impacts on bondholders (see Table 3).
Table 3: Three Possible Scenarios and Potential Impacts on Bondholders with regard to Sales of Toll Roads
| Scenario | Potential Impacts on Bondholders | |
| Scenario 1 | • Successful sales of toll roads with the majority of proceeds used for special dividends | • Negative • Most credit metrics likely to deteriorate • Bond yields might face upward pressure |
| Scenario 2 | • Successful sales of toll roads with proceeds used for debt reduction or acquiring new assets | • Neutral or Positive • Credit metrics remain stable |
| Scenario 3 | • The rumor about the potential toll road sales prove unfounded, or the transaction is ultimately shelved | • No impact • Bond yields might slightly retreat to levels seen before the rumors, approximately a 50 basis point decline |
| Source: iFAST Compilations | ||
In theory, the major shareholder, CTFE, has significant funding needs, we believe that the incentive to distribute special dividends is substantial. Therefore, there is a higher likelihood of Scenario 1 occurring. Consequently, the below would focus on analyzing the potential impact of Scenario 1 on bondholders.
Exclude Toll Roads, Credit Metrics Still are considered Relatively Strong
The distribution of special dividends is not favourable to bondholders. This is because after the dividend distribution, CTF Services would significantly reduce its cash. The dividend payment will also lead to a decrease in total equity. The future profitability is expected to deteriorate, indirectly causing most credit metrics to worsen.
Under the extreme assumption, if CTF Services successfully sells the toll roads for USD 2 billion and directly distributes the entire USD 2 billion as special dividends, equivalent to approximately HKD 3.96 per share (in the normal situation, a portion of the proceeds would be used for debt reduction), then we could expect that the most credit metrics would deteriorate (see Table 4). Nevertheless, even under this extreme assumption, the credit metrics would still be considered relatively strong.
Table 4: CTF Services’s Credit Metrics
| HKD billion | Jun-22 | Jun-23 | Jun-24 | Jun 24 (Assuming Sales of Toll Roads and Special Dividend, called “Predicting Indicators”) |
| Net Debt | 20.7 | 14.9 | 19.5 | 19.5 |
| Undrawn Credit Facility | 11 | 11.4 | 12 | 12 |
| Adjusted EBITDA | 6.8 | 6.6 | 7.2 | 4.5 |
| Net Gearing Ratio (%) | 48% | 37% | 50% | 84% |
| Net Debt / Adjusted EBITDA (times) | 3.0x | 2.3x | 2.7x | 4.4x |
| Interest Coverage Ratio (times) | 6.7x | 5.3x | 6.0x | 3.7x |
| Source: Company's Announcement, iFAST Compilations Data as at 30 June 2024 | ||||
In terms of predicting indicators, the net gearing ratio is expected to increase significantly to 84% due to the decline in total equity caused by the special dividend distribution, but it remains at a manageable level. The net debt to adjusted EBITDA ratio and the interest coverage ratio would deteriorate to 4.4x and 3.7x respectively, but these levels are still considered quite healthy.
These predicting indicators can be seen as a stress test for CTF Services. The rumor (sales of toll roads) might not be true. Even if the transactions go through, they might not necessarily be completed smoothly. Furthermore, after receiving proceeds from the transaction, CTF Services has the option to use the funds to acquire new assets or reduce debt levels.
Therefore, these predicting indicators will serve as the worst-case scenario for the credit metrics, and the actual credit metrics of the Group will ultimately depend on different factors to be determined. There is a high likelihood that the actual credit metrics will be better than these predicting indicators.
Remaining Segments still Exhibit Growth Potential, with Stable Business Models
In the remaining segments, construction, insurance, logistics and dividends from associated companies are equally important for CTF Services, accounting for 13% to 23% of CTF Services' attributable operating profit.
This reflects that as a conglomerate, CTF Services has diversified businesses, which could reduce its exposure to risks associated with a single industry. (We discussed the advantages of conglomerates for bondholders—refer to this article for more information.)
In the construction segment, CTF Services has maintained a good relationship with the Hong Kong government. Many construction projects related to the Hong Kong government, such as large public housing and affordable housing projects, are assigned to Hip Hing Construction (“Hip Hing”), a subsidiary of CTF Services. Besides, Hip Hing is a key partner for many major developers (its recent signature projects include Kai Tak Sports Park under Chow Tai Fook Group and The Henderson under Henderson Land). The profitability is relatively solid.
It is worth noting that in recent years, The Pavilia Farm III, which requires reconstruction due to construction quality issues, was not mainly built by Hip Hing. Furthermore, the Group has announced the acquisition of Hsin Chong Aster Building Services, which is expected to boost this segment attributable operating profit by around 6.5% (an increase of around HKD 50 million) once the transaction is completed.
As shown in Chart 2, the value of new contracts in CTF Services' construction business was increased by 3.2 times to HKD 21.9 billion. Hence, the gross value contracts on hand increased to HKD 63.9 billion, reaching a multi-year high. These gross value contracts will be gradually recognized and translated into revenue and profit, indicating a growth potential for the Group in this sector.
Chart 2: Key Operating Indicators in Construction Segments
Regarding the insurance segment (see Table 5), CTF Life (formerly known as FT Life) delivered a strong performance in the fiscal year 2024 (from July 2023 to June 2024). The gross written premium and new business value increased significantly by 77% and 37% to HKD 4.55 billion and HKD 1.23 billion respectively. This growth was driven by suppressed demand from mainland Chinese visitors following the opening of the border between Mainland China and Hong Kong after COVID-19.
Table 4: CTF Life’s Operating Indicators
| HKD billion | FY21 | FY22 | FY23 | FY24 |
| Gross Written Premium | 1.96 | 1.75 | 2.57 | 4.55 |
| Value of New Business | 0.49 | 0.52 | 0.9 | 1.23 |
| Value of New Business Margin (%) | 25% | 30% | 35% | 27% |
| Investment Portfolio Return (%) | 4.30% | 3.6% | 3.8% | 4.5% |
| Embedded Value | 21.4 | 17.7 | 19.3 | 21.2 |
| Source: Company's Announcement, iFAST Compilations Data as at 30 June 2024 | ||||
We believe that the insurance business remains one of the main sources of profit for the Group, providing relatively stable and higher visibility cash flows.
In the logistics segment, despite the economy downward pressure on both Mainland China and Hong Kong, the occupancy rates of logistics properties maintained at 85% or above, with rental growth recorded at single-digit percentages. Therefore, the operational performance in this segment should remain stable.
Regarding JVs and associates (refer to Chart 3), their book value is up to HKD 21.9 billion. In the fiscal year 2024, dividends from JVs and associates reached HKD 1.2 billion, equivalent to an implied dividend yield (dividends from JVs and associates / book value of JVs and associates) of approximately 5.6%, which is not excessively high or low. The dividend levels received over the past five years have always over HKD 1 billion. Therefore, we believe that the group is likely to receive at least HKD 1 billion or more in dividends from JVs and associates, providing a solid dividend cash flow for the Group.
Chart 3: Related Indicators about JVs & Associates
Overall, in the remaining segments, the key segments still exhibit growth potential, with stable business models. We believe that even after CTF Services fully divests its toll road business, the remaining segment will continue to provide a solid cash flow. The operational and credit risks remain low.
Investors could still consider its 2028 or 2029 Bonds
After the news about sales of Toll Roads, two CTF Services bonds are traded at around 7.6% net yield to maturity, increased from around 7% level, which results in a higher attractiveness (see Table 6).
Table 6: CTF Services USD Bonds
| Bond Name | Tenor (years) | Ask Price (Investors Buy) | YTM |
| NWSZF 6.375% 22Aug2028 Corp (USD) | 3.6 | $95.8 | 7.7% |
| NWSZF 4.250% 27Jun2029 Corp (USD) | 4.5 | $86.8 | 7.8% |
| Source: Bondsupermart Data as of 10 January 2025 | |||
With CTF Services' stable business model and relatively low credit risk (even after fully divesting its toll road business, the credit profile remains robust), we believe that investors could still consider its 2028 or 2029 bonds.
Currently, the bond yield reflect certain concerns on the sales of toll roads and the distribution of a potential special dividend. Since the sales of toll roads does not necessarily entail a significant increase in credit risk for CTF Services, we believe that even in the worst-case scenario, bond prices are not likely to plummet solely due to the ongoing development of this transaction.
However, investors should anticipate that the bond will be more volatile as the event unfolds. It is possible that the bond price will be under pressure if these concerns are materialized. Nevertheless, the execution of this transaction would take at least six months (potentially longer), and there is no guarantee of successful completion. The tenor of its bonds will be much shorter after the transaction is completed. In this case, the risk of widening credit spreads should decrease as the tenor shortens (as the market expects the Group to redeem the bonds, approaching the maturity date, the bond prices should trend towards $100). This indicates that if investors can hold the bonds until maturity, disregarding the price fluctuation, the bonds still hold certain investment value.
It is worth noting that if investors choose to wait for bond prices to fall, there are significant opportunity costs involved (including forgoing coupon received during the waiting period), and there is no guarantee that these bonds will be traded at a lower price as desired.
Related Risks
Given the economic downturns in both Mainland China and Hong Kong, it could potentially impact the operational performance of businesses under CTF Services and weaken its debt repayment ability.
We believe that CTF Services might continue to increase its dividend amounts, potentially even distribute high special dividends. This could affect the Group's liquidity, potentially unfavorably impacting its credit profile and leading to a decline in bond prices.
CTF Services might engage in asset purchases from other related parties such as the sister companies under Chow Tai Fook, the parent company (CTFE) and/or Mr. Cheng family at the prices that could be higher than the fair market value. This poses certain risks associated with related-party transactions.
Conclusion
CTF Services intends to seek disposal of toll roads in Mainland China. If the news is true, it is not in line with the Group’s development strategy. We believe that apart from optimizing the business and asset portfolio, the major sales proceeds from the toll roads could be used for distribution of special dividends.
The distribution of special dividends is not favourable to bondholders. Even under this extreme assumption, the credit metrics would still be considered relatively strong. The remaining segment will continue to provide a solid cash flow. The operational and credit risks remain low.
Investors could still consider its 2028 or 2029 bonds, with net yield to maturity of up to 7.6%, which has certain attractiveness.
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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